Energy Conversion Devices, Inc. F3Q08 (Quarter End 03/31/2008) Earnings Call Transcript

Energy Conversion Devices, Inc. (ENER)

F3Q08 Earnings Call

May 8, 2008 10:00 am ET

Executives

Mark Trinske – Vice President Investor Relations & Corporate Communications

Mark D. Morelli – President, Chief Executive Officer & Director

Sanjeev Kumar – Chief Financial Officer & Vice President

Analysts

Robert W. Stone – Cowen & Company

Steve O’Rourke – Deutsche Bank Securities

Sanjay K. Shrestha – Lazard Capital Markets

Paul Clegg – Jefferies & Company

Brian Gamble – Simmons & Company International

Stephen Chin – UBS Securities

Colin W. Rusch – Broadpoint Capital

Patrick Forkin – Tejas Securities Group

Jesse W. Pichel – Piper Jaffray & Co.

Unidentified Analyst – Lehman Brothers

Presentation

Operator

Welcome to the Energy Conversion Devices conference call to discuss the financial results of the company’s fiscal 2008 third quarter ending March 31, 2008. (Operator Instructions) I’ll now turn the call over to Mark Trinske, Vice President of Investor Relations and Corporate Communications.

Mark Trinskey

Good morning and welcome to our third quarter earnings call. The members of EDC’s management team participating today include Mark Morelli, our President and CEO and Sanjeeve Kumar, our Vice President & Chief Financial Officer. This morning’s presentation will also include the use of several slides which will be included in our webcast. We will be controlling the advancement of the Slides and providing commentary on each as we make our prepared comments. A downloadable copy of the slide presentation and our third quarter earnings press release are now available on our website at www.Ovonic.com. Today’s call will also be archived on our website. A special note for those who are participating via conference call today, we ask that you please select the no audio slides only link when prompted during your registration. This will allow conference call participants to view slides in synch with the audio.

I’d like to remind you that the following discussion may contain forward-looking statements within the meaning of the 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 ECD’s filings with the SEC including our most recent 10Q which will be filed this afternoon.

Now, I’d like to turn the call over to Mark Morelli.

Mark D. Morelli

This is Mark Trinske’s first quarterly call with ECD and we’re glad to have him as part of our team. Good morning everyone. Thank you for taking the time to join us today. Please turn to Slide Three. As you can see from our press release, we had an excellent third quarter and turned the corner to profitability. Both product activity and revenues were substantially up. Megawatt production increased 145% compared with last year’s third quarter while consolidated revenues increased 155% to $70 million. We’re pleased to report income from operations of $5.6 million and net income of $7 million or $0.17 per share compared to a loss of $0.17 per share one year ago.

Before I review the quarter in details I would like to share with you an update on Cobasys. In the third quarter there were new developments on two fronts. First, we are pursuing a sale of the business based on a non-buying proposal from a buyer. As a result we’ve entered in to an interim settlement agreement with Chevron to suspend the arbitration while we jointly pursue this sale. Second, since February, 2008 Cobasys has been self funded and has not sought any capital from its owners. Cobasys has instead received funding from a customer in the form of a capital equipment purchase loan and a price increase on the product sold to the customer. As you would expect, there are still uncertainties here and I’m limited in what more I can say so I’d direct you to our third quarter 10Q which will be filed later today for additional details.

Now, I’d like to talk about what drove the improvement in our financial results and I’ll start with our products. Turn to Slide Four please. You’ve heard me say this many times but it bears repeating Uni-Solar Laminates are unlike other solar cells on the market today which provides us with a distinct competitive advantage. Our solar laminates are light weight, durable and flexible because they are manufactured using paper thin stainless steel rather than glass. Due to our proprietary triple junction technology our products also produce more power in real world conditions. Another competitive advantage is we use no polysilicon therefore our growth rate is not constrained by the availability of this resource. Also, our products are easy to install and require no roof penetrations which reduces the total system installation costs. To take advantage of our product’s distinct attributes we’ve adjusted our marketing and distribution channel strategies to reach new target markets, market that value Uni-Solar products more than commodity panels.

Turn to Slide Five. We view the global solar PV market in three segments: ground mount; building applied; and building integrated. Overtime we believe this market will evolve from a historically ground mounted industry to rooftop with a large portion being building integrated. By 2012 building applied and building integrated will represent 70% of the market and the majority of which will be rooftop installations. One of the drivers for growth in rooftop installations is the need to provide more electricity to densely populated areas. The Uni-Solar solution of distributed power takes advantage of unused roof space to create electricity at the location of use.

Please turn to Slide Six. Commercial rooftops are a good opportunity for us because Uni-Solar’s differentiated value proposition meets the needs of this segment. About half of all commercial buildings could generate 100% of the electricity they need with just five watts of power per square foot of roof space. Our Uni-Solar Laminates produce approximately 5.8 watts per square foot which more than meets this need. Our targeted portion of this market represents approximately five gigawatt opportunity by 2012 as shown in the bar graph. In this large and fast growing market for building integrated photovoltaic or BIPV, we are the leader and we have few competitors.

Slide Seven; one of the reasons we are the leader is because our flexible laminates can be integrated in to roofing products and other building materials. With our building integrated product customers can receive a solar PV system and a roof at the same time. As this Slide shows leading solar companies such as Centrosolar, Tegola Canadese and Solar Integrated are choosing Uni-Solar for use in their building integrated installations. Let me tell you why. Centrosolar AG, a German company recently used Uni-Solar Laminates in a large PV installation in Belgium. We were chosen because of our many benefits over glass panels, especially our light weight. [Willie Earnst] of Centrosolar explained, “A large portion of the industrial roofs in Belgium are not suited for crystalline installations, they can’t bear the weight. Tegola Canadese in Italy is using our laminates as the base for a new line of building integrated systems called Tegosolar. As you can see from the roof on this Slide flexibility was a key reason Tegola choose our product.

Luciano Mazzer, Tegola’s CEO said, “After years of research we decide to incorporate Uni-Solar Laminates in to Tegosolar BIPV product line because Uni-Solar can be installed rapidly and perfectly integrates into a traditional roof system offering architects more design freedom when planning BIPV systems.” And, Randall MacEwen, CEO of Solar Integrated noted, “Uni-Solar Laminates are an ideal solution for our BIPV roofing systems since they are flexible for ease of integration and installation, lightweight to accommodate the roofing loads of most buildings and because they are a proven energy producer with the best in class energy production per watt in the industry.” I hope that gives you an indication of the success we’re having at matching the competitive advantage of Uni-Solar products with the specific needs of the fast growing building integrated channel.

Slide Eight; forward-looking governments around the world are actively supporting solar on rooftops, especially building integrated by offering higher incentives in the form of feed-in tariffs for these products. This chart shows the incentives offered in Germany, Italy and France in US cents per kilowatt hour. We expect the new program in Spain to be similar to the German feed-in tariff while France will likely continue to offer specific building integrated incentives like Italy does. Because building integrated solutions are attracting the highest government incentives, we expect to see more competition. However, there are strict criteria for products to qualify as building integrated and Uni-Solar already meets or exceeds those standards. We have the leadership position in this market and are working hard to extend our lead.

Please turn to Slide Nine. Our product is generating strong demand and our pipeline is filling well in to the future. We are beginning to translate these benefits in to take-or-pay commitments. This chart shows the percentage of our forecast production for which we have sales commitments. Take-or-pay contracts give us better production and pricing visibility while ensuring our supply to our strategic channel partners. Customers who have signed take-or-pay agreements include Solar Integrated, [Macegalia], [Decosja], Ibersolar and Unimetal. Note that fiscal 2008 is not shown because we’re 100% sold out. In the third quarter we filled 90% of the 2009 pipeline, nearly half of the 2010 pipeline and more than a third of our pipeline for 2011. All together, these sales commitments represented approximately 400 megawatts of future sales. With this kind of momentum, we’re having no difficulty selling our products. At this point, we’re only limited by how quickly we can expand our production capacity to make more laminates.

Turn to the next Slide. Slide 10 shows the progress we’ve made this year in increasing our production. In the third quarter we manufactured 21.6 megawatts of solar laminates, more than twice what we produced in the first quarter and 40% more than in the second quarter. On our last call we gave guidance that fourth quarter production would be able 15% higher than the third quarter and we are reiterating that percentage increase for the fourth quarter. We expect to produce approximately 25 megawatts in the fourth quarter which means we will produce about 72 megawatts for full 2008 fiscal year and we expect to double this amount in fiscal 2009.

Slide 11; at approximately 31% our solar gross margin in the third quarter exceed prior guidance. There are several reasons why this happen which Sanjeev will review in a moment but the high level explanation is that our new facilities in Greenville and Mexico are performing better than our original forecasts. These forecasts were based on our older facilities in Auburn Hills and our new lines are ramping faster which is a positive trend as we continue to ramp new lines. Sanjeev will provide more details about our gross margin going forward but the important thing to remember is that this level of solar gross margin is sustainable.

Next slide; while we improve our operations we are also changing the way we think about our manufacturing facilities. Given the strength of our markets and the demand of our products we’ve decided to expand our operations. We’ve developed an improved expansion concept that doubles the capacity of our Greenville facilities from 60 to 120 megawatts per building. We will be leveraging the existing facilities by increasing their footprints to maximize efficiency. This new concept and other changes we’ve made to the facility and equipment will save approximately $26 million and will reduce our annual operating expenses by $2 million. The expanded facilities will have 51% better space utilization than before. The newly expanded facilities will also be easier to ramp in to service. Another plus is that we have the ability to pay for this expansion ourselves based on our solid financials, steady ASP levels and positive cash flow supported by gross margins of 30%.

Let me explain the ramp of this new and improved concept. Turn to Slide 13; this slide shows our nameplate capacity at the beginning and end of each fiscal year from 2006 through 2010. You can see that we are growing at a rapid pace, we nearly doubled nameplate capacity each fiscal year for the past two years and we’ll nearly double that capacity again next year. We expect to end fiscal 2008 with 118 megawatts and fiscal 2009 with 238 megawatts of nameplate capacity. Because we were developing a new Greenville facility concept we held off ordering certain production equipment. We will now begin the ramp of the next line in the next quarter instead of this quarter so the nameplate capacity looks different from previous disclosures but does not change our production expectations. By leveraging our existing Greenville footprint we realize significant financial benefits and reach our goal of 300 megawatts of nameplate capacity earlier than previously expected.

Now, let me turn the call over to our CFO Sanjeev Kumar who will walk us through the improvement in gross margins in the quarter, our financial position and discuss our ability to fund our 120 megawatt expansion.

Sanjeev Kumar

Please turn to Slide 14. As Mark pointed out our solar gross margin increased substantially from 19.2% in the second quarter to 30.7% in the third quarter. This was primarily because of better than expected ramp up. I’d like to explain the factors contributing to this improvement and give you some color on our expectations regarding solar gross margins for the third quarter. The biggest contributing factor which higher factory utilization that resulted in higher yield and throughput which accounted for almost half of the total improvement quarter-over-quarter. We have moved up the learning curve and our ramps are going better than forecast. Customer and product mix accounted for about four percentage points of the improvement. 35% of the product mix was 144 watt product which contributed favorably to gross margin. The benefit of high production at our lower labor cost facility in Mexico added nearly two percentage points. In the fourth quarter we will have better factory utilization and improved yield. However, expenses will increase as we invest to improve operations. Therefore, we expect to sustain the solar gross margin we achieved in the third quarter.

Please turn to Slide 13. During the quarter SG&A declined to 17.8% of total revenues which was better than our guidance of 18% to 20%. We believe SG&A will be between 16% and 17% of total revenues in the fourth quarter. We began our restructuring program almost a year ago. Year-to-date, we have taken $7.5 million in restructuring charges. We said we would achieve about $23 million in annualized savings and we are on track. The last phase of the cost cutting will be the rationalizing of our facility footprint. We have several non-manufacturing facilities located within close proximity of each other. We anticipate the cost for the facility consolidation will be approximately $3 million in the fourth quarter and it will result in $1.5 million in annualized savings.

Pre-production costs of $751,000 was lower than the first half of the fiscal year when we were averaging about $2.5 million each quarter. During the fourth quarter pre-production costs is expected to normalize to the $1.5 to $2 million range as we prepare to bring two additional lines in to production in fiscal 2009. Also in the third quarter net total company R&D expense was about $825,000 slightly better than the guidance we gave you last quarter of net R&D costs of $1 to $2 million. We continue to make progress with our net R&D costs and are on track to reduce cost by about 50% to 60% in fiscal 2008 from fiscal 2007. Ovanic Materials is doing well and we expect this will continue to operate profitably.

Moving on to Slide 16; as Mark discussed we are adding 120 megawatts of additional capacity with our new concept of Greenville’s footprint. Our balance sheet and profitability give us the ability to fund this expansion from available resources and future operating cash flow. This shows our future capital requirements. We expect projected capital spending to reach 300 megawatts will be between $290 and $310 million through fiscal 2010. As this Slide notes our financial strength is improving. We now have the flexibility to fund the expansion ourselves through existing cash and investments, sustainable gross margins, growing operating cash flow, reduction in working capital requirements and access to a credit facility to smooth out cash flow. I’d like to point out one more balance sheet item. We own about $34.3 million in face value of auction rate securities. This quarter due to the current lack of liquidity in these securities, we classified them as a long term asset. We also recorded an unrealized valuation allowance of $1.5 million. This was [inaudible] as charge to other comprehensive income on the balance sheet and did not impact our income statement. Finally, due to both operational and capital allocation improvement, we continue to reduce our cap ex per watt. We expect the cap ex per watt for the new 120 megawatt facility will be approximately 26% lower than at our Auburn Hills two line which was just put in to production about one and a half years ago.

With that, I’ll turn the call back over to Mark.

Mark D. Morelli

Please turn to Slide 17. Let me go over our outlook for the fourth quarter and next fiscal year. Our fourth quarter expectation is for solar product sales to be in the range of $68 to $70 million and for total consolidated revenues to be about $73 to $78 million. We expect to maintain gross margins in our solar business at about the same level as the third quarter, between 30% and 31%. Those fourth quarter estimates raise our previous guidance for fiscal 2008. Our new full year guidance is for solar product sales to be between $222 and $227 million and for total revenues to be between $246 and $251 million.

As for fiscal year 2009, we expect total production to be approximately double the production of fiscal year 2008. Given the timing of putting two additional lines in to production late in the year, our throughput will increase in the second half of the year. We expect 60% of the company’s total fiscal 2009 production to be in the second half. In fiscal 2009 our gross margin should remain steady at about 30% until we begin to see the benefit of the increased production in the second half of the year. We will give further guidance on our fiscal year 2009 in our next conference calls.

This concludes our prepared remarks and operator now we’d like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Robert W. Stone – Cowen & Company.

Robert W. Stone – Cowen & Company

I wonder if you could just put a little more granularity Sanjeev on the cap ex per watt calculation? I’m assuming to get another 120 megawatts you’re adding effectively four more lines and those won’t come in all at the same time. So, can you give us a sense of how the cap ex per watt walks down through those lines? Or, what is it on a per watt basis?

Sanjeev Kumar

Let me start Rob with the overall cost of the cap ex. Of that $290 to $300 million, we are going to use roughly $50 to $60 to complete out the current existing Greenville 2A and 2B facilities and the remainder of $240 to $250 million on the new 120 megawatt expansion that we will spend between now and fiscal 2010 with the majority of the funds spent in 2009.

Robert W. Stone – Cowen & Company

So are you adding floor space to the buildings as well? Or, are you just reconfiguring so you have room to put in that much more deposition equipment?

Mark D. Morelli

Rob, we are leveraging a significant amount of the footprint that exists. At the same time we do have to reconfigure a couple of the existing structural elements of the buildings themselves. But, we think this is a great opportunity for us to further improve our return on invested capital as we make a significant leverage off our existing footprint.

Robert W. Stone – Cowen & Company

Are you getting any assistance from the state with your capital program?

Mark D. Morelli

We are. We have negotiated with the state of Michigan and they are very, very supportive of our continued expansion in Greenville so we are quite pleased with the incentive that we have received.

Robert W. Stone – Cowen & Company

Can you say what form that will take?

Sanjeev Kumar

It will take the form of [block] grants so, as we hire people we get a certain [block] grants for each line that we bring in to production and people that we hire in Michigan.

Robert W. Stone – Cowen & Company

Can you say roughly how that – I’m just trying to parse out how the cap ex would be split between internal funds and cash flow, credit line and potential state assistance, so rough proportion?

Sanjeev Kumar

If we look at our cash and short term and long term investments, if we count the auction rate securities, we have roughly $135 million of funds available. We also have a $55 million credit facility of which we’ll contribute to us paying towards our funding the cap ex and the remainder will come from as we mentioned from our growing gross margins and our operating cash flow.

Robert W. Stone – Cowen & Company

So you can’t put a dollar number on the state assistance?

Sanjeev Kumar

The state assistance is roughly for each 60 megawatt footprint is somewhere between $4 million and $5 million.

Robert W. Stone – Cowen & Company

For each 30 or 60 megawatts?

Sanjeev Kumar

I believe it’s 60 megawatts?

Robert W. Stone – Cowen & Company

Roughly $8 to $10 million for the 120 megawatts of expansion?

Sanjeev Kumar

That is correct.

Operator

Your next question comes from the line of Steve O’Rourke – Deutsche Bank Securities.

Steve O’Rourke – Deutsche Bank Securities

With the progress that you’ve made, does it make sense to expand beyond this 300 megawatts over the next three years that you’ve announced currently?

Mark D. Morelli

Well, for us Steve, I think it’s important that we take this step-by-step. I think the team has made tremendous progress and it’s a real testament to the hard work the team has put in to it. Our full attention is on this new concept for expansion and how we get the improvements that we have been making and how we continue to expand those. But, we haven’t put a lot of thought in to how we go forward next. There has been something thinking there and as the time arises to inform people appropriately, we will.

Steve O’Rourke – Deutsche Bank Securities

A couple of other questions, can you tell us what the finished goods inventory for Uni-Solar was in the quarter? And, did you have any 10% customers?

Sanjeev Kumar

We had two 10% customers and the finished goods inventory in the US is less than two megawatts. It’s roughly $2 million in finished goods inventory in our Uni-Solar business.

Steve O’Rourke – Deutsche Bank Securities

One last question, what was the average conversion efficiency of product in the quarter?

Mark D. Morelli

Well, we have about 35% of our sales were 144 watt product, it’s roughly 8.5% conversion efficiency. So the rest is roughly 8% conversion efficiency.

Steve O’Rourke – Deutsche Bank Securities

Does that mean you’ll be re-rating your lines in a sense?

Mark D. Morelli

In terms of nameplate capacity?

Steve O’Rourke – Deutsche Bank Securities

Yes.

Mark D. Morelli

Nameplate capacity is a bit academic. As you know, or may know, when we launched the Auburn Hills facilities they were original 25 megawatts and now they are 30 megawatts. We actually haven’t put a lot of thought in to when or how we will re-rate the lines as we are focused a lot on increasing our production. But, as it makes sense to update nameplate capacity we may decide to re-rate them. But, at this point, we’re not doing that.

Operator

Your next question comes from the line of Sanjay K. Shrestha – Lazard Capital Markets.

Sanjay K. Shrestha – Lazard Capital Markets

A couple of quick questions, Mark you mentioned in your prepared remarks that you’re negotiating contracts for 09 and 010. Can you give us a sense now that the product is getting better appreciated and well received in the market, what kind of an ASP trend are you seeing while you’re negotiating contracts for 09 and 010.

Mark D. Morelli

We see that 09 is about flat to slightly down and this is pretty much the guidance that we’ve given before. The great news is that we are working with our channel partners to cure take-or-pay contracts. This is really good for us because it enables us to have greater visibility in our pricing going forward. It’s also good for us too because we really define who we’re really going to work with on a close in basis to help reduce overall installation costs over time and help support them accordingly. At the same time, this is a dynamic situation, it’s changing quite rapidly as we are currently in the process of negotiating more take-or-pay agreements so given that, we really prefer not to talk about pricing going forward.

Sanjay K. Shrestha – Lazard Capital Markets

But the direction on the ASP is kind of flat to modestly up given the benefit of your product and the subsidy program that your product can get on a global basis. My assumption is not incorrect if I were to think like that, right?

Mark D. Morelli

Well, I would say clearly we want to get to great parity at some point so directionally the pricing will be down over time. 09 is flat to slightly down.

Sanjay K. Shrestha – Lazard Capital Markets

One other quick question then guys, when we’re talking about the ramp up schedule here, we’re getting the solar gross margin of 30% plus already just with the low hanging fruit. I just wanted to get a better sense of as the new line comes in obviously, in the beginning we’ll have the pre-production cost and all that that might sort of weigh on the overall reported margin. But, as you start to get the benefit of the scale and the benefit of the cheaper raw material if you would, is it unfair to say that there’s another 300, 400, 500, 600 basis point improvement to have on a fully loaded basis as you get to that 300 megawatt type of run rate the next two years?

Mark D. Morelli

Sanjay I would say on a long term basis that may be correct. I think in the next couple of quarters we’re going to be doing the things that we’ve been doing this pass quarter which is pushing our operations for improved efficiency, better up times, better yields and improving cycle times and we’re going to use those type benefits and as well as the material cost savings to offset the impact of bringing on these new lines. So, we’re guiding to 30% plus gross margins in the next couple of quarters.

Operator

Your next question comes from the line of Paul Clegg – Jefferies & Company.

Paul Clegg – Jefferies & Company

What percentage of 2009 sales are already priced actually at this point? I think I may have missed that.

Mark D. Morelli

Well, we show our sales commitments to be 90% of 2009 so we obviously have pricing associated with that.

Paul Clegg – Jefferies & Company

But of that 90% does that mean all of them are priced at this point?

Mark D. Morelli

Our sales commitments, obviously take-or-pay has commitments but our other sales commitments also have pricing associated with them, yes.

Paul Clegg – Jefferies & Company

We mentioned conversion efficiencies, you talked about this a little bit but I was wondering if we could go a little bit further there. Is there any upside of the 8.5% number going on in the lab right now that you have any visibility on?

Mark D. Morelli

Absolutely, we published 15% conversion efficiency in the laboratory. Now, obviously as we know there’s a big difference between something in the lab and getting it in the factory. Our company is focused a lot on processes and putting in place processes and one of those is how we take technology from the lap and bring it in to production. So, in our challenge here is over time how we begin to digest that and how we bring this great technology we have in the lab in to production. So, though we see further improvements in conversion efficiency, nothing really to report at this point as we are currently digesting our new 144 watt product opportunity. But, over time you should see us begin to roll out improved conversion efficiency.

Paul Clegg – Jefferies & Company

If I can, can we just get an update on PRAM. I think some of us were expecting to see some roll out of commercial projects with PRAM in them. Was there anything that you could say on that front?

Mark D. Morelli

Certainly. I think some of the latest news on PRAM, there was a recent VLSI conference where one of the leads at Samsung has reported the benefits of PRAM in an industry where the pricing is declining quite rapidly. This is due to really the cost advantage and technology advantages of PRAM. There’s really no news to report, we do have our joint development agreements in place, we know folks are working on this technology. In terms of them picking an insert point and ramping it up to volume, we actually don’t have a lot of visibility beyond that. We work very closely on these joint development agreements but this information to our customers is quite proprietary and literally we read about any production volume that might occur in the press along with everybody else.

Operator

Your next question comes from the line of Brian Gamble – Simmons & Company International.

Brian Gamble – Simmons & Company International

I just wanted to touch a little bit on the ramping. I know you mentioned two things, you mentioned 60% of the production in the back half of 09 for your full year estimates and also you mentioned on the call that you had experienced some better than anticipated ramping at the current facilities. How should we think about months from initial startup of those two new lines to the full production capacity of getting out 60 megawatts per annum?

Mark D. Morelli

We’ll begin ramping those lines in the first half of fiscal year 2009 and our ramp times have come down a lot. As we reported it’s nine months and we’re actually doing it in better than that. The issue is in terms of when we start the ramps and given that we’ve been working on this new concept we delayed ordering some of the equipment so we won’t start those ramps in terms of first half so we really won’t see the real benefit of those ramps until the second half of fiscal year 09.

Brian Gamble – Simmons & Company International

So we should be thinking about maybe an end of first fiscal quarter of 2010 to finally get to a full production schedule?

Mark D. Morelli

Yes, that sounds good.

Brian Gamble – Simmons & Company International

Then when you talk about efficiency improvements and you talk about the Mexico facility reaching certain levels and things you can do at the existing facilities to continue to ramp that kind of follow on Sanjany’s question, when you do hit that run rate in 2010 it really doesn’t seem unreasonable to expect that that margin will be in the mid 30s. You said yes, maybe long term that is appropriate to point to but what internal measures are you taking to try to even go past that and to continue to increase efficiencies. As you mentioned the lab and converting over 15% to actual line production, where could that go longer term?

Mark D. Morelli

Well Brian we have our hands firmly on the wheel and we’re pressing on the accelerator so obviously we want to take advantage of every opportunity we’ve got. There is still great opportunities we have in terms of improving cycle times, improving our yield and our uptimes of our equipment. We think that the guidance that we’re giving and that I think that you quite rightly reiterate is responsible guidance at this point.

Brian Gamble – Simmons & Company International

Finally, Sanjeev on 2009 you’re not paying any taxes in 09 are you?

Sanjeev Kumar

We have about $325 million in NOLs so that’s a fair assumption that we won’t be paying federal taxes in 09.

Operator

Your next question comes from the line of Stephen Chin – UBS Securities.

Stephen Chin – UBS Securities

Given the strong gross margin improvement you saw this quarter, could you please share with us what you think you’re longer term gross margin operating targets could maybe be? That would be my first question, I have a follow up.

Mark D. Morelli

Well, as we’re saying, we think that the business should be generating 30% plus gross margins and currently right now we think the responsible guidance is to stick with that for the next couple of quarters until we start seeing the production increase in the later part of 2009 and paying off in 2010.

Stephen Chin – UBS Securities

My other question Mark is what is the longer term goal that you think you’ll be able to strive for with [inaudible] some of these new operational efficiencies?

Mark D. Morelli

Well, we still think there remains a lot of opportunities that we go pick up. As you know, we’ve recently started on a very serious commercialization path so we definitely see some benefits there. But, it’s difficult for us to guide to any specific number because right now we see the 30% plus as being a responsible guidance for the next couple of quarters and as we go from there, as you know it’s something that we really want to take step-by-step. This company hasn’t had a good history of hitting the guidance that we’ve put out there so we want to be very appropriate in our guidance and from what we see today, we think that’s responsible guidance.

Stephen Chin – UBS Securities

In terms of the take-or-pay commitment, I saw the Slide in the presentation but what percentage of the fiscal 2010, fiscal 2011 do you expect will be take-or-pay commitments? Do you think its fiscal 2010 to fiscal 2011 could be similar to the 48% that you’re seeing in fiscal 09? Is that right way that we should think about the company trying to sign up its customers?

Mark D. Morelli

Steven, I think the right way to look at this is a snapshot in time. We’re currently very actively in the process of negotiating more take-or-pays and we clearly will see more take-or-pays coming in. It’s hard for us to guide to exactly clearly. We don’t want 100% take-or-pays, we’re going to have some portion where we want to see greater than we have now but we also want to have some opportunity for some flexibility as well. I think you’ll see this number increase.

Stephen Chin – UBS Securities

If I could get one last question in, on the June guidance can you talk about what the expected solar modular average selling price will be in the June quarter? Because, it looks like if you take the June solar sales guidance and the June solar production guidance, it looks like there is a modest 5% to 10% sequential price decline in the June quarter. Is that simply because there is a new contracting time with your customers? Or, is there something else in that number?

Mark D. Morelli

Well, quarter-to-quarter we do see some fluctuation. As you may look back, our Q1 average selling price is roughly about what our selling price was in Q3 but we had a slit dip in Q2 so there is some mix product and customer mix that w do have from quarter-to-quarter. We see that for this June quarter to be flat to very slightly down.

Operator

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

Colin W. Rusch – Broadpoint Capital

My first question is on production metrics that you’re tracking right now. Could you give us an update on how that initiative is rolling out? How many check points you’re actually tracking within the production process?

Mark D. Morelli

Colin, we really look at a couple of key ones. What we measure is our throughput, our yield and specifically also cycle time, particularly when it relates to any bottlenecks that we have in the system. We look at and manage this on a daily basis. There are a number of points in each of the factories that we do look at very closely and that we do manage. We have also invested in and continue to invest in the new industrial engineering team where we both look and manage these operational improvements so we’re quite pleased in the approach that we’ve taken and we’re beginning to see a lot of the benefits of that paying off.

Colin W. Rusch – Broadpoint Capital

Can you give us an update on those Solar America Initiative checkpoints or benchmarks that you need to meet? Is there any sort of update to give us at this point?

Mark D. Morelli

Yeah, we’ve recently gone through a review on the Solar America Initiative and we went very well through that review and that checkpoint process so we expect to see continued support there based on the excellent progress that we are making.

Colin W. Rusch – Broadpoint Capital

Can we just get a little bit more color on how it’s going to affect the income statement as well as the balance sheet over the next 18 months?

Mark D. Morelli

Well, directionally you should see the kind of support that we’ve gotten on R&D continuing going forward.

Sanjeev Kumar

What that means from an income statement standpoint is we expect most of the R&D expenses incurred in our solar business to be reimbursed under the Solar America Initiative program and other programs that we have so we expect to cover most of our R&D expenses next year.

Colin W. Rusch – Broadpoint Capital

Then just one follow up question on the process and the improved efficiencies. I think about a year ago there was discussion about kind of the upper limits for the current production process. Now, with the platform that you have right now, what are you seeing as the upper thresholds in terms of efficiencies on the process?

Mark D. Morelli

Well, we see about, as we said 15% in the lab, we’ve got roadmaps to about close to 10% conversion efficiency and we’re going to continue working on that path but that’s not to say that as we further think about that we couldn’t improve it beyond that.

Operator

Your next question comes from the line of Patrick Forkin – Tejas Securities Group.

Patrick Forkin – Tejas Securities Group

There’s already been a lot of great questions so I just would like to make a comment. I’ve been in the equity research business for 15 years and followed ENER for three years. I’ve never seen such significant sustainable progress made in such a short period of time so congratulations to the team and best wishes to you guys for continued success.

Mark D. Morelli

Thanks a lot Pat. I think it’s a real testament to the hard work and the team work that we have here so I appreciate your comments.

Operator

Your next question comes from the line of Jesse W. Pichel – Piper Jaffray & Co.

Jesse W. Pichel – Piper Jaffray & Co.

I have a few questions, now that Greenville One has produced a good amount of product, is there any reason to think that the Greenville One ramp shouldn’t be at full capacity in the June quarter?

Mark D. Morelli

Well, I think when we think about Greenville we also need to think about Mexico because as you know some of the product is also manufactured in Mexico so when we talk about them we should really talk about them together. So, I think our Greenville and our Mexico facilities are both ramping up significantly. I think the guidance we’ve given in terms of the megawatts for the fourth quarter is currently where we see everything coming out. When we say full capacity, it’s also a bit of an academic number as well because as you know, we can re-rate the nameplate capacity and get more out of the production facilities as well. I think the best way that we can help folks as they build their models accordingly is to guide to what we believe is responsible guidance in terms of total production output.

Jesse W. Pichel – Piper Jaffray & Co.

Now, First Solar, they guide to roughly 6.5 some odd annual price declines under its contracts. Can you give us similar guidance?

Mark D. Morelli

As we’ve said, we see flat to very slightly down pricing for 09; nothing to the order of which you just articulated. Then going forward from there it’s currently a dynamic situation in terms of us signing take-or-pay so we’d rather not talk about our pricing going forward.

Jesse W. Pichel – Piper Jaffray & Co.

So we should kind of assume that we have fixed pricing for 09 and something to be renegotiated for 010.

Mark D. Morelli

Well, our take-or-pay stipulate pricing out to five years out but it’s just not something at this point that we think we should be talking about.

Jesse W. Pichel – Piper Jaffray & Co.

I think what I’m trying to get at or what investors are trying to understand is that you charge about $0.75 less than Poly Panels today and if the poly shortage elevates and poly prices come down and say Poly Panels fall to where they were priced three years ago of about $2.70 a watt, then will you have to sell at $2 or do you think your price delta with Poly – that you can keep pricing essentially while the poly based modular prices fall?

Mark D. Morelli

I think that’s a good question but I think the assumption there is that our starting point on pricing was the right starting point. If I were to really re-launch this product only in the value proposition that we’ve been talking about, I probably would have launched it at a higher price. I think it is somewhat at a discount today. Keep in mind that when we did launch the product a number of years ago, we were selling a lot in ground mount installations and when you look side-by-side, that may have made sense at that time but clearly due to the unique benefits of this product, I think it’s selling at a discount to where it should be.

Jesse W. Pichel – Piper Jaffray & Co.

Regarding the cost per watt, last quarter you had a very interesting expectations of cost coming down and I believe we’re about $2.10 a watt this quarter. How are you thinking about that cost now from this $2.10 number? And, can you specifically name some cost reduction improvements that you have in your sites like lower costs steel for example and what that should do to the cost per watt?

Mark D. Morelli

Absolutely. We’re making great traction on our costs per watt and I think it’s indicative in our growing gross margins. A number of areas that are really beginning to pay off for us is improved yield as an example, that certain helps significantly. Improved up time of the equipment helps a lot as well. We also on the materials side, particularly going forward will see this paying off more and more. We’ve talked about we’ve got eight out of our 11 top suppliers for our building material are single source supply. We’ve talked about the stainless steel being one of those. We now have four suppliers on stainless steel. We now have multiple suppliers on grid wire and they’re beginning to come in, we’re beginning to work on our inventory there of existing material and should start seeing the benefits of that as well. We don’t have any very specific constraint in our supply chain such as poly silicone as you know, this is mostly stainless steel, grid wire and polymers so it’s a matter of us qualifying it so we can maintain very high quality in our products and also making sure that those supplies are secured going forward. But, we should definitely see some benefits over time.

Jesse W. Pichel – Piper Jaffray & Co.

Can I try to peg you to a cost per watt number for 2009?

Mark D. Morelli

No, actually we haven’t given those cost per watt numbers. The last time we gave one officially was Q1 which was $2.57 and I think we will update that number periodically. I think you can definitely see the traction that we’ve gotten off that number.

Operator

Your last question comes from the line of Unidentified Analyst – Lehman Brothers.

Unidentified Analyst – Lehman Brothers

Can you comment about on the take-or-pay contracts, I think you said [inaudible] for [inaudible] take-or-pay? What percentage of that would be for the US market?

Mark D. Morelli

It’s a very small portion end up in the US market. In fact, if you look at our concentration in the US quarter-over-quarter it’s declined. Q2 it was in the high 30s in terms of a percentage and this quarter that we’re reporting off right now, Q3 was about 25% in the US in all. So, we see that about 25% going forward basis in the near term is probably going to stick.

Unidentified Analyst – Lehman Brothers

Do you see any slowdown? I know [inaudible] Solar this morning reported a reduction in their outlook for 2008 based on some slowdown in the residential market. Are you seeing any of that or on the commercial side as well?

Mark D. Morelli

Well, we don’t current participate with a residential product. Our strategy has been to focus on the commercial rooftop space and we are sold out in that capacity and I think it’s indicative of what’s occurring. We see very strong demand for the product longer term and we don’t see any signs of slowdown.

Operator

At this time you have no further audio questions.

Mark D. Morelli

Thank you. To sum it up we’ve reached profitability, improved our solar gross margin and generated positive cash flow from operations this quarter. Our Uni-Solar product are the leaders in the fast growing BIVP marketplace and we’re growing to meet the strong demand with the new 120 megawatt expansion. This is great news for ECD and our shareholders and we’re committed to sustaining these operating measures. Thanks for being with us today and joining us for the call.

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Comments

[dppd123:]

A fabulous job by Morelli et.al., I think ENER is going to over $100 in the next five months. Thank you for posting this conference call.

dppd123

2008 May 28 02:55 PM

[beandog:]

beanieville.blogspot.c...

we love ENER!

2008 May 30 11:38 AM