Highlights From Energy Conversion Devices' (ENER) Q1 Conference Call; Continue To Face Challenging Market Environment

November 9, 2009 1:53 PM EST

Energy Conversion Devices (NASDAQ: ENER) reports Q1 EPS of $0.34 ex-items, versus the analyst estimate of ($0.31). Revenue for the quarter was $42.90 million, which compares to the estimate of $56.42 million. Shares are down 3.65%.

Highlights From ENER's Q1 Conference Call:

• (CEO) We continue to face the challenging market environment during the first quarter of fiscal 2010.
  
• We're growing beyond just selling laminates towards providing engineering, procurement, and construction or EPC solutions and a step closer to project development.
  
• In total, we shipped more megawatts this quarter, but our revenues declined on lower traditional channel sales and a 13% decline in ASPs.
  
• Our expanding business model will open up additional rooftop opportunities where the market is strong today and creates incremental demand for our UNI-SOLAR laminates. However, our quarterly shipments and revenues may seem somewhat uneven.
  
• We believe the total addressable rooftop market in our top five markets is far more than the 50 gigawatt - far more than 50 gigawatt, with about 15 gigawatts of PV opportunity on low load commercial rooftop.
  
• The building materials channel has been adversely impacted by the economic downturn and we expect this channel to continue to be soft in the near-term. We believe this market will recover in the longer-term.
  
• Through the combination of Solar Integrated engineering and installation expertise and new UNI-SOLAR product offerings like PowerBond and PowerTilt, we are reducing our balance of system cost for our BAPV products. Our BAPV costs can be anywhere from 20 to 40% below most polysilicon systems, which further reduces total installed system costs.
  
• We've made excellent progress over the past two years and still have a lot of opportunity to reduce our cost more. We're targeting a total install cost of $3.50 per watt in calendar year 2010, with an LCOE of $0.15 per kilowatt hour which is approaching grid parity in key markets such as Southern California.
  For the longer term LCOE goal of a $0.11 per kilowatt hour.
  
• (CFO) Our revenues declined in Q1 of our fiscal year, however megawatt shipments increased over the fourth quarter of 2009. This was due to 3.9 megawatts of product that were shipped in the quarter for the ProLogis Spain project.
  
• Moving on to our bottom line, we had a smaller net loss in Q1 than in last year's Q4. Q1 net results were affected by several items, which were taking collectively, had a positive net income of approximately 2.7 million or $0.06 a share.
  
• Our net operating cash flow was negative, but relatively flat sequentially as we use cash to support our business model by acquiring and integrating SIT and building additional finished goods inventory in anticipation of sales and projects in the latter half of fiscal 2010.
  
• Selling, general and administrative expenses in the first quarter were slightly higher than in previous quarters, due primarily to transaction costs associated with the acquisition of SIT and with the Cobasys transaction, which offset $1.9 million in savings achieved through our ongoing cost control efforts. As you could see, the Cobasys payment accounted for $1.1 million of total SG&A. The offset to this payment is $1.3 million, an income from the sale of our interest in Cobasys which is recorded on our income statement as a distribution from the joint venture. Thus been ineffective the Cobasys transaction this quarter was a positive $200,000.
  
• We closed on the acquisition of SIT on August the 19th about halfway through the quarter. Purchase price was $11.3 million at the time of the closing.
  
• In Q1, SIT contributed approximately $3.7 million in incremental solar product and project sales. Gross margin was essentially breakeven due to the application of purchase accounting. Transaction costs were additional $3 million in the quarter less than our original estimate of about $5 million. We incurred about $0.5 million of restructuring costs in the quarter and are anticipating a total of approximately 5 to $6 million for the fiscal year. Our liabilities for warranty increased to include SIT's warranty reserve and our balance sheet also reflects the addition of approximately $11.7 million in net additional assets from SIT, the majority of which is goodwill.
  
• Our total inventories at the end of September were approximately $128 million of which the greatest portion was finished goods inventory. This uptick in inventories was caused by the acquisition of SIT, which brought approximately 24 million in additional inventory and slower than expected sales in the quarter. It is also important to note that approximately 7.2 million of our inventory is already contracted for a project.
  
• As of the end of Q1, we had $255 million of cash, cash equivalents and short term investments. The decline from the fourth quarter of fiscal 2009 due to costs of acquiring and integrating SIT and the increase in finished goods inventories.
  
• We have no near term debt coming due as our convertible bonds do not need to be repaid until mid 2013 and we continue to focus on conserving cash as evidenced by reduction in our operating expenses, capital expenditures and our manufacturing costs per watt, which declined 12% in the first quarter as compared to the average for the full fiscal year 2009.
  
• (Q&A) I just want to make sure I understand something when you look at flexing production going forward to maintain inventory at current levels. What does it mean for manufacturing costs, can you quantify that? And secondly, has your outlook for uptake in the first half of calendar 2010 changed at all? (A)I think what we provided was the guidance that would be building inventory in the first half of our fiscal year and we would be seen strength in the second half of our fiscal year. I don't think that perspective is changed. What is difficult for us to predict is the exact timing of when those projects will fall, but when it comes to the actual cost, yes when we run at a lower capacity level, our cost in fact will be impacted by that and I will turn that over to Harry so he can describe that a bit more. (A)You may
  remember Steve we had a similar situation in the third quarter of last year when we ramped down our production facility to less than optimal capacity. We had unabsorbed overhead costs and at this time we are anticipating when running at about 50% production level in this quarter, we will have those unabsorbed overhead cost of about 8 to 10 million.
  
• And one follow-up question if I might. It sounds like you kind of retracted the revenue guidance you gave previously for fiscal 2010. Wouldn't the inclusion of the systems business however lumpy it might be I mean that the prior guidance might seem a little easier to me or is that an incorrect way of looking at it? (A)I don't think it's a question of ease to meet the guidance or not it's just the level of predictability. What we want to do is be able to provide responsible guidance. We are very optimistic about our new business model and about the projects and the perspective projects that we see and that we are currently working on. We will make this optimistic about it as if you can see what we announced from the MP2 announcement earlier today these are at scale. This is a 10 megawatt pipeline of projects that we've announced we are working with. What can be evidenced from the ProLogis Spain deal, this is a 4 megawatt rooftop. This is a very different approach in the sense that we're not chasing individual rooftops but we're chasing them at scale. At the same time there's level of difficulty in exactly predicting when the timing of that revenue will hit. As an example we'd an originally thought that this ProLogis Spain deal would be a revenue recognition for us, but as you can see we've got many channel partners involved and as we actually worked through the final details and we're actually shipping the product
  we've recognized that the way that we had done those contracts it would have to be through POC accounting. So, as a consequence we think it's really the best thing to not provide the guidance because it's uneven.
  
• First of all, you didn't write down any PP&E this quarter but certainly some of the assets seem to be impaired somewhat, given the inventory balance and some of the other items, and I'm wondering certainly on the construction in progress number, I'm wondering how you look at that number and sort of what the trigger would be for you to write down those assets? Thanks. (A)Yeah, Tim, we take a look at asset impairment every year as part of our annual profits when we through in filing our 10-K. And then, each quarter we look for a certain triggering events that may cause, so as to take a look again at all the assumptions we used in our impairment during the first quarter we didn't have any triggering events that caused us to take a look at that, but nevertheless we do look at our assumption and we'll take a look at them again in the second quarter, as we look at how our business model evolves to this more project-driven.

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