This summary is based on the second quarter fiscal 2008 earnings call conducted by Evergreen Solar, Inc. (ESLR) on July 17, 2008.
Management:
Chief Financial Officer & Secretary: Michael El-Hillow
Chairman of the Board, President & Chief Executive Officer: Richard M. Feldt
Key Investors Issues
- EPS were a loss of 8 cents per share compared to a loss of 9 cents per share last year.
- The company posted a loss of $8.9 million compared to a loss of $7.5 million in the year-ago period.
- Revenue jumped 48% to $22.8 million, from $15.4 million last year.
Second Quarter Highlights
The company opened the first 80 megawatt phase of Devens manufacturing facility, the company signed over $1 billion in take-or-pay contracts with four customers and raised $375 million in capital.
- On June 2nd, nine months after the company broke ground in a Greenfield site, it began wafer production at Devens facility using new generation of quad ribbon furnaces and have already produced over 350,000 wafers to date.
- The company has received approximately 110 quad furnaces of which about 30 are fully operational. By late 2008 the company will have 200 quad furnaces in operation in this Phase I of Devens.
The company began to scale back the production of 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.
- The company is in the final stages of selecting the site for its string factory.
- The company began receiving silicon from DC Chemical.
- The company signed four long term take-or-pay sales contracts totaling about $1.7 billion in revenue through 2013.
- The company announced a long term sales contract valued at approximately $1.2 billion with German based IBC Solar. This contract extends through 2013 and brings total contractual backlog to nearly $3 billion.
Products sales of $18.1 million were essentially flat compared to the first quarter of $18.3 million.
- The company shipped 4.7 megawatts compared to 4.8 megawatts in the first quarter of this year. Approximately 53% of 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. Average selling price was $3.78 per watt 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 joint venture from REC and Q-Cells were $4.6 million within $50,000 of what the company recorded in the first quarter of this year.
- Gross margin was 34.7%, up from 33.6% in the first quarter. The sequential increase in gross margin was due to higher ASPs and lower manufacturing costs.
- R&D expenses of $5.9 million 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 the company has been installing equipment in Marlboro as part of pilot operation focus. For new equipment purchased for R&D for pilot purposes the company will depreciate that equipment over three years as it intends to introduce new technology and process more rapidly than in the past.
- SG&A expense was $5.9 million 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, costs for 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 Marlboro ramp down plan, the company will be disposing of certain equipment by the end of 2008. This requires accelerating the depreciation on that equipment ratably over the rest of 2008 resulting in a charge of $2.7 million during the second quarter.
- 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 loan to Silpro, silicon prepayments in Euros and receivables that are denominated also in Euros offset by liabilities denominated in Euros. 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 was $8.9 million or 8 cents per share versus $25,000 in the first 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 was 24% and $6.4 million Euros respectively compared to 19% and $2.7 million Euro respectively in the first 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.
Third Quarter 2008 Outlook
- Revenue 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 ramp in the fourth quarter, the company expects gross margin to improve to about 20% in that quarter and it will return to at least 30% gross margin by early 2009 when Devens I approaches full capacity.
- Operating expenses 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 is required 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. Operating loss is expected to be between $18.5 and $19 million. Other income is expected to be approximately $3.5 million as the company will have higher invested funds resulting from recent convertible note financing and 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 is expected to open up early next year.
- Net loss is expected to be approximately $12.5 to $13 million or 10 cents per share. During July the company 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, the company issued a more typical convertible security it 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 impact of the financing the company entered into a cap call auction contract that has an upstart price limit of $19. In short the capped call reduces the impact of the net share settlement feature of the notes.
- The convertible notes and the capped call are two separate transactions. Under net share settlement arrangement with the note holders the company will have to issue shares if stock price at conversion is above $12.11 per share. Under the capped call arrangement the company will receive the same number of shares from the counter parties that it issues to the note holders when 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 stock is greater than $19 at conversion. Above a stock price of $19 the amount of shares the company 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 it is using.
- Dilution is tied directly to increase in shareholder value. The cap call will cost 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 the company has essentially repurchased 11.2 million shares of stock at a price of about $6.25 per share if stock price at conversion is $19.
