Evergreen Solar, Inc. (ESLR)

Q2 2008 Earnings Call

July 17, 2008 5:00 pm ET

Executives

Michael El-Hillow – Chief Financial Officer & Secretary

Richard M. Feldt – Chairman of the Board, President & Chief Executive Officer

Analysts

Timothy Arcuri – Citigroup

Jesse W. Pichel – Piper Jaffray

Christopher Blansett – JP Morgan

Stephen O’Rourke – Deutsche Bank

Sanjay Shrestha – Lazard Capital Markets

Jonathan Hoopes – ThinkEquity Partners

Michael Horwitz – Stanford Group Company

Mark W. Bachman – Pacific Crest Securities

Robert W. Stone – Cowen & Co.

Vishal Shah – Lehman Brothers

Michael Carboy – Signal Hill Capital Group LLC

Ben Pang – Harris and Company

Pavel Molchanov – Raymond James

Stephen Chin - UBS

Sam Dubinsky – Oppenheimer & Co.

Jeff Osborne – Thomas Weisel Partners

Presentation

Operator

Welcome to Evergreen Solar second quarter 2008 conference call. (Operator Instructions) At this time for opening remarks I’d like to turn the call over to Chief Financial Officer of Evergreen Solar, Mike El-Hillow.

Michael El-Hillow

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

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

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

Richard M. Feldt

The second quarter of 2008 was perhaps the most eventful in the company’s history. We opened the first 80 megawatt phase of our Devens manufacturing facility, we signed over $1 billion in take-or-pay contracts with four customers and raised $375 million in capital. On June 2^nd, nine months after we broke ground in a Greenfield site, we began wafer production at our Devens facility using our new generation of quad ribbon furnaces and have already produced over 350,000 wafers to date.

We have received approximately 110 quad furnaces of which about 30 are fully operational. By late 2008 we’ll have 200 quad furnaces in operation in this Phase I of Devens. We have received at least one piece of equipment needed to make cells and panels, or one of each piece I should say. We’re in the final stages of debugging and performing final acceptance testing on that equipment. Within two weeks we expect to be able to make a panel with 100% of Devens’ production content. To date, we have made about a dozen panels with mostly Devens’ content but have performed pre-manufacturing process steps in Marlboro while the debug and final acceptance testing at Devens is underway.

Over the next few months we will complete the training of about 280 production associates, complete the debugging of the remaining manufacturing equipment and gradually expand production capacity. We expect to produce between one and three megawatts of panels at our fully integrated Devens facility in the third quarter and between eight and 10 megawatts in the fourth quarter of this year. This first phase of Devens should be at full capacity at 20 megawatts per quarter in early 2009 at which time we expect to reach operational profitability.

We’ve also made significant progress in the second 80 megawatt phase at Devens. Phase II has included site work, concrete pouring for footings and foundations and structural steel erection. We will commence roof installation and we’ll start pouring floor slabs later this month. We expect to close in the building by early September, begin wafer production in January of 09 and cell and panel production in February of 09. By mid 2009 Devens will be a 450,000 square foot facility with an annual capacity of approximately 160 megawatts. At that full capacity, we expect to achieve cell conversion efficiency of about 15.5%, experience yields of approximately 95% in each of the wafer, cell and panel fab areas, consume silicon at a rate of about four grams per watt and achieve total manufacturing cost of about $2 per watt.

Late in the second quarter we began to scale back the production of our Marlboro manufacturing location, historically the only source of product revenue for the company to about 50% of its recent 4.5 to five megawatts per quarter output. Marlboro will produce about 2.5 to three megawatts per quarter until the end of 2009 and then be reduced to less than one megawatt per quarter thereafter as the site becomes a pure pilot operation. As we have discussed over the last several years, it has been our intent to make Marlboro a pure pilot location as soon as we were able to replace the lost production with our new factory. Given the dual nature of Marlboro, that is supporting both production and pilot operations, the predictability of revenue generation and the related manufacturing cost per watt has never been our focus. Rather, this location’s main purpose has been the continued development of our unique String Ribbon technology. But, that has been hampered because Marlboro also was needed to generate revenue.

Our original plan was to perform this transition in 2009. However, because we’re able to begin Devens I production on schedule as planned, as well as accelerate the Phase II expansion by six months, we have begun the Marlboro transition six months early. This allows us to send our most experienced associates to Devens to facilitate the training and ramp up of that factory and to balance our workforce. The transition of Marlboro and the ramp up of Devens I will take about six months and last through about the end of this year. Beyond the direct factory startup costs that we incur, there will be the typical inefficiencies that negatively impact gross margin and this will happen in third and fourth quarters. This occurs because we have hired and trained over two thirds of the Devens I workforce.

Since we will ship products from Devens this quarter, we are putting the majority of those employee costs in the costs of goods sold instead of start up costs. The margin issue arises because our shipments are but a fraction of the factory capacity while we have most of the at capacity number of people. All companies are impacted similar when they open new facilities but it’s very pronounced in our case because this expansion will increase our annual capacity by over 10X from our Marlboro pilot operations. Mike will discuss the specific financial impact in further detail just a little later on.

Turning to our factory expansion plans beyond Devens, over the last month we have made significant progress in the site selection for our next integrated wafer cell and panel facility. We plan to make a final decision on the specific location by the end of the quarter. We expect to begin detail site planning early next quarter and construction by the beginning of 2009 probably in two phases of about 250 megawatts each. We expect that the first phase will begin wafer production in early 2010 and the second phase at the very end of 2010 or early 2011. This schedule is consistent with our stated expansion plans of reaching 850 megawatts of production in 2012.

We’re also in the final stages of selecting the site for our string factory. As you are aware, as I talked about on the last few calls, we use a special form of string in our wafer manufacturing process. As again I’ve described a number of times, worldwide demand for this form of string is fairly limited and as a consequence we procure our string from a sole source. We plan to begin factory construction later this quarter and begin initial string production early 2009 and gradually increase our production consistent with our internal needs. We have arranged with our current string supplier to meet both ours and [inaudible] string requirements and that supply will continue to be a valued second source for the foreseeable future.

Also during the quarter we began receiving silicon from DC Chemical, our largest silicon supplier. In addition to our two long term polysilicon agreements with DC Chemical, we have contracts with REC, NETOL, Barker and Silpro providing approximately 12,500 tons of silicon to 2019. We have silicon under contract to reach annual production levels of approximately 135 megawatts in 2009, 300 megawatts in 2010, 600 megawatts in 2011 and about 850 megawatts in 2012. Again the numbers we’ve talked about before, this is just a review. We are gratified to have 100% of our silicon needs through 2012 at a point in time when we believe that silicon supply will be much less constrained.

Even though we believe silicon will be more available and prices will moderate, we will still be able to maintain our cost advantage in silicon consumption since we will continue to assume less than half the silicon than the industry average. Our target is to reduce silicon consumption to under two grams, we’re hoping to get to 1.5 grams per watt by 2014 a time where the industry average is expected to be about six grams per watt. So, if silicon prices fall to $60 a kilogram, we’ll still have a cost advantage of about $0.20 per what, substantial given that many in our industry are targeting a total cost of about $1.00 per watt in that timeframe.

Now, turning to our customers, in the second quarter we signed four long term take-or-pay sales contracts totaling about $1.7 billion in revenue through 2013. As a review, these contracts are with Ralos, one of Europe’s leading companies in the field of photovoltaic with headquarters in Germany and subsidiaries in Spain, Italy, Austria, United Kingdom and Portugal. groSolar, a leading North American solar power company focused on designing, distributing and installing high quality solar electric and solar hot water systems. Wagner & Company, a leading photovoltaic system integrator in Germany and serving all of the major markets in Europe through an expensive installer network. And, another large US base installer who prefers not to be named until they begin receiving a product.

On Monday, we announced a long term sales contract valued at approximately $1.2 billion with German based IBC Solar. Actually, this past Tuesday morning we released the announcement. This contract extends through 2013 and brings our total contractual backlog to nearly $3 billion. IBC Solar is the largest PV distributor in the world and this contract represents the single largest contract in the history of our company as well as one of the largest contracts ever between a panel manufacturer and a distributor. The solar panels for these five take-or-pay contracts total over 875 megawatts and represent approximately 70% of Devens’ expected capacity through 2010 and all of Devens’ capacity through 2011 and 2013 and approximately 10% of the next factor that I discussed earlier.

We believe that our strong relationship with reputable customers in the past combined with the proven reliability and quality of our string product have allowed us to further expand our customer base. Looking to the EverQ joint venture, Ted Scheidegger the new CEO started this week. Ted’s most recent experience has been with Emerson Corporation. He spent much of his 25 year career at Invensys and Siemens. Since March, EverQ has also added a COO and a head of marketing and sales. In the next six months EverQ will complete its next factory, an 80 megawatt facility that will license our quad furnace technology and prepare for the planned IPO later this year or early next year.

With that, I’ll now turn the call over to our CFO Mike El-Hillow for the financial review including details on our most recent capital raise.

Michael El-Hillow

First, our second quarter financial results; products sales for the second quarter of $18.1 million were essentially flat compared to the first quarter of $18.3 million. We shipped 4.7 megawatts in the second quarter compared to 4.8 megawatts in the first quarter of this year. During the second quarter approximately 53% of our product sales were in the US, 42% in Europe and 5% in Asia compared to 50% in the US, 49% in Europe and 1% in Asia during the first quarter. Our average selling price was $3.78 per watt in the second quarter up from $3.74 per watt in the first quarter resulting mainly from the continued strong Euro.

The small decrease in sales volume was offset by the increase in selling price resulting in product revenue that was essentially flat quarter-over-quarter. Fees from EverQ our joint venture from REC and Q-Cells were $4.6 million within $50,000 of what we recorded in the first quarter of this year. Gross margin was 34.7% in the quarter up from 33.6% in the first quarter. The sequential increase in gross margin was due to slightly higher ASPs and lower manufacturing costs.

R&D expenses of $5.9 million for the quarter compared to $4.9 million for the first quarter of 2008. The increased R&D expense was driven primarily by an increase in the depreciation expense as we have been installing equipment in Marlboro as part of our pilot operation focus. For new equipment purchased for R&D for pilot purposes we will depreciate that equipment over three years as we intend to introduce new technology and process more rapidly than we have in the past.

SG&A expense was $5.9 million for the quarter compared with $5 million in the first quarter. The sequential increase in SG&A expense was driven primarily by cost associated with attending two solar trade shows during the quarter, costs for our annual report and proxy and stock compensation expense. Planned startup costs for Devens of $8.6 million increased substantially as expected from the first quarter amount of $5.3 million. In addition, as part of our Marlboro ramp down plan that Rick discussed, we will be disposing of certain equipment by the end of 2008. This requires us to accelerate the depreciation on that equipment ratably over the rest of 2008 resulting in a charge of $2.7 million during the second quarter.

Our operating loss is $15.2 million compared to $7.5 million in the first quarter. The sequential increase in the operating loss is due to start up costs and to a lesser extent the increases in R&D and SG&A. Other income was $2.5 million which consisted of a small foreign exchange loss of $158,000 and net interest income of $2.7 million. Other income in the first quarter of 2008 was substantially higher at $6.5 million which consisted of a foreign exchange gain of $3.8 million and net interest income of $2.7 million. The first quarter foreign exchange gain of $3.8 million resulted from mark-to-market adjustments of our loan to Silpro, silicon prepayments in Euros and receivables that are denominated also in Euros slightly offset by liabilities denominated in Euros. As you know, during the quarter the Euro maintained its strength when compared to the Yen at the first quarter.

Equity income from EverQ was $3.7 million versus $950,000 for the first quarter. The sequential increase was due to higher sales volume, higher selling prices and improved operational processes. Net loss for the second quarter was $8.9 million or $0.08 per share versus $25,000 in the first quarter of 2008. Turning to some detailed EverQ results, during the second quarter of 2008, EverQ had total revenues of $58.8 million Euro and shipped 21.7 megawatts of products at an average selling price of $2.65 Euros per watt. In the first quarter of this year EverQ had total revenue of $55 million Euro and shipped 20.6 megawatts at an ASP of $2.59 Euros per watt. EverQ gross margin and net income in the second quarter 2008 was 24% and $6.4 million Euros respectively compared to 19% and $2.7 million Euro respectively in the first quarter. During the second quarter, approximately 71% of EverQ product was sold in Europe and 29% in the United States compared to 54% of products in Europe and 46% in the US during the first quarter of 2008.

I will now turn to guidance for the third quarter of 2008. Revenue for the third quarter 2008 is expected to be approximately $24.5 to $25.5 million including approximately $4.5 million of selling fees and royalty payments from EverQ. Gross margin is expected to be in the range of 6% to 8%. As production and sales at Devens begins to significantly ramp in the fourth quarter, we expect gross margin to improve to about 20% in that quarter and we will return to at least 30% gross margin by early 2009 when Devens I approaches full capacity. Operating expense s excluding factory startup costs are expected to be approximately $12 to $12.5 million with the increase being from R&D but also the additional support costs that we require for Devens I.

Factor startup costs for Devens are expected to be in the range of $5 to $5.5 million. Accelerated depreciation associated with the Marlboro ramp down will again, be approximately $2.7 million. Our operating loss is expected to be between $18.5 and $19 million. Other income is expected to be approximately $3.5 million as we will have higher invested funds resulting from our recent convertible note financing and our shared EverQ income is expected to be approximately $2.5 million going down sequentially as they incur startup costs for the EverQ III factory that we expect to open up early next year.

Net loss is expected to be approximately $12.5 to $13 million or $0.10 per share. During July we sold $373.8 million of senior convertible notes due in 2013 with a cash coupon of 4% payable semi-annually. These notes have an initial conversion price of $12.11. Under a traditional convertible note security and with this $12.11 conversion price the notes would have been convertible into about 30.9 million shares upon conversion. In order to minimize the share dilution of this potential 30.9 million shares that would have been issuable upon conversion had we issued a more typical convertible security we did two things. First, the convertible notes were issued on a net share settlement basis whereby the $373.8 million of principal must be settled in cash.

Any value the notes holders would realize over and above the conversion price of $12.11 per share would then be paid in shares of stock. Second, to further limit the diluted impact of the financing we entered into a cap call auction contract that has an upstart price limit of $19. In short the capped call reduces the diluted impact of the net share settlement feature of the notes.

I want to point out that the convertible notes and the capped call are two separate transactions. Under our net share settlement arrangement with the note holders we will have to issue shares if our stock price at conversion is above $12.11 per share. Under the capped call arrangement we will receive the same number of shares from the counter parties that we issue to the note holders when our stock price is between $12.11 and $19 which is the cap price at the time of conversion. So there is no share dilution until our stock is greater than $19 at conversion. Above a stock price of $19 the amount of shares we will issue is calculated by taking the difference between the stock price at conversion and the $19 cap price times the number of shares underlying the notes of 30.9 million and dividing that amount by the stock price at conversion since the stock is the currency that we’re using.

For example, if our stock price at conversion is $25 per share then a difference of $6 per share above the $19 cap price, the incremental value is to be distributed to the note holders of $6 per share times the 30.9 million shares underlying the notes or $185 million. Because our stock price is $25 per share we would issue 7.4 million shares which is the $185 million divided by the $25 stock price. If we have a $50 stock price at conversion, a fivefold increase from today, we would issue 19 million shares.

As you can see dilution is tied directly to a significant increase in our shareholder value. The cap call will cost us approximately $70 million of which approximately $40 million was already paid at the closing date and the remainder will be paid in installments over the four and a half years. The cap call can be thought of as a prepay stock buyback. So for $70 million we have essentially repurchased 11.2 million shares of stock at a price of about $6.25 per share if our stock price at conversion is $19.

Another point of reference is this, we had talked about getting straight debt as part of this transaction. The interest cost under that debt was substantial. The direct cash interest cost would have been about 10% to 12%. With some paid in kind interest and not even counting what would have been a warrant sweetener we were looking at an interest cost of about 14% or a 10% delta from the convertible coupon cost. We would have raised about $325 million and you can take the 10% of the net interest, we used the interest savings to make the down payment on the cap call and the second year’s interest save is we will pay for the rest of the cap call and so from a straight cost of capital approach this was the best avenue for Evergreen Solar.

Also under US GAAP the cost of the cap call is charged to additional paid in capital and there will be no impact on earnings but the cost of the cap call under current IRS Regulations is deductible. Our cash interest expense will be $3.75 million per quarter. Additionally a new accounting rule has recently been approved that would be effective on fiscal years beginning after December 15^th, 2008 but which must be applied retroactively. The rules require that all companies that have issued notes with a net share settlement provision must calculate an original issue discount or OID to take into account both the debt and equity aspects of the transaction. What this means is that we will be required to record additional non-cash interest expense over and above the coupon each quarter.

While the rule is still being analyzed we believe that our OID could be about $60 million. Upon adoption of this statement later this year we as will every other company who has issued this type of debt will reduce the amount of debt by the $60 million of OID and increase additional paid in capital. The $60 million will be amortized over the term of the notes in charged interest expense. It is reasonable to assume that this would result in quarterly non-cash interest expense of about $3 million to $3.5 million a quarter. Therefore total interest expense both cash and non-cash will be about $6.7 million per quarter. Under US GAAP we will be able to capitalize this interest expense to the extent that we continue to construct factories and we will depreciate the capitalized interest over the lives of the underlying assets.

Given our expected capacity expansion targets our planned construction costs will be substantial. For modeling purposes it is reasonable to assume that our reported interest expense in our offering statement could be 20% to 40% lower than the amount of total interest expense under this financing.

Rick and I will now be happy to answer any questions you might have.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Timothy Arcuri – Citigroup.

Timothy Arcuri – Citigroup

Two things, first of all I think last call you were talking about your 09 pricing view being down mid to high single digit. It seems like there’s definitely been a fade in the pricing outlook next year, certainly what your peers just talked about pricing being down between 10% and 20% next year, so I’m wondering if you can update us on what we should think about for pricing next year and then I also had a second question.

Richard M. Feldt

We’re still believing pricing declines will be in the 8% to 10% range. We have just signed a lot of contracts with a lot of customers and that’s what we believe we’ll be selling for.

Timothy Arcuri – Citigroup

I guess that leads me to my next question, if I’m your customer what does it take for me to break that contract? What’s the band around the contract price by which I could break it? Because it would seem to me that customers signing deals right now right when it’s widely thought that pricing is going to be getting a little bit tougher next year, would want to have some out in case the pricing environment does get tougher.

Richard M. Feldt

As I described before these are take or pay contracts, we assume that pricing will decline pretty much consistent the [German Feed In Tariff] which is going to start going down the 8% to 10% range. It varies a little bit contract to contract but in round terms if it’s close to double the decline then we have to go back in good faith and renegotiate. A few percent more than what I’ve described, no change but if it’s double what I’ve described then in good faith we would go back and renegotiate.

Timothy Arcuri – Citigroup

Just to make sure that I get that, if I have a contract with you and if it assumes a down 8% year next year it would have to be in fact down 16% or more for me to come back to you and get a new price?

Richard M. Feldt

In round terms it’s not a bad way of thinking, it’s not quite that simple, but yes it has to be substantially different than what we’ve assumed in the contract and in terms of thinking about it, thinking about a close to doubling is not a bad way of thinking about it. I can’t go into detail of every contract and they are different but conceptually the notion was, and it’s symmetrical too so if pricing didn’t drop, then we’d be able to go back and renegotiate a higher price than the expected decline.

But the point is that for a few percent, 3%, 4%, 5% changes we don’t want to be renegotiating either way, up or down. We want to understand our business, they can understand their business. They can do projects around those prices but if the market really tanks then from a practical standpoint we’d have to renegotiate because someone couldn’t stay in business if they bought something from us at one price and had to sell it at a much lower price. That’s about how I can describe it, I hope that helps you but I can’t really go into much more detail.

Timothy Arcuri – Citigroup

It’s like that every year going forward so even into the out years, right?

Richard M. Feldt

Yes.

Operator

Your next question comes from Jesse W. Pichel – Piper Jaffray.

Jesse W. Pichel – Piper Jaffray

What was your Spain exposure in Q2 and overall first half and how do you expect that to change in the second half and what do you think compensates for that?

Richard M. Feldt

We don’t really have big Spain exposure. Remember relative to the market at large our volumes are relatively small. I know there is a lot of angst about what’s going on in Spain. We feel relatively unaffected. I can’t say completely unaffected because of course if the total market changes dramatically and if total demand changed real dramatically of course it might affect us but in general we aren’t really worried about Spain.

Jesse W. Pichel – Piper Jaffray

Sun Power indicated that they’re seeing a lot of quoting activity from the US utilities. Are you seeing similar quoting activities or only the system installers are seeing that?

Richard M. Feldt

It’s really the system installers. The good news for us is that Massachusetts just recently passed a very, very progressive very innovative new energy bill allowing utilities to own up to 50 megawatts of solar power generating assets which is really a big deal. We’re hoping that that provides both incentive and ability to move forward in working more closely with utilities. But just the specific answer to your question, the utilities talk to the installers, they haven’t historically talked to the manufacturers. We are trying to engage them.

Operator

Your next question comes from Christopher Blansett – JP Morgan.

Christopher Blansett – JP Morgan

When you think about your customer interaction in some of the contracts are you seeing significant regional differences in interest due to the subsidy decline? Some of the comments on your competitor’s earlier call was that there is enough pent up demand that at least for the near term there’s enough demand even if say these power generation type systems decline for a while.

Richard M. Feldt

Again we are seeing a lot of interest. The thing I think you should think about is that we only built a couple of panels and we’ve already virtually sold all this factory, Phase I and Phase II and we’ve had inquiries from more customers. In fact our sales force, although small, is asking can we speed up capacity expansions because we still have a lot of people in line, it’s a relative thing. We have a number of fairly substantial firms asking if there’s ways we can free up some capacity for them. Each company has their own view, our view is still fairly bullish. We’re getting a lot of inquiries. That’s all I can tell you. We’ve sold out this factory, Phase I and Phase II and we’re working hard to get the next one going because we’re getting lots of inquiries.

Christopher Blansett – JP Morgan

You say you have 30 Quads installed now. In general could you give us a quick update just on the performance of all 30 of those systems, how things are going?

Richard M. Feldt

It’s going really well. As I mentioned we’ve already grown 350,000 wafers. To the extent that investors had concerns the Quad would work, it’s going very well. We’re very pleased. Now of course we’ve got to put those wafers through all of the cell and panel processing steps. We’ve taken some of those and brought them to Marlboro as a quick check and we’ve been pleased with the results. We’ll feel even better after we actually build panels in Devens but we’re real happy. This is going about as well as you could expect and to those of you that were worried that Quads would work, it does work.

Operator

Your next question comes from Stephen O’Rourke – Deutsche Bank.

Stephen O’Rourke – Deutsche Bank

Just a quick question then on the Quad ribbon pullers, do you see any technical benefits that is seeing conversion efficiency compared to the Gemini furnaces that are running and producing wafers?

Richard M. Feldt

We’ve said that one of the reasons we’re going to get conversion efficiency from 14.5 to 15.5 is in part due to Quad, yes.

Operator

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

Sanjay Shrestha – Lazard Capital Markets

After you guys de-ramp more what’s going to be the expected output from Marlboro going forward and what is the expected output for EverQ after the EverQ 3 ramp up starts in Q3 of 2008?

Richard M. Feldt

We said we’re taking Marlboro down to 2.5, 3 megawatts next couple quarters and then under a megawatt next year, Sanjay. We really want Marlboro to just be a pilot operation. We wanted it all along. It’s very, very expensive. What we’re doing is really very, very positive for the company. I know in the short term because of having such low volumes, margins degrade but margins are great on a pilot factory that produces only a couple megawatts. It’s actually not very relevant even though everyone focuses on it. We’ve talked about that for years. We’re really setting ourselves up to have a very, very good and effective cost structure in Marlboro to run efficient pilot operations and the right cost structure to run a very, very efficient commercial factory in Devens.

Michael El-Hillow

For EverQ, Sanjay, next year they’re up it will be 150 to 160 megawatts including from EverQ 3.

Operator

Your next question comes from Jonathan Hoopes – ThinkEquity Partners.

Jonathan Hoopes – ThinkEquity Partners

I wanted to thank you for taking my question and to also thank management for the granularity you provided last month at your analyst event. Quick housekeeping, what currency are your contracts denominated in or does it matter? The question is how quickly do you plan on selling your new factory production? You mentioned that your sales reps are asking to increase your capacity build out there? Are there certain development milestones that you’re prospective customers are looking for before they step up and make take or pay commitments?

Richard M. Feldt

That was more than one question. My belief is in both personal dialog with them as well as talking to our sales force that our customers have confidence now that if we’re willing to take contracts for 2010 and 2011 for new factories they would sign them. We’re not willing to, until we’re a little farther along, and so we’ve actually chosen the site, we’ve really sized it, we’re thinking in terms I said of 250 megawatts Phase I and then another 250 Phase II but we want to have a real plan in place not just an Excel spreadsheet. We are inhibiting that.

We could take more orders and announce more orders but we won’t do that until our plan is a little bit more solid around the expansion. Remember, we’re just beginning Devens I. We just opened the doors a few days ago, just got our Certificate of Occupancy a few weeks ago and we’re still very early in Devens I, Devens II to be taking contracts for the next factory.

Michael El-Hillow

And in answer to your question, the currency on these take or pay contracts the majority of these companies and contracts are in Europe and so they’re priced in Euro.

Operator

Your next question comes from Michael Horwitz – Stanford Group Company.

Michael Horwitz – Stanford Group Company

I know we talked about this quite a bit but I’ll ask the question, since you’re accelerating a lot of your plans and will get some pretty good data out of Devens in a few months are people coming to you and trying to negotiate with you on any licensing agreements for String Ribbon or are you prepared to have those conversations right now given that silicon still remains quite tight? It would seem that those people should be knocking on your door. Then a follow up to that, are any upgraded metallurgical players looking at String Ribbon or your technology and using UMG with the String Ribbon technology?

Richard M. Feldt

Regarding licensing, Michael, it’s still a little bit early for us to comment on that as we’ve said. Once Devens is up and going and we have a good existence proof, we would entertain those discussions but right now we aren’t. The same thing would be for metallurgical. There is actually nothing going on in the metallurgical front. On the license front, we’ll just have to wait and see.

Operator

Your next question comes from Mark W. Bachman – Pacific Crest Securities.

Mark W. Bachman – Pacific Crest Securities

On ramping your facility, if you want to make 26 megawatts this year in production are you going to be able to achieve at least 12 megawatts in Q4? The other one is, is how do we think about scaling here and getting more watts out of the factory? For example, as you exit 2009 do you expect to be producing more than 40 megawatts a quarter for both Devens I and Devens II? Because right now the current nameplate is just 40 megawatts a quarter, right? So is there a way to get more out of that either through increasing the throughput of the tools and/or increasing the efficiency of the cells?

Richard M. Feldt

The nameplate is pretty accurate. We expect to be able to run Devens I at 20 megawatts per quarter, not the first quarter, the second quarter. They’re very close in the first quarter and then likewise by the middle of the year, have Devens II up and running in a 20 megawatts so the combined output would be 40. We’ve already assumed that we’re going to get the yields that we expect to get with the improved performance out of Quad. We expect we’re getting cell efficiency of 15.5. Right now the production numbers that we’re talking about we think are good numbers but it’s too early for any of you, for us to be playing upside to them. We’re just starting the factory so it’s too early to talk about upsides to things that we’ve just begun to build.

Mark W. Bachman – Pacific Crest Securities

Rick, I wasn’t looking at upside, what I was trying to determine was how the quarterly numbers are going to look, whether or not if Q4 could be so back end weighted there it looks like people are going to have to pull forth their numbers of Q2 assume a faster ramp because if you’re not going to produce more than 40 megawatts in Q3 and Q4 of next year that’s the only place you can make up to get to 135 megawatts for sale.

Michael El-Hillow

We’ve told the marketplace, Mark, that we’ll be at about 125 to 135 megawatts next year. As Rick points out Devens I should be approaching full capacity in the first quarter, Devens II starting but Devens II, you can’t think of it as a separate factory because it’s really an extension of the first factory. The ramp up at Devens II could be a little bit sharper than Devens I but it’s not really back end loaded. If the second, third and fourth quarters of next year can be in the 35 to 40 megawatt range, we’re going to make our goal. It’s not a back end loaded kind of thing at all.

Mark W. Bachman – Pacific Crest Securities

You’re comfortable with the 12 number for Q4?

Michael El-Hillow

As comfortable as Rick said.

Richard M. Feldt

Eight to 10 is what we feel real good about for Devens and then yes, a couple more for Marlboro, so sure, 12, yes.

Operator

Your next question comes from Robert W. Stone – Cowen & Co.

Robert W. Stone – Cowen & Co.

A question about the contracts you described, if I got that correctly you said that the take or pay deals you’ve signed cover 100% of the Devens output from 2010 onward but it’s less than 100% in the meantime. Is that because you have other non-contract obligations in the meantime or you just didn’t want to sign contracts for all the volume until you were sure that the factory was fully ramped?

Richard M. Feldt

As we said, we’d be happy if on average we were at 60% or 70% for Devens I and II after we got up and going. We’re beyond that now so we have opportunities to work here in Massachusetts with various utilities. We don’t want to be in a position where we have nothing to offer anybody for the next few years. So, no we want to have some dry power. I will reluctantly sell everything out now for next year. I don’t want to do that, I want to have some capacity going into the year so I can work with the utilities, I can see a new integrator or distributor. So, the answer is we could sell everything out now if we chose to, we don’t choose to do that. But we will have to get most of it sold out.

Robert W. Stone – Cowen & Co.

Can you characterize in general the rate at which the volume under these contracts is expected to ramp over the next several years? In other words, they’re not level shipments each year or how should we think about the linearity of volumes?

Michael El-Hillow

They start slowly in 08 and 09 and then they go up pretty rapidly in 10, 11 and 12.

Operator

Your next question comes from Vishal Shah – Lehman Brothers.

Vishal Shah – Lehman Brothers

The contracts that you’ve signed, let’s say if some of these contracts are just for the US market and if your customers were deciding to move supply to the European markets where prices are higher, do you renegotiate on these contracts or are these fixed only for the US market or are they free to sell any way they want to?

Richard M. Feldt

No, they’re not free to, that would not be real smart on our part. We have prices negotiated for Europe and prices negotiated for North America. We have expected volumes for each region and if there are to be changes, those are to be negotiated.

Vishal Shah – Lehman Brothers

The most recent contract with IBC Solar, was it for the US market or for the European market?

Richard M. Feldt

Mostly European.

Operator

Your next question comes from Michael Carboy – Signal Hill Capital Group LLC.

Michael Carboy – Signal Hill Capital Group LLC

Rick, I’d like to elaborate a little bit if you would on these multi-year forward deals. People obviously see a lot of value in coming and contracting with you. What specifically is it that you think is giving them the confidence to put ink to paper over as many years for the sizable volumes that they’re taking down?

Richard M. Feldt

We’ve had a lot of discussions with our customers so I think there’s a few dimensions. The first, our customers really do have confidence that we will deliver as advertised and so although some investors have had concerns our customers have not. They’ve seen how we helped EverQ up and going and they visited a couple times, the progress that we were making here in Massachusetts on Devens. So they felt really good about our ability to deliver.

Secondly, we’re told this repeatedly, although we’re a little company we have really had focus groups who had a lot of discussions with our customers, listened hard to what they say is important to them and so we’ve made it easier to sell our product. We have probably the tightest specs in the industry regarding power ratings. We’re getting feedback from customers that in side by side evaluations with many named companies that you know that for a rated system we deliver more power than our competitors do because we’re very judicious about our power ratings. If we say it’s 200 watts on our high quality products, it’s at least 200 watts or maybe a little bit greater and in our lowest quality, maybe it’s 196 watts at the worst case.

So they like our power ratings, they like the fact that we use anti-reflective glass to absorb more sunlight when it’s at lower angles of infinite, when it’s either rising or declining in the evening. They like the fact that we use heavier grade aluminum so that the snow loads our panels can withstand are the highest in the industry. We’ve done a lot of things to make the customer like our product and so even though we’re small and in a marketplace that really where solar is as good as a commodity, we’ve done things to make our product not just like everyone else’s.

Our customers have confidence in our ability to deliver as advertised. They have confidence in the product itself and they have confidence that we’re going to be a long term player. We’ve articulated to everybody our cost reduction plan for the next couple of years. Although we don’t have everything solutioned on it we feel real good about achieving the cost targets that we said. The world knows that prices are going to drop a lot in the next five years and so our customers have said we’re betting you’re going to be one of the long term players here. It’s really multi-dimensional.

Michael Carboy – Signal Hill Capital Group LLC

Do those customers ask you at all about your exposure on the capital cost side of building the future plants between DI and DII given the way that steel and various other component costs are running?

Richard M. Feldt

No, that hasn’t been an issue especially once we get up and going with Devens I and II. I can’t wait, and I know a lot of investors can’t wait, I can’t wait until we have these calls and we talk about how much money we made versus what our losses were and why and why we spent investors’ money we think wisely. Once we start making money, our ability to finance going forward goes up a lot.

Operator

Your next question comes from Ben Pang – Harris and Company.

Ben Pang – Harris and Company

One question, you talked about the timeline in terms of moving from the cell to the module for your Devens I in the first quarter, does that timing change as you go into the Devens II start up? Is it always a month or two month lag?

Richard M. Feldt

Not always but what we do want to do, is you want to get the first up and going. You want to build some inventory of wafers and frankly given how well our vendor is delivering furnaces, how well they’re starting up and the vendor’s capacity, it’s easier for us to get furnaces than it is for us to get some cell and panel equipment. The industry is growing very rapidly so we’re pushing hard to get the cell and panel equipment in ASAP.

We’re about two weeks later than I would have liked to have been in the cell fab. That’s not bad given the timing of the industry but I really would like to be two weeks ahead of where I am but I have all the equipment in now to get up and going. I’m just commissioning the last few devices. It’s really desire on our part to get some wafers built up and it’s also just a reality that our furnace supplier is doing a really good job and all the other equipment in the industry is very, very tight and it’s hard to manage lead times. We’ve done a good job, we’re not materially late but it’s hard to manage lead times. Everyone is buying the same kind of equipment.

Operator

Your next question comes from Pavel Molchanov – Raymond James.

Pavel Molchanov – Raymond James

Quick question about your silicon contracts, you have a number of contracts as I recall with a few new entrants in the silicon arena. Could you just go over those and update us on where they stand in terms of ramping up production?

Richard M. Feldt

I think it’s important to note again that we have two contracts with DC Chemical, they will be our primary supplier and looking to 2009 they’ll supply about 75% or so of our needs. The balance will come from REC on a small contract and then NETOL. NETOL is a couple of months away from getting a lot of reactors from GT Solar, so they’re on schedule. We expect to start taking delivery of small quantities from them in the first quarter and more as the year goes on. In 2009 it’s predominantly DC with a small amount coming from NETOL and REC.

Operator

Your next question comes from Stephen Chin – UBS.

Stephen Chin – UBS

Just a question about your view on the US ITC? What are your thoughts about that? Do you think that US ITC will be passed this year?

Richard M. Feldt

I have no clue. I have no clue. You ask 100 people, you get 100 opinions. Who knows what the politicians will do. I think it would be foolhardy not to. I think that with gasoline prices as high as they are and our reliance on oil going up. [T Boom Pickens] now says in 1970 it was about 30%, now it’s 75% or something. I think it would be ridiculous not to, but who knows. Again for us given our volumes and given the relationships and what we have scheduled with different customers, of course it’s a good thing for the industry if it happens, but in the short term it isn’t going to affect our sales.

Operator

Your next question comes from Sam Dubinsky – Oppenheimer & Co.

Sam Dubinsky – Oppenheimer & Co.

I just have a quick housekeeping question here, it seems like on the gross margin front, currently 6% to 8% is kind of light and I see you have a $2.7 million accelerated depreciation charge in there. Am I correct that gross margin would have been about 17% and change without that?

Michael El-Hillow

No the $2.7 million isn’t even included in that, that’ll be below the line.

Sam Dubinsky – Oppenheimer & Co.

That would be below the line. So could you maybe just explain how we should think? I know you have 20% gross margin again after Q4 and 30% for Q1 of next year, could you just (A) discuss cost per watt once a plant is up and running with silicon, non silicon and then how do you model in start up costs for a factory, how you ramp Devens II? Just a way to think about this in the future.

Michael El-Hillow

The best way to think, I said all along, and it was Rick’s part of the presentation. The fact is when Devens reaches full capacity mid-next year, it’ll be at about $2 a watt, that’s Devens I and Devens II probably could get there a little bit faster because it’s really an expansion of Devens I. Start up costs, we talked about typically they’ll be about $12 million to $15 million per expansion with Devens I being an expansion, six months to fully open and that quarter you get about a third of it, you get the other two-thirds thereafter, so $5 million to $10 million.

As we move to the next location, if we go to low cost rates, those costs would go down. But yields as a frame of reference you should get there. So next generation of factories at full capacity $2 per watt. The generation thereafter we talked about it at the Analyst Day we expect that cost to be about 10% to 12% even lower than that. Silicon versus non silicon costs, what I would rather do is call me separately and we’ll go through it. Okay?

Sam Dubinsky – Oppenheimer & Co.

That’s fine but as Devens II comes on line pretty much at 30% gross margin assumes $2 per watt for Devens I and then start up ramp for Devens II that’s factored into pressure and gross margin?

Michael El-Hillow

We put all the start up costs below the line though, Sam, that’s the thing. It goes into our operating, but if you refer to the Analyst Day slide that we gave out on the operating model we had percentage of sales for operating expenses by year 09, 10 and 11, that includes start up costs.

Sam Dubinsky – Oppenheimer & Co.

I’m actually just concerned about the gross margin front, just trying to think how I should conceptualize that as new lines comes on line, how we think about COGs and gross margin just because next quarter it’s a little light.

Michael El-Hillow

We’re taking the hit this quarter on Devens I because as Rick pointed out a significant ramp up. It shouldn’t be that difficult going forward. We can talk and I’ll try to give you a little bit more detail.

Operator

Your last question comes from Jeff Osborne – Thomas Weisel Partners.

Jeff Osborne – Thomas Weisel Partners

Just a quick one on the early 2010 expansion, Michael, when would you need to put cash down payments on equipment? You mentioned long lead times. Do you envision having the working capital to fund that or are we going to need to come back and do a similar debt instrument between now and that?

Michael El-Hillow

To get the next factory going, Jeff, it’s not so much equipment per se, but to acquire the land, get the contractors going. We will probably start spending some money later this year. This recent raise that we did gives us sufficient capital to move forward very fast with that expansion. But to complete that expansion we’ve said all along in 2009 we will have to access the market again somewhat. We do hope to go get some asset backed lending and we’ve said upwards of about $400 million over the year, not all at once. But that should be the last I’ll say need for outside infusion of capital. Between asset backed lending hopefully the EverQ IPO and we’ll be generating some cash from operations, that should do it.

Thank you all for joining us today. We look forward to talking to you in the future and for those of you who haven’t seen the Devens facility, please make arrangements to come up here. Have a good day.

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