MEMC Electronic Materials Inc. Q3 2008 Earnings Conference Call Transcript

Oct.24.08 | About: SunEdison (SUNEQ)

MEMC Electronic Materials, Inc. (WFR) Q3 FY08 Earnings Call October 23, 2008 5:00 PM ET

Executives

Bill Michalek - Director of IR

Ken Hannah - Sr. VP and CFO

Nabeel Gareeb - President and CEO

Analysts

Gordon Johnson - Hapoalim Securities

Stephen Chin - UBS

Brett Hodess - Merrill Lynch

Mehdi Hosseini - Friedman, Billings Ramsey

Vishal Shah - Barclays Capital

Stuart Bush - RBC Capital Markets

Steve O'Rourke - Deutsche Bank

Timothy Arcuri - Citigroup

Christopher Blansett - JPMorgan

Krishna Shankar - JMP Securities

John Hardy - American Technology Research

Sam Dubinsky - Oppenheimer

Sean Conner - FAF Advisors

Ben Pang - Caris & Company

Neal Jacobs - Bodri Capital Management

Theodore O'Neill - Kaufman Brothers

David Smith - Longbow Capital

Satya Kumar - Credit Suisse

Operator

Ladies and gentlemen, thank you very much for standby, and welcome to your MEMC Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode, until later, we'll conduct the question-and-answer session. And we'll give you instructions at that time. [Operator Instructions]. As a reminder, the conference is being recorded.

And so with that, we'll turn the call over to our host, Mr. Bill Michalek, please go ahead.

Bill Michalek - Director of Investor Relations

Good afternoon and thank you for joining our third quarter earnings conference call. Nabeel Gareeb, President and Chief Executive Officer; and Ken Hannah, Chief Financial Officer, are with me today.

Before we begin, please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. These risks are described in the earnings release published today and in our 2007 Form 10-K.

I will now turn the call over to Ken Hannah, who will present an overview of the financial results.

Ken Hannah - Senior Vice President and Chief Financial Officer

Thanks, Bill. For the third quarter, MEMC sales were $546 million, above our updated post hurricane third quarter guidance of approximately $530 million plus or minus $10 million, due to a rapid ramp following the hurricane, and represents growth of 3% sequentially over the second quarter level and 15% growth over the same period last year.

Gross profit in the quarter was $269.7 million, or 49.4% of sales, down from 53.2% in the second quarter, primarily as a result of the impact of Hurricane, Ike and the associated raw material delays from our original suppliers, as well as a $9 million charge related to the potential shortfall to our annual purchase obligation associated with the take or pay agreement for raw material supply to our Pasadena facility. Discussions with the supplier are ongoing and a portion of this charge maybe recoverable in the fourth quarter.

Operating expenses were $42.2 million or 7.7% of sales, compared to $40.3 million or 7.6% of sales in the second quarter, primarily due to the one-time non-cash severance related expenses as previously indicated in our mid-quarter update on September 2nd.

Operating income was $227.5 million or 41.7% of sales, compared with the second quarter's $242.5 million or 45.6% of sales. The lower than the previous quarter, due primarily to the hurricane related impacts and the charge associated with the potential shortfall to a purchase obligation, this amount represents an increase of 13.7% versus the year ago quarter.

Total stock-based compensation expense in the third quarter was $11.9 million or 2.2% of sales. Using our estimated effective cash tax rate of 15%, non-GAAP net income for the third quarter excluding the non-cash effects of the quarterly valuation of the Suntech warrants, was $195.8 million. And non-GAAP diluted earnings per share excluding warrants, was $0.86 per share.

GAAP net income for the quarter using a book tax rate of 17.2% was $182.8 million or $0.80 per share, which includes a $0.04 per share impact relating to a decrease in the valuation of the Suntech warrants.

The third quarter book tax rate includes the $38.2 million favorable impact associated with the previously disclosed closure of the IRS examination of the 2004, 2005 tax years. Both GAAP and non-GAAP earnings per share figures include $5.8 million of other than temporary impairments of long-term investments, due to the company's holdings of certain Lehman Brothers bonds and Sigma SIV bonds. The impact of this impairment was $0.02 per share on the quarter.

MEMC continues to generate strong cash flows with operating cash flow of $115.3 million or 21.1 % of sales in the third quarter. This compares to $205 million or 38.6% of sales in the second quarter.

Capital expenditure for the third quarter totaled $73.1 million or 13.4% of sales, and free cash flow which is operating cash flow minus capital expenditures was $42.2 million or 7.7% of sales. The company's operating and free cash flows were reduced by $65 million, based on the company's election to further fund its U.S. pension plan and optimize its after tax return on cash.

During the quarter, the company repurchased approximately 2.5 million shares under the company share repurchase program. The balance sheet remains strong with cash in investment balances of over $1.4 billion and virtually no debt.

Now turning to business conditions. Solar application demand continues to be healthy. However, semiconductor application demand is weak, mostly due to customer inventory reduction efforts in light of uncertain macro economic conditions. This is resulting in a significant sequential reduction in semiconductor wafer demand. While it takes quite a bit more polysilicon to make up the equivalent revenue by producing wafers for solar applications, our increased polysilicon production capability demonstrated in the third quarter and our market positioning should allow us to show continued sequential growth in the quarter while improving our margin profile.

As a result of these offsets in the face of uncertain demand, we are targeting fourth quarter revenue to be approximately $540 million to $600 million. In addition, we're targeting gross margin percent to be over 50% in spite of reduced utilization of our manufacturing facilities and price reductions.

Operating expenses are targeted to be approximately $41 million. These targets would represent full year 2008 revenue growth in the double-digits, compared to 2007. This continued growth in spite of the sharp inventory corrections in the semiconductor application market in the second half of 2008 highlights the benefits of MEMC's unique positioning as a vertically integrated wafer supplier to multiple markets, especially as we achieved a significant milestone of having revenue generated by solar applications exceeding $1 billion in 2008, in spite of our spot polysilicon sales declining as a percentage of sales year-over-year.

Let me now turn the call over to Nabeel.

Nabeel Gareeb - President and Chief Executive Officer

Thank you, Ken. Let me start by giving you a couple of standard updates and then give you my perspective of our performance in the third quarter and our fourth quarter projections in the context of this year. As Ken stated, we demonstrated revenue growth and good margin performance in spite of the $9 million charge and approximately four weeks worth of production impacts, which was primarily related due to hurricanes.

One of these hurricanes passed directly over our Pasadena facility and in spite of this, our Pasadena plant did incur any significant physical or structural damage, and our team there was prepared to restart production within hours of the storm passing.

However, some of our suppliers were impacted by the storm more than we were, causing the raw material delay we reported during the quarter. Operations are now back to pre-hurricane levels after needing to perform some maintenance due to the extended shutdowns.

Now let's talk about the performance of Q3 and projections for Q4 in the context of the bigger picture. As you know, we had a difficult first half of 2008 from a poly production standpoint. In the first quarter, we went through discovery issues on the technical front as we expanded our capacity in Pasadena and then the second quarter some unfortunate equipment failures late in the quarter restricted our progress. However, I'm proud of our progress in the third quarter and our projections for the fourth quarter, which are somewhat masked by the effects of the hurricanes and the cloud of macroeconomic events.

I would like to call out some of these accomplishments to emphasize the progress we have made. First, we had approximately four weeks of on unanticipated production heads in Q3 nearly 3 of them due to hurricanes, and we still grew sales sequentially and year-over-year. That is pretty impressive and shows how much we are going our output.

Second, the results we demonstrated for Q3 plus the inventory that we built could have gotten us close to our original Q3 guidance despite the four weeks of impact. This shows our potential and what our recover capability is.

Next, we are still talking about growing revenue and margins in Q4 sequentially by up to 10% with improving margins in an environment where a) semiconductor wafer demand is projected to be down by between 20 and 30% sequentially. b) pricing is down by mid to high single-digits and c) it takes approximately two times the amount of poly to make the same amount of revenue selling wafers to solar applications as it does selling to semiconductor applications.

Last and most important, even in this environment, our far superior asset turns which has been our key operational differentiator for the last six years, will allow us to continue to expand capacity, reduce cost and generate free cash flow, while many of our competitors will have negative free cash flow and may not be able to invest in their own planned expansions as desired due to credit conditions.

In conclusion, in this uncertain economic time, MEMC has one of the strongest net cash positions in the industry, a cost efficient structure and consistent free cash flow generation, which can allow our financial position to be enhanced even further. I believe that this position which was the result of several years of planning and execution, will allow us to outshine our solar and semiconductor competitors during this macroeconomic slowdown and position us for even greater success in the times to come.

With that, we will now take your questions. Operator?

Question And Answer

Operator

Yes, thank you. [Operator Instructions]. And we have some questions. And first being from Gordon Johnson with Hapoalim Securities. Please go ahead.

Gordon Johnson - Hapoalim Securities

Thanks for taking my question. Nabeel, Ken, how are you guys doing?

Ken Hannah - Senior Vice President and Chief Financial Officer

Good.

Nabeel Gareeb - President and Chief Executive Officer

Good, Gordon.

Gordon Johnson - Hapoalim Securities

I guess my first question has to do with your production utilization. I think last quarter you mentioned that you're adding some FBR reactors and also you continue to ramp Merano. Can you update us on how that ramp and those additions are going?

Nabeel Gareeb - President and Chief Executive Officer

Yes. We added those FBR reactors, there were two of them as well as the Merano expansion all of them state on track, the ramp is on track as basically demonstrated by our output post hurricane to be able to achieve the $546 million of revenue in Q3.

Gordon Johnson - Hapoalim Securities

Thanks that's very helpful. And then with respect to the solar market, I think clearly there is a lot of concern around the credit crisis and the impact on demand. Have you guys factored any of that into your, I guess Q4 outlook and what kind of impact should we expect to see in '09 as a result of this?

Nabeel Gareeb - President and Chief Executive Officer

'09 obviously we are not going to comment on much given the uncertainty of just macroeconomic conditions and we are not giving '09 guidance. But very specifically for Q4, yes, every thing we know about has been packed into our guidance. The semi shortfall we started talking about that in July, you know people thought we were little nuts. But as basically escalated and we think that there will be somewhere between the 20% and 30% unit reduction, we have our long-term arrangements as well as people wanting to buy solar wafers that is helping offset that and so that's what our guidance is based on.

Gordon Johnson - Hapoalim Securities

Okay thanks. And then one last, if I could. You guys are flushed with cash, should we expect any potential increase in you share buyback program?

Ken Hannah - Senior Vice President and Chief Financial Officer

Gordon, this is Ken. As we indicated, we increased the amount of the repurchase programs in Q3, by an incremental 1.5 million shares. And so, we're continuing to participate... we do have Board Meeting scheduled next week, where we will continue to have discussions regarding that, and hopeful that we will be able to participate.

Gordon Johnson - Hapoalim Securities

Actually guys I am sorry, one last if I could. It seems like a lot of your competitors in the polysilicon arena, specifically GCL are having some problems getting funding. Is there any of that backing into you guidance, since specifically people having problems getting funding unless you coming in and taking that business from them in the spot market?

Ken Hannah - Senior Vice President and Chief Financial Officer

No, we haven't factored then exclusively into our guidance.

Gordon Johnson - Hapoalim Securities

Okay, thanks a lot guys.

Operator

Thank you. And next from the line Stephen Chin with UBS. Please go ahead.

Stephen Chin - UBS

Great, thank you. Ken, could you just elaborate a little bit more in this $9 million payment obligation that had to be made. What was this material for was that silicon test for chloride, and is this payment expected to have to come up again in the fourth quarter?

Ken Hannah - Senior Vice President and Chief Financial Officer

I mean basically what we did Stephen, in the issues we've had in our Pasadena facility have been discussed at length. And we've been in discussions with our supplier there. Particularly, going into the events that are outside of our control and looking for relief to an annual obligation that we have. We were hoping that those... the negotiations and discussions would have been concluded in Q3, they were not. And so, from an accounting perspective, we had to take a position of what we thought the annual shortfall would be without the final outcome of those negotiations.

And so the comment that we made in the release indicating that we were hopeful that we would be able to recover some of that is based on or predicated on us completing those negotiations in Q4. And obviously coming to the terms that we believe we will.

Stephen Chin - UBS

Okay. The second question I had is, I was hoping you could elaborate a little bit more on that $7 million sequential growth in inventory. Was that mostly polysilicon? Was it still wafers or was it oil and gas and how should we expect inventory levels to trend going into the fourth quarter?

Ken Hannah - Senior Vice President and Chief Financial Officer

That $7 million Stephen, basically was poly and semi-wafers. And there was a kind of a combination of the two and the goal was to build some inventory we did, the goal in Q4 is to also build some inventory and let's see if we can add to it a little bit.

Stephen Chin - UBS

Last question I have to deal with is, in this $540 million to $600 million revenue guidance, approximately how many days of buffer time have you built into that guidance, is it similar to the prior quarter?

Ken Hannah - Senior Vice President and Chief Financial Officer

It's similar to the prior quarter; we got little over to between two and three weeks in there.

Stephen Chin - UBS

Okay, thanks. Well, that was helpful.

Ken Hannah - Senior Vice President and Chief Financial Officer

Sure.

Operator

Okay. Thank you very much. And next, from the line of Brett Hodess with Merrill Lynch. Please go ahead.

Brett Hodess - Merrill Lynch

Good afternoon. First of all, good to see a [indiscernible] execution ramp about to the hurricane, and Nabeel I'm wondering, you mentioned that you have some buffer built into this quarter. But, do you feel that the actual volume of poly production that you're going to get out of this quarter is in line with what you originally thought for this quarter, two quarters back for the hurricanes?

Nabeel Gareeb - President and Chief Executive Officer

Yeah, I think the volume of poly is not going to be significantly different than what we thought we were going to get out for this quarter. What's the different Brett is, really the demand and its impact on our mix. And let me try to explain that.

Basically, if you look at it, semi-wafer unit consumption if you will, is down Q3 to Q4 we are estimating somewhere between 20% and 30%. You combine that with some price reductions that are in the mid to high single-digits quarter-on-quarter, that results basically in a price and mix shift which results in a dollars per kg of revenue down quarter-on-quarter by nearly 10%.

Okay. Well, basically your net capacity of the poly... the ability of the poly to generate the same amount of revenue is reduced by that effective amount. So when we guide 540 to 600, that's basically like guiding 590 to 650 three months ago. And so, yes, we have to produce at or above the levels we had anticipated, which we feel pretty comfortable about to achieve those levels of revenue.

Brett Hodess - Merrill Lynch

Got it. That's a good explanation. And my follow-on is that, earlier in the year, you have talked about producing spot solar wafers as well as spot poly and because of all the problems through the year, it is probably difficult for you to do that. But is there an opportunity for you to start to do that now that the poly is ramping up, and can that help with some of this mix, this revenue mix issue?

Nabeel Gareeb - President and Chief Executive Officer

Yes. As a matter of fact we've been put it in their explicitly, but we did produce and deliver significant quantities of short-term wafers in the third quarter and we plan to do so also in the fourth quarter. And that's going to help us at this mix, and that's baked into the guidance as well.

Brett Hodess - Merrill Lynch

Okay. And then just a last one for Ken. Ken, can you remind us of what the unfunded pension obligations are?

Ken Hannah - Senior Vice President and Chief Financial Officer

Well, the obligations are no longer unfunded, part of what we did as we have elected to go ahead and fully fund, if you will the plan based on the September 30 date.

Brett Hodess - Merrill Lynch

Got it. Thank you.

Operator

And, next from the line of Jesse Pichel with Piper Jaffray. Please go ahead.

Unidentified Analyst

Hi, good afternoon. This is Len [ph] for Jesse Pichel. Could you just confirm the multiplier, the revenue multiplier effective solar versus the semi-wafers given the current pricing conditions that we're seeing in the semi market?

Nabeel Gareeb - President and Chief Executive Officer

Well, traditionally what we said Len is that when you take a dollar of poly of long-term prices and you convert in those solar wafer, you get $2 and then when you take... again at long-term prices, and we take that solar wafer and convert into a semi-wafer you get between $4 and $7, again depending on the mix. That's probably still the case with again in the spot wafers or the short-term wafers are probably somewhat higher than the long-term wafer prices and lower obviously than the semi-wafer prices or starting to approach the semi-wafer prices on the low-end.

And probably the high-end of the semi-wafer prices are coming down a little bit. So that's probably still an adequate range of multipliers with the range compressed a bit.

Unidentified Analyst

Okay, great. And what are you seeing in terms of the spot poly pricing in light of the uncertain macro condition?

Nabeel Gareeb - President and Chief Executive Officer

Well for Q3 it stayed pretty healthy, in Q4 we don't have any significant indications as obviously a lot of pasturing about OG people are talking about this and this article and that article that it's going to be this way. And so customers continue to tend to do that and they do that every quarter and our spot poly negotiations, if you will, as well as our sales happen in the third month of the quarter, which is when people need it. So we will structure what happens when we get there.

Unidentified Analyst

Okay. And solar customer appetite for wafer contract, are you seeing lessening there or any backing off?

Nabeel Gareeb - President and Chief Executive Officer

Well you will see people that can't necessarily afford the contract and then there is other people who can. So the ones who can definitely have the appetite to do it and even the ones who can't afford the long-term arrangements have the appetite to buy wafers on a more short-term or intermediate term basis.

Unidentified Analyst

And, great. And just the last question real quick, where is the cash balance currently invested at this time?

Ken Hannah - Senior Vice President and Chief Financial Officer

The details of that have been broken out in our 10-Qs. I mean if you go back there is a portion of it, that's in cash and cash equivalents. At the end of September that number was about $932 million, and then there is some short-term investments, so things that are between 0 and 90 days kind of a terms, that's about $187 million and that's in your typical, short-term investments.

The longer term investments, as we've broken out, we had a strategic investment portfolio that we had invested in a couple of years back and about a year ago that fund was closed, we actual we took those investments and we've been managing them separately and as they mature, recouping our cost basis back on those. And so in the 10-Q, it breaks up. There's a portion of it, that's in corporate debt, that's the majority and then there is small amount of that's in asset back and mortgage-backed securities that were in that, that fund we had invested in.

Unidentified Analyst

Okay, great. Thank you very much.

Operator

Thank you. And next from the line of Mehdi Hosseini with FBR. Please go ahead.

Mehdi Hosseini - Friedman, Billings Ramsey

Thanks for taking my question. Nabeel, if I recall correctly, in the past you have talked about the portion of mix shares poly capacity that has yet to be contracted and I think it was around 20%, if I just take the existing contracts and now that the poly production was behind, is back on track. I would assume that you remain on target to have 20% of next year's poly capacity to be contracted. Is that accurate?

Nabeel Gareeb - President and Chief Executive Officer

I think, what we've said Mehdi is that we had the ability to sign up a deal that was in the... about the size of the original Gintech deal which is in the $3 billion to $4 billion range. And that is still the case, and obviously depending on the semi environment that will be... they may be more available less available all of those good things. So, yes, that's probably still the case.

Mehdi Hosseini - Friedman, Billings Ramsey

Sure. So as a follow to that first, there's a lot of concern in the market that the customer you mentioned, Gintech may not be able to fund their capacity expansion since they couldn't raise... they couldn't pull up their secondary couple of weeks ago. So if you could comment on it just based on what you see and what you... if you could help us, how you see the risk from Gintech.

And number two, going back to earlier question. If some of the new entrants cannot find funding for the poly capacity ramp, and given the fact that the module demand is going to decline sequentially due to Spain expiring. What would it take for some of the potential sort of wafer customers to come in and actually sharing contracts with you? What are some of the milestones? Is that just you negotiating with them or is that something now that we could look for?

Nabeel Gareeb - President and Chief Executive Officer

Let me answer the first two, and the third I'm not sure I understood the question. But start with risk from Gintech, obviously I can't comment on the risk from Gintech other than to see what they're doing with us, they are paying us on time, they haven't indicated that they are not going to be able to make their deposits on a timely fashion. Everybody wants to pasture and negotiate all the time. And if it turns out that they are unable or unwilling to do so, that's why we have the security clause, security deposit as part of the clause where we would just collapse and keep all the money.

The second is if they can't fund it, again the other part that you asked is funding their expansion very specifically; everybody had pretty aggressive expansion plans. And so we were a portion of the total expansion plan. We weren't the 100% supplier to the expansion plan. So the expansion plan is reduced and we turned out to be a larger portion of their supply stream, that's okay with us and I'm sure it's okay with them as well. So I think there is some sort a middle ground that they'll be able to reach in their minds in terms of their aspirations for expansion given market conditions.

And then on the module demand decline and its pricing, I'm not sure I understood that question.

Mehdi Hosseini - Friedman, Billings Ramsey

The question is, the module, let's assume that module demand decline, you will have an impact on a whole supply chain. At the same time some of the new entrants in the poly side may not be able to find funding, so therefore there wouldn't be so much of a incremental poly capacity added.

So given those two kind of opposing forces in the market, what would it take for you to sign additional contracts? What are the kind of milestones you see, can you help us understand some of the milestones that are out there?

Nabeel Gareeb - President and Chief Executive Officer

Well. The milestones I don't think... the forces, the offsetting forces that you are talking should lead to continued balance or imbalance if you will, right in the market, depending on how things turn out.

In terms of the milestones, they're no different than they were a month ago, two months ago as a matter of fact, we're a little more stringent about them, given the credit conditions to ensure that the people that we talk to and the people that we do business with, are capable of funding security deposits because that's a critical tiller in the negotiation and in our deal structures.

Mehdi Hosseini - Friedman, Billings Ramsey

So does that mean that you're concurrently or actively talking to the top five seller module producers?

Nabeel Gareeb - President and Chief Executive Officer

I am not going to indicate who I am talking to, but I certainly... yes, we continue to have discussions because there is appetite to do deals. There is some people that just can't afford to raise the funds, don't... can't raise the funds and then there is others who have apparently access to cash, so we talk to them and we'll see where it goes.

Mehdi Hosseini - Friedman, Billings Ramsey

So do you think that you have more bargaining power if in case some of these new entrants in fact grow the business, so we're talking about 3 months, 6 months anything?

Nabeel Gareeb - President and Chief Executive Officer

Again I don't put specific timetables because if I do that, I put myself at disadvantage on the negotiating table. But yes, certainly as these new entrants have difficulties both whether it's in ramp, production or funding, it certainly is an advantage to us.

Mehdi Hosseini - Friedman, Billings Ramsey

Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Thanks.

Operator

Thank you. And, next is from the line of the Vishal Shah with Barclays Capital. Please go ahead.

Vishal Shah - Barclays Capital

Nabeel, I remember you've said in the past that when all four units are operational, you will be able to produce between $800 million and $900 million of quarterly revenue. Now, given the current environment you're in and the potential revenue mix shift, are you able to update us with the new targets that you have for your quarterly revenues?

Nabeel Gareeb - President and Chief Executive Officer

Right. So, good memory, Vishal. Basically, that 800 to 900 was based on the capacity installed and completed by September 1st which would take 3 to 6 months for ramp. That means when it was fully ramped, it would be able to potentially achieve close to that level of revenue and so that would imply some time in Q2 next year.

Now, when you look at what I said earlier on this call, which is basically with the price reduction and the mix shift as a result of the semi-weakness, that number has gone down by basically an equivalent of 10% nearly. So that 800 to 900 when fully ramped would be somewhere in the 720 to 810 range, if you will. But that's a phenomenon for this quarter. We don't know how that phenomenon made change for Q1, as semi comes back and becomes a larger percentage that should help a little bit.

So, but for this quarter, yes, that would be... and its kind of apples and oranges, because that number wasn't really applicable for this quarter, it was really applicable for Q2. So you got to be a little bit careful. But yes, in essence, that's the generic trend. We also are pretty pleased with our operational ramp as I commented on earlier. As a matter of fact, unit four, the last unit that started up, I think in May. And we brought it up in 2-3 days. Basically we did some maintenance on it post hurricane. It was scheduled from maintenance, we accelerated it. The maintenance and did it, and now, its actually running at rates that are a 110% of designed rates, because we've made some maintenance and did some modifications to it.

So, and we think some of the technical issues are behind us and we look forward to continuing to perform.

Vishal Shah - Barclays Capital

Okay, great. And then, just in Q4, when you look at the available poly and the contracts out there, do you expect to have a greater percentage of the sales in the spot compared to Q3 levels?

Ken Hannah - Senior Vice President and Chief Financial Officer

No, not really. I mean I think our goal was to try and keep the poly sales volume flattish, and we indicated basically you'll note in the one of the paragraphs in this press release we talked about conceivably our revenues from solar applications crossing or exceeding a $1 billion this year alone, and our poly sales revenue being down year-on-year as a percent of sales. So, I think that's a pretty strong indication of the health of our 156 millimeter wafer growth.

Vishal Shah - Barclays Capital

Okay, great. And then final question on the use of cash. I mean I know, you've talked about buybacks and all, but given the current environment and some of your competitors, the weak position, both for the wafer manufactures and also some of the poly players, are you looking at any potential M&A opportunities in this environment?

Ken Hannah - Senior Vice President and Chief Financial Officer

Certainly, we keep our eyes open. And as people get weaker, obviously today just the stock prices are weak, right. As the time passes the operational elements will get weaker as well, the people can't find funding, their cash flow will get weaker and their stock prices might get even more weaker. So it's a good time to be generating cash like we are and keeping our eyes wide open.

Vishal Shah - Barclays Capital

And in that case would you consider horizontal or vertical integration?

Ken Hannah - Senior Vice President and Chief Financial Officer

Yes, we've always been... that we want to stay in our core competency of making wafers for the most part. So that's how we always have thought so far, and so far we haven't found a reason to change.

Vishal Shah - Barclays Capital

Great. Thank you.

Operator

Thank you. And next from the line is Stuart Bush with RBC Capital Markets. Please go ahead.

Stuart Bush - RBC Capital Markets

Yes, hi, Nabeel. I know you've been spending a lot of time down here in Texas and you've got two to three weeks of production buffer built in. Can you give us some color on what milestones you need to achieve in this quarter with the plant there in Italy, and where you feel confident that technical issues have solved in and what steps to ramp concern you the most that we should be looking for?

Nabeel Gareeb - President and Chief Executive Officer

Yeah, I mean, I think, so basically in terms of capacity, we obviously as I commented in my... stated in my prepared remarks, we had technical learning issues in the first quarter and some equipment issues in the second. But in the third quarter, the hurricanes and some macro-economic events kind of masked the progress. But just our ability to recover from the hurricane very rapidly, produce the product, run this Unit 4 which is our latest expansion at a 110% of designed capacity after making some minor modes is a pretty phenomenal accomplishment.

So, I think we're making good progress in Pasadena, in Merano, we've basically continued on track on the expansion that we've talked about that in September, I believe September, say mid quarter update. So that's on track, and we had allowed three to six months for both of those elements to ramp. And I think we are well on track to that.

Stuart Bush - RBC Capital Markets

Yeah. I here the... you start two to three weeks of buffer built in and you are saying, I understand why your cautious, given the last few quarters. But we are safely out of hurricane season, so what is it that gives you, makes you conservative with two to three weeks buffer built in?

Ken Hannah - Senior Vice President and Chief Financial Officer

Well. A couple of things, just normal everyday stuff happens in any manufacturing facility, you need to build in some degree of buffer for that, number one. Number two, if you forget buffer piece of it and you just look at numbers we are talking about, right? We have guided 540 to 600. And again, if you say, as you think about the fact that this is representing a 10% sequential reduction in equivalent dollars per kg of revenue as a result of the mix shift, that 540 to 600 is like guiding 590 to 650 just a month ago or two months ago. So if you keep that in the back of your mind and you divide that into the capacity you'll see the utilization rates that are pretty high.

Stuart Bush - RBC Capital Markets

Okay, so on another issue, we've heard some concerns out there about the letter of credit issues on shipping. Have you had any challenges in shipping products overseas?

Nabeel Gareeb - President and Chief Executive Officer

Letter of credit, no that sounds... that doesn't sound familiar, for us you mean?

Stuart Bush - RBC Capital Markets

Well just across the whole industry piling up on port since.

Nabeel Gareeb - President and Chief Executive Officer

No, we haven't encountered that to the best of our knowledge.

Stuart Bush - RBC Capital Markets

Okay and lastly if you did get a customer that could afford a long-term contract, would you expect to give them the capital market situation in cash, would you expect to see the same type of repayments that we saw couple of years ago?

Ken Hannah - Senior Vice President and Chief Financial Officer

Yeah, we would probably structure deals pretty similarly, with across the different customers we've trying to be pretty consistent so we don't end up playing to much of a favorite. We've been flexible on how we structure cash versus, irrevocable out sees etcetera. But other than that where the terms have been pretty consistent we probably want keep them as close to that as we could.

Stuart Bush - RBC Capital Markets

Okay, great. Thanks.

Ken Hannah - Senior Vice President and Chief Financial Officer

Thank you.

Operator

And next from the line of Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

Thank you and good afternoon. Could you give us a quick update on the status of bringing wafering for solar wafers in house.

Ken Hannah - Senior Vice President and Chief Financial Officer

Steve, we have continued to be on path we've set some time in late '09 and we're still thinking along those lines. We got some equipment on order and as this market evolves, again keeping our eyes open for, what we might be able to buy versus purchase in terms of assets is probably a goal trying to get to think about as well.

Steve O'Rourke - Deutsche Bank

Okay, fair enough and with respect to a lot of the discussion on trends, how are you looking at early '09 with respect to semiconductor and solid PV industry trends that you're seeing now. Any indications that you might be able to share that we'll either continue or moderate or improve or who knows?

Ken Hannah - Senior Vice President and Chief Financial Officer

Yeah, exactly. Sure Steve, we're not giving '09 guidance now. We won't know Q1 visibility from our customers. Pretty much we get that idea in December. We got all sorts of forecast that I won't want to comment on because obviously I get into trouble when I do that if I have confidentiality agreements with the customers. But for the most part as they come out with their '09 thoughts, we get wafer orders in December for basically Q1 consumption. So we get somewhat of a leading indicator and then also the price negotiation occurs in that same last two weeks of December. We'll have a pretty good sense then. But at this stage it is probably a little too early to tell.

Steve O'Rourke - Deutsche Bank

Okay, and lastly, what is your outlook on Silane supply and demand over the next year or so?

Ken Hannah - Senior Vice President and Chief Financial Officer

Well Silane, we've talked about it for couple of years. We have said basically Silane in terms of shortage was a couple of years behind poly on the slope but it was definitely on the slope but it was short in supply. Prices had gone up, it continues to be short on supply for thin film, flat panel, semiconductor consumption. So there is continued demand for it and we continue to get request for increasing quantities of it.

Steve O'Rourke - Deutsche Bank

Could you comment on pricing trends in emerging markets for Silane?

Ken Hannah - Senior Vice President and Chief Financial Officer

They have continued to go up.

Steve O'Rourke - Deutsche Bank

Any quantification?

Ken Hannah - Senior Vice President and Chief Financial Officer

No.

Steve O'Rourke - Deutsche Bank

Fair enough. Thank you.

Ken Hannah - Senior Vice President and Chief Financial Officer

Thanks.

Nabeel Gareeb - President and Chief Executive Officer

Operator.

Operator

I am sorry. I must have been muted. But we have a question from the line of Timothy Arcuri from Citigroup. Your line is open.

Timothy Arcuri - Citigroup

Hi guys, couple of things. I am just trying to figure out what those poly charts would look like if you had shown this quarter. If I look at the last chart you showed from early September, you were running kind of at $700 million, kind of on a quarterly basis. Now if you kind make the adjustment, the mix adjustment, you're probably running 630ish, that assuming that you don't add a poly capacity this quarter which you're obviously adding some. So I'm wondering how much capacity are you adding sequentially in poly to adjust that 630 upward.

Ken Hannah - Senior Vice President and Chief Financial Officer

Yes, I guess there's two questions in that Tim. Number one we're basically running at pre Hurricane rates. If you just look at those lights pre hurricane and exclude all the unplanned maintenance and all of that good stuff. So basically you can use that as an approximation. Second is like you said yes, you do have to do some adjustment for the mix and the pricing that we talked about. And then the third is in terms of capacity, we stated what the capacity addition was. We went from the 6000 to the 8000 or the 700 to the 800 etcetera. And... but that was over a six months period. So if you did some sort of a reasonable interpolation in between you might get an idea what that is.

Timothy Arcuri - Citigroup

Okay, but I guess just on that point there wasn't... there is not appreciably more capacity being added for poly in Q4 sequentially and there wasn't in Q3, is that right?

Ken Hannah - Senior Vice President and Chief Financial Officer

Well capacity is coming online but its really the ramp, right. So we added the capacity and completed those additions between the months of July and end of August and then we said okay we're going to ramp that over the next six months. So it's really, one was the addition of the capacity the second was the utilizations of that capacity in producing more poly. And as matter of fact that's why we're able to guide to the 540 to 600 which is like guiding to the 590 to 650 range three months ago because we have got more poly.

Timothy Arcuri - Citigroup

Right, I understand. Okay, and then I... obviously with the stock where it is there is obviously lots of people that feel that there's reasonable enough risk that several of your contract customers either walk away from their contract or they can't pay you. And so I am wondering I don't think that's realistic but I am wondering can you walk us through what kind of a worst case would be. So out of the roughly say 1000 tons that you are giving to the Gintech, Conergy, if they either couldn't pay you or they kind of walked away from those deals what would the worst case be?

Ken Hannah - Senior Vice President and Chief Financial Officer

So if all of them walk away while basically we get tripled digit millions from each them that is basically in our banks and we collapse it, put it in our bank and sell whatever capacity we have perhaps on the short-term and medium term market and wait for somebody else to come along to sign another deal probably at incrementally better pricing.

Timothy Arcuri - Citigroup

So you think just to be clear on that. So you think that you would in a reasonable amount of time in this current environment knowing what you know, you think that you could place that much capacity under contract at pricing that is reasonably close to what you currently have?

Ken Hannah - Senior Vice President and Chief Financial Officer

I mean so, lets say I can't place any of it and let say I put three contracts with three triple digit million numbers, I have basically got profits covered and revenues covered for a little bit of time, right? I don't have to produce the product even. I can say I won't produce, I may choose not to produce product or I may choose to put it on the stock market or short-term or an intermediate term agreement. So there is a lot of options. So depending on whether you're looking at a financial angle or a production angle or a capacity angle.

Timothy Arcuri - Citigroup

Okay, thanks for the answer.

Ken Hannah - Senior Vice President and Chief Financial Officer

And currently by the way Tim, one more that's good point, the prices are way higher than those long-term prices, so the differential is significant.

Timothy Arcuri - Citigroup

Okay, thanks a lot.

Operator

Thank you. Next we have a question from line of Christopher Blansett with J.P. Morgan. Please go ahead.

Christopher Blansett - JPMorgan

Hi, guys, couple of quick ones. You know Nabeel... there is a lot of... the decline in the semi wafer market in the fourth quarter is pretty significant but going into the most semi-device makers didn't have a significant amount of inventory. So how you see this may be heading into the first quarter because it does seem a little bit unprecedented for the times right now?

Nabeel Gareeb - President and Chief Executive Officer

Actually, sort of they... it turns out that the semi guys, our customers actually did have a decent amount of inventory and the inventory is just the... I guess its in terms of weeks. So it gets a little compounded. As their demand goes down, their weeks go up even with the cost and quantity of inventory and they are trying to keep their inventory in weeks or days under control. So what we're seeing is publicly the customers are announcing 10% to 15% to 17% reductions that's getting compounded for semiconductor wafers because they're also trying to reduce inventory which is resulting in the 20% to 30% reduction in unit demand.

And so yes, whatever there was, whatever inventory there was at the start, they are trying to reduce it further and then yes, so that will become a very interesting scenario in Q1. Q1 is seasonally weak for them so we'll see how that pans out, but sometime in Q1, Q2, it's going to be interesting as they just try to ramp back up.

Christopher Blansett - JPMorgan

Alright. The other only question I had was tied to your initial solar wafer contracts. Obviously you had some execution and some weather related issues in the beginning of the year. Are you in the need to play catch up with your initial two solar wafer contracts in the second half of this year, or the last quarter of the year?

Ken Hannah - Senior Vice President and Chief Financial Officer

I guess catch up is relative. From a contractual standpoint, we're actually allowed to miss like 25% of our annual deliveries for three years in a row before we get into trouble. Okay, so I mean it's a huge buffer we have. However that's not our style. So yes, whatever we basically, we're trying to keep all our long-term customers hold as much as possible every quarter in spite of some of these events that have occurred. And then whatever little is left over, we definitely try to keep... make sure that in any given quarter, we need to make it up, we'll make it up. For example, in Q4. So that's certainly the goal.

Unidentified Analyst

Then one more kind of question related to solar wafers. You're going to start shipping into two new partners there and although you haven't given specific about the contract volumes, could you give us some kind of color? I think a lot of investors just very concerned on what kind of volume metric change will be in Q... in '09 versus '08 so we can use that to help model next year earnings.

Nabeel Gareeb - President and Chief Executive Officer

Well, I mean so we started shipping in Q3 to both Tainergy and Conergy like I think we received that deposits. We started shipping just like we planned. And from a modeling standpoint, I would say that whatever you've got modeled, whatever you had modeled for Gintech, because they are about the same size, starting a couple of years ago and they start about the same time, you could probably just do a cut and paste over 10 years and you'll be pretty darn close.

Unidentified Analyst

Alright, thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

And next from the line of Krishna Shankar with JMP Securities. Please go ahead.

Krishna Shankar - JMP Securities

Yes, congratulation on the good execution here. Couple of questions, the industry is down 20% to 30% in semiconductor unit demand. Does that apply to your semiconductor wafer shipments or was that more of an industry comments?

Nabeel Gareeb - President and Chief Executive Officer

That's definitely wafer units. And Krishna, and that's in KSIE's our anticipation. We don't have any forecast, but it's definitely excess of 20% we think, and it could be depending on how market conditions evolve as high as 30.

Krishna Shankar - JMP Securities

That's for any NC [ph]

Nabeel Gareeb - President and Chief Executive Officer

That's, we are anticipating that both for the industry as well for us. Yes. That's baked into our number as an assumption.

Krishna Shankar - JMP Securities

Okay. And secondly, can you give us a sense for what will exit 2008 at in terms of annual poly capacity and what that will be at the end of 2009?

Nabeel Gareeb - President and Chief Executive Officer

Well, what we've said is we were at 8000 metric tons of capacity in the first part of September, about a quarter earlier than we had originally anticipated because we had anticipated, we'll be at that capacity at the end of '08. And then by the end of '09 we'd I said I think about a 11.5 number half way to our 15,000 metric ton target by the end of 2010. So with lose, are all still on track.

Krishna Shankar - JMP Securities

Okay. And can you rank order for us the gross margins for spot markets all the wafers, poly, semiconductor. I know you've given us this rank order and can you give that for us again?

Nabeel Gareeb - President and Chief Executive Officer

Yes. I mean basically, short-term spot poly business has the highest margin, short-term 156 millimeter wafer is also probably is higher than average and then you've got basically longer term 156 millimeter wafers and 300 millimeter wafers starting to be in the similar band. And then you've got 200 millimeter and smaller diameter wafers.

Krishna Shankar - JMP Securities

So 200, and only 200 and smaller below the corporate, and everything else would be above the current corporate bended gross margin?

Nabeel Gareeb - President and Chief Executive Officer

Yeah, pretty much. You get into a little bit of dichotomy there when you start talking about loaded and what utilization rates you are running and what facilities et cetera. But that's probably a good approximation to use for now.

Krishna Shankar - JMP Securities

And where you exiting Q4 at a run rate where solar revenues were say, but 40% or close to 50% of total company revenues in Q4?

Nabeel Gareeb - President and Chief Executive Officer

Yes, we are not breaking out that by quarter, we give an indication for the year to kind of give more insight, people have asked for us. And we though we were achieving a milestone that was pretty significant. And so we wanted to articulate that that we would get up to exceed $1 billion this year, probably in revenue from solar applications.

Krishna Shankar - JMP Securities

Okay. Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure thanks.

Operator

We have a question from the line of John Hardy with the AmTech Research and your line is open.

John Hardy - American Technology Research

Hello, guys thanks for taking my question. Thanks for going through the poly expansion plans for 2009 and 2010. I was curious though, given the change we've seen in the macro environment over the past six months or so, whether you guys would consider scaling back those plans at all?

Nabeel Gareeb - President and Chief Executive Officer

No, we can certainly throttle those, given our asset efficiency and given that we're doing, we're not doing greenfield sites, we're doing basically on-site expansion, there is the ability to manage that better and probably more cost effectively that our competitions. So we'll keep our eyes and years open. The only key thing is to make sure that this is not a six-month lead time activity, this is a typically 2 to 3 lead time activity. So, we can manage it and we will try to keep... make sure that it's very prudent whatever we do.

John Hardy - American Technology Research

Okay. So with those lead times you just mentioned in line for the '09 ramp which I believe you said previously on previous calls, should take place in the second half of the year. In terms of CapEx, do you expect the majority of that to take in Q4 '08 in terms of equipment spending?

Nabeel Gareeb - President and Chief Executive Officer

No, I mean Q4 '08, I would say, for... you can probably use the CapEx number for the year and just stick to that range that we talked about, which is 15% or less all revenues for the year should be the CapEx for the year. And if you use those general guidelines, quarter-by-quarter it gets lumpy because equipment arrives and you commission it, all of that. But for the year, it should be a pretty good guideline.

John Hardy - American Technology Research

Got it, thanks for that. And then just moving real quickly onto the semi side of the business, do you have a good feel for what the utilization rates are at your customers, at this point?

Nabeel Gareeb - President and Chief Executive Officer

Yes, I think we have enough information. But I don't want to get into trouble talking about it.

John Hardy - American Technology Research

Okay. And one more quick question on semi side. What percentage of your semi business was up for price adjustments, in Q4? I think that the majority of your contracts because you reset at the beginning of the year. So I am just curious if you have a feel for... as you see larger ASP here in Q1 '09 as a larger number of your contracts have been readjusting?

Nabeel Gareeb - President and Chief Executive Officer

Yeah, we had said that typically on a quarterly basis, 20%, 25% of our agreement adjusts from Q3 to Q4. This quarter, over half of them did, because people wanted to renegotiate and talk about it given the market conditions. And typically in the fourth quarter, the large majority of the contracts come up for negotiation, because they are annual, semi-annual and quarterly time tables coincide other than the ones in Japan that are off-cycle.

John Hardy - American Technology Research

Okay, great. Thanks guys.

Nabeel Gareeb - President and Chief Executive Officer

Thank you.

Operator

Thank you. And next from the line of Sam Dubinsky with Oppenheimer. Please go ahead.

Sam Dubinsky - Oppenheimer

Guys, two couple of quick questions. In terms of your guidance for next quarter, with the semi business pretty weak, why won't your gross margin improve on mix shift towards solar? And then I have a couple of follow-ups.

Nabeel Gareeb - President and Chief Executive Officer

Sure. Yes, I mean on the gross margin, with typically be held. But when the semi is that weak, you are basically talking about facilities that are not utilized and therefore that lack of absorption of the fixed cost causes a drag effort. In addition, we are talking margins going up from where we were obviously in Q3, plus the pricing reduction.

Sam Dubinsky - Oppenheimer

Okay. And then in terms of your model, do you have ever stress tested it in terms of what a peak and maybe a trough gross margin in a worst case scenario for next year, then I have couple of follow-ups.

Nabeel Gareeb - President and Chief Executive Officer

Well, yes. I mean we do all kinds of internal models, I won't feel comfortable talking about them for the next year because we haven't provided any guidance. We also started about two years going away from gross margin and operating margin percent peak and troughs, because again we were looking at both nominal improvements in both over the long-term s well as growth in revenues which would cause significant fall through to the bottom line causing pretty good EPS growth as well.

Sam Dubinsky - Oppenheimer

And just housekeeping question, what do you expect for tax rate for next year?

Ken Hannah - Senior Vice President and Chief Financial Officer

We have not provided any '09 guidance for tax rates other than back in I guess January of '07 when we were giving the 3 to 5 year outlook numbers where we had said a mid-teens rate.

Sam Dubinsky - Oppenheimer

Okay. And my last question is just when I look at your model, even if you assume next year is extremely tough for you guys, it seems like you can generate cash even in a pretty bad macro environment. I know you are looking at acquisitions and stock buy backs, but would you ever consider a dividend, just given how far your stocks pull back, it seems like you can offer pretty attractive dividend yield and still have cash to play around with?

Nabeel Gareeb - President and Chief Executive Officer

I mean, obviously from a cash return, you can do several things with cash, right. One, you can do acquisitions; second, you can do stock buyback, third, you can do dividends and you want to make sure that you get enough hanging around for working capital as well, so the key question is how do you balance that?

And so far what we have done is we have kind of a checking account theory to do that, we are trying to accommodate at least two out of the three, one trying to build some cash for opportunities that may come along while doing some nominal stock buy backs to offset dilution and we will see how as time evolves what the opportunities are for what we do or don't want do as a Board.

Sam Dubinsky - Oppenheimer

Okay, thank you.

Operator

Alright, thank you. And from the line Sean Conner with FAF Advisors. Please go ahead.

Sean Conner - FAF Advisors

Hi thanks. Just real quick, most of my questions have been answered, but I just wanted to confirm, so if I kind of... since you didn't provide the charges this quarter like you did last time, you actually exited the quarter at a similar revenue run rate that you were at pre-hurricane, is that correct?

Nabeel Gareeb - President and Chief Executive Officer

Basically, yes, similar output rate pre-hurricane, in the same range.

Sean Conner - FAF Advisors

Okay. And then from a receivable standpoint, have you had any increasing kind of the amount of days it's taking to receive payables towards the end of this quarter versus kind of towards the beginning or last quarter, are you seeing any difference in that?

Ken Hannah - Senior Vice President and Chief Financial Officer

Yes, Shawn this is Ken. We've not seen any material change at this point. You get a lot of people asking for relaxed terms going forward, but if you look in the DSO there is no real change in Q3.

Sean Conner - FAF Advisors

Okay. And then also from a stock repurchase, it looks like you spend roughly $130 million or so last quarter on stock repurchases. Is that... should we expect that kind of as a going rate or these prices should we expect you to buy more?

Nabeel Gareeb - President and Chief Executive Officer

Buy more in quantity or buy more in dollars?

Sean Conner - FAF Advisors

Hopefully more in dollars, I mean not in quantity.

Nabeel Gareeb - President and Chief Executive Officer

Right. so if you look at what is transpired about a little over a year ago, the Board had authorized a $500 million program. As if you add up the purchases since that time, we've exhausted over $400 million of that program. Last quarter they increased it by another $500 million, so that the total now is $1 billion. And they had given the BLI some additional flexibility to go off of the 10B51 program that had been in place, and so you saw some of that in Q3.

Sean Conner - FAF Advisors

Okay. And then just lastly, from a... back to the semi-wafer production side of things, can you give us an idea of utilization rates? Where they were kind of last quarter and where they are now?

Nabeel Gareeb - President and Chief Executive Officer

I mean last quarter we had said that in Q3 we anticipated rates ended Q2 and then Q3 anticipated rates 65% to 90% range depending on the product line you were looking at and the diameter. And so, obviously if you assume that we're talking about a 20% to 30% unit reduction, you can kind of make your own guesstimates from there.

Sean Conner - FAF Advisors

Okay great. Thanks you guys.

Ken Hannah - Senior Vice President and Chief Financial Officer

Thanks, Shawn.

Operator

And next from the line of Ben Pang with Caris & Company. Please go ahead.

Ben Pang - Caris & Company

Thanks for taking my question. First on the semiconductor side, you commented that 50% of your contracts are up for negotiation in the fourth quarter. Is that correct?

Nabeel Gareeb - President and Chief Executive Officer

What I said was over half our contracts actually did get negotiated in Q3 for effect in Q4, which is already baked into the price that we said was down by mid to high single-digits that caused part of this 10% mix price shift correction.

Ben Pang - Caris & Company

Okay. And so, if you look into let's say, 1Q which is kind of usually seasonally weak for a lot of these factories, the pricing erosion on the semiconductor side really shouldn't have too much of an impact in 1Q. Is that the way to think about it?

Nabeel Gareeb - President and Chief Executive Officer

I don't know about 1Q because what happens is we get the vast majority of our contracts will come up again for renegotiation in late December for effect in January and that will depend on what the outlook for consumption by our customers is probably in the February to March time period for them.

Ben Pang - Caris & Company

Okay.

Nabeel Gareeb - President and Chief Executive Officer

About a 30 day lag in between there.

Ben Pang - Caris & Company

Okay. And on the solar side, in terms of the solar wafers, outside of the two contracts that you have, you kind of commented on the growth rate you expect there. When I look at the growth for that part the business in '09, are you guys looking to replace other vendors within the solar companies, is that the growth method that you prefer or are you looking for another long-term contract?

Nabeel Gareeb - President and Chief Executive Officer

Yes, what we are looking for... we've got four arrangements long-term, we have some short-term arrangements as well that we look at every quarter so the goal was we got a core set of long-term arrangements, we want to add and cultivate more customers on a shorter to intermediate term basis plus add one or may be one more long-term contract. So, it's a combination of both, not one or the other.

Ben Pang - Caris & Company

Okay. Thank you very much.

Nabeel Gareeb - President and Chief Executive Officer

Thanks.

Operator

And next from the line of Neal Jacobs with Bodri Capital. Go ahead please.

Neal Jacobs - Bodri Capital Management

Hi, thanks a lot for taking my question. Most of my questions have been answered. I just have one, which is, Nabeel talked about I think Tim's question about sort of the worse case. I just want to make sure, I understand this. Triple-digit millions from each of those three customers, I guess four. Where does that sit on the balance sheet?

Ken Hannah - Senior Vice President and Chief Financial Officer

Neal, this is Ken. If you go through... there is two places where you can see that we have got in the balance sheet under current liabilities there is a customer deposit line. And that balance as of the end of September was about $210 million and then if you go to the long-term there is down in other liabilities, there is a portion of it there and if you go back and read some of the previously filed 10-Q's and 10-K's, you can kind get the flow of what is in short term and what is in long-term and should be able to come up with it.

Neal Jacobs - Bodri Capital Management

Got you, okay. I appreciate that. And I think you said earlier that nobody has missed a deposit that you are aware of?

Ken Hannah - Senior Vice President and Chief Financial Officer

That's correct all of the customers are current on their deposits. One other thing that I want to make sure is understood we talk about cash and irrevocable LC's, the irrevocable LC's are not on our balance sheet anywhere but those, should these customers deposit should be default those are available for us, no questions asked to collapse.

So if you go though and you follow the trail of the inflow and you'll see that the number is close to $300 million that we are holding just in cash and then there is also irrevocable LC's that are out there and available as well. So when the deal talks about hanging out should that worse case come through, we've got real cash and then we've also got the ability to go pull these LC's.

Nabeel Gareeb - President and Chief Executive Officer

Doing about that similar range of that cash equivalent in dollar figures, right.

Neal Jacobs - Bodri Capital Management

I see and so just to be clear, the offsets of those liabilities sitting cash and cash equivalents?

Ken Hannah - Senior Vice President and Chief Financial Officer

That's right.

Neal Jacobs - Bodri Capital Management

Okay thanks a lot.

Ken Hannah - Senior Vice President and Chief Financial Officer

It could, I mean or somewhere in the investments.

Ken Hannah - Senior Vice President and Chief Financial Officer

It's in the cash and investment balance, correct.

Neal Jacobs - Bodri Capital Management

Okay, thanks a lot.

Operator

Alright, thank you. And now we have a question from Theodore O'Neill with Kaufman Brothers.

Theodore O'Neill - Kaufman Brothers

Okay, thanks. So we've heard from at least one supplier that they've received a letter from the semiconductor customer there is asking for payment holiday until some time next year and I was wondering if you've received notice from any of your customers about taking a payment holiday?

Nabeel Gareeb - President and Chief Executive Officer

Well certainly, we've got as Ken alluded to that people want to negotiate. This happened in '05, it happened in '02. It happened in... I mean it happens all the time. People will ask for it, that doesn't mean you succumb to it. So you work with the customer to figure out what make sense, but as somebody says, well I just want a payment holiday for six month period you can't accept that.

Theodore O'Neill - Kaufman Brothers

Okay and a question, I think... I do think you were all little concerned about the credit environment and the impact that's going to have on... it's having on customers. And it seems that there is tremendous amount of risk here in your top line guidance going into the fourth quarter. And I'm not sure anybody on the call even believes it. But given that the company has missed the last five quarters guidance, why wouldn't you like cut that by at least $100 million and so that you have a chance to hurdle that number, if the quarter actually happens and sort of can't kick in some of that risk and put that into your guidance going forward?

Ken Hannah - Senior Vice President and Chief Financial Officer

I think it's a good question Theodore. Number one, for the third quarter if you exclude the hurricane, which hopefully nobody expects us to be able to forecast hurricanes of this intensity. If you exclude that, basically you would have hit original... the top end of our original guidance. As a matter of fact, with the performance even post the hurricane, we came pretty darn close with the inventory build to the lower end of the original guidance.

Having said that, in the fourth quarter if we said okay, lets target a number of 100 million less than this and becoming a 100 million over, then we've got a different credibility problem. So, we've basically taken the best information we have on the markets we have and we've taken a pretty normal stance on the semiconductor, where we are talking about 20% to 30% reduction sequential we baked in. We have the ability, we believe to offset all of that through, basically the solar market and the wafers not only the long-term, wafer game is that people are asking for more wafers this quarter as a matter of fact, then we can supply as well as some short-term arrangements. So we think this is prudent guidance aligned for even some production hiccups and let's see where we end up.

Nabeel Gareeb - President and Chief Executive Officer

I don't think it would be... impacts your credibility negatively, where you to come in a 100 million over for a couple of quarters but I will leave it up to you. Thank you.

Theodore O'Neill - Kaufman Brothers

Alright thanks

Operator

Great, thank you and next in line of Paul Leming with Soleil Securities. Please go ahead. Paul is your line muted on your end? Alright, we will go to our next question from David Smith with Longbow Capital. Go ahead.

David Smith - Longbow Capital

Hi guys. Can you hear me?

Nabeel Gareeb - President and Chief Executive Officer

Yes, yes, sorry David.

David Smith - Longbow Capital

In the solar markets specifically, we're hearing a lot of talk these days about ASP is potentially dropping in the range of 10% to 20% and earlier on expectations seem to be around 5%. I am just trying to get a good sense on the contracted sales, what you could annually see in terms of an annual price decline and then how that potentially could play out if you actually saw a worst case 20% to 30% ASP decline. I am just getting at the point that poly prices would probably drop pretty significantly and then contracted customers probably would not be as enthusiastic obviously to be paying what those prices are. I know you've got the deposits and I know Tim asked that question but just a sense of what the renegotiation potential would be?

Ken Hannah - Senior Vice President and Chief Financial Officer

So I think, let's separate these questions a little bit. So, poly prices obviously we talked about the spot poly prices are whatever you assume they are, right. Our long-term arrangements are not at spot prices, they only...

David Smith - Longbow Capital

Yeah I agree. Yeah.

Ken Hannah - Senior Vice President and Chief Financial Officer

So they're already at long-term prices which are significantly less than the spot prices. When we look at the revenue multiply I was talking about earlier, basically a $1 poly becoming $2 of solar wafer, $4 to $7 of semi which is probably in the range of the spot poly pricing. So, you've got a pretty significant multiplier differential and so you would have to have a pretty significant reduction in spot poly pricing for to remotely start achieving or approaching our long-term wafer pricing. And so that is an inherent competitive advantage for our customers as well as a buffer for us.

And so yes, is there potential risk, if the markets offense for spot poly pricing? Yes there is. But we've also given enough information now in this press release I think for you to, kind of get an idea, what that quantity or dollar figure might be based on a percent of revenue. And you can do some sensitivity analysis and see if it's a meaningful difference to our earnings potential over intermediate or long term.

David Smith - Longbow Capital

So the contracted declines, where would the annual contracted decline, would be roughly, is it in the range of 5% to 10%?

Nabeel Gareeb - President and Chief Executive Officer

Yes. What we haven't done is we haven't been very specific about that. But basically, we said look we start with long-term prices and we end up with prices that would enable solar energy to be at good parity if oil without subsidiaries... if oil was at $40 a barrel as a proxy for energy prices. So, if you look at that and that's a pretty standard ending point $3.25, $3.50 depending on what you are using and dollars per watt installed module prices. And you will backwards you get pretty much figure out the ending point and if know the starting point then what that curve looks like.

David Smith - Longbow Capital

Okay. And just the last thing was on the wafer pricing. Can you just repeat that number and was that sequential year-over-year?

Nabeel Gareeb - President and Chief Executive Officer

Yes, the semi-wafer pricing reduction that we were talking about was sequential Q3 to Q4 mid to high single-digit reduction.

David Smith - Longbow Capital

Great. Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Thanks.

Operator

Thank you. Next from the line of Satya Kumar with Credit Suisse. Please go ahead.

Satya Kumar - Credit Suisse

Yes, hi thanks for taking the question. On this production guide... the revenue guidance of 540 to 600, it's a pretty wide range. Would the two to three weeks of buffer that you've assumed, how should we think about that if you... does that mean that if you don't have that two to three week buffer, you come to the high end of that. What will take you to high end and the low end of that, what do that two to three week buffer really mean?

Nabeel Gareeb - President and Chief Executive Officer

Yes. the buffer, obviously the buffers in there, semiconductor demand is in there, we have talked about 20% to 30% ranges that's in there, there's the mix effect of that's in there. So, all of the above are in that range.

Satya Kumar - Credit Suisse

Meaning, if for you were to come into that high end of the range basically, you will use up some of the buffers, that's the way to think about it, all others being the same?

Nabeel Gareeb - President and Chief Executive Officer

Depends on what happens with the other elements, right? So if all the other elements come in at the best end in their curve, then we won't need to use up a lot of the buffer, if they don't come in then we'll need to use up the buffer.

Satya Kumar - Credit Suisse

Got it, okay. This 30% decline in wafer shipments to the industry, I was wondering if you could provide any granularity in terms of 200 versus 300 memory versus foundry, that's one. And secondly, I am assuming that you are going to divert a lot of the polysilicon production which was allocated for semis into the spot market or the solar wafer market. And I am assuming that al your semi wafer competitors will do the same. If I calculate how much polysilicon become available as a result of that, that's the equivalent of somewhere between 15% to 20% of global solar panel production in Q4 that goes from semi to solar. I was just curious, what you are assuming for the spot market pricing trends in Q4 in your guidance, what did you seen in Q3 and what are assuming for Q4?

Nabeel Gareeb - President and Chief Executive Officer

So, on question one, Satya, basically we've got 200 between 200 and 300 it varies by customer. Some are lot weaker on 200, basically we got the movement where in the memory space you got 200 millimeter fabs they're shutting them down faster. The analog guys want to move into those 200 fabs, but they can't do it one quarter. So there's all that churn ongoing from the earlier part of this year just being accelerated. So it's not a generic 200 is weaker than 300, which on hold that's going what we see a little bit, but then when you start breaking at that down it becomes very much customer specific, which I don't want to get into trouble on there.

The second piece of it that you asked about in terms of the poly sales, basically if you recall, our goal was to try and keep poly sales volume approximately flattish for the year in terms of our quarter-to-quarter. And so what we did obviously in Q3, Q1 was down depressed from Q4, then Q2 came backup to Q3 again was lower than Q2, and we anticipate Q4 probably will be about Q3 levels maybe slightly higher or maybe slightly lower, will be in that range.

So we don't anticipate some significant happening on the spot market from us anyway. And then the vast majority that will go into 156 millimeter wafers. In terms of the competition doing, what's they are going to do, we'll see what they do and we'll see what the... what their obligations are in terms of what they can or cannot resell.

Satya Kumar - Credit Suisse

What have you assumed, what did spot poly price do in Q3 and what have you assumed in your guidance for Q4?

Nabeel Gareeb - President and Chief Executive Officer

In Q3, they were pretty healthy. In Q4 we have not seen any significant deterioration in the bookings we've done to-date.

Satya Kumar - Credit Suisse

Okay. And finally on this Conergy, Gintech, Suntech Tainergy contract, is it fair to think that you can at least double the volumes to those customers from this year to next year?

Nabeel Gareeb - President and Chief Executive Officer

Well, I think if you go back to the modeling guidance we had given a couple of years ago that you start with any one of those customers and basically start in the triple-digits, we're close to the triple-digits in the first year and then you basically expand it from there over the course of 10 years, every year in equal increments. You'll end up with... and it adds up to the total number for the contract. You'll have a pretty good idea of how that ramps. And you allow for that work backwards, and allow for some sort of a price reduction every year you'll get an idea of the volume.

Satya Kumar - Credit Suisse

Alright. Thank you.

Unidentified Company Representative

Sure thanks.

Operator

Thank you. And we have a question here from the line of Mehdi Hosseini with the FBR. Go ahead.

Mehdi Hosseini - Friedman, Billings Ramsey

Just have a very quick guys of clarification, did you say that in your assumptions you have $3.50 as the grid parity before including subsidies?

Nabeel Gareeb - President and Chief Executive Officer

Yes $3.25 to $3.50 installed excluding subsidies.

Mehdi Hosseini - Friedman, Billings Ramsey

Okay. And this is basically the cause to either utility or whoever who is going to own the project?

Nabeel Gareeb - President and Chief Executive Officer

At the end of it. Yes.

Mehdi Hosseini - Friedman, Billings Ramsey

Okay thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Thank you. And no other questions in queue, please continue.

Nabeel Gareeb - President and Chief Executive Officer

Thank you all for participating. Good Night.

Operator

Thank you. And ladies and gentleman, that does conclude your conference for today. Thank you for your participation. And you can now disconnect. .

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