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Energy Conversion Devices, Inc. (NASDAQ:ENER)

F1Q08 (Qtr End 9/30/07) Earnings Call

November 08, 2007 10:00 am ET

Executives

Ghazaleh Koefod - IR

Mark Morelli- President and CEO

Sanjeev Kumar - VP and CFO

Analysts

Sanjay Shrestha - Lazard Capital Markets

Jesse Pichel - Piper Jaffray

Paul Clegg - Jefferies

Steve O'Rourke - Deutsche Bank

Patrick Forkin - Tejas Securities

Mark Manley - Natixis

Bob Stone - Cowen and Company

Michael Molnar - Goldman Sachs

Colin Rusch - Broadpoint Capital

Maxwell Vanderwal - UBS

Operator

Good morning. Welcome to the Energy Conversion Devices Conference Call to discus the financial results of the company's Fiscal 2008 First Quarter ended September 30, 2007. (Operator Instructions)

I would now like to turn the call over to Mrs. Ghazaleh Koefod, ECD, Investor Relations. Please go ahead.

Ghazaleh Koefod

Thank you, Audrey. Good morning and welcome to our call. The members of ECD's management team participating today include Mark Morelli, our new President and CEO and Sanjeev Kumar, ECD's Vice President and CFO. This morning's presentation will also include the use of several slides, which we will be advancing. Following the call, a copy of our slide presentation will be available on our website. Also, today's call will be archived on our website.

A special note for those participating via conference call today, we ask that you please select the "No Audio-Slides Only" link, when prompted during your webcast registration. This will allow conference call participants to view slides in sync with the audio. During the Q&A period, as a courtesy to those individuals seeking to ask questions, we ask that you limit yourself to one question and one follow-up question.

As is our custom, I would like to remind you that the following discussion may contain forward-looking statements within the meaning of SEC's Safe Harbor provision. Such statements are based on assumptions which ECD, as of the date of this call, believes to be reasonable and appropriate. We caution you that the facts and conditions that may exist in the future could vary materially from those upon which the statements were based. Please review the risk factors identified in the ECD filings with the SEC, including our most recent 10-Q which will be filed later today.

And now, I would like to introduce Mark Morelli. Mark?

Mark Morelli

Thank you, Ghazaleh. Good morning, and thank you for joining today's call. As most of you know, this is my first Investor Call as President and CEO of ECD. Since I joined the Company as CEO on September 1st, I've been meeting with customers, understanding our operations and focusing the team on our top priorities. I am now more optimistic than ever about the tremendous potential of our business.

Before we discuss our first quarter results, I'd like to take a few minutes to tell you a bit about my first 60 days and how it's driving my short-term initiatives.

First, I have learned that our customers are enthusiastic about our product. As you can see from Slide 3, despite what some may say, not also our products were the same, because our laminates are flexible, durable, light weight and can be easily integrated directly into building materials, they are ideal for large and growing market segments, in particular, rooftop applications. What also sets us apart from crystalline and other thin-film products is that we generate more electricity per rated watt. This last point is a key. So let's explain how it works because there is some confusion about his measurement.

Solar panels are sold on a basis of their peak output measured in watts under standard lab conditions. This approach allows solar panels to be compared on a consistent basis but it's not the best measure of how products perform in real-world application, giving varying light and temperature.

As you can see from Slide 4, in a real-world setting, our PV laminates produce more electricity per rated power than our competitors. They wake up earlier, stay awake longer and perform better in both sunny and cloudy days.

The result is that our laminates generate 15% to 20% more electricity than conventional modules. So our customers are actually getting more electricity for the same rated output and in many cases, at lower total installed costing crystalline products and a better ROI.

Speaking of our customers, I've spent time in my first few weeks, talking to customers and walking on rooftops. Our customers are our best spokespeople. They love our solar laminates and particularly for rooftops. One example of this is our relationship with General Motors, which is off to a promising start.

Uni-Solar laminates are currently in the process of being installed on one of the world's largest commercial solar systems on the roof of GM's Fontana, California facility. GM, a repeat customer like Solar laminates because they do not require roof penetrations or structural modifications. They are light weight, easy to install and rugged. In short, they perform great in real world conditions.

Systems like these demonstrate while our laminates are ideal for commercial rooftops and it's our primary focus in the near-term. My first initiative has been selling laminates along the lines of the differentiator that we've just discussed.

Today, I am pleased to report that we have a growing sales pipeline with supply agreements and commitments in place for our volume for the balance of fiscal year 2008. The momentum was building before I joined the company and with the additional focus, we are accelerating.

Second, I learned that as good as our laminates are we can improve how we market our advantages to our customers and our operations. We've already made some changes to reposition our company around the rooftop market and I believe we will help end users understand our laminates better. We are focusing on the global rooftop market, where we can sell at relatively high average selling prices, because of our differentiated value proposition. And this market is huge.

As an example, I have decided we are phasing out our frame module product line, where we sell at low gross margins, which was originally introduced so that our product would look like conventional solar modules but really ended up masking our key product differentiators. We are also reorganizing our marketing function to focus on markets and customers, best served by our products.

Third, I learned that we have a lot of opportunities to enhance our competitiveness through operational improvements. As you may know, I spent most of my professional career with United Technologies were I had significant general management responsibility with functional marketing experiences, product development and operations job throughout North America, Europe and Asia. United Technologies concepts of operational excellence, performance-driven cultural and accountability are the norm. This is a typical part of the CEO play book but it's new for ECD, which is transforming from its roots in R&D.

I am instilling these concepts here in everything we do. I personally assume day-to-day over site of our Uni-Solar business and attracting daily operating metrics and costs information, something that's not been done here before. Daily visibility and accountability are changing the way we do business. For example, in Q1, we experienced manufacturing variances at Auburn Hills 1 facility related to maintenance issues.

As you may know, this is our first large scale machine and has been in constant operations since it was commissioned in June 2002. By having the right information, we have been able to identify and address the underlying causes of these variances in real time. In other words what gets measured gets done.

I am also focused on making sure we meet our ramp-up schedule for the 90 megawatts of additional installed capacity slated for fiscal year 2008. We are focusing on this issue through building a metric-driven culture reallocating resources to focus better on critical issues and improving processes such as preventive maintenance.

To sum it up, I believe we have a great product and one that is differentiated in the marketplace. I see tremendous opportunity for us to accelerate our growth and improve our financial results through better execution.

Before I turn the call over to Sanjeev for a review of the quarter, let me take a moment to address our joint ventures, Cobasys and Ovonyx.

As you are no doubt aware, we have a Cobasys' joint venture with Chevron. Interest in demand for hybrid electric vehicles has never been higher, and Cobasys is the only North American supplier of nickel metal hydride batteries, which remain the preferred power solution for hybrid electric vehicles.

Now, you'll see in our 10-Q, that we and Chevron have some differences regarding operations and funding at Cobasys, and that Chevron has initiated an arbitration proceeding. Unfortunately, this arbitration somewhat limits what we can say about Cobasys at this time. However, I can say that we believe the right approach for Cobasys is self-funding and a sustainable business model in which revenues from sales and other customer support are sufficient to fund operations and capital expansions at Cobasys. We intend to work with Chevron to achieve this goal by the end of this calendar year, if we are unsuccessful, then Cobasys maybe at risk as a going concern.

Our other principle joint venture Ovonyx, it's commercializing a new type of digital memory technology for use in a variety of applications from cell phones, digital cameras to personal computers. Ovonyx has the top memory companies in the world under license, including Samsung, Intel, ST Microelectronics, Elpida and Qimonda.

Last month, Ovonyx announced a new license agreement with Hynix Semiconductor. We are hopeful that these agreements will translate into significant revenue streams in future years, as the leading semiconductor companies begin selling products containing our memory technology.

At this point, I would like to turn the call over to our CFO, Sanjeev Kumar, for a discussion of our first quarter financial results and guidance for Q2 and fiscal year 2008. Sanjeev?

Sanjeev Kumar

Thank you, Mark. For our first fiscal quarter, EDC reported a 73% increase in revenues to $47 million from the prior year's first quarter. Revenue from our Solar Business, which represented 89% of the total, was up 76%. We won significant new business in Germany, Italy and the US.

As indicated in the pie-chart on Slide 6, 96% of our Uni-Solar product sales were for rooftop application, further validating the ideal value proposition for our solar laminate. We expect to build on this momentum and have added sales staff in Europe and other staff for expansion activity. As a result, selling, general and administrative costs were higher.

Other revenues in the quarter were about $5 million from our Ovonic material segment. We continue to make progress on further cost reductions in this business segment, which reported an operating loss of $700,000 in Q1, down from $2.7 million in the prior fiscal Q4 '07. I want to reiterate management's position that we will make this a breakeven business segment in the near-term.

So, while EDC's consolidated net loss was lower than the fourth quarter, we still have plenty of runway to improve our margins and reduce our cost structure. To highlight this further, let's look at our next slide. With regard to our non-solar G&A cost structure, we continue to execute the restructuring plan we announced earlier in the year.

The plan we announced had two phases, the total savings were projected to be about $23 million, with approximately $17 million coming in the first phase and the other $6 million coming in the second phase. Today, we have executed the first phase of the plan inline with our expectations. We are now working on an even more aggressive plan for Phase 2 cost reduction. They are on the previously planned $6 million. Obviously, with the more aggressive Phase 2 cost reduction plan, we may need to take additional restructuring charges above and beyond, the $3 million to $5 million for fiscal 2008 as previously guided.

We look to keep you updated on our progress. We fully expect the savings to more than offset any incremental restructuring costs. We incurred pre-production costs of $2.5 million in fiscal Q1 associated with a new Greenville Michigan facility and the expansion of our Tijuana, Mexico operations. These pre-production costs are primarily related to employee training and other costs for the new manufacturing facilities in advance of the commencement of manufacturing. We currently estimate that fiscal 2008 pre-production costs will be within the range of $6 million to $9 million, as we previously guided.

Now, let me provide some color on our ramp-up on Slide 8. We have received numerous questions on our ramp-up schedule, how it impacts margins and our expectations for adding our new capacity.

I would like to give you as much clarity as possible, by walking you through our expansion schedule. Looking back, our first facility at Michigan, Auburn Hills 1 took 37 months to ramp-up. With each ensuing line, we are improving our ramp time and we expect that acceleration to continue. Greenville 1a, our third line, which commenced production on November 1, is actually a month ahead of schedule and the estimated ramp time is down to nine months.

We are successfully applying the knowledge we gain from each successive installation. This is a critical area where Mark's operating expertise will have an immediate impact on helping improve our performance.

Our goal is to achieve a material acceleration in the time it takes to ramp a new line. As with any manufacturing company, there is a normal penalty that hits the gross margin when we ramp-up a new line. At present, we feel it more because each 30 megawatt line we have is a significant addition to our current capacity, but that impact on the combined gross margin will decrease overtime as our total capacity increases.

Based on this schedule, we expect to have 148 megawatts of nameplate capacity by the end of June 2008, 178 megawatts by the end of December 2008 and at least 300 megawatts by the end of December 2010.

As you look at Slide 8, you can see that Auburn Hills 1 has been in production since Q3 of fiscal 2003. It took 37 months to fully ramp our first slide. As an aside, when we talk about ramp, we are talking about the moment the manufacturing line is placed in production.

Further as a rule of thumb, once a 30 megawatts line starts to ramp we expect to produce two to three megawatts in the first quarter, three to five megawatts in the second quarter, five to seven megawatts in the third, with a line targeted to produce at a rate of 7.5 megawatts per quarter at the end of nine-month ramp.

Greenville 1a, which just went into production on November 1 will take about nine months to ramp-up, compared to about 13 months at Auburn Hills 2. Greenville 1b is expected to go into production in Q3 of fiscal 2008. Greenville 2a, which is expected to start production in Q4 of fiscal 2008 is expected to see ramp time drop to 8 months, and we anticipate that Greenville 2b will have a ramp time of just seven months.

In terms of capital cost per line, we remain on-track for a 5% to 10% reduction for each Greenville line. Clearly, we have opportunities to improve our capital costs further.

Now, let me spend a few minutes on our gross margins. While we expect both, Auburn Hills 1 and Auburn Hills 2 to maintain margins above 20% in the second quarter, we expect our total blended gross margin to be in the 15% to 16% range in the second quarter, due to several factors.

First, as I just explained, the ramp-up of Greenville 1a will begin to hit gross margins. Second, Auburn Hills 2 is in the final months of its 13-month ramp-up. From an operations standpoint, ramp-ups are not linear as most efficiencies come towards the end. Finally, the fiscal second quarter normally has one less week of production, due to routine year-end maintenance.

While we plan to bring an additional 60 megawatts on line in fiscal Q3 and Q4, we plan to offset the margin impact with a cost reduction and operations improvement initiatives. This will allow us to reach 21% to 23% gross margin in fiscal Q4, and 25% longer term.

As you can see in Slide 9, we are going from a 15% to 16% gross margin to 25% gross margin, roughly through one-third improvement in yield and throughput, one-third through raw material and labor cost savings, with the remaining one-third through higher production efficiency and other initiatives.

These cost reduction initiatives are expected to mitigate the impact of future ramp-up. Strong customer demands from both new and repeat US and global customers reinforces the confidence we have in our previous guidance for fiscal 2008.

We expect total revenues of $220 million to $245 million, but the full year sales of Solar products to be $205 million to $225 million. For the second quarter, we expect total company revenues to be $50 million to $55 million, and solar products sales of approximately $45 million to $49 million.

Now, let me turn the call over to Mark. Mark?

Mark Morelli

Thank you, Sanjeev. Before we take some questions, I want to follow-up on some earlier comments by providing some clarity on our actions looking forward.

First, we will achieve profitability by June 2008, the end of this fiscal year. This is a very important milestone for the Company and I am engaging the team everyday, at all levels, to ensure that we get there and we stay there. We've already discussed on this call, some of the key activities that are underway, like accelerating our topline growth, improving manufacturing operations and reducing expenses. Put simply, we have to sell more and spend less and we're making significant progress in both areas.

Next, achieving 300 megawatts of nameplate capacity in 2010 is important milestone, but it's not our end goal. The important takeaway is that we are on-track to hit previously set targets. We're also evaluating a more aggressive ramp. Strong demand is validating the proven advantages of our products. We want to grow to meet the needs of this rapidly expanding rooftop market.

Part of the foundation for this growth will be creating the operational excellence that I discussed earlier and I have assumed responsibility for Uni-Solar operations to ensure that we perform better matching the yield, throughput and cost metrics we have established. Combining these activities with our cost reduction initiatives in our new strategic marketing efforts creates the right mix for a broader expansion.

Finally, our solar laminates will be part of a system that achieves greater parity. Our laminates are attractive now, especially in rooftop applications, our target market. But the opportunities for laminates are near limitless as we bring the costs down to a point where electricity competes better with grid pricing. That's our goal.

I am excited about our opportunities for this fiscal year and beyond. We are making the right steps to accurately manage the business to reach near-term profitability and product course for longer term success. I hope you share my enthusiasm and we appreciate your interest in ECD.

We are happy to take your questions, operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

Great. Thank you. Good morning guys. First of all, thank you for a lot of detail here. Just first question, Mark, you talked about how you are taking over the operational aspects of Uni-Solar, and obviously, with your UTC experience from an operational standpoint, can you get into some more detail in terms of what are some of the steps that you are taking on the near-term basis as well as some of the plans that you have laid out on a long-term basis to, sort of, get to that point that you really reiterated about getting to that profitability by Q4 of '08 fiscal year and maintaining it, and growing it from there?

Mark Morelli

Absolutely, we're transforming this company from R&D company to a manufacturing and performances oriented company. And there is lot of low hanging fruit, I can tell you. In particular, there is really two areas that we've moved very quickly on.

The first was establishing metric driven culture; really measuring the right things in the factory and we're seeing pretty good progress on that. We quickly diagnosed some of the issues that we had. And I am happy to report, in October we see some pretty good numbers coming out of the factory. And it's just really generating the right sense of urgency and the right visibility.

The second issue is really putting the right people on the right jobs. We've got fantastic talents here in ECD, but it's interesting because folks had been gravitating towards really non-critical areas. And by really putting this right talent in the right areas, we have also seen some pretty good traction. In fact, that's how we addressed our problems that we had, that we spoke about in Auburn Hills 1 and that machine is also running quite well as of October.

In terms of looking forward and getting to that part of your question, Sanjay, we see really opportunities to outsource a little bit better than what we've done. As an example, we have air scrubber which is typical part of the factory that really makes sure you don't emit any particulate and it's interesting because part of our cultural here is not invented here culture. So folks were actually developing their own product to scrub the air. Obviously, that's not where we want to put our critical talent. We can outsource that better and deploy those folks to that critical technologies expertise on running our plants better and that's in fact, what we have done.

Sanjay Shrestha - Lazard Capital Markets

Got it. That's great. And just a quick follow-up then. Guys, you talked about getting to that gross margin by the June '08 timeframe of 21% to 23%, and longer term on 25%. But I have got to imagine, that's based on today's plan, and the second thing on that is, I take it that in that Q4 guidance or the range that will provide it, that does include the ramp-up costs. So to get to that 25%, it's not like you got to reinvent the wheel here. If you were to continue to execute on your cost-out strategy and outsourcing strategy, you have a potential to actually get higher than that.

Mark Morelli

Absolutely, 25% is a good starting point for us. Now, this is a company where we really have to establish some credibility. Let's set our targets, let's hit those targets. We have all the right technology, the people, the process in place. We have pretty good visibility on how we get there. And once we get there, then we'll readjust accordingly.

Sanjay Shrestha - Lazard Capital Markets

Got it. And one last question, then I will hop back in the queue. The comment that you mentioned about Cobasys, so obviously, you guys are in negotiation with Chevron technology ventures at this point in time and we are, sort of, at the November, almost at middle of November and that's something that by the end of -- is that by the end of this calendar year or end of fiscal year that something has to happen?

Mark Morelli

Well, we are pushing for a very near-term resolution to this in a matter of weeks. This is not something that we want to see drag on.

Sanjay Shrestha - Lazard Capital Markets

Okay.

Mark Morelli

We are committed for a self-funding model here and we're optimistic we can achieve it.

Sanjay Shrestha - Lazard Capital Markets

Terrific. That's great. Thanks a lot guys.

Operator

Your next question comes from the line of Jesse Pichel with Piper Jaffray.

Jesse Pichel - Piper Jaffray

Hi. Good afternoon. Congratulations on the ramp. Just conceptually, First Solar last night announced its intention to adjust the utility market as a solution for our past quarters. Have you thought about becoming a solution for utilities with perhaps a rooftop solution for utility customers? Could you comment on that?

Mark Morelli

Part of our marketing strategy to address the rooftop market is to really look at the countries where we've got a lot of rooftop market growth. That is, Italy, France, South Korea and California, and hopefully, Spain going forward, as they get more out of the ground now and we see that more of a better next step.

To address your question more specifically, there, we've brought on board a gentleman with a marketing background. He has worked with McKenzie in the energy practice and for utilities. We see this as a really good opportunity going forward.

Jesse Pichel - Piper Jaffray

That's great. And could you discuss what you think is the critical factor there for cost reductions on a go-forward basis. Is there something that we can look out there, like stainless steel or encapsulins or CapEx is being the biggest driver there, for a potential upside to your gross margin targets?

Mark Morelli

Yeah. I mean that's a good question, because as we look at our aggressive goals to get the grid parity, you can think about this as about a $6 per watt selling price and the biggest -- half of that will come out of the channel or downstream costs, both the installation, the balance of sales, the invertors.

And the other half is essentially our selling price, and the biggest piece of that getting the grid parity is really for us to reduce our laminate pricing and to get down to our targets for the laminate pricing, about half of that is going to come through materials. And that half through materials is really both efficiency improvement, to get our conversion efficiency up and we're happy to report some traction on that.

You may remember in the last phone call, we were talking about launching a 144 watt laminate. That actually means a conversion efficiency of 8% to 8.5%. And we're happy to report that we've launched that product line. So we see some traction on the conversion and efficiency side.

So to answer your question specifically, we see some runway on the conversion efficiency with existing technology to go from 8.5% to 10% is our goal and we think that's achievable. And then, the other aspect is the material costs side too, which I think you directly alluded to. And in that case, we are outsourcing to a number of other sheet metal suppliers.

There is also a fairly expensive component, essentially it's our grid wire which is a silver-plated grid wire that we have as a single source right now. And we are currently getting other suppliers online for the grid wire. And believe it or not, we use a lot of polymers in our technology and we use fairly sophisticated distribution channel to obtain our polymers. And we are currently breaking that down by sourcing more directly on that.

So we're spending a lot of time in this effort, we've really invigorated our focus on how we get to grid parity. And I think we'll just have to update you on how we go.

Jesse Pichel - Piper Jaffray

Thanks for that answer, and if I could just hit in one more. As you said, you are thinking about capacity expansion beyond what's been announced and I think you have alluded to that on this call. Do you suspect that the liquidation activities of Cobasys and Ovonyx plus margin improvement could allow you to self-fund further expansion or is it a little too early to tell?

Mark Morelli

Well, it's little early to make comments on that directly, but let me speak to what I think is a really important issue for us. And that is, how we further bring down our invested capital cost. We need to increase our return on invested capital and we are looking at all activities to do that. One, by either selling other assets might be ways that we would fund that expansion but also by trimming back on how much our capital costs are effectively, in bringing that down, we simply can also improve our return on invested capital.

Operator

Your next question comes from the line of Paul Clegg with Jefferies.

Paul Clegg - Jefferies

Thanks guys for all of the detail this quarter. I reiterate everybody else's comment on that. I was wondering if you could talk a little bit about the directional moves in ASPs, since we haven't really given the same level of detail that we gave this quarter. Can you talk a little bit about how they moved over this quarter and maybe give some color on where you expect to see the move over the next couple of quarters?

Mark Morelli

We're happy to report that are ASPs are holding strong. They have actually increased a little bit recently and we expect that they will actually go down very slightly, maybe 3% in the future and let explain why. It's not really because we're selling at lower gross margins, it's because we're dropping our frame product line that we spoke about a little bit earlier. This is a higher average selling price but much lower gross margin product line. So as we drop that product line, we'll actually enhance our gross margins.

Paul Clegg - Jefferies

Okay. And on the Solar side of the business, just a detail question, what percentage of your installations would you say require a light weight module versus those where you are selling more against the crystalline, silicon or other thin-film module just based on more of a kilowatt hour equation?

Mark Morelli

Well, the folks do value light weight and our product from an ease of installation perspective, as well as many of the roofs that may go in, folks don't want to add to the structure of that roof as well. It's a hard answer for us to understand exactly but we can speak to it, maybe more in terms of an opportunity. And we know that about a third of the very large rooftop market is a low, low baring roof marketplace. So that's a very significant part of the market.

Operator

Your next question comes from the line of Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you, good morning. Mark you mentioned that metrics are already beginning to look better in October. Can you speak a bit about what you've implemented very quickly here, and can you help us quantify, kind of, how much better they look month-over-month and how we should expect that to trend?

Mark Morelli

Sure. I'll give you very easy answer to that question. It's about yield and our throughput and there is a many breakdown metrics that you can see by line. But obviously, if you hit those two a lot goes in to that. In particular in Auburn Hills 1 the maintenance problems that we are having, is really related to our yield issue. And specifically there, we've doubled the yield in Auburn Hills 1 from September to October. And this is really by getting the right folks to put in place the right preventive maintenance program there and it seems to be working quite well.

Steve O'Rourke - Deutsche Bank

Fair enough. And you spoke also about going to a 10% conversion efficiency products as a longer term kind of goal. Does that require a significant change to the sales structure of the product?

Mark Morelli

No, it doesn't. It really involves no technology invention there whatsoever. It's doing more of what we did as an example this quarter to improve our conversion efficiency.

Operator

The next question comes from the line of Patrick Forkin with Tejas Securities.

Patrick Forkin - Tejas Securities

Good morning. Mark, I want to go back to your comment about exploring a more aggressive ramp and I assume that's based on two things your competitive assessment of Uni-Solar's place in the rooftop market and the various gaining factors associated with production. I wonder if you could weigh, I would really like to hear your assessment of Uni-Solar's competitive place in that rooftop market and balance that against the hurdles that you may have in on the production side.

Mark Morelli

Absolutely, it's important for me to start off by saying that we are not taking our eye of the ball when we think about ramp. We are very seriously committed to making sure that both our day-to-day operations and our commitment out to ramps of 178 megawatts absolutely stay on force. So there is no distraction there.

However, at the same time, we can't ignore the fact that we are in a very large market opportunity with an excellent product which has a very differentiated place for selling onto rooftops.

Why can we say that? Well, we're selling out our pipeline at pretty good average selling prices, so I think the facts speak for themselves. In terms of how we get there, we just are re-formulating what is really the right approach to be able to capitalize on this opportunity.

Patrick Forkin - Tejas Securities

Okay. Very good. And then, Sanjeev, on Cobasys, it's my recollection that you really don't have anything on the balance sheet so we don't have any balance sheet exposure there?

Sanjeev Kumar

That's correct, Pat. Our investment at Cobasys is recorded as zero since they contributed our technology. So we do not have any significant exposure to as such impairment or write-down.

Operator

The next question comes from the line of Mark Manley with Natixis.

Mark Manley - Natixis

Hi. Just on the production, having production growth faster, can you give me a sense of what the factors are, that go into that decision? You alluded that you might be able to get to 300 megawatts or beyond that quicker?

Mark Morelli

Absolutely. One of those is your capital spend. How much do we think we need to spend for every additional megawatt, we may think about, how we leverage government subsidies there, both, not only in Michigan but obviously beyond and how we can get them, other governments to help buy down our capital costs?

Another factor into those decisions is who are we going to look at as major outsourcing partners for more turn key solutions? And this is what I am talking about, perhaps, more above the 300 megawatts.

I think other folks have shown that the models here worked quite well. We have a bit of a non-invented here syndrome. And I think we can manage ourselves the way we've got organized to that 300 megawatt point. But going beyond that, to take advantage of this value proposition we have, we really have to do some more formulation and a little bit more serious planning to do that.

Mark Manley - Natixis

And then, what would drive that, those decisions I mean, obviously it's a market but any other factors?

Mark Morelli

Yeah. Return on invested capital will drive that and obviously shareholder value.

Operator

(Operator Instructions) Your next question comes from the line of Bob Stone with Cowen and Company.

Bob Stone - Cowen and Company

Hi, guys. I know everyone else said it but let me repeat, great job on the improved disclosures.

Mark Morelli

Thank you.

Bob Stone - Cowen and Company

A question on the pricing, when do you expect to sell out of the remaining frames materials?

Mark Morelli

We do have some inventory on frame materials and we'll hang onto those, but obviously, the way to do this is to raise price. And there will be some customers that buy at higher prices and I have no problem selling our inventory at higher prices. So I am not really concerned about that inventory.

Bob Stone - Cowen and Company

I am just trying to get a sense of, sort of, how much inventory you have?

Mark Morelli

It's not significant. Just as an example, our sales last quarter we had about 10% of our overall sales. And we've seen actually, this frame module go down in the past several months. And I think this is a real turning point for our company because if you think about it we really have to be recognized by folks as a Solar Company. So we have to look like a solar module.

And a real turning point here is that now, by getting rid of this product line, it actually turns the page to say people are interested in buying PV laminates and its doesn't have to look like a module, and take advantages of those are unique differentiators.

Operator

Your next question comes from the line of Michael Molnar with Goldman Sachs.

Michael Molnar - Goldman Sachs

Hi. Good morning, everyone.

Mark Morelli

Good morning

Michael Molnar - Goldman Sachs

Just a quick question on costs. Not to be a broken record, but thanks again for the disclosure. Obviously, you have some goals out there. I am wondering if you can give some comments on goals, longer term goals on where you think costs per watt could go. I guess my math is correct you had about 249, I know that number bounces around a bit. But where could you see that, when you talk about grid parity where do you see cost per watt going?

Mark Morelli

We see our cost per watt getting down to about $1.10 by 2012 and we see that primarily due to some of the things that we just spoke about with Jesse. We got to take about half of that out of our material costs and including into that is our efficiency about another quarter to burden and the other according to labor.

Michael Molnar - Goldman Sachs

Got it. And when you talk about better ROI to your end customers due to the technology capturing more of the light spectrum, I just want to make sure I understand, if you had to compare that, are you talking about that advantage over crystalline or crystalline and other thin-films like cadmium telluride as well?

Mark Morelli

It is both over crystalline. What we showed you in the chart today what based on crystalline so that 15% to 20%. We do have an advantage over other thin-films such as cadmium telluride as well. And more importantly, we have to do this on a case-by-case basis.

There is actually situations where we can get above that 20% and obviously, situations maybe down at 10%, but in aggregate we see about 15% to 20% advantage depending on where you are, the light conditions, that where we can take advantage of our unique proprietary technology.

Operator

Your next question comes from the line of Colin Rusch with Broadpoint Capital.

Colin Rusch - Broadpoint Capital

Good morning. Broadpoint Capital used to be First Albany Capital. And my question is about customer mix. Are you seeing that change over the next couple of years as you bring more production online and how so?

Mark Morelli

I am sorry. I didn't hear the first part of your sentence.

Colin Rusch - Broadpoint Capital

Okay. Your customer mix, do you see that shift in at all? Are you expecting to add new customers little deeper into with couple of roofing customers? Could you just comment on that?

Mark Morelli

Yeah. We do see some changes there happening to our customer mix. So we have very good traction with a couple roofing companies right now. We expect that that will probably continue. We also have some very good traction with some national account pay customers that we just spoke about with GM. And we also hope to see better traction with utilities.

Colin Rusch - Broadpoint Capital

Great. And could you talk a little bit about capturing the value of the actual roofing process, are you guys going to be able to capture any of that, with the roofing material if you take any of that value with you, in your sales?

Mark Morelli

Well, we see our product as a real game changer working with the roofing market, because we are really the only proven reliable product on the market right now that can seamlessly integrate with the roof. So we are exploring all opportunities to enjoy channel opportunities there appropriately.

Operator

Your next question comes from the line of Mark Manley with Natixis.

Mark Manley - Natixis

Sorry, just one follow-up on your building integrated product in California market. You are waiting for UL approval on that. Are you still pursuing that?

Mark Morelli

Yes, we are. It's something that we think is a great opportunity longer term, as a residential market. However, we are really, primarily focused selling right now on our commercial rooftop application because its out there in the marketplace. And when we get that fully to the pipeline, we'll launch it accordingly.

Mark Manley - Natixis

Okay. Thank you.

Operator

Your next question comes from the line of Jesse Pichel with Piper Jaffray. Mr. Pichel, your line is open.

Jesse Pichel - Piper Jaffray

My questions have been answered. Thank you.

Operator

Your next question comes from the line of Bob Stone with Cowen and Company.

Bob Stone - Cowen and Company

Hi. A couple of follow-ups, if I may. You mentioned, if I heard you correctly, the yield doubled following resolutions and maintenance issues of Auburn Hills 1. Could you clarify exactly how that's measured, doubling seems like an extraordinarily large change?

Mark Morelli

Also, one way to look at that Rob is that yield wasn't very good out of Auburn Hills 1. So the issue that we measure is that the yield is measured on a percentage of really very good products to the percentage of not so good products. So we were producing products but not at the tight grade that is really important there.

So specifically, what's happened and I can describe to you more of the soft-line, but the short answer to this problem is that Auburn Hills 1 has gas nozzles that are part of the chamber that were really a first generation design.

When we redesigned Auburn Hills 2 and Greenville, which are essentially clones of each other, they reposition these gas nozzles differently. And so, through by working on that machine, we've been able to come out the appropriate preventive maintenance schedules for these gas nozzles, which with some testing immediately improve that yield.

What we are going to do about that is we are babysitting the machine to make sure it produces the yield that we need out of it, which is doing pretty well at the moment. And we have a plan to go back and retrofit those gas nozzles to look like Auburn Hills 2 and what's going in the Greenville machines now, and that's going to happen in the regularly scheduled maintenance down time this quarter.

Bob Stone - Cowen and Company

Okay. So could you breakout where the megawatts of productions split between Auburn Hills 1 and 2, roughly?

Mark Morelli

Yes, sure. Sanjeev?

Sanjeev Kumar

Yes, Rob, Auburn Hills 1 produced at about five to six megawatts that have been coming from Auburn Hills 2.

Operator

Your next question comes from the line of Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you. Just a follow-up. Can you give us an idea of the milestones you are looking for over the next several quarters to gauge the success of your Ovonyx memory business?

Mark Morelli

In Ovonyx, we are cautiously optimistic about Ovonyx. The real activity is in hands of our licensed partners and they are actively developing products. It's tough for us to comment on that because they obviously keep whatever progress is going on there quite close to themselves. So, I think it's very difficult to answer.

What we do measure, obviously, is how much activity we have with them and how much patents they actually release? Obviously, patents are public information but they don't come visible to about 18 months after they have been filed for. So it's tough for folks on the outside to gauge that. So the milestones that we're currently looking at is, is just working actively with our licensed partners as they bring their products to market.

Steve O'Rourke - Deutsche Bank

If I can ask you slightly differently. Two of your licensees, particularly, Intel and Samsung have made comments over the past several quarters about when they anticipate some sort of pilot production. Have you seen activity levels from your prospected increase in that regard or will you not see that?

Mark Morelli

Well, we see activity by working with them. We have engineers that that's what they are under license agreement to do to work with these channel partners. And I can tell you that they are very busy working with our licensing. So there is a tremendous amount of activity there.

Operator

(Operator Instructions) Your next question comes from the line of James Williams.

Mark Morelli

Next question please.

Operator

Your next question comes from the line of [Maxwell Vanderwal] with UBS.

Maxwell Vanderwal - UBS

Good morning. My question is just a little more clarification, in the residential single-product, where you are talking about being able to produce it by the end of '07. I am just wondering, is that still on line, who are you planning to use distribute it and do you have any data, yet as to wind tolerance?

Mark Morelli

Yeah. Residential product, I would say is still in a development phase. We are currently going under UL testing of that product line and at the moment, we are focused on getting that product out, I can't really elaborate further. But part of the issue too, is really developing a sound distribution strategy for our residential product as well.

And at the moment we are very captivated off the strong demand of the commercial, which is essentially to turnout our product line. So we're going to come forward I think with further plans and details on the residential product line when we have it.

Maxwell Vanderwal - UBS

All right. Just as business side I can tell you, the client constantly keep trying to find out what's going on the residential. So there is few junctures in that product I am sure you are aware.

Mark Morelli

Yeah. We appreciate that. Thank you.

Operator

Your next question comes from the line of Bob Stone with Cowen and Company.

Bob Stone - Cowen and Company

Hi. One last question on the accelerating ramps schedule, can you provide any color details in terms of what's changing, what are you doing differently that gives you confidence and shortening the ramp interval?

Mark Morelli

Part of our shortening the ramp interval really goes after understanding the mistakes that we have made in some of the earlier designs. What the team tracks very carefully is some of the issues that have been barriers to obtain some of our earlier ramp targets. And keep in mind, there has been a tremendous amount of learning in Auburn Hills 1. And out of that, we have dramatically shortened a ramp time out of Auburn Hills 2, but it's not nearly where we need to be.

So every learning cycle that we have the team is studying that obviously, through metrics, [pareto's], what's really driven the time, but it's very important to channel this learning into this ramps schedule. And I have a lot more confidence because I have spent time with this team. I am confident that they understand some of the issues that they run up again, example is this nozzle that I described to you, just one minor example.

And I would say that probably the most important part of this is the Auburn Hills 2, excuse me the Greenville machines are a modified clone of the Auburn Hills 2 based on our learning's.

Sanjeev Kumar

Bob, let me also clarify a point I made earlier on the production on Auburn Hills 1 and 2. We really look at Auburn Hills 1 and 2 as one campus and as such we try to utilize efficiencies on both of the plants depending upon what's happening on the ramp-up. And the production number that I gave earlier, I wanted to put it in that context, we clearly have issues in Auburn Hills 1 that Mark alluded to, but internally, we look at the production at Auburn Hills 1 and 2 as one single campus. So, we generally don't provide the breakdown of the two plants.

Operator

At this time, there are no further questions.

Mark Morelli

Well, thank you for joining the call today. Hopefully, you now have a better understanding at what we're doing to capture this tremendous opportunity that I see at ECD. We thank you for your interest and good day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Source: Energy Conversion Devices F1Q08 (Qtr End 9/30/07) Earnings Call Transcript
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