Energy Conversion Devices, Inc. (ENER)

F4Q08 Earnings Call

August 28, 2008 10:00 am ET

Executives

Mark Trinske - Vice President Investor Relations & Corporate Communications

Mark D. Morelli - President, Chief Executive Officer and Director

Sanjeev Kumar - Chief Financial Officer & Vice President

Harry Zike - Chief Financial Officer

Analysts

Rob Stone - Cowen & Company

Sanjay Shrestha - Lazard Capital Markets

Satya Kumar - Credit Suisse

Colin Rusch - Broadpoint Capital

Peter Kim - Deutsche Bank

Paul Clegg - Jefferies & Company

Kelly Dougherty - McClarey

Brian Gamble - Simmons & Company

Jagdish Iyer - UBS

Vishal Shah - Lehman Brothers

Sam Dubinsky - Oppenheimer

George Kotzias - Calyon

Clint Coghill - Coghill Capital Management

Patrick Forkin - Tejas Securities

Rob Stone - Cowen and Company

Presentation

Operator

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

Mark Trinske

Participating on this call are Mark Morelli, our President and CEO and Sanjeev Kumar, currently ECD’s Vice President and CFO; Harry Zike who will become ECD’s new CFO effective next week is also with us here today.

This morning’s presentation will include the use of several slides, which will be on our webcast. We will be controlling the advancement of the slides and providing commentary on each. A downloadable copy of the slide presentation and our fourth quarter earnings press release are available on our website at www.ovonic.com.

Today’s call will also be archived on our website. A special note for those participating via conference call today, we ask that you please select the no audio slides only link when prompted during your webcast registration. This will allow conference call participants to view slides in synch with the audio.

I would like to remind you that the following discussion may contain forward-looking information within the meaning of the SEC’s Safe Harbor provisions. Such statements are based on assumptions which ECD as of this date 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 these statements were based. Please review the risk factors identified in ECD’s filings with the SEC including our most recent 10-K which will be filed soon.

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

Mark Morelli

Before I begin our review of the quarter and year, I would like to thanks Sanjeev for his service to the company these last few years and wish him the best of luck. I also want to welcome Harry Zike who’ll become our CFO effective September 1. Harry joins us with more than 30 years of International Finance and Accounting experience both in the corporate side and in operations.

Harry Zike

I am very excited to be a part of the ECD team and I’m looking forward to meeting with each of you.

Mark Trinske

Now let’s get to the results of the fourth quarter and year; please turn to slide 3. We made excellent progress on a number of operational and financial fronts. In fact each quarter of fiscal 2008 was better than the last. Our operational improvements and faster ramp times in Greenville and Tijuana to a higher productivity each quarter, which in turn led to increasingly higher revenues. As a result we turn profitable in the third quarter and increased our profit in the fourth quarter.

We believe that fiscal 2009 will continue to build on our successes in 2008. We will ramp two new production lines, so we expect revenue and income to be modestly higher in the first half of the year and then increase in the second half; please turn to the next slide. Since we have a number of new investors on the call today, let me begin by briefly reviewing how our product UNI-SOLAR has distinct competitive advantages versus glass based PV panels.

UNI-SOLAR laminates are light weight, durable and flexible. They generate more power in real-world conditions. They are manufactured using paper thin stainless steel rather than glass without poly silicon. Our products are easy to install and need no roof penetration which reduces the cost of installation and the total cost of this system; lower cost of ownership results in faster payback and higher return on investment for our customers.

Please turn to slide five. UNI-SOLAR’s outstanding value-proposition gives us a competitive advantage in the fast growing, building integrated and rooftop segments of the PV market. By 2012 approximately 70% of the total PV market will be comprised of rooftop and building integrated applications.

Please turn to slide six; within the overall rooftop market we believe that the commercial rooftop segment alone will represent a 10 gigawatt opportunity by 2012 and we estimate about half of this segment approximately 5 gigawatts, are prime targets for our UNI-SOLAR laminates.

With rooftop solar application our customers can benefit from significant energy savings by employing their unused rooftop space to reduce the reliance on the electrical grid. This approach to energy is called distributed power which generates electricity at the location of use. This method of power production has benefits over traditional solar firms because it avoids burdening the transmission lines and does not require the use of valuable land.

Please turn to slide seven. The advantages of distributed power are being embraced by countries like Germany, Italy and France which offer higher incentives for rooftop solar installations than for ground mount. Even Spain with its new feed-in tariff structure represents a growth opportunity for us because Spain has proposed new feed-in tariffs that provide higher incentives for rooftop and BIPV than for ground mounted systems.

The highest tariffs in the world are for BIPV and since our product can easily be integrated into roofing materials we have a competitive advantage here. We’ve been working on this market for 25 years and we produce about nine miles of solar laminates each day and our products are proven, reliable which continues to make us attractive to our growing base of global customers. Let me give you a few examples of why our customers continue to choose UNI-SOLAR for the rooftop and solar needs; please turn to slide eight.

In July we announced that UNI-SOLAR laminates were selected to power the world’s largest solar rooftop installation, a 12 megawatt project at General Motors facility in Zaragoza, Spain. This installation is more than twice the size of the previously claimed largest roof mounted system installation in the world.

UNI-SOLAR laminates were chosen because they are light weight, easy to install and do not require roof penetration. In this slide you see workers installing our product. The complete installation will utilize more than 85,000 laminates. Please turn to slide nine.

We are also providing the solar laminates for two large POSCO facilities in Korea totaling two megawatts, including one of the largest steel mills in the world as shown here. POSCO choose UNI-SOLAR to power this installation because of our unique rooftop attributes; once again the light weight and ease of installation which didn’t require any roof penetrations were deciding factors; please turn to the next chart.

Slide 10 shows the two megawatt system here on a Tesco distribution facility in California that supports their fresh and easy neighborhood markets. A key differentiator for this project was Uni-Solar’s high power output as measured in kilowatt hours per rated kilowatt as well as our excellent performance at high temperatures particularly in the Southern California location.

As these examples show, commercial customers and distributors around the world continue to recognize UNI-SOLAR’s differentiated value proposition. The result is that we have continued record demand. Please turn to slide 11 to see more.

We continue to take advantage of the growing demand for our products by selling our sales pipeline. In just the fourth quarter we increased the sales pipeline by $0.5 billion from $1.2 billion to $1.8 billion. This increase includes repeat and new customers in the fourth quarter and as the graph indicates, the majority of the pipeline is comprised of take-or-pay agreements. Only the take-or-pay portion is consider backlog in our 10-K, this slide shows the entire picture that also include supply agreements.

Turn to slide 12. As a result of the continued strong demand for our products we’ve included our expansion plan from 300 megawatts to one gigawatt by 2012. This expansion is demand driven and it’s fully funded by our recent capital raise and cash flow from operations.

Please turn to slide 13. As we installed new manufacturing lines we continue to make both design and operational improvements that are creating real improvements to our efficiencies. The chart on the left shows that the ramp times are decrease 76% from our first Auburn Hills line to our first Greenville line and we continue to challenge our operational team to speedup our ramp times even further. Our target is to reduce this time to less than eight months.

On the right is the graph of our capital expenditure per watt by line. As you can see we’ve already made substantial improvements in reducing our CapEx per watt and the trend will continue downward as we ramp towards one gigawatt. Our target to reduce CapEx per watt is less than $1.70.

Please turn to slide 14. Our success at reducing our CapEx and manufacturing costs per watt is due to our relentless focus on operational excellence. We make numerous improvements each quarter some small, some large and I want to mention of few example and explain their effect on our performance.

First, we are very focus on reducing the bottlenecks, which constrain our processes. Our newly formed industrial engineering operations group has been working to optimize our factories. As an example in a fourth quarter we’ve reduced our cycle times by 10% on our sub manufacturing lines by improving the material handling systems.

We’ve also increased our up time and throughput of our deposition lines 5% by improving the material changeover times. As we implement these improvements across all of our lines, we will anticipate this will help us produce an additional two megawatts per 30 megawatts annually.

One of our ongoing strategic initiatives is to qualify new suppliers. We are starting to see benefits from lower raw material pricing from several of these suppliers that result in a more than $1.5 million of savings in the fourth quarter. As an example, we started work with a new supplier, whose grid wire not only costs less, but also offers enhance performance. The new grid wire is much more durable, which has resulted in a proved machine up time and higher yields.

These adjust three examples of the numerous enhancements we’ve made to our manufacturing process as part of our commitment to operational excellence. We will continue to make operational improvements as we grow.

Now let me turn the call over to Sanjeev for a review of our financials; Sanjeev.

Sanjeev Kumar

As you can see from slide 15, fourth quarter solar gross margins of 33.5% were ahead of our previous guidance of 30% to 31%. The improvement was primarily due to better factory utilization and absorption, as well as improvements in raw materials and labor costs as Mark just discussed.

We believe, we can continue to sustain solar gross margins above 30% by the first half of fiscal 2009, despite the impact of the cost of the ramp up of our new lines in Greenville and Tijuana as well as the ongoing retrofit of our first generation machine in Auburn Hills.

As a reminder, there are three steps to our manufacturing process: deposition, cells cutting and laminations. In September, we will begin ramping new deposition machines, but the corresponding cell cuttings and lamination machines will be delivered in the second fiscal quarter and are not expected to begin ramping until January. Therefore, gross margins will be negatively impacted by ramp in the first half of fiscal 2009 without receiving the benefit of the revenue associated with that production until the second half of the year when the unfinished inventory will be finished and sold.

As a result, first quarter solar gross margin is expected to be about 31% and then increase to an average range of 33% to 35% for the second half of the fiscal year as we ramp our production and also benefit from better absorption and throughput on the machines being ramped. We expect to achieve long-term gross margin of more than 40%.

Please turn to slide 16. The improvement during the year in selling, general and administrative costs as a percentage of revenues reflect our savings from restructuring initiatives and improved sales. Selling, general and administrative costs for the fourth quarter were 16.9% of revenues down from 30.8% of revenues in the fourth fiscal quarter of last year.

For the full-year net research and development spending that is net of revenue from product development agreements was reduced by nearly $10 million, a decline of nearly 62% as a result of our restructuring initiatives. For fiscal 2009, we expect net R&D spending to be in the range of $8 million to $10 million driven by continued investment in the solar business.

Pre-production charges in the quarter were $1.3 million and for the full-year $6.9 million. Restructuring charges for the fourth quarter were $1.9 million and for fiscal 2008 a total of $9.4 million. Going forward the consolidation and rationalization of our facilities were required additional charges of $1.7 million to $2 million for the first quarter and $2.5 million to $3 million in the first half, which will substantially complete the restructuring program.

We estimate preproduction costs of $1.5 million to $1.9 million for the first quarter and $7 million to $9 million for fiscal year 2009. Please turn to slide 17. Fiscal 2008 marked a major transaction in ECD’s history, as operating cash flow generated a positive $28.5 million during the year, a significant improvement from the negative $21.8 million in fiscal 2007.

I also wanted to point out our future tax benefits. As of the end of June, we have net operating loss carry forwards of about $331 million. During June we raised more than $400 million in net proceeds from a concurrent offering of $1.4 million shares of common stock and $316 million of 3% convertible senior notes. As of the end of June we had approximately $500 million in cash, cash equivalents and short-term investments. We have an additional $32 million in auction rate securities, which given their current life of liquidity have been classified as long-term investments.

Given our sustainable gross margins, our ability to generate significant positive cash flows, our substantial NOL’s and strong balance sheet we are well positioned to financial growth. CapEx in the fourth quarter was approximately $28.5 million and for the fiscal year $117.3 million. CapEx for fiscal year 2009 is expected to be between $230 million to $240 million.

Due to changes in the value of foreign currencies compared to the dollar we wanted to clarify our foreign exchange exposure. Almost all of our sales and costs are dollar denominated. As a result we have very little profit and loss exposure as related to changes in foreign exchange rates. We do have some equipment commitments in the end and we added these exposures.

Finally, I’d just like to say what a pleasure it has been working with my colleagues here at ECD and with all of you, our investors and research analysts. I wish you all the best. Now I’d like to turn the call back to Mark.

Mark Morelli

Sanjeev has already discussed many of the components contributing to next year, but let me summarize how we view the upcoming quarter and fiscal 2009. We estimate that for the first quarter of fiscal 2009 solar product sales should be about $89 million to $91 million, with total revenues coming in at about $95 million to $98 million. Keep in mind that megawatt production won’t increase substantially until the second half of fiscal year, when we bring our new lines in Greenville and Tijuana.

We estimate that 55% to 60% of the total fiscal 2009 production will occur in the second half of the fiscal year. Therefore we estimate solar gross margin will be about 31% for the first quarter and 33% to 35% in the second half and about 32% to 34% for the full year. We estimate that solar product sales should be about $430 million to $450 million with total revenues of about $455 million to $485 million for the full year. Please turn to slide 19.

It’s been a great year and I know that fiscal 2009 will be as exciting and as challenging as ever as we double our production and expand our operations. It’s great to be at ECD at this time in the company’s history. We have the right products focused on the right markets at the right time.

Our light weight durable and easy to install PV laminates is the prefect solution for building, integrated and rooftop applications. We’re capitalized on the opportunities provided by tariffs in the EU which encourage building integrated PV. We’re also building strong relationships with building material suppliers around the globe to create new channels of distribution and extend our lead.

Finally, we built a pipeline of $1.8 million in future sales, made great strides in operational excellence and have the funding and operating cash flow to take us through our next level of expansion. We are looking forward to sharing our progress with you throughout the year and now we’d like to open the call to take your questions; operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rob Stone with Cowen & Company.

Rob Stone – Cowen & Company

I wonder if you could just clarify Mark, I wasn’t quite sure about your comments about the increased throughput. What is approximately the capacity per line at the moment and where do you think it will be by the end of the year?

Mark Morelli

I think what’s happening here Rob is that our Tijuana and our Greenville operations are essentially fully ramped and we’ve done a very good job by ramping those ahead of where we thought we would be. We have not disclosed our capacity by line. One of the reasons why we’re doing that is as we’re continuing to ramp our facilities, we may run into a bottleneck at any given facility, we may transfer production from one to the other to overall optimize or total throughput and a little bit of that has occurred in the quarter.

We also have our Auburn Hills 1 facility, which continues to meet some further refinements in terms of their overall operation processes. As you know, we’ve gone back and we’re continuing to do some upgrades there so, we don’t think that providing guidance by facility is necessarily a helpful one.

Rob Stone – Cowen & Company

I actually wasn’t thinking in terms of guidance by facility a bit more to just get a sense of what your overall capacity might be and I guess it’s potentially a little bit confusing for people because if you’re producing on the front end in the first half of the fiscal year, but not shipping as you said, those laminates until the second half, it might then look like your second half output is actually above your capacity. So, I was just trying to get a sense of what your effective capacity for the year might be, sort of a rough range of megawatts that are embedded in your revenue guidance for solar for the year?

Mark Morelli

Sure, I think there is some guidance we’ve given here that might be helpful. We’ve given a guidance of $89 million to $91 million for the Q1 in terms of total sales. Our ASPs in Q4 were $3 per watt. We’ve guided to the fact that that’s going to be flat to slightly down for the quarter. So, that should give you a pretty good guidance for our megawatt output for Q1.

At the same time, our production is in fact backend loaded as we’ve said; that’s because our two new facilities in Greenville, which also ramps along with Tijuana don’t come online until the second half of the year. So, you’re not going to appreciably see the output there. The way to get the end of the year number is to look at the total guidance with the ASP number there, so you can then kind of make the curve to get to the actual production by quarter.

Rob Stone – Cowen & Company

The other non-solar revenue is also a little bit higher than I had been modeling, but of course some of that is high margin royalty and some of it is potentially lower margin product development. Can you just give us a sense of roughly what’s in the non-solar revenue?

Sanjeev Kumar

The non-solar revenues are primarily like you said royalties and then license and the sale of our nickel hydroxide product in automotive material segment as well as revenues from the development contracts that we have from the government.

Rob Stone – Cowen & Company

In terms of thinking about laying out those components though, which is the part that’s really growing in fiscal ’09?

Sanjeev Kumar

I think from a non PV products sales standpoint, I think there will be some growth expected perhaps in the royalties, but I think as a percentage of total revenues I think it’s going to be relatively flat with marginal growth in the next fiscal year.

Rob Stone – Cowen & Company

But mainly the non-royalty part that’s growing.

Sanjeev Kumar

Non-royalty and then we’ve expect to see some growth in royalties as well.

Rob Stone – Cowen & Company

Okay. I wonder if you could comment on -- your guidance incorporates a lot of things restructuring, preproduction, R&D charges, but I know that you didn’t have prepared comments on SG&A expense.

Sanjeev Kumar

Our SG&A expenses; going forward we expect the SG&A expenses to obviously decline as a percentage of total revenues as our revenue base increases. We are commented to the 8% to 10% SG&A of total revenue in the intermediate to long-term. So going forward we are very carefully investing in the growth of the solar business, we are keeping our corporate G&A constant and in our sales growth, you would expect the SG&A to decline as a percentage of revenue.

Rob Stone – Cowen & Company

For your additional restructuring you’re taking is it going to take something out of expenses?

Sanjeev Kumar

Yes, the restructuring cost that we expect to incur in the first half of $2.5 million to $3 million will result in additional cost savings of somewhere between $2 million to $3 million. We are still compelling those numbers and will guide appropriately in the near future.

Operator

Your next question comes from Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

A couple of quick questions; first off on your supply agreement on the AirTec contract here. This is now from $1.2 billion to $1.8 billion; can you guys give us a sense as to how far out does that extend, so does it mean that you’re basically all sold out for fiscal ’09 and can you talk a little bit more about that and also give us a sense of the geographic split of that sort of the sales pipeline.

Mark Morelli

Our fiscal year 2009 is appreciably committed. Those supply agreements extend out till 2012 and some of that actually driven into 2013 now. The geographic mix that we’ve experienced recently has been about 70% Europe, 20% North America and about 10% rest of the world which is mostly South Korea.

Within Europe we see strong demand in France, Italy and Germany about 30 each for those countries and as you know in the fourth quarters we announced we had a fairly sale in Spain and we think that Spain can represent some marginal upside going forward.

Sanjay Shrestha - Lazard Capital Markets

And you guys talked about how you’re sort of reducing your overall cost optimizing the line, raw material dynamics, now when will we start to sort of see the benefit from the lower steel cost for you guys and is that sort of factored in terms of sort of the margin expansion guidance for the second half of fiscal ’09 or is it really more just coming from the utilization ramp up and things along those lines?

Mark Morelli

We started to see some of the impact of better steel this past fiscal year. About 30% of our overall cost increases in fact came from overall material costs increases which steel started happening there. However, we do have commitments for steel that have extended into this next fiscal year with our previous suppliers. As you know we’re bringing on that new grid wire supplier and we’re continuing to work on our polymer suppliers as well.

So in our fiscal year 2009, we’re going to see a greater portion of our cost reduction coming for material suppliers. In fact some of that unfortunately is back-end loaded, so we’re doing everything we can to bring that forward, but right now we’ve got it in the back end of our year right now.

Sanjay Shrestha - Lazard Capital Markets

So one last question from me, because you guys did go through a lot of stuff on the call; so you’re talking about a sequential decline in gross margin in Q1 of ’09 and I know you guys mentioned some points about the deposition machine coming on, but not the full unitization of the line. Can you talk about that a little bit, so that I can fully understand exactly the dynamics that’s unfolding there?

Mark Morelli

Absolutely, I think the good news is that we’ve increased our gross margins to more than 33% on better throughput. To your question specifically that’s coming down to about 31% in Q1 and stands relatively flat for Q2 and that’s really due to the impact of the ramp.

What essentially happens there is that we take on the new facilities without getting much production output out of them as they’re just beginning to ramp. So we get hit by a couple of 100 basis points right there to the ramp alone. We won’t to see gross margin expansion till the second half as appreciably we start getting volume out of those new facilities and then we can experience some gross margin expansion accordingly.

Operator

Your next question comes from Satya Kumar with Credit Suisse.

Satya Kumar - Credit Suisse

I jumped in a little late Mark, I was wondering if you guys gave any guidance for the new year ending capacity you should be remodeling for fiscal 2010?

Mark Morelli

No, we haven’t actually gone out that as far for guidance Satya. So we’ll hopefully be updating you soon on that.

Satya Kumar - Credit Suisse

Are we still looking at 300 plus megawatts for that number, is that right?

Mark Morelli

Yes, we said 300 megawatts of nameplate capacity by the end of fiscal year ’10 is what we previously guided to.

Satya Kumar - Credit Suisse

Great with the improvement that you’re doing right now with the faster time to ramp up, can you let us know what does it take in terms of lead times to add capacity from what’s fully that?

Mark Morelli

Well we’ve got the installation of the facilities themselves, which has appreciably taken a number of months and then you see the ramp time that’s shown here, that we’re targeting at eight months or better. As we continue to make improvements there we’ll update people appropriately on our progress.

Given our lead times from assigning new facilities I think you can expect to hear that we will announce some site selection here relatively shortly; we are not ready to do it on this conference call, but given that we need to keep or try to accelerate our schedule on our ramp that we will need to be making that site selection here -- announcement quite quickly.

Satya Kumar - Credit Suisse

And I think you mentioned that your contracts are now extending out into 2012 and ‘13. What percentage of your output for fiscal 2010 is sold out at this point and what should we think of for ASP trends in fiscal 2010 at this point?

Mark Morelli

We are not ready to talk about ASP’s in fiscal year ’10. As you know we’ve guided fiscal year ’09 because we’re appreciably sold out. The good news is that we are filling the pipeline longer term, but we still have some more work to do to fill that pipeline in ’10. When it’s appreciably sold then we’ll disclose the ASP. Now due to competitive reasons it’s not in our best interest to disclose them at this point.

Satya Kumar - Credit Suisse

As final question from me, on Cobasys is there any additional litigation expense that we should be thinking of or is that included in the comments that you’ve made about SG&A in fiscal ’09?

Mark Morelli

Yes, we continue to incur a little Cobasys expense as we’re still working on pushing that transaction through with our intended buyer. So we will continue to incur those expenses and they are included in the guidance as you see.

Operator

Your next question comes from Colin Rusch with Broadpoint Capital.

Colin Rusch – Broadpoint Capital

Regarding the equipment manufacturers for your capacity expansion, I understand you have a couple of pieces of equipment that are single sourced; how confident are you in the on-time delivery of that equipment and how can you give us some comfort in terms of how you’re managing the process into delivery?

Mark Morelli

We have a new team that’s focused on how we ramp our facilities; in fact how we accelerate the ramp of our facilities. One of the areas that we’ve identified that we need continuing improvement on is the supply base for our equipment suppliers. We put a lot of work and effort into that.

The good news is that many of these suppliers we’ve worked with for a period time; we know what issues we’ve run into in the past and we worked to address those. At the same time we’re working to extent our supplier base to be able to ramp more affectively and to try to direst that process. So, we’re kind of midway through that.

I would say we don’t anticipate any major problems, but it is pretty complicated to ramp the number ones we do have, so there is some risk there. I think what we’re providing here is responsible guidance given the balance of risk that we see and as we see improvements on that we can update people accordingly.

Colin Rusch – Broadpoint Capital

And then regarding currency issues and your contracts being larger denominated dollars are you starting to see any sort of transition into other currencies or are you expecting to continue on with dollar denominated contracts?

Mark Morelli

We expect to continue to stay on the dollar, we think that’s obviously served us well in the history and as you know the dollar has strengthened recently, but we still got a very good value proposition for the folks that buying in dollars and selling in the local markets in Europe. So, we don’t anticipate any near-term change there.

Operator

Your next question comes from Peter Kim with Deutsche Bank.

Peter Kim - Deutsche Bank

I wanted to touch based on the in-stock cost provided. In your prepared remarks you talked about the benefits of your product in terms of installing the light weight and the faster installed times on rooftops and I was wondering given that situation are you seeing a pricing leverage as you book systems and regions with higher premiums for the rooftop instillations?

Mark Morelli

Essentially what happens is the majority of our demand is going to where there is a feed-in tariff that supports rooftop application. That combined with about a 10% to 20% instillation cost advantage on the roof is essentially the reason why we’re growing our pipeline so rapidly in the countries that we spoke about. So, I think the short answer to your question is, yes.

Peter Kim - Deutsche Bank

So, you are seeing ASP increases when you do book orders in these other regions where the feed-in tariff is higher?

Mark Morelli

No, I’m sorry, I misstated that. Longer-term we see a decline in ASP. Now, the question is, at what rate does it decline? Right now, for fiscal year ’09 it’s flat to slightly down, but we’re translating that strong demand into selling that pipeline out for longer-term. We don’t see any dramatic drop offs in our ASPs going forward, but at the same time they are not going up.

Peter Kim - Deutsche Bank

Okay. Two quick questions then; one, what was your mix of your conversion efficiencies; I remember the last quarter you talked about the 8.5% versus the 8% products, what was your mix this quarter?

Sanjeev Kumar

The 144 product was roughly 45% of the rough total in the fourth quarter.

Peter Kim - Deutsche Bank

How do you see that trending over the next year?

Sanjeev Kumar

About relatively flat.

Peter Kim - Deutsche Bank

So, you expect about half of the products to be 8.5% to the 144 product.

Sanjeev Kumar

I think that’s a reasonable assumption, yes.

Peter Kim - Deutsche Bank

Okay. What were your shipments this quarter in terms of megawatts?

Sanjeev Kumar

The shipments were 25.7 megawatts.

Operator

Your next question comes from Paul Clegg with Jefferies & Company.

Paul Clegg - Jefferies & Company

I was wondering if you could talk about the gross margin differentials or maybe even the cost per watt differentials without maybe disclosing too much between the different lines. In terms of how much better is Auburn Hills 2 than Auburn Hills 1 and how much better is Greenville than Auburn Hills, in terms of what they’re able to do in cost per watt or gross margin?

Mark Morelli

Actually I haven’t given those numbers Paul, because it’s tough for us to be able to guide based on those numbers. Directionally speaking, obviously Greenville’s doing quite well. We’ve recognized a lot of improvements as you know for Auburn Hills 1 facility even after Auburn Hills 2 and while it’s a modified clone of Auburn Hills 2, we have to go back to Auburn Hills 1 and do some retrofits with the things we’ve learned. So, we don’t think it’s particularly helpful to be able to guide for gross margin versus facility, but I think our overall gross margin should suffice in giving a responsible guidance to where we think we’re headed.

Paul Clegg - Jefferies & Company

Okay. Can you maybe say what the highest number of megawatts you produced from any one line has been?

Mark Morelli

Well, our nameplate capacity is up 30 megawatts per line within the Greenville 1 facility and as you know we have two 30 megawatt lines there. We actually haven’t gone back and thought about re-rating the capacity of those facilities; obviously at some point, we’re going to have to re-rate our nameplate capacities. We’re focused really on ramping and getting things together, but at some point we’re going to go back and say how are we doing versus those nameplates. I don’t think we’re ready to do that quite yet.

Paul Clegg - Jefferies & Company

Okay and then shifting gears for a second on Ovonyx YXP run business; when could we actually see that being reflected in your financial statements? I guess we all got kind of excited about that a year ago and we haven’t seen all that much sense and I was wondering if you had a thought on when we might actually see that roll into your reported numbers.

Mark Morelli

Yes, that’s a difficult question to answer. It’s really the adoption rate of the licensees that Ovonyx has that’s adopting the technology. We hear about it kind of when the rest of the market hears about it, because it’s an online transaction. Ovonyx has these joint development agreements with folks like Hynix or Samsung or Intel.

So, they’re working on their applications of the technology; for competitive reasons they actually don’t disclose where they are in launching their products. As you know the overall memory business has slowed appreciably this past year and the prices have decreased.

We know there is current activity working on their new developments, however it’s difficult for us to guide, so the consequence have guided folks to not think of any value there because it’s very difficult for us to guide responsibly to any number and as we see further adoption or read about it than we can be able to let people know what implications we think it has for the business and our P&L accordingly.

Operator

Your next question comes from [Kelly Dougherty] with McClarey.

Kelly Dougherty – McClarey

I have got a few bigger picture questions. I am just wondering if you can give us some more detail on how you’re pitching the product when you’re selling it into the building material segment which is not necessarily the additional channel. I am wondering how you go about selling that and if there are some economics that you put around the UNI-SOLAR product or are customers just excited to know that there is something like this out there for that?

Mark Morelli

In our interactions with building materials companies, the great thing is that they understand the value proposition implicitly. Given that it is like other roofing materials, it can be integrated with their roofing materials and so as a consequence, our conversations there go quite well.

They also sell, the benefits of being up on the roof which they are concerned and the major buying criteria there maybe wind loading, maybe weight, maybe roof penetrations, ease of installation, using the existing labor force of contractors, to be able to be trained and install this product are all pretty significant benefits.

So as a consequence we worked with the building materials company as with their sales force, as to how this product needs to be sold. More than 50% of our sales goes to the building materials channel, at the same time we see there are some other folks in the building materials area that continue to want to get into this business and work with us, so we think that this is a relevant value proposition we are going to be working on for some time.

Kelly Dougherty – McClarey

So this is something you sell more on the attributes of the product rather than just around the pricing or economics or anything like that?

Mark Morelli

Absolutely, I don’t think when you take the balance of overall attributes that we have for the roofing segment that we’ve defined, that we intent to sell based on those balance of advantages that we have and we don’t appreciably see competition here that have the similar product.

Kelly Dougherty – McClarey

That was actually my next question. I know that its pretty scares out there right now, but people are obviously getting interested in the space, so how do you see the competitive landscape maybe a few years out and where UNI-SOLAR fits in that hold grant scheme of things.

Mark Morelli

That’s a difficult question for us to answer. The great news is that we see excellent demand for the product. We’re working diligently to further develop our expertise on rooftop applications and working with the building materials channel and we get better and better at that everyday.

It’s difficult for us to say when competition will appreciably come to the market in the segment. At the same time we just stay focused on extending our lead, focusing on quality installations and applications and we think that these will be hallmarks of further differentiation in the future.

Kelly Dougherty – McClarey

Would you say that maybe imparity is closer than any kind of meaningful competition from anyone else like as it maybe that far out?

Mark Morelli

Yes, once again it’s kind of tough. What we do know is it taking us a long time to get to where we are. We’ve appreciably worked on this technology and value proposition for 25 years.

We don’t think that there will be any easy answers to these problems because it takes a lot of hard, hard work and a lot of failures and trials to be able to get our application to work right to the manufacturing process and know how as well through applications durability problems we faced in the past that we’ve worked through. So it’s not something that will occur quickly but at the same time it is very difficult to see when other folks will likely solve the problems as well.

Operator

Your next question comes from Brian Gamble with Simmons & Company.

Brian Gamble – Simmons & Company

I just had a couple of things. First on the ITC, how was the lack of the extension on that end affecting your North American business and possibly grant that this was only 20% of the quarter and you are focused more on the European market, but how is that affecting North American sales going forward?

Mark Morelli

I think that it’s quite obvious that our North American sales have slowed due to the lack of the ITC. Overall it’s an impact for the business for us and we continue to see very strong demand and our pipeline continues to grow. One of the biggest problems we have in the near term is where our product actually goes because there is so much demand for it. So we don’t see any near term concerns with the lack of the ITC.

We’re hopeful in the next calendar year of 2009 that we will see the extension of the ITC in the United States. While there are current state markets that provide good incentives, such as Maryland, New Jersey, California, these markets remain somewhat strong I would say that I would be concerned into ’09 or ’10 if we did not see an ITC being passed in the United States and my major concern for that is that we’re a North American supplier and it’s obviously our home tariff and we’d love to see that we could develop our home market accordingly.

Brian Gamble – Simmons & Company

When you talk to new customers and mention the product pipeline that is increasing just very well for the quarter; what is their comfort level with the expansion beyond the 300 megawatt that’s you guys have talked about; how are you reassuring them?

So I’m assuming that at some point you’re going to have to say something on that end sooner rather than later, but what is their comfort level, either whether it’s a timing point from year end or giving them some details on location, what are they expecting from your side to just be comfortable in finalizing some of the contracts that are in your pipeline?

Mark Morelli

Well, I think they are relatively encouraged by our progress that we’re making. I think we’ve got some pretty interesting targets that are out there that we want to work towards, but I think we’re fairly open with our major customers and suppliers about how we go about getting this expansion to happen, in fact accelerate. So, I don’t think there is a lot of a concern there at the moment.

Brian Gamble – Simmons & Company

And then just finally, when you mentioned long-term 40% solar gross margins, does that imply full ramping to 1 gigawatt and then some type of high utilization on that end or is that more like a late 2010 type number; is there any type of timing around that?

Mark Morelli

That’s a good question. We see it happen in late 2010, the 40% gross margin we believe will occur in the second half. We certainly will not see a 40% gross margin average for fiscal year 2010, but by the end of 2010 we should see the 40% gross margin show up.

Operator

Your next question comes from Stephen Chin with UBS.

Jagdish Iyer – UBS

This is Jagdish for Stephen. Hi Mark, a couple of questions; the first question is, I know you had mentioned about fiscal ’09 ASP’s to be down flat slightly. I just wanted to get a little bit more granularity in terms of is it going to be in the low single-digit or is it going to be in the high single-digit and in my follow-up I just wanted to see how the ASP’s are trending between the first half of calendar ’09 versus the second half of calendar ’09?

Mark Morelli

We see it sort of flattish in the first half and a little bit down single-digits in the second half to flat.

Jagdish Iyer – UBS

The second question is that, you had said about some issues or some delays in the cell cutting, can you just elaborate a little bit more on that situation; is it related to the vendor or can you give more color on that please?

Mark Morelli

Sure, you may remember that we were conceptualizing our 120 megawatt expansion in Greenville and at the time we were doing that, we were actually looking at our facility footprint and we were trying to figure out how to get that additional 120 megawatts pretty much in the existing footprint that we had, in order to save our overall CapEx per watt and really economize on our capital spending.

That was a new thought for the business and while we were thinking through that we had delayed to actually place the orders with the suppliers, because we didn’t know how we would proceed. As a consequence, we think it was the right thing to do was to rethink that footprint approach, because it really shows our sensitivity towards CapEx per watt.

We did a good job with coming up with that proposal, but at the same time due to that delaying we are not actually getting the equipment for our cell lines until essentially this quarter and into our next quarter. So as a consequence we have a bit of this flat spot in terms of our ramp.

Jagdish Iyer – UBS

And I just wanted to get a little bit more on the fiscal ’09; based on your guidance, how do you see the geographical distribution of revenues as you look out for the next six to nine months?

Mark Morelli

Yes, it’s what I said before I see it continuing about 70% Europe, about 20% U.S., 10% rest of the world and the geographic that I articulated previously.

Jagdish Iyer – UBS

Okay and I don’t know whether you had given shipment guidance for the next quarter, is there any guidance for shipments in the next quarter please?

Mark Morelli

Yes, I think the way to get the overall shipments is you can take a rough estimate of our sales, our ASPs and I think you’ll get there with a very modest inventory level.

Operator

Your next question comes from Vishal Shah with Lehman Brothers.

Vishal Shah - Lehman Brothers

Two questions, firstly on your fiscal ’09 guidance you said ASPs flat to slightly down. What percentage of your contracts is fixed priced contracts, take-or-pay contracts for ’09?

Mark Morelli

Well, all of our contracts have a price stipulation with them, so regardless of their supply agreement or take-or-pay for ’09 and they are appreciably take-or-pay, they stipulate the price.

Vishal Shah - Lehman Brothers

I’m just curious to know what the risks are if lets say the dollar continues to appreciate and if at the same time the crystal and silicon based module ASPs decline to close to about $3.25 per watt. What happens to some of these contracts?

Mark Morelli

Well, I think that we have to take a better review on how we got to the price that we’re showing at today and as I’ve said previously, I think we’ve already sold at a discount to the market and as a consequence I think the supply agreement and the take-or-pays that we’re signing now reflect a modest decrease of pricing going forward, but we don’t see a lot of risk to that certainly in 2009.

Vishal Shah - Lehman Brothers

Okay great and the second question is you said your customers are signing take-or-pay contracts for 2012 and 2013 timeframe; can you talk about what kind of markets they are signing contracts for because my understanding is that the incentives and feed-in tariffs for some of these markets may have a gap that could be reached by that timeframe, so are the customers trying to assume that incentives are going to be available for that timeframe or some other markets?

Mark Morelli

Yes, I think there is for a number of our customers, they want to be a long-term supplier with us; they don’t anticipate that there is going to be any cliffs of what's going to happen in terms of overall tariff structures, there maybe some diminishing of that, but at the same time our costs have to comedown appropriately as well. At those timeframes as well you can imagine that our cost structure could also be better.

So, I think that for us it’s important to identify and work with channel partners that we essentially have a very good working relationship with them. We’ve trained them on installation, they focus on high quality installations in the market that they’re focused and this is not an issue where you get into the market one day and you get out the next day. We want to work with that folks on a long-term basis and there are some folks that are customer based that obviously see that value proposition on a long-term and are willing to work with us on a long-term.

Vishal Shah - Lehman Brothers

Great, so these contracts are with customers in France, Italy and Germany?

Mark Morelli

Yes.

Operator

Your next question comes from Sam Dubinsky with Oppenheimer.

Sam Dubinsky – Oppenheimer

A couple of quick questions; can you guys just discuss what your cost per kilowatt hour is with your technology?

Mark Morelli

Yes, in Q4 our cost per kilowatt is $2.03.

Sam Dubinsky – Oppenheimer

The cost per kilowatt hour that your customers are generating, just to compare this first on apple-to-apple versus other technologies?

Mark Morelli

Sure, we see anywhere from a 10% to 30% cost per kilowatt hour advantage, the problem that we have is how do we sell that way, appreciably we don’t. We have one example where a customer has seen an update in the local markets to be able to want to buy off that value proposition.

On balance we don’t see a lot of people buying that way because we haven’t provided enough comprehensive data, so that they can appreciably be able value that for their local. As we become more sophisticated in our sales force and be able to articulate that data in a way that can make sense for their specific location then hopefully that will be an advantage for us in the future.

Sam Dubinsky – Oppenheimer

Do you have any absolute numbers you can get out for cost per kilowatt hour; I know it varies per region, but…

Mark Morelli

No, it’s tough because if you’re in a low light condition, say in the coast of California, you may see one set of numbers based on the sun. It’s also based on the orientation of the laminate versus our panel that might be erected there. If they’re flat on the roof there is a difference, so that’s the problem, in each location it maybe different that’s why there is a range.

Temperature makes a big difference; if you’re in a hot climate we perform very well in high temperature applications. So, there is a number of variables here that makes it a bit complex to how we bring that value proposition to be understood for a specific application.

Sam Dubinsky – Oppenheimer

Okay and then can you give an update in terms of monetizing non-core assets and I have one last follow up question.

Mark Morelli

Sure, we’ve got a number of interesting technologies that have been developed over many, many years here at ECD. We have gone through our first step of the process by which we called back the R&D in those areas. We still retain some I think valuable IP and we still have a number of R&D activities that do continue where we believe there maybe some value.

Going to the first step means that we are making money on those businesses, there is no longer a drain on our financials nor are they a significant drain on our management time; however, in our step two we’re trying to figure out what the next steps might be.

We may work with some venture capitalist; we may close some of those businesses; we may continue to invest in some of those businesses; so as we get greater focus on what we’ll do we will articulate it accordingly as it has some impact on our shareholders.

Sam Dubinsky – Oppenheimer

Actually I have two more questions and on the capacity expansion for 2010 I believe 300 megawatts, what prevents you from pulling that and just because the things don’t seem like ’09 versus 2010 to make that big of an increase and there is a decent amount of time over the next 24 months. So what prevents you from bringing or pulling in capacity expansion plans for 2010?

Mark Morelli

Well, there is nothing that prevents us from doing it. In fact we have a team that’s been formed, we’ve got some folks that have joined from the outside as well as some very skilled people that have worked on the inside of our business to work exactly on that problem. We see that as an opportunity. I think at this point we’re getting responsible guidance based on what we see and what we know, but certainly the opportunity exists to pull it in.

Sam Dubinsky – Oppenheimer

Okay and then just a housekeeping question on the model, what should we model in for share account for the next quarter and for the coming quarters?

Sanjeev Kumar

I think the reasonable estimate to use for fully diluted share count is, I said between 42 million to 43 million shares.

Operator

Your next question comes from George Kotzias with Calyon.

George Kotzias – Calyon

Just a quick question on conversion efficiency; I was wondering where you are right now and basically where you’re falling on the distribution curve if you’re getting to the higher end of that?

Mark Morelli

George, is the question about how much we sell or where we see we’re going forward in terms of product development?

George Kotzias – Calyon

Sorry, right now what’s like the mean conversion efficiency right now as of this quarter and then are you getting towards the higher end of that distribution or…?

Mark Morelli

Well we see going forward about 50% of our sales with conversion efficiency of the 144 watt laminate which is as you know about 8.5% conversion efficiency. We see that balance being maintained, that’s a yield issue. How much yield we get out the equipment accordingly; we are currently working on improvements to conversion efficiency and we anticipate a regular drum beat of that going forward as we continue to provide better products in terms of conversion efficiency and launch them to our manufacturing facility. So, right now I think I would take that balance of 50% being the 144 watt laminate.

Operator

Your next question comes from Clint Coghill with Coghill Capital Management.

Clint Coghill - Coghill Capital Management

All of my questions have been answered, but if I take your long-term gross margin target of 40% plus and kind of imply some sort of SG&A and R&D expense, I guess I’m trying to understand the return on investment capital building additional capacity and the payback period in doing that.

If you can maybe just talk a little bit around that, I know that there is a bunch of different assumptions that go into there and then the second question I have is just regarding payback for your customers, any sort of just conversation that is a seven year sort of payback for the customers who buy your product as compared to buying against the grid.

Mark Morelli

Sure, I think on the long-term steady state sense perhaps you should think of the 40% gross margin, the 8% to 10% SG&A and about a 5% R&D. So, I think that could get you to your calculation that you need for perhaps the returns you’re looking for.

In terms of the payback for customers in fact we see in some countries the seven year or even better payback that they’re getting with our product, which for Green power generation of electricity we think is quite attractive and I think that’s the reason why we’re seeing such strong demand for our product.

Operator

Your next question comes from Patrick Forkin with Tejas Securities.

Patrick Forkin – Tejas Securities

Mark I want to dig into North America a little more. Last week GM announced that they were doing another 1.2 megawatt rooftop project in Maryland and in talking to the GM folks it sounded like it was a UNI-SOLAR project and they were doing it with SunEdison and it sounded like under a PPA agreement.

I was wondering in North America, is your sales channel more direct or is it more with companies like SunEdison and how are companies like SunEdison looking at UNI-SOLAR versus maybe some of the lower cost glass-based products that are out there?

Mark Morelli

As you know we have a relationship with General Motors, the site in Maryland in fact is a UNI-SOLAR product, it’s their fourth installation. Given we have a very good relationship with General Motors and they understand the attributes of our product, that’s clearly something that they have a preference for.

SunEdison is a company that we’ve recently began to work with and they I think are focused on a number of applications and I think they’re also beginning to recognize some of the benefits that we have for a segment of the rooftop market that makes a lot of sense based on the attribute we’ve been talking about.

The way we go to market in North America is traditionally through channel partners. We may retain some direct relationships with customers, but many times in order to get a PPA, something that we don’t obviously provide today, they would obviously work with our channel partners as well on installations.

So, I think it would be a typical model that we would have as we may retain some direct relationship with customers that we would pull in a channel partner; appropriately in this case it’s SunEdison.

Patrick Forkin – Tejas Securities

Okay. So for SunEdison to use UNI-SOLAR they’d really have to be comfortable with the economics versus a capital based glass product, right?

Mark Morelli

No, I think that’s a very good aspect here where you see them adopting this technology for this application.

Operator

Your final question comes from Rob Stone with Cowen and Company.

Rob Stone - Cowen and Company

Just kind of a high level question; Mark you in the past presented your backlog in terms of percentage coverage of your expected shipments. I noticed you’ve converted that to backlog in revenue terms now and I’m sure you’re not trying to be evasive, but you’re also in the mix of negotiations. Can you give us a sense of roughly, what percent of fiscal 2010 is covered? I know, you don’t want to talk about ASPs, but I’m just trying to get a sense of the shipment coverage, which was previously I think about 48%. Thanks.

Mark Morelli

Well it’s up from the 48%, but it’s not appreciably sold and what I would consider appreciably sold is something around the 70% or 80% range, so it’s kind of in between and the reason why we’re saying that is just means that there is more work to do in fiscal year ‘10 for us to sell it out and obviously we want to sell it out at good average selling prices as well. So, I think the good news is that we continue to see the pipeline growing, we still have more work to do in ‘10 and beyond, but I think that represents good opportunity for us.

Rob Stone - Cowen and Company

So, is it fair to say that you’re in discussion and/or negotiations for additional volume that would show in that substantial number you talked about?

Mark Morelli

Absolutely, we are very actively engaged in discussions with channel partners on further filling our supply line.

Rob Stone - Cowen and Company

That should be a busy week in Valencia next week?

Mark Morelli

Yes, it always is at the seller show, so I look forward to seeing you there.

Operator

I would now like to turn the call over to Mark Morelli for closing remarks.

Mark Morelli

Well thank you for your participation and interest on today's call and have a good day.

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