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Executives

Michael El-Hillow - CFO

Rick Feldt - Chairman, President and CEO

Analysts

Stephen Chin - UBS

Jeff Osborne - Thomas Weisel Partners

Michael Carboy - Signal Hill Group

Michael Horwitz - Pacific Growth Equities

Robert Stone - Cowen & Co

Kelly Dougherty - Calyon Securities

Sanjay Shrestha -- Lazard Capital Markets

Pearce Hamond - Simmons & Company

Steve O'Rourke - Deutsche Bank

Jesse Pichel - Piper Jaffray

Adam Krop - Ardour Capital

Chris Blansett - JP Morgan

Havel Makshnov -Raymond James

Evergreen Solar Inc. (ESLR) Q4 2007 Earnings call January 30, 2008 5:00 PM ET

Operator

Good day, everyone, and welcome to today's Evergreen Solar's Fourth Quarter and Full Year 2007 Conference. This is a reminder that today's call is being recorded and webcast. At this time, for opening remarks, I would like to turn the call over to Chief Financial Officer of Evergreen Solar Mr. Michael El-Hillow. Please go ahead, sir.

Michael El-Hillow

Thank you, Sarah. Good day, everyone. Before we begin today's call, we would like to remind everyone that the statements that are made in this conference call that are not historical facts, such as those dealing with future financial performance and growth, future revenue and product gross margins, solar power industry trends, the demand for renewable sources of energy, capacity expansion plans, the availability of supply and costs of raw materials, product demand, and the regulatory environment in certain key markets. R&D programs are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Future performance and financial results of the company will differ from those expressed or implied in any such forward-looking statements due to various factors. Such factors include, but are not limited to, those described in our filings that the company makes from time to time with the Securities and Exchange Commission. The Company undertakes no obligation to update these statements.

I will now turn the call over to Chairman, President and CEO Rick Feldt for his review of the fourth quarter. Rick?

Rick Feldt

Thanks, Mike, and good afternoon, everyone. You have to excuse me here -- I am fighting off a cold for the three week now, and so if my voice fails, I have to ask for some help from Mike.

This past year was marked by significant accomplishments for Evergreen Solar including our first ever quarterly profit in Q4, the breaking ground in Massachusetts of our first major factory expansion, completing the development of our proprietary Quad ribbon wafer furnace with automated ribbon cutting, significantly expanding our contracted polysilicon supply agreements, and helping to position EverQ for more robust growth and an IPO.

Starting with the fourth quarter of 2007, we recorded total revenues of $22.2 million and a net income of $788,000 or penny-per-share. Our fourth quarter performance provides investors with a glimpse of how our String Ribbon technology, when employed at a commercial scale, is highly profitable, and Mike will review the details later.

Turning to the new 80-megawatt factory that we are constructing in Devens, Massachusetts, I am pleased to report that notwithstanding an early New England winter with almost record snowfall in December, we are still on schedule.

Last week we imposed the facility allowing us to avoid any possible future weather related delays. We have begun hiring key personnel, including the factory’s general manager. We have executed purchase agreements for all of the major manufacturing equipments. We expect to ship up our first panels in mid-2008 and reach full capacity in early 2009.

From a technology standpoint, we continue to develop and refine our revolutionary Quad furnace with state-of-the-art automated laser ribbon cutting process that we call-cut on the fly. This innovative wafer production process provide substantial opportunity to further increase yield, cell conversion efficiency and labor productivity, as well as reduce our already industry-leading silicon consumption.

The Quad furnace will be used in all future String driven facilities, beginning with our Devens station and EverQ's third factory.

The two of the furnace technology currently running at EverQ, factory-wide yields are approximately 75%, wafer thickness is a 190 microns, and cell conversion efficiency is approximately 15%. This process uses less than five grams of silicon per watt today. We believe we are the industry leader in efficient polysilicon consumption.

We believe our new Quad-driven technology gives us the opportunity to gradually reduce polysilicon consumption to approximately 2.5 per watt over the next few years by improving factory yields to approximately 90%, reducing wafer thickness to approximately 150 microns, and increasing cell-conversion efficiency to about 18%.

We believe that our silicon consumption will continue to be less than 50% percent of conventional industry expectations. These improvements, combined with expected material cost saving through panel redesign and improved supply chain leverage, should lower our best process, total manufacturing costs from about $2.25 per watt today to about $1.50 per watt by the end of 2010.

Therefore, factories opening in 2011 will have a total manufacturing cost of approximately $1.50 per watt when they reach full capacity. When our Devens facility is in full capacity in 2009, we expect the total manufacturing cost will be approximately $2 per watt.

We announced today that we signed our second major polysilicon supply agreement with DC Chemical, reinforcing the importance of our relationship with this key supplier and significant Evergreen's stockholders. Our polysilicon continues to be in short supply; this new contract will supply us with additional silicon beginning in 2009, enabling us to begin expansion of our Devens' capacity as earlier this spring six months sooner than we have previously planned.

By early 2010, the Devens site should have annual capacity of approximately 160 megawatts. In listen to our two contracts with DC Chemical, we have long-term polysilicon supply agreement with REC, Nitol, Wacker and Silpro, providing approximately 12,500 tones of silicon through 2019.

On the call at the end of the third quarter, we had capacity targets of 100 megawatts in 2009, 200 megawatts in 2010, 250 megawatts in 2011, and 500 in 2012. We are in a position today to report an increase in our plant capacity in each year through 2012.

We now have silicon under contract reached annual production level of approximately 125 megawatts in 2009, about 300 megawatts in 2010, 600 megawatts in 2011, and about 850 megawatts in 2012. We are pleased and excited to be in a position to accelerate and almost double our expansion plans.

I recently visited DC Chemical in South Korea, and I continue to be impressed with the progress that DC has been making with the start of other facility. We continue to expect to receive our first shipments of silicon has scheduled, which coincides with the opening of our Devens factory in mid-2008.

One of the members of our executive team visited Nitol at year-end, and find they too continued to be on schedule. They are currently sprucing (inaudible) and expect to produce first highly-poly quantities of polysilicon over this year.

Silpro is in the earlier stages of its factory construction. They have a seasoned management team with experience in silicon manufacturing and world-class partners including the [GUSSA] and strong financial backing.

Before turning to EverQ, I would like to focus on the other key raw material use in our production process that is String. As you are aware, we use a special former String a wafer manufacturing process does not use by any other wafer manufacturers. In fact, worldwide demand is pretty limited for this product, and as a consequence, we currently procure our String supply from a sole source, and we recently extended our contract with that source.

As part of our initiative of securing adequate raw material supplies and reducing costs, we have begun the construction of our own factory's crew String utilizing a technology that we are licensing from a company in England. We expect this factory to begin initial production near the end of this year at Devens and gradually grow to become a significant second source String supplier to meet the expansion plans for both Evergreen and EverQ.

Our EverQ joint venture continues to show the significant financial improvement that we anticipated when we formed the JV in 2005, achieving sales of EUR 60 million and operating income of approximately 17% for the quarter. EverQ's strong fourth quarter financial results clearly demonstrate the compelling economics of our String Ribbon technology and provide the catalyst for Evergreen to achieve profitability in quarter four.

As the fourth quarter ended, EverQ had two factories with annual capacity approaching 100 megawatts. EverQ has begun the construction of the third factory an 80 megawatt facility that will use our Quad technology. We expect this factory to be open in late 2008 and to be at capacity in mid-2009.

EverQ has had significant success and could be ramping to wafer cell and panel factories employing our String Ribbon technology has generated positive operating income within 15 months of breaking ground. We expect that our own Devens factory may have will experience similar success.

During 2008, both Evergreen and EverQ will continue the capacity expansions and will incurs of central factory startup costs in packing profitability in 2008. Evergreen specifically will incur start up cost for Devens Phase I and Phase II, as well as our new String factory.

As Mike will describe shortly, he has had investments including the acceleration of our expansion plans at Devens increase our losses in '08. We will lay the foundation for significant profitability in '09 and beyond. Consistent with our previous forecast, we expect that Evergreen will achieve sustain profitability when Phase I of our Devens factory's reports full capacity, which is expected in the first quarter of 2009.

In preparation for an IPO, the Supervisory Board of EverQ has been actively recruiting key members of EverQ's senior leadership team, including a CEO, and they expect our achievement in place by mid-year. Is this team that will lead the EverQ IPO later this year or early next year.

Additionally EverQ is beginning to staff both research, development, and the sales and marketing organization in preparation for becoming a stand-alone company. The distribution of solar panels produced by EverQ will ultimately be marketed under yet-to-be-determined brand name.

In the interim, EverQ will continue to provide Evergreen Solar branded products [to an all current] -- and possibly future -- Evergreen Solar customer contracts and commitments. Our backlog of those contracts is approximately $900 million. EverQ currently has a long-term silicon contract with REC for about 8,000 metric tones and long-term market pricing to reach 300 megawatts of capacity 2010.

Towards the further growth of EverQ to 600 megawatts, REC has offered an additional supply of polysilicon for approximately 400 metric tones beginning in 2010 and extending through 2015. That pricing that is again competitive with long-term contracts. This additional supplies contingent on successful IPO of EverQ.

However, polysilicon volumes supplied by REC to EverQ potentially reach 2,100 metric tons per year. From our standpoint, we have the strong financial performance of EverQ and the continued enthusiasm and desire of the EverQ partners to quickly and substantially grow the joint venture, using our String Ribbon technology as a validation of the technology and the future opportunities they can provide.

We believe the solar industry will remain robust. We continue to experience rapid growth over the next several years and that our String Ribbon technology will be a big part of that market growth, providing approximately 1.5 gigawatts by 2012.

We anticipate rapid market growth through 2008, with demand continuing to exceed supply for our products. Our expectation is that PV growth will be lead in Europe, but with Germany continuing to be the dominant market. We believe the slightly-increased declines in the German feed-in tariff of 2%-more annually beginning in 2009 are reasonable, and we will continue to provide substantial support through growing market in Germany as the industry moves towards good parity.

In percentage terms, we expect more rapid growth in some of the newer PV markets in Europe. This growth will be led by Spain, which is expected to officially increase the scale of its incentive program from about 400 megawatts to 1,200 megawatts in this coming quarter two.

We believe the combination of significant incentive, large market opportunity, and substantial sunshine will make Spain an outstanding market. We are also excited about the tracks’ development in Italy, France and Greece. We are optimistic about the continuing growth of the US markets.

State-level programs continue to expand including the recent announcements of the CommonWealth Solar Program here in Massachusetts. This program initial phase and expected tenure 250 megawatts program is expected to provide $68 million of subsidies over the next four years.

On the Federal level, we are optimistic about the passage of an extension and expansion of the ITC investment tax credit during this year. While the proposed eight-year extension did not get included in last year's energy bill, it did enjoy broad bipartisan support in the Congress. The pass is proposed last year, This extension would expand credit to include utilities, and increase the residential cap.

We believe this changeable, significant increase the applicability of the ITC and further accelerate US market growth. We are also seeing early signs of significant market growth in Asia. The Japanese market continues to grow, albeit more slowly, than what we have seen in the US and Europe, and essentially though with our subsidies. The support in Korea continues to create significant demand, and the announcement in China were quite early is encouraging.

Our production volume for 2008 is fully committed to existing customers and partners with the exception of a few percent that we held back to see new customers. We intent to place about 55% of our product in Europe, but we expect the highest price is given the strength of the market in the euro-to-dollar exchange rate, with remaining 45% being sold in the US and a small percent in Asia.

With that, I'll now turn the call over to our CFO Mike El-Hillow for the financial review. Mike?

Michael El-Hillow

Thanks, Feldt. Evergreen product sales of $16.9 million for the fourth quarter were up approximately 10% from $15.4 million in the third quarter of 2007. We sold 4.0 megawatts at an average selling price of $3.55 per watt, compared to the third quarter of 4.3 megawatts at $3.44 per watt. The increase in sales volume was primarily due to additional output of both the prototype Quad furnaces and additional Dual furnaces placed in service during the fourth quarter.

The increase in the selling price is primarily due to a shift in sales from the United States to Europe. Approximately 80% and 20% of our products sales during the fourth quarter were to US and European customers respectively, compared 86% and 14% to US and Asia-Pacific customers in the third quarter of 2007 respectively.

The fourth quarter of 2007 included $5.3 million of fees from EverQ, compared to $2.8 million in the third quarter of 2007. The sequential increase is due to higher sales volume associated with the ramp up of the second EverQ factory, a stronger Euro, and a 300,000 end of year catch-up adjustments.

Gross margin for the fourth quarter of 2007 was $6.2 million, or 28.1%, compared to the third quarter of $4.5 million, or 24.9%. Sequential increase was primarily due to the increase in fees from EverQ.

As we have mentioned in the past, the main purpose of our Marlboro facility is to develop and prototype new manufacturing process technologies, which, when developed, will be employed in new factories. As such, our manufacturing costs incurred in Marlboro are substantially burdened by additional engineering costs as we intensify preparations for the deployment of our Quad driven technology into a commercial setting in Devens. And also reflect in efficiencies typically inherit in pilot and development operations.

We expect the product gross margins at Marlboro, which is good fees from EverQ, will gradually decline as we move forward to opening up our Devens facility. Operating expenses were $11.1 million in the fourth quarter, with research and development of $4.8 million and selling, general and administrative of $5.3 million, and Devens factory start-up costs of approximately $1 million.

In the third quarter, our operating expenses were $10.8 million, with R&D of $5.4 million, SG&A of $5.1 million, and start-up costs of $358,000. We will continue entirely control our ongoing spend in R&D and SG&A as we devote more of resources through new factories. Our operating loss was $4.9 million, compared to $6.3 million in the third quarter, and it improved mainly due to the higher joint -venture fees.

Net income for the fourth quarter was $788, 000, or $0.01 per share, including $3.4 million for our portion of EverQ's quarterly profit. In the third quarter of 2007, our net loss was $3.7 million, or $0.04 per share, including $400,000 through our shares of EverQ's quarterly profit.

Total worldwide sales of String Ribbon product were $104.1 million, including $87.2 million of sales generated by EverQ. Total worldwide String Ribbon product was $62.9 million in the third quarter, including $47.5 million of sales by EverQ.

In the fourth quarter, EverQ sold 21.3 megawatts at an average selling price of the Euro 2.68. We had sales of Euro 60.2 million, gross margin of 22.8%, operating income of Euro 10.5 million or 17.4%, and a net income of Euro 7.1 million.

In the third quarter, EverQ sold 12.6 megawatts at an average selling price of Euro 2.74 per watt. We had sales of Euro 34.5 million, a gross margin of 12.8%, an operating income of $2.1 million, and a net income of EUR 872,000.

EverQ's volume increases primarily due to the ramp up of EverQ-2. Selling prices in Euro is decreased slightly diminutive geographic mix as more products was sold into the US in Q4 and the weakening dollar impact of EverQ's averaged selling price.

In terms of kilowatts sold during the fourth quarter, approximately 59% of products was sold in Europe, 39% in the US, and 2% Asia, compared to 62% in Europe and 38% in the US during the third quarter of 2007.

The actual results of EverQ showed that our technology and integrated manufacturing process can provide an attractive operating model and a significant financial leverage. To put this in perspective, if EverQ was paying the long-term contract price for all of it's silicon in the fourth quarter of 2007, its gross margin would have been over 30%, despite only being at above 80% capacity.

As we have discussed previously, EverQ agreed to pay $200 per kilogram to f this year. However, as we have previously discussed, EverQ agreed to pay $200 per kilogram to REC and Q-Cells, which was the spot-market price at the time for the silicon used in EverQ-2 for about one year after opening in exchange for accelerating the construction of the 60-megawatt facility.

REC's new feedstock plans, which will provide the silicon to enable EverQ's continued growth, is expected to come online in mid-2008. By that time EverQ will pay the long-term contract price for all of the silicon it purchases from REC.

Based on the success of EverQ and the similarities with our expansion, we expect to realize strong financial performance from the new phase we were build, starting with Devens. As Rick mentioned, Devens will use the Quad furnace platform, which is another major step in our technology roadmap.

Quad provides with the foundation to drive factory yields to about 90% and cell conversion efficiency to about 18% over the next few years, and we expect to meet our target operating model of gross margins of at least 30% and operating margin of at least 20% as these factories reach full capacity.

As Rick said, we believe the production is 2009 will be approximately 125 megawatts. We expect to reach full capacity for the first 80 megawatts phase of Devens in early 2009 and achieve sustained and significant profitability beginning in the first quarter of 2009.

However, during 2008, we will continue our significant capacity expansion and will incur substantial factory start-up costs, temporarily impacting our profitability but allowing us to scale our manufacturing much more rapidly than previously expected.

Accordingly, operating guidance for the first quarter of 2008 is as follows. Product revenue was expected to be in the range of $16.5 million to $17 million, essentially flat with the fourth quarter.

Fees from EverQ expected to be approximately $5 million, down from $5.3 million in the fourth quarter due to the end of the year adjustments of $300,000. However, total fees from EverQ will be substantially higher in 2008 over 2007. As EverQ-2 will be near full capacity, as we progress throughout the year.

Gross margin is expected to be in the range of 24% to 28%, down slightly from the fourth quarter essentially because of higher cost in Marlboro and slightly lower JVCs. Operating expenses are expected to be in the range of $10.5 million to $11.5 million, excluding factory start-up costs that are expected to be in the range of $5 to $5.5 million.

Our operating loss is expected to be in the range of $10 to $11 million. Other income is expected to be approximately $1 million because we will have lower invested funds with the continued growth of our new factory.

I assure that EverQ income will be approximately $1.75 million volume of fourth quarter because EverQ's operating expenses will be higher if they expand their management, support teams and preparation for their IPO, incur start-up costs for EverQ-3, and pay income taxes once they have reached sustained profitability. Our net losses are expected to be in the range of $7 to $8 million.

Let me summarize now the expected change from the approximate 788,000 profit in the fourth quarter to our high-end forecast of a net loss of $8 million in the first quarter of 2008. We will have higher factory start-up costs of approximately $4.5 million for Devens, and the String factory as activity will increase substantially.

We will have lower equity income from EverQ of approximately $1.7 million if they build out their organization to appear for their IPO, save taxes, and incur the costs of start-up and lowering interest income of our investable funds of approximately $1.25 million.

I want to stress that despite forecasting a net loss of $8 million for the first quarter of 2008, our technology well planned an operating model of fundamentally strong. We have demonstrated consistently through EverQ that our String Ribbon technology is highly scalable and delivers strong financial performance. Such as EverQ incurs start-up losses, we expect to incur several, and only our near-term financial performance will be impacted by such incremental expenses.

The start-up expenses we are making over the next few quarters will begin to return substantial profitable results as Devens when approaches full capacity in early 2009.

Rick and I will now be happy to answer any questions. Operator, please open the lines.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go first to Stephen Chin of UBS.

Stephen Chin - UBS

Congratulations on the second DC Chemical Polysilicon deal. Just a few follow-up questions on that to start with. Did Evergreen have to make any additional prepayment to DC Chemical for this second deal? And: what is the price per kilogram being paid to the DC Chemical for the second deal compared to the first deal?

Rick Feldt

We are making a prepayment will be phased in over the year. We haven't announced how much it is, but it's a typical prepayment, which you see about 15% of the total contract costs. And that the cost in this contract would be little bit less than the earlier contract, with that the price starting a little bit higher, but going down over the period of the contract, which is similar to what we and other companies have paid or have done in recent silicon contract.

Stephen Chin - UBS

And then: can you just provide a little bit more clarity on when you think the first polysilicon sample will arrive from DC Chemical? You said the middle of 2008: are you suggesting that Q2 '08 or 3Q '08? And: what initial quantity, do you think, will be delivered?

Rick Feldt

We'll be getting sample quantities this quarter and we will be getting small production quantities we think by the end of the second quarter in constant with our small requirements as we begin to build our first wafers and panels at the end of the second quarter beginning of the third quarter of this year.

Stephen Chin - UBS

And one final question could you just give us an idea: what was the progress that Evergreen is making in finding distributors or customers to purchase the solar modules made at Devens?

Rick Feldt

Let see, as probably to answer to that question. One is that, our current customer base is anxious for us to allocate some of the Devens product and we have not yet done so. And the second is that, Terry has been out developing new contacts in many markets, Korea especially. So, we feel really good about we'll be able to sell out Devens, almost as we please. But we haven't yet done so.

Stephen Chin - UBS

Okay. Thanks guys. Congratulations on that second deal.

Rick Feldt

Yeah, thank you.

Operator

We'll go next to Jeff Osborne of Thomas Weisel Partners

Jeff Osborne - Thomas Weisel Partners

Great, congratulations on the results. I just have few questions, I was wondering: if you could talk about what the start up costs would be that you expect to experience for Devens in 2008? And: how we should think about modeling those?

Michael El-Hillow

Well, total start up costs in the first quarter, which will settle be in the range of $5 million and then as we said in previous calls in the quarter before we opened up a factory, it ramps up. So, it could go up to two times at first quarter and then we'd open up the factory and then I will scale right down again but then, as Rick has said, we are going to accelerate the expansion of Devens too.

So, in round firms, you could probably use that model, we also have some start up costs for our String factory and also some manufacturing corporate overhead to support the rapid expansion of worldwide factories. So, we are not going to give out guidance, that goes beyond the quarter, but it's safe to say that if you would have modeled something in the range of 2x and implement down a little bit and just factor that in as to how you are growing out on our capacity, you will be close to our factory startup cost.

Jeff Osborne - Thomas Weisel Partners

You are starting line two in Devens this spring. Is that correct? And: is there any reason to believe that line two would not experience a similar $5 million startup cost? Or: would it be lower because it's an existing building?

Rick Feldt

Yes, our plan is to break ground in Devens too, sometime in the spring, the details are to be ironed out. We just got the second polysilicon agreement signed this morning. But yes we will break ground in Devens too in a few months. And so, it will incur similar, maybe slightly less, but very similar startup cost, because the startup costs really are function of the hiring and training of people. The Devens 1 will employ around 375 people the way it works is you have to hire people anywhere from production operator, a good four weeks to six weeks before they will begin producing products on their own.

So, there is a lot of training that goes on and then you have to hire the technical staff in advance of that. So, you have people to oversee the production folks, people who plug the equipment. So, it is no getting around it, these are (inaudible) as factories and they cost money to get started. Once they are up and running though we think that we have a very, very attractive financial model and we can provide very attractive returns to our investors, but it just no getting around it. We are going to accelerate our expansion, so we are real excited about that. We are going to incur lots of costs in '08 to do that, to really set ourselves up, we think for '09 and beyond to become a much, much bigger player in this industry and a profitable company.

Jeff Osborne - Thomas Weisel Partners

I understand. And then just quickly on the CapEx, what was CapEx for 4Q? And now that you are building the String plant and accelerated Devens 2: How should we be remodeling '08 and '09 CapEx? And then also: if you can just touch on the String plant, given that you have that in-house, it sounds like for 2009. Should we be thinking about any reduction in your non-silicon cost per watt? And: what would be that be?

Michael El-Hillow

I don't want to go through CapEx for the whole year. What I would like to do is, let me just call you after this and I’ll give more detail on the CapEx.

Jeff Osborne - Thomas Weisel Partners

Okay.

Michael El-Hillow

Thanks.

Rick Feldt

And String and String costs, as our volumes are increasing we are getting better pricing from our current sole source. But we also believe that as we build our factory, we will be able to capture the margin that is currently captured by our current supplier. And that will part of the way we achieve the cost targets that we have established and articulate here again today $1.50 in 2010.

Jeff Osborne - Thomas Weisel Partners

Can you just talk about then what String is as a percentage of your gross per watt?

Michael El-Hillow

We haven’t gone to that level of the detail, no. What we have said is that and we'll talk about this later on. We are going to have a Capital Markets Day here in March at which time we will probably give little more detail on our cost make up, but until that time we are not giving out additional details.

Jeff Osborne - Thomas Weisel Partners

Great, thanks a lot. Good luck.

Rick Feldt

Thanks.

Operator

We'll go next Michael Carboy of Signal Hill Group.

Michael Carboy - Signal Hill Group

Ladies and gentlemen, Rick, I like you to sort of (inaudible) for a moment on a broader industry topic, and that is, it relates to specific interconnection standards here in the U.S. Once we start to get more polysilicon available and more panels manufactured, available here in the U.S, what sort of volume do you think the market can take before some of the vulcanized interconnection standards that exist in the 50 states, begin to become an impediment to the market, being able to consume these products?

Terry Bailey

This is Terry Bailey. I'll try and answer that. Did you say vulcanized?

Michael Carboy - Signal Hill Group

Vulcanized, yes.

Terry Bailey

Okay. So, basically the beauty of solar is in its distributed nature and so part of that is that it reduces the overall requirement for infrastructure to be improved at a normal rate you do. We fully expect, keep in mind, solar is extremely small or renewable energy in total is extremely small with regards to the total power output, total energy output in the country. So, it's going to be a long time before we run in to any issues with that.

Michael Carboy - Signal Hill Group

Well, I appreciate the low penetration, I am more concerned about the fact, that State PUC regulations impede the growth of the market and I am trying to get an idea of: how soon you'll see ineffective PUC regulations regarding interconnection standard as being something that impedes or slows growth?

Terry Bailey

Okay, so these standards are being changed all the time, for instance the PUC, they call it different things in different states, but basically the PUC in Massachusetts has recently changed several things with regards to supporting the Governor’s program for putting in up to 250 Megawatts over the next few years. So, it is a dynamic thing, changing constantly just as the subsidiary programs are themselves, and they will go in locked steps, in order to support the local markets. And trifle, we don’t expect that will be an issue, we also, as many companies are working closely and the utilities are paying a lot more attention with regards to renewable energy of all types and that will have an effect, on that sort of regulation as well.

Michael Carboy - Signal Hill Group

And Michael, if I can squeeze in one financial one: could you elaborate a little bit on what that $300,000 EverQ true-up was?

Michael El-Hillow

Well, Michael, we do estimates early in a year, it's just a matter of volume of what the sales are going to be and the exchange rate and nothing more than just truing up an estimate, that’s it.

Michael Carboy - Signal Hill Group

Alright, thanks gents.

Operator

We are going next to Michael Horwitz of Pacific Growth Equities

Michael Horwitz - Pacific Growth Equities

Hi Gentlemen.

Rick Feldt

Hi Mike.

Michael Horwitz - Pacific Growth Equities

So, could you just run through: how you view ASP declines over the next few years? Understanding that tariffs dictate a lot of this over in Europe, but I know in the past you have been pretty aggressive with the way that you have internally modeled ASP declines and you have still helped it to substantial gross margins guidance. But: are ASP declines, when you internally model them, coming down faster has anything changed there in the out years? And then the second question is: any comments on the Italian market from your perspective?

Rick Feldt

Its sort of two questions are on ASP's, but we think its going to happen how we internally model there Michael.

Michael Horwitz - Pacific Growth Equities

Right.

Rick Feldt

So, as we look at the market, we look to Europe we think that because of the decline feeding tariffs that European prices will decline over the course of the year, 5% to 7%. This year the tariffs start declining, 2% higher next year. And so, we envision more like 7% to 9% next year and after that maybe a double digit, 10%. For the U.S we think the first half is pretty stable, the second half price declines of 3 to 4%, then probably in a 5% to 8% range next year. Internally we tend to model pricing drop a little bit more aggressively, so we set more aggressive cost targets. But that’s how we view the markets for next couple of years, at least as we see it.

Michael Horwitz - Pacific Growth Equities

Great! And then that Italy

Terry Bailey

I'll take the questions Terry. So, the Italian market has been exciting for a long time, unfortunately it’s been exciting solely in potential and not in reality. But it's continuing to move to more reality and frankly we have expectations that the Italian market can be as large and interesting as the Spanish market, it just lagged couple of years behind that.

Michael Horwitz - Pacific Growth Equities

Okay. Great that’s helpful. Thank you.

Terry Bailey

Hey Michael

Operator

We will go next to Rob Stone of Cowen & Co.

Robert Stone - Cowen & Co

Hey guys congratulations on the first profitable quarter.

Rick Feldt

Thanks.

Robert Stone - Cowen & Co

I wonder: if you could comment on the estimated percentage of EverQ fees this year? And: how should we think about following that in relation to EverQ sales?

Michael El-Hillow

I think the best way Rob, we've guided to $5 million or so in the first quarter. If I were to look quarter-by-quarter I would model $4.5 million to $5 million, because EverQ itself is not going to grow much. The growth side of this year -- this expands every second quarter during the year, but there is also little bit of pricing pressure out there. So just as a rule of thumb that's what I would do on the top line.

Robert Stone - Cowen & Co

And could you remind us: what you have in terms of funds that you need to transfer to the JV this year? And related to that: what's in the $41 million in restricted cash?

Michael El-Hillow

The $41 million in restricted cash is to support a loan that was used to build EverQ-2. Based upon current projections by the partnership, we do not anticipate to have to advance any funds this year to support the EverQ-3 factory. That could change. We haven't finalized the loan documents yet, but we are in negotiations with a bank syndicate. And the most recent negotiation say that between internally generated cash, cash on hand, rents that they are going to get, plus the loans from the syndicate. The partner should not have to invest any cash further.

Robert Stone - Cowen & Co

Okay. Finally, a more high level question for Rick. In the past I think you have talked ultimately getting to maybe a 20% conversion efficiency with String Ribbon technology. But in your comments today you used an 18% target. What is the ultimate level you think you are going to achieve? And: has that changed?

Rick Feldt

Rob, it has not changed. We've not knowingly ever established a target of 18% for our product. We have said is, we've announced in four words, it's theoretical that could be achieved and theoretically that we can achieve in polysilicon is in the 23%-25% range. But that just in theory, in practice that's not really all that likely.

So we believe the target of 18 is typical of the aggressive target that the polysilicon producers or multi crystalline producers are targeting. So we think we are right in there with the best of the best actually.

Robert Stone - Cowen & Co

Okay. Some of the other companies that are targeting polycrystalline efficiencies that higher and doing it with some time of selective emitter, but in different surface treatment and so forth. Would you say that your plans are consistent with that?

Rick Feldt

Yes, I would say so.

Robert Stone - Cowen & Co

Okay. Thanks very much.

Rick Feldt

Okay. Sure.

Operator

We'll go next to Kelly Dougherty of Calyon Securities.

Kelly Dougherty - Calyon Securities

Picking my call. Congratulations on everything we've heard so far. Just wondered: if you guys can give me any detail on your need to asses the capital markets? I believe you guys were looking in the mid-2008 time frame and quickly we are approaching that number I am just wondering: as far as the Devens expansion is going to impact that at all?

Michael El-Hillow

I would say all along Kelly as you point out. We believe we'll be accessing it by mid this year. The expansion and acceleration then should not affect that. So the plan will not change.

Kelly Dougherty - Calyon Securities

Okay, great. And then I'm just wondering: may be if you can give us a bit more detail on how you look at and prioritize the markets on a global scale? If higher AFP is that what drives you? Or: may be there is a desire to diversify away from one particular country or the other? And then: may be even within the US, how you look at things on a state level?

Terry Bailey

Okay, Kelly, this is Terry. So we tend to look at the market pretty strategically and not so much strictly as of where is the best ASP that can be gotten on any given day or month. And so, whatever reason we look at the balance. So, traditionally we have been invested in the U.S. market because we know we will grow and become a real market so we put significant portions of our product here to maintain that investment. Southern Europe is clearly a strategic direction to continue to invest highly in with regards to all the advantages you have there from seller viewpoint. We began doing business in Korea, New Zealand, and Australia as those markets began to come up. So, we will continue to look at diversified portfolio. I don't see a country that we want to avoid or get away from. And of course they are all highly effected by local subsidy programs, etcetera, but at least until where everyone able to reach good parity status.

Kelly Dougherty - Calyon Securities

Hey, great. Thank you. And how bad was in the U.S., I mean: California obviously is the 800 pound gorilla, but: how do you look at the U.S. market may be on a state level?

Terry Bailey

We think the 800 pound gorilla is really a good looking gorilla.

Kelly Dougherty - Calyon Securities

Fair enough.

Terry Bailey

It is where the market is. New Jersey has a program that that should be coming online. That will be very interesting. There the exciting part of it is that many, many states are brining on programs and there is just a swell of continued interest in renewable energy for all the right reasons. And so we expect to continue to see rich programs, programs rich enough to continue to move silver and other renewals forward in many new states.

Kelly Dougherty - Calyon Securities

Great! Thanks very much and congratulations again.

Terry Bailey

Thank you.

Operator

We will go next to Sanjay Shrestha of Lazard Capital Markets.

Sanjay Shrestha -- Lazard Capital Markets

Good afternoon, guys. Again, congratulations on a good quarter. There is couple of point of clarification. Just on the sub silicon coverage that you guys talk about 425 megawatt in '09, 300 in '10. Does that also include EverQ or that is just the Evergreen standalone expansion coverage that you guys have?

Rick Feldt

That's our own, Sanjay. That's Evergreen alone.

Sanjay Shrestha -- Lazard Capital Markets

Terrific! I just wanted to clarify that, that's great! And the second thing is the fact you guys are going with the expansion of Devens two now, then I guess means that your Quad’s P&L performing obviously up to the par. And with that, and given the still continued tight silicon market here which likely remains at least until the end of this year, probably into '09 as well. Are you starting to see, even more interest to license your Quad driven technology from, more specifically from the Asian players? Can you talk about that a little bit?

Rick Feldt

I won’t talk very briefly, Sanjay. We are building our factories, both Devens one and now as we call Devens two around Quad because we have done a lot of testing. We are getting very good results with our prototype furnaces here. But before we would want to license the technology to someone outside the family, we consider EverQ in the family. We want to get some more operating experience. And so, yes, we've had preliminary discussions with people who have expressed an interest, but we really want to make sure that we understand all the new odds of the machines before we would put them out in the world to strangers. So, that still, conceptionally, is a little ways off.

Sanjay Shrestha -- Lazard Capital Markets

Got it, terrific! Once again congratulations, guys. That's great!

Rick Feldt

Thanks, Sanjay.

Operator

Up next from Simmons & Company, we will go to Pearce Hamond

Pearce Hamond - Simmons & Company

Good afternoon.

Rick Feldt

Hi, Pearce

Pearce Hamond - Simmons & Company

Before Devens one was suppose to be around $165 million and then you got some money from the state and I think we are looking it about $1.90 a watt. Should we think about the same thing capital cost for Devens two?

Michael El-Hillow

Yeah. It will be in that range. But one thing we are facing though, Pearce is that we have already kind of built the shelf. We are always anticipating expanding Devens as far as to accelerating if the equipment passes. So, in that ballpark you should be fine.

Pearce Hamond - Simmons & Company

Okay. And the String plant, the capital cost of that and: is it an incremental source of supply? Or: will it be your sole source of supply?

Rick Feldt

It will be an incremental source. And we'd like to have two sources, since this type of string is not manufactured broadly throughout the world. We want to make sure that we can ensure long term source of supply. Our current supplier does the fine job, but we don't want to just have the sole source. So, we actually want to have two sources, our self and our current supplier.

Pearce Hamond - Simmons & Company

And the capital cost there?

Michael El-Hillow

Capital cost of string, we are going to be rolling it out over several years, but in this particular year, it will be in a neighborhood of $18 million to $20 million, and to get to the volumes that we really believe we think we have to get, to meet the string demands of both Evergreen and EverQ, it could approach $30 million over about three years.

Pearce Hamond - Simmons & Company

Thank you very much.

Michael El-Hillow

Welcome.

Michael El-Hillow

From Thinkequity we will go next to Jonathan Hoopes.

Jonathan Hoopes - Thinkequity

Could you just mention that number? You just mentioned over three years. How many million it was for the string CapEx?

Michael El-Hillow

Close to about $30 million Jonathan.

Jonathan Hoopes - Thinkequity

$30 million, okay thanks. I wanted to know, did you guys talk specifically what the throughput is today on the Quad ribbon. I wanted to actually first clarify that Quad ribbon furnaces are in production.

Rick Feldt

Quad ribbon furnaces are only a pilot production here in Marlboro.

Jonathan Hoopes - Thinkequity

Okay, only in pilot there in Marlboro. Okay, so to talk about yield and conversion deficiencies: is it too early for that?

Rick Feldt

It's too early, we run experiment, and so we believe when we open-up Devens after we get it operational, we will have factors yields in the 83% to 85% range, once for operating at steady states, efficiency of around 50.5% or so, still with the 190 micron thick wafers. But that's when as we get to study state.

Jonathan Hoopes - Thinkequity

And then I had a question on a DC contract, I guess both or almost all of your contracts, are they fixed price: are they take or pay provisions? And: do they have price adjustment mechanisms incase spot goes down and I guess could that hurt you as well if the spot goes up?

Rick Feldt

They are take or pay, the prices are fixed by year, they start hiring in the years, and they dropped down substantially in the latter years. And beyond that we don’t really talk too much about them, but I will tell you that we are real comfortable with the long term pricing and don’t believe that unless it is an absolute (inaudible)0.32/029 people are willing to give it away that we would suffer any consequences if the spot prices fell.

Jonathan Hoopes - Thinkequity

Great! Thanks for taking my question.

Rick Feldt

Sure.

Operator

(Operator Instructions) We will go next to Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you. Good afternoon. I think the numbers you gave for '09 through 2012 were production numbers. Is that correct? How much silicon you have for production?

Michael El-Hillow

Yes.

Steve O'Rourke - Deutsche Bank

What will capacity ramp look like, as we go out through those years. Obviously, a bit above that, but: is there some guidance you could give us on that?

Rick Feldt

Well, the numbers we gave here are what we effectively believe we will be able to produce in those years.

Michael El-Hillow

But I think if you go to 2010 and Rich talked about being a 300 megawatts in 2010, I mean: we would have may be one factory that wasn't at full capacity at that time. And so it might be: 325, 340. With each factory we would provide about half of the annual capacity in the year it opens. That’s how we roll on this house.

Steve O'Rourke - Deutsche Bank

Okay. And once something is up and running: are you assuming something like a 90% utilization rate for that factory?

Michael El-Hillow

If you would say 90% it was like yield or whatever?

Steve O'Rourke - Deutsche Bank

Just overall utilization that is megawatts out based upon what your rated capacity is. It seems very high and that's the case because you've said 325 or 330 with 300 megawatts out that's pretty ambitious.

Rick Feldt

Yeah, it does get a little confusing. Some people talk about name plate capacity and they say name plate like capacity is 100, they effectively can produce 65, 70, 75, 80 and 85 whatever however they do it. We talk more about what our effective capacities are. And so when we say 125 plus or minus a few percent, that's where we expect to get out of the factory, not name plate get de-rated by 10 or 20%.

Steve O'Rourke - Deutsche Bank

Okay, fair enough. That's actually quite helpful. And Mike one other question, I return to sort of extractive questions, but: do you have guidance for CapEx for 2008?

Michael El-Hillow

We've not gone there, yet, Steve, no.

Steve O'Rourke - Deutsche Bank

Okay. And one lat question: when do you expect the sample shipments of silicon from Nitol and Silpro?

Rick Feldt

Nitol. It's a

Michael El-Hillow

It's later this year.

Rick Feldt

Yeah, I forget it, I forget the…

Steve O'Rourke - Deutsche Bank

But: it is in 2008?

Rick Feldt

In '08 yes.

Steve O'Rourke - Deutsche Bank

Okay.

Rick Feldt

Silpro won't be till '10.

Steve O'Rourke - Deutsche Bank

Okay, thank you very much.

Operator

Jesse Pichel excuse me, Piper Jaffray has our next question.

Jesse Pichel - Piper Jaffray

Yes, hello good evening. Another question on DCC, your new poly contract comes at the time when there are growing concerns about midterm or even near term poly oversupply. Can you discuss your thought process in signing this expanded contract? And, specifically: has your team visited some of the other startups in Asia and other places? And: what is your conclusion there?

Rick Feldt

We sell the start ups B030 0:19 poly silicon start ups or?

Jesse Pichel - Piper Jaffray

Yeah, that's right from some of these Chinese companies?

Michael El-Hillow

Sure. So, the first question we've a view that long-term understanding the basic cost structure of polysilicon industry which I believe that long term it's going to cost these manufacturers in the order of $30 to $35 to produce a kilogram of polysilicon. May be with FBR and a very efficient process it could be in the high 20s, but generally speaking $30, $35 or so.

Therefore in order for these companies to be in business they got to get reasonable margins, they got to recover the cost of capitals. We think long-term the price of poly is got to be in the $50 to $60 range. So, when we think about signing up the long-term contract, so long as we're going to get around or close to that range in the other years then we are happy to sign the contract.

Jesse Pichel - Piper Jaffray

Got you. So, you don't necessarily subscribe to the notion of a lot of polysilicon overcapacity out there outstripping installation demand?

Michael El-Hillow

I guess that's possible and I guess people can give it away because if they do book a lot of big. So, I guess I don't subscribe enough to say I'm kind of sit on the sidelines and hope that happens that's much price you have.

Jesse Pichel - Piper Jaffray

And I guess that Dough tells to my next question for Terry if he is still available. Terry, would you be willing to pre-sell modules for 2009 or 2010 at a substantially lower ASP in order to avoid potential inventory builds across the supply chain?

Terry Bailey

Well, I'm still in there Jesse. So, the answer is: we already have long-term arrangements with multiple companies they go out past 2009. So, we've structured deals along those terms. With regards to what the specific pricing may be. That is what the market requires at that time and frankly from our viewpoint although anything can crash as the other industries have. But the basically feeling is that the demand for energy is still large that at the proper price point. And remember every company out there saying they want to reduce the total cost by 50% over a given period of time. So, the proper price point there won't be of anything. There is ample to absorb it all. And what we and everyone should be working toward is getting to those correct points.

Jesse Pichel - Piper Jaffray

Terry, like you said your prices are not fixed right there, they are market prices. But given your cost structure there couldn't you pre-sell a much lower price module for the end of '09, 2010 when quads running at a near good competitive rate. And: why wouldn't you do that just perhaps to mitigate the risk of another supply situation?

Terry Bailey

We absolutely could Jesse, and on any deals that have been consummated we'd be discussing it.

Jesse Pichel - Piper Jaffray

Got you. And Terry, a follow-up, I think the Senate will have a forego tonight or perhaps tomorrow morning with the one year ITC expansion written to the sales package. And: do you think this is going to have any kind of material effect on '08? Of course I guess, there was continue growth in '09, but: could this accelerate '08?

Terry Bailey

So, anytime you've something that's going away then it does create a little more sense of urgency to put things in now. So, “yes”, I think if soon something in past that we would see a little -- an increase in activity here in the U.S. in that period of time. Frankly I'm not sure that it will pass tonight.

I think that there is a lot of activity going on and a couple of other opportunities to get the ITC moving along in the first half of this year, and so, we will see more activity then. Clearly, if the ITC isn't passed then there will be some adjustment in the U.S. marketplace or move the product outside the U.S.

Jesse Pichel - Piper Jaffray

And last question for Mike based on the new poly contracts, given update on your projected costs per watt for 2010 and: that would be including silicon of course?

Michael El-Hillow

That's the $1.50 that we've talked about earlier, Jesse.

Jesse Pichel - Piper Jaffray

So, it's $1.50 including silicon?

Michael El-Hillow

Yes. That's total cost, Jesse including variable and fixed costs.

Jesse Pichel - Piper Jaffray

Thank you.

Michael El-Hillow

And last because you brought up silicon question, one other things that has been talked about with our technology is that if the price of silicon comes down, we loose our competitive advantage, I just want to take a second to go over the math on that.

Jesse Pichel - Piper Jaffray

Yeah, sure.

Rick Feldt

We are driving to about 2.5 grams of watt in 2010 with Quad. And when you look at all of our competitors in the poly area, they don't have string, they have to use the sawing technique and all the prognosticator say that they may get down to seven, that can be some I guess, little bit less than seven. So, no one knows what's going to happen to poly.

But we know for the longest time the price is $35 went to $50, now its running. Our spot price is well over $300. But if you just say Mike, if that was in a steady state of $50 a kilogram, our competition is going to have $0.35 of watt of silicon cost in 2010 and beyond. We'll have $0.13 that's $0.22 difference may not sound like a lot, but we are driving to $1 of total cost that's 22% of the cost.

So, for those you have a hard time doing the math, please you got to think about that way. Going to the [class stage] of 75, maybe it stays at a 100 and suddenly, if it goes down to $35 a kilogram then we're going to be able to compete with the thin film people and the people that are trailing us can get closer. So, it a very compelling technology some people in investing community get that, some don't. But we'll be happy to keep going through it in detail every meeting.

Jesse Pichel - Piper Jaffray

And Mike, we certainly agree with that. But to say it's a $0.22 advantage, you would have to net that against the higher variable costs of your wafer processing, silicon…

Michael El-Hillow

Just as you are assuming that's the case but I'll tell you, I have looked in great detail at all of the pundits who go through all wafer manufactures around the world, and if their cost to develop wafers is correct. We are less than they are today. People assume that our process is more expensive, mainly because we haven't shared it. It's also a developing process.

And so, when we have this Analyst Day, we are going to start sharing that information. We assume that the market data is correct, and the cost per wafers that are done by the wafer companies and then purchased by the cell manufactures, we assume the numbers are correct. We will go through that and we will show you our competitive advantage that we believe is sustainable.

Our process is not more expensive if the pundits are correct in analyzing what the true cost of wafer production is. So, we will be prepared -- this is my advertising to get all of you to come on March 11 Analyst Meeting and get a tour of our facility.

Jesse Pichel - Piper Jaffray

Mike that opens up one more question is: if you are competitive on wafers, what about on the cells? I mean: some would argue you might have a higher breakage rate or slightly lower efficiency: you probably give up a little something there?

Michael El-Hillow

And we are working our way thought that. One of the reasons we moved into Quad, we believe it gives us a stronger wafer. We are improving our technology. That could be the case that we said along that with the Quad technology, we believe we will have more flexibility in how we make our wafers, also size of wafers, and we are, we will be experimenting what are the processors and to get to that point many people say that why aren't we going to China?

We've said all along we haven't had to open up our (inaudible) in Massachusetts. This is emerging, disruptive technology, we wanted it near by. We are looking at cell manufacturing. We are looking at panel manufacturing. If the least expensive place to manufacture is in China, we will have our competitive advantage with wafers and we will go to China. We will do best; we will do the fast forward technique. But in the mean time yes, we are opening in Massachusetts, because this technology is disruptive. This technology is new and we have to make certain, that it operates perfectly out of the gate.

It's obviously doing very well in Germany with the Gemini-dual ribbon. So, we are going to give this much more detail at the March Analyst Meeting, because we do believe there is a certain level of confusion and we will be happy to answer at any questions that day on, why people believe that our technology is not a sustainable competitive advantage, near-term and long-term. They have now done advertising. If you want to ask any question Jesse ask anytime.

Jesse Pichel - Piper Jaffray

We appreciate the transparency there and just in our defense there, the numbers are little harder to analyze in you case.

Rick Feldt

That we acknowledged that's what we are saying.

Jesse Pichel - Piper Jaffray

Exactly.

Rick Feldt

We are prepared to give the investing community more information. We made that commitment at the Analyst Day last year and I think you have seen it throughout the year. We are prepared to do it again.

Jesse Pichel - Piper Jaffray

Understood, thank you.

Rick Feldt

You're welcome.

Operator

We will go next to Adam Krop with Ardour Capital.

Adam Krop - Ardour Capital

Thanks for taking my question. Most of my questions have been answered, but I do have one follow-up clarification. You issued more guidance on the cost side for the Davens 1 and Devens 1 facility and I appreciate that. Should we still be expecting the same amount of unit shipped in the back half of this year out of the Davens 1 facilities? Could you just clarify that for me?

Michael El-Hillow

We have said all along and we probably be may be 8-12 megawatts for the year, if that still operational. I mean: one other thing to just talk about the accelerated costs. We are going to accelerate the cost. We are going to accelerate the production. There is no doubt, that I mean: if you had a megawatt, substantial profitability. But right now when we said we have been saying it for about six months. Eight to twelve megawatts in the second half of the year.

Adam Krop - Ardour Capital

Okay. So, that hasn't changed.

Michael El-Hillow

Yes.

Adam Krop - Ardour Capital

Okay. That's all I have. I appreciate it.

Michael El-Hillow

Thanks.

Operator

And next from JP Morgan, we will go to Chris Blansett.

Chris Blansett - JP Morgan

Quick question about the guidance and I was wondering: why the gross margin range is so large. It is just tied to the additional cost of the Devens start up back in the…

Michael El-Hillow

It comes down to this, Chris. We have acknowledged that the fact is the Marlboro facility will move people around it's to get Devens ready. And so that's the only reason we made it large. And then we are not going to manage to, we get to Devens, will give much narrower gross margin goal. That will run a factory.

Chris Blansett - JP Morgan

Right.

Michael El-Hillow

In the meantime, we just give a broader margin.

Chris Blansett - JP Morgan

So, a lot of the start up costs you highlighted in the earnings statement, is really tied to SG&A costs that are kind of being moved around to help the start up and training?

Michael El-Hillow

No, the SG&A is really process engineers, support engineers, supervisors in the various wafer, cell and panel areas that really going to transfer those process to Devens.

Chris Blansett - JP Morgan

I know I'm just trying to get to the point. You probably lump of SG&A right now because you really can't tie them in to cost of goods sold.

Michael El-Hillow

On the pure side of costs, we are breaking them out. But quite frankly there are inefficiencies and they will be inefficiencies that we are not going to go to great lengths to isolate those costs.

Rick Feldt

Correct.

Michael El-Hillow

And so we will look at productivity and we are not going to transit. That will stay in our cost of goods sold. Because we know productivity is going to go down somewhat.

Chris Blansett - JP Morgan

Alright.

Rick Feldt

We are also adding some I will say corporate manufacturing overhead to start now looking at other place of the bill factory and we need to add people in the purchasing organization you would add some facility folks. So, we are going to be, we are getting ready now for this big expansion question. So, we got to hire people. So, we can figure out, where we put the next factories and do we go to Oregon or New Mexico or Mexico or China or wherever. It takes some people to do that. So, part of the overhead in Marlboro is this corporate overhead manufacturing piece.

Chris Blansett - JP Morgan

When you look at kind of tied back to may be where you are going to select the locations of further or additional factories, I mean: this really tied to the cost of labor and when Devens is fully ramped: How you would expect to breakout the cost of labor versus materials and may be depreciation of the finished products?

Rick Feldt

The labor is not the driving cost for us, when you starting ranking it is fairly far down in the left.

Chris Blansett - JP Morgan

Below 10%?

Michael El-Hillow

Yeah, it's below 10%. The reason the people really have to understand that in the manufacturing environment other than maybe if your hand making garments or something. Main reason for going to a low cost region is not necessarily the lower cost of labor that you incur or avoid in the final assembly of the product. It's more the entire infrastructure that country that allows you to buy materials more cheaply there, because of low labor costs throughout the entire supply chain.

So that you can buy aluminum or glass or string or silicon or the automotive industry can buy punch parts or injection modeled parts, whatever and so labor is not the driving component. Going to China we will lie to avoid potentially if the infrastructure gets build up material costs as well as some capital cost because you can trade labor for capital. But it's more complex equation than just saying: what's your labor cost? And: when do you move to China or Vietnam?

Rick Feldt

Quite frankly, we are also concerned about shipping costs. We are going to want to be near the markets. And everyone we ship the (inaudible) are very large.

Chris Blansett - JP Morgan

I mean: I guess I'm looking at it, and also influenced by your expectations of which market in the next few yeas will be the bigger markets? If the US passes that really good tariff, would you build here, so you can actually to be close to the end market.

Rick Feldt

It would our desire. So, once we can make the right economic that's what we do, yeah.

Chris Blansett - JP Morgan

All right. One more question on the actual product gross margin out of Marlboro and I think I'm kind of calculating about 6% gross margin: is that going to be expected to run at that range until Devens ramps?

Michael El-Hillow

No. We did say during the prepared text that the margin will probably go down somewhat as the year progress. We will give more color quite frankly at the March Analyst Day.

Chris Blansett - JP Morgan

Is there any cost associate with the royalty revenue? Or: is it to just assume 100% gross margin?

Michael El-Hillow

It just 100% gross margin, but it's obviously covering some R&D cost, the fact is because the revenue win and it goes above gross margin, so its dollar-per-dollar and increase in our gross margins.

Chris Blansett - JP Morgan

All right, thank you guys. I appreciate it.

Rick Feldt

We are going to take only one more questions, 6.15 and I will be happy to take additional questions afterwards, if you just call my main number, I will be here for few hours to take some additional questions, but it's now to an hour and 15 minutes. So, one last question please.

Operator

That would comes from [Havel Makshnov] of Raymond James.

Havel Makshnov -Raymond James

Good afternoon guys. Have you given a time table for reaching the 18% efficiency target?

Rick Feldt

Just over the next few years. We have a lot of work to do. No one I mean the (inaudible) silicon looks guys with expensive manufacturing processes are certainly above 18 today. But the multi crystalline silicon cell manufactures are nowhere near 18% today. So everyone is rushing madly and so we just thought over the next few years we identified series of things that we believe are doable that could get us there. But we don't have a precise date. We have a lot of the experimentation to deal with and a lot of test to run and developments to accomplish. So, we have done it a few years, we feel good about it.

Havel Makshnov -Raymond James

A real quick follow-up to that; for a 1% improvement in efficiency, everything on constant: what should your gross margin change by?

Rick Feldt

We will not go to that per se, but a 1% change in efficiency would get us maybe $0.10 improvement in cost.

Havel Makshnov -Raymond James

$0.10 per what?

Rick Feldt

Test.

Havel Makshnov -Raymond James

Okay. Thanks very much.

Rick Feldt

Okay. Think just one last thing. Next week we will be sending out our detailed invitation of our Analyst Day and it will be held in near our Devens location. There will be management presentations from eight till noon called followed by at luncheon at our new facility and we certainly hope that you all will be able to attend. Thank you for you interest in Evergreen Solar. We look forward to seeing you in abut six week and updating you on our progress as the year goes through. Thanks,

Operator

And that conclude today’s conference. We thank you all for joining us

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