ECD shifting business model downstream: cutting production on inventory build

Solar product and project sales have plummeted since last year. In its FY1Q10 (3Q09) sales were US$36.1 million, compared to US$89.5 million in the same quarter last year and $46.0 million in the previous quarter. Total consolidated revenues for the first quarter of fiscal 2010 were $42.9 million, compared to $95.8 million in the first quarter of fiscal 2009. ECD expects flat sales in the fourth quarter and declined to guide revenue going forward due to the evolving business model and the nature of how PV projects revenue recognition can be different on a project by project basis.

The  company noted in a conference call with financial analysts that its had shipped higher MW in the quarter reported compared to the previous quarter but saw average prices decline by 13%. Average ASP’s in the quarter stood at US$2.33.

However, inventory continued to climb as production was restarted after a structured shutdown mid-year. The company said that inventory reached US$128 million and was sufficient for near-term expected demand and would be lowering manufacturing output by 50%. The company had produced 33MW in last quarter and has a nameplate capacity of 42MW.

Although the company said that it has a very flexible production system that allows for non-optimum production levels, unabsorbed overhead costs of about US$8 to US$10 million per-quarter are incurred which prevents the company from lowering its cost per watt. ECD noted that it had an average cost per watt of US$1.76 in the last quarter with a production output of 33MW. When at nameplate capacity, the cost per watt was said to be US$1.50. 

Business model

Following in the footsteps of other PV producers, ECD is planning to shift its business focus towards EPC solutions. Morelli noted in the call that its announced partnership with MP2 Capital and Rumble Energy, an Ontario-based renewable energy developer was a good example of its future business direction and was currently developing a pipeline of projects.

The deal with MP2 Capital incorporates the installation of a series of rooftop solar projects throughout Ontario, Canada. ECD will need to partner with other Ontario-based suppliers and contractors, due to the stipulations set out by the Ontario Power Authority. The companies expect to complete construction of approximately 10MW of projects by October 2010.

ECD expects to grow business in other regions of the world, especially in Europe. Morelli said that he expects a major percentage of its future revenue to come from France, putting this at 35% of sales. Although recognizing the difficult regulatory conditions in the Spanish market, Morelli expects Spain to generate 20% of future sales. Another important market was Italy, which should generate 15% of sales in the future.

Interestingly, Morelli didn’t expect any sales from the German market, the largest since the collapse of the Spanish market in 2008. Although noting the U.S. as another key market, he didn’t provide any guidance on sales expectations in the near-term.

Financial analysts on the call were concerned that with the move downstream and based on other companies attempts in that model, margins had actually declined further rather than the claimed synergies and cost savings of such a strategy that was intended to improve margins of the business.

Even with the production cuts planned in the fourth quarter, ECD would have produced an estimated 114MW in 2009. According to the latest figures from Photon Consulting that appear in its Solar Annual 2009 report, ECD was projected to have produced 118MW in 2009 and would have global share of the fast emerging thin film market of 6%, the third largest producer this year, behind First Solar, 1GW (48%) and Sharp 120MW (6%).