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Executives

Bill Michalek - Director of Investor Relations

Kenneth Hannah – Chief Financial Officer

Marshall Turner - Interim Chief Executive Officer

Analysts

Brett Hodess – Merrill Lynch

Jesse Pichel - Piper Jaffray

Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

Vishal Shah - Barclays Capital

Sam Dubinsky - Oppenheimer & Co.

Adam [Kropf] – Arbor Capital

Paul Clegg – Jefferies & Co.

Christopher Blansett - JP Morgan

Timothy Arcuri - Citigroup

Stephen Chin - UBS

Steve O'Rourke - Deutsche Bank Securities

Stuart Bush - RBC Capital Markets

Paul Leming - Soleil Securities

Benedict Pang - Caris & Company.

[Atas Maliek] - Morgan Stanley

Gordon Johnson - Hapoalim Securities USA Inc.

Dan Rice - Collins Stewart

Satya Kumar - Credit Suisse

Luke Langford - Langford Capital Management

Jeff Osborne - Thomas Weisel Partners

Dan Sobel – [firm inaudible]

MEMC Electronic Materials Inc. (WFR) Q4 2008 Earnings Call January 22, 2009 5:00 PM ET

Operator

Ladies and gentlemen, thank you very much for standby, and welcome to your MEMC fourth quarter earnings call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions) As a reminder, the conference is being recorded.

I will now turn the conference over to Bill Michalek, Director of Investor Relations for MEMC.

Bill Michalek

Good afternoon and thank you for joining our fourth quarter earnings conference call. With me today are Marshall Turner, Interim Chief Executive Officer, and Ken Hannah, Chief Financial Officer.

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 to review the financial results and outlook.

Kenneth Hannah

For the 2008 fourth quarter MEMC was not immune to the global economic slowdown. Sales were $425.7 million, slightly above the high end of our December 1, 2008, updated fourth quarter outlook. This represents a decline of 22% sequentially from the third quarter level and a 21% decline from the same period last year.

The sequentially and year-over-year decreases in sales were primarily the result of lower wafer volumes for semiconductor applications and lower prices associated with short-term sales of solar products, partially offset by higher volumes of wafers for solar applications.

Gross profit in the quarter was $193.0 million, or 45.3% of sales, down from 49.4% in the third quarter, primarily as a result of lower pricing and reduced semiconductor product volumes partially offset by higher solar wafer volumes.

Operating expenses in the quarter were $23.7 million, or 5.6% of sales compared to $42.2 million, or 7.7% of sales, in the third quarter, primarily due to the decrease in stock compensation expense resulting from the forfeiture of option grants by our former CEO and continued cost controls.

Operating income was $169.3 million, or 39.8% of sales, compared to the third quarter’s $227.5 million, or 41.7% of sales.

Using our estimated effective cash tax rate of 15%, non-GAAP net income for the fourth quarter, excluding the non-cash effects of the quarterly valuation of the Suntech warrants, was $145.9 million and non-GAAP diluted earnings, excluding warrants, was $0.65 per share.

GAAP net income for the fourth quarter, using a book tax rate of 33.9%, was $73.2 million, or $0.33 per share, which includes a $61.2 million charge relating to a decrease in the valuation of the Suntech warrants. The decrease in the estimated value of the Suntech warrants had a $0.23 per share negative impact at the estimated effective tax rate of 15%.

Both GAAP and non-GAAP earnings per share figures include $8.6 million, or $0.04 per share, of other than temporary impairments associated with the decline in fair value of the company’s holdings of certain investments driven by the current credit environment.

MEMC continued to generate strong cash flows with operating cash flow of $123.0 million, or 28.9% of sales in the fourth quarter. This compares to $115.3 million, or 21.1% of sales in the third quarter.

Capital expenditures for the fourth quarter totaled $60.9 million, or 14.3 % of sales, and free cash flow, which is operating cash flow minus capital expenditures, was $62.1 million, or 14.6% of sales.

Our cash and investment balances at the end of the year were $1.4 billion.

Now turning to business conditions, in-market weakness and low order visibility across both semiconductor and solar applications continues in the first quarter as reduced consumer spending, limited access to credit, and other results of the macroeconomic environment weigh on both markets.

Our semiconductor customers are experiencing one of the worst industry downturns on record. They are responding to the low demand and resulting high inventory levels by cutting their production output and factory utilization rates to very low levels. This has resulted in a significant sequential reduction in semiconductor wafer demand, which is in turn leading to the diversion of some polysilicon output from semiconductor to solar markets. This has reduced prices for polysilicon and wafers in the solar market.

We are working closely with each of our long-term solar contract customers to help them compete during this difficult phase of the solar market development. Like all other companies in the solar industry, they are under significant pricing pressure and have poor visibility into their 2009 demand. As we did with Conergy last year, we are working with them to create solutions to their short-term issues while keeping the total revenue value of the agreements the same for 2009 and beyond.

That said, the Q1 guidance announced in our press release earlier today reflects uncertainty about some customers’ ability to perform in these current markets. Because our discussions with these customers are not complete and because these market dynamics have not yet settled out, we cannot be certain what the final outcome of the efforts to help these customers will be. But just as we helped our partners win in 2007 and 2008, we are working with them to try to help them win in the very tough and uncertain environment of 2009.

The unusually low levels of visibility that many of our customers have in the current environment reduces our ability to provide meaningful quarterly, annual, or long-term guidance at this time. Our current view of the markets we serve indicates that first quarter 2009 revenue could decline by as much as 50% from the fourth quarter 2008 levels.

The reduced pricing and significantly lower factor utilization assumed in this view, the latter of which would result in significant under-utilization charges, could result in gross margins declining to the 20% range.

For the past few years we have been providing both cash and book tax rates in anticipation of a convergence of the two toward the lower rate. Because we expect that 2009 will be the year that these rates are approximately the same, we currently plan to provide only the GAAP, or book, tax rate going forward. For the quarter we are estimating that rate to approximate 16%.

We will continue to report EPS numbers with and without the Suntech warrant as the value of the warrant is difficult to estimate, varies, and has no cash effect.

Now I would like to turn the call over to MEMC's Interim CEO, Marshall Turner. As most of you are aware, Marshall is a semiconductor industry veteran and former Chairman and CEO of DuPont Photomasks. Marshall has been on the MEMC Board of Directors since 2007 and became Interim CEO in early November.

Marshall Turner

Good evening and thank you for joining us. I am pleased to be addressing you as Interim CEO of MEMC, my full-time activity until the search for the permanent CEO is completed. It is an honor to join the MEMC team on an active basis for a while because I’m well aware of MEMC's achievements, its innovative culture, and its exceptional talent.

Today I would like to highlight our 2008 performance then discuss our priorities and share early thoughts about what we believe is necessary to keep our business on the right track in this difficult macroeconomic environment in 2009.

For the full year MEMC grew sales by 4% in a difficult environment while achieving two significant milestones, crossing the $2.0 billion mark in total revenue, and crossing the $1.0 billion in sales to the solar market. In addition, we grew gross and operating profits to record levels, generated continued high levels of cash flow, achieved a return of assets over 25%, and significantly increased our polysilicon and 300mm capacities, all while growing cash and investment balances to over $1.4 billion. It is clear that in 2008 MEMC again improved its financial, technical, and operational position.

Now let me give you some additional perspective. As I dug into this role during the last ten weeks I have reviewed our strategies and operations, met with customers, and discussed the company with employees at all levels of the organization. As a result, I can assure you that the company’s strategic position is strong and, frankly, unique. Certainly the overall economy is suffering and impacting all industries to different degrees and MEMC is not immune to that. However, we are extremely well positioned, particularly relative to our peers. We entered this downturn with a lean operation, good cost structure, a self-funding business model, a strong technology base, and a very strong balance sheet.

My top priority during my short tenure is to ensure the continued integrity and discipline of this strong financial and market position and to keep us moving quickly in the right direction. MEMC's business model, focused on the innovation and asset-efficient cost structure that are the key strengths of the company, is the right one for these times.

MEMC has had a keen focus on efficiency maximization and on the return from each dollar spent on capital. This has produced the leading profitability and cash flow generation that we have enjoyed over the last six years. Now as we enter to 2009, even in this uncertain environment, our teams are focused on continued cost, yield, and efficiency improvements. We will continue to increase spending on R&D and our R&D and manufacturing teams will continue to work together to develop the next generation products that will drive our future growth.

These include silicon insulator which is ramping up to larger commercial volumes through 2009. We are also developing our further improvements to today’s products that will allow our customers to achieve greater efficiencies and performance, at a time when that is critical for them.

Our enhanced wafer products, such as our patented MDZ and defect-free Perfect Silicon wafers are designed to improve customer yields and save the customer money, something that is certainly top of mind in this environment. These products allow the customer to optimize their chip yield per wafer and potentially increase performance while reducing costs, and these products are available today.

Our R&D teams are also focused on improvements to our own internal manufacturing processes that will drive further efficiencies in our factories. These optimizing strategies are not only honing our semiconductor operations, they are being extended into solar, where we have already achieved significant technical advancements as we drive for the long-term efficiencies in solar silicon that the world has come to expect from MEMC in semiconductor silicon.

During 2009 we will work hard to improve MEMC's operational predictability to customers, to employees and to shareholders. For example, we plan to increase inventory levels somewhat to better support our customers and fit our strategic objectives. While we do expect to adjust manufacturing and support staffing levels in some locations to match the reduced sales and manufacturing volumes that will characterize the next months, we will continue of now, our practice of temporary plant shut downs when necessary and we will continue the redeployment of some fixed assets to better match our customers’ future requirements and our long-term cost reduction goals.

We are a 50-year old technology company playing in a long game that rewards technical excellence, close connection to customers, and continual product cost reduction. While it is clear that we must contend with a difficult near-term business environment, I believe that MEMC's strengths are well aligned to the challenges and opportunities of 2009 and future years.

With our strong net cash position, lean and adaptable cost structure, and great technology, MEMC is well positioned to weather the storm, strengthen our role in the emerging solar wafer market, and continue to deliver strong financial results over the long term.

I would also like to thank all of our employees for their important contributions to MEMC's accomplishments in 2008. MEMC is a rich collection of people from around the world united by their participation in two of the most stimulating and important global industries, the exacting semiconductor industry and the fast-emerging solar power industry. I am thrilled to be sharing this hard and interesting work with them while I am the Interim CEO.

With that, I will open up the floor to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brett Hodess – Merrill Lynch.

Brett Hodess – Merrill Lynch

Can you tell us what you are going to try to do with the operating expenses in this tough environment? Are they going to be pretty stable here or is there room to take some out of that? And also, can you address your comment on the tax rate? So the 16% is for both and you see that for the full year as well?

Kenneth Hannah

We were very cautious not to try to provide some guidance. We did, however, want to make sure that everyone could get an understanding of what we were dealing with and what we were using for planning purposes. What I would tell you is the opex, as you know, we have run very lean.

And big portion of our operating expenses is made up of R&D, as well as stock option expense, and so we will continue to manage that and make sure that we watch it very closely and if we see that this current environment is going to last for a longer period of time, we will act appropriately.

As far as the tax rate, we have been kind of using that 15% rate for the last couple of years and in anticipation of those numbers converging below 20%, 16% is our best estimate for the quarter and we will have to come back to you as the environment changes and the mix of income changes for the year.

Brett Hodess – Merrill Lynch

When you look at the drop in revenues in the first quarter here, do you expect that the volume on the solar side will drop along with the pricing and volume drops that you are seeing in semi and pricing drops in spot and stuff?

Kenneth Hannah

It depends on which of the scenarios you pick. We were very cautious to provide some insight that it could be up to 50% and depending on where you are along that range is going to ultimately determine how I would answer the question.

What I would say is pricing is under pressure. We are working through that to understand how much of it is real and how much of it is customers just wanting lower prices. A big piece of it is pricing in semiconductor reductions as opposed to solar volume reductions.

Brett Hodess – Merrill Lynch

I’m wondering because when you mentioned that you are working with some of your customers on long-term contracts and you want to try to preserve the revenue level, it sounds like you might have to be giving lower prices given the drops in channel pricing, etc. that we’re seeing, which would mean, of course, more volume to offset it.

Kenneth Hannah

That is certainly a good assumption. I chose my words very carefully in the prepared remarks. We are working through that, with those customers, we have not concluded and until we do so it’s really not appropriate for us to comment.

Operator

Your next question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

In terms of shuttering plant capacity, is there any reason why you couldn’t take out the Italian sites? Are there any labor laws there that would prevent temporary shutdown of that site first, since that is your higher-cost facility? And could you talk about wafering capacity, what your strategy is there to lower the under-utilized assets?

Marshall Turner

We don’t have any plans to do that. As I said in the remarks, we are always making adjustments to follow our traditional cost reduction curves that have always been very aggressive. We expect we will have to make some adjustments but we don’t have any plans of that type, or really any reason to look at those.

Jesse Pichel - Piper Jaffray

And can you give us a little more color on where your cash is invested and how should we think about interest income from that cash?

Kenneth Hannah

I think the most detail is really in the 10-Q that was filed for the third quarter. It breaks out the short-term investments and the long-term investments. I don’t expect any material changes, quarter-to-quarter, in the income generated from those investments. There is no significant change in terms of the make-up of those investments in Q4 as compared to Q3.

Jesse Pichel - Piper Jaffray

Could you quantify how many weeks of standing wafer inventory you think there was in the channel in Q3 and where that is today?

Kenneth Hannah

We are seeing our customers comment as they are releasing their earnings and we have seen numbers as high as 100 days.

Bill Michalek

There have only been a few guys so far that have reported. There are a lot more coming out in the next several days. And it’s difficult because of that but it’s also difficult because when you look at a forward date of inventory a lot of the semi guys, most that we have seen, have decided not to give Q1 guidance so that makes it even more difficult.

Jesse Pichel - Piper Jaffray

For your solar business, I understand you are having those wafers made, through tolling arrangements in many cases. Are you at least seeing the price of tolling agreements come down from where it was a quarter or two ago?

Kenneth Hannah

Interestingly enough, with the semiconductor downturn and the incremental poly that has become available as a result of that, and we’re actually seeing the opposite where there’s actually a lot of wafering guys that have now found some temporary polysilicon and those prices have firmed up.

Jesse Pichel - Piper Jaffray

For the actual tolling?

Kenneth Hannah

Right.

Jesse Pichel - Piper Jaffray

And where are those wafers going exactly? Because the solar end market seems particularly weak here in Q1. Do you think there is inventory being built of solar wafers in addition to semi wafers?

Kenneth Hannah

Well, I think that weak is all relative. I think we have been watching this industry grow at 40% and it doesn’t look like it’s going to grow at 40% here at the beginning of 2009 but it’s not clear that there’s going to be a precipitous decline either.

Operator

Your next question comes from Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

Mehdi Hosseini - Friedman, Billings, Ramsey & Co.

In the prepared remarks you were talking about helping your sili customers to remain profitable. I want to explore this and find out what you mean and is this the level of profitability is through something that is negotiable, as the sili customers see a very dynamic end market industry.

And also, you referred to the SOI, Silicon-on-Insulator opportunity, if you could also help us better define that market. It is based on my understanding that that market may not have as much growth opportunity as it did several years ago.

Marshall Turner

We haven’t said anything about and don’t intend to ensure the profitability of our customers. We are just all in a market where there is not much visibility. There is a lot of change, there is a lot of data that is incomplete, and in this kind of market we’re just trying to help them as best we can, come to a common understanding of best ways to attack it and do what we can to help them do, consistent with the integrity of our long-term contracts. So each customer has different issue but fundamentally this temporary increased supply of polysilicon and its effects working through the system seem to be an underlying driver.

The other shorter-term drivers of such companies that were liquidating inventory last quarter appeared to be a lot of the price quotes that you hear unattached to information about volumes, quality, things like this.

So it looks like the solar market, perhaps stimulated by this economic crisis and these pressures, is accelerating its maturing process and beginning to organize itself for the next phase of its development.

On SOI we don’t want to give any projections of that but we have a healthy SOI business that is meeting its objectives and we are finding increasing customer interest just in the ones that we have. It’s again the kind of thing that you expect to see in a downturn as customers examine their strategies for the future, they often make technology changes.

Operator

Your next question comes from Vishal Shah - Barclays Capital.

Vishal Shah - Barclays Capital

Just a clarification on the opex side. I believe you said $27.0 million in last quarter was a one-time thing. So should we assume opex goes up in Q1 or should it remain flat, from Q4 levels?

Kenneth Hannah

The actual number I reported was just under $24.0 million. And that included close to $15.0 million associated with the reversal of those options. It was really nothing else that was out of the ordinary in that number.

Vishal Shah - Barclays Capital

So we should assume close to $40.0 million of opex in Q1?

Kenneth Hannah

Well, if you take $24.0 million and add back $15.0 million you get $39.0 million. And we’re not providing any Q1 guidance in regards to expenses.

Vishal Shah - Barclays Capital

And can you talk about your assumptions for the semiconductor business in Q1, what kind of volume growth or volume decline you are assuming when you provide the 50% revenue decline guidance?

Kenneth Hannah

Well I think from a macro standpoint every day we get a new data point. This morning we saw a pretty large boundary talking about a 50% reduction quarter-on-quarter. We see a lot of data that talks about 35% to 40% reduction quarter-on-quarter. The environment is very uncertain and with every day we get an additional data point that we have to use to run our business.

Vishal Shah - Barclays Capital

On the solar contracts, in Q4 did you renegotiate some of these contracts to help your customers on pricing? Because essentially I think poly prices went down significantly in the second half of Q4 so some of these contracts, were they still fixed price or are these prices negotiated?

Kenneth Hannah

No, as I tried to allude to, we are working with them in Q1 for 2009. The contracts that are in place, we have been shipping wafers against those contracts at the contract volumes, at the contract prices. So what we are discussing here is specific to Q1.

Operator

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

Sam Dubinsky - Oppenheimer & Co.

Could you explain what normalized gross margin would be going forward if you excluded the under-utilization charges? Or put another way, what would the target gross margin be for the company, even if macro weakness persists? What can you do to keep margins higher than 20% going forward?

Kenneth Hannah

When you look at the various scenarios, obviously what we’re trying to share with everyone is that if the semiconductor demand is as bad as some of the preliminary indications are and our utilization is somewhere south of 50%, then that’s out of a normal operating range and we can’t just defer all of that incremental cost onto the balance sheet. That has to be expensed. And so that is going to depend on exactly what those levels are in Q1.

Sam Dubinsky - Oppenheimer & Co.

Do you expect 20% gross margins to be the norm for the next several quarters? Or are there things you can do to improve that? And how high could gross margins get?

Kenneth Hannah

It depends of your view of what you think semiconductor units are going to do in Q2, Q3, and Q4.

Sam Dubinsky - Oppenheimer & Co.

Maybe on a side note, could you give me an update on your polysilicon expansion plans?

Kenneth Hannah

We communicated to everyone last year that we had met the 8,000 metric ton capacity number that we had communicated. We are currently evaluating those plans. They are tied very specifically to the current market environment and whether or not we need to continue at the break-neck pace that we’ve been on to bring the incremental polysilicon capacity on line.

Sam Dubinsky - Oppenheimer & Co.

If you don’t expand capacity further for poly, what is maintenance capex for your business?

Kenneth Hannah

So we are not saying that we are not going to expand poly, to support our long-term contract customers, our partners. We need to continue to expand to be able to provide their incremental needs from a wafer standpoint.

What we have said historically about capital is that we would try to maintain capital as a percent of revenue in the 10% to 15% range and that the higher end of that was due to a lot of the 300mm and polysilicon expansion and that we would anticipate when that was over for that to go down to the bottom end of that range.

Sam Dubinsky - Oppenheimer & Co.

Do you think you can generate cash in 2009, with all the market turbulence?

Marshall Turner

Yes.

Operator

Your next question comes from Adam [Kropf] – Arbor Capital.

Adam [Kropf] – Arbor Capital

On the semi side, we have heard some industry players talk about a possible recovery towards maybe the middle part of 2009. Can you comment on that, as far as what you are expecting for order flow there?

Kenneth Hannah

We hear the same sorts of things that you do. And obviously we would welcome that. But if we were comfortable with our position there we probably would have provided some longer-term guidance. I think the fact that we didn’t is an indication that our customers are having a hard time understanding their customers demand flow and that is flowing right back into us.

Adam [Kropf] – Arbor Capital

And on the internal wafer slicing capacity, can you provide a quick update on that?

Kenneth Hannah

Are you referring to semiconductor?

Adam [Kropf] – Arbor Capital

On the solar side.

Kenneth Hannah

We are still subcontracting the wafer capacity at this time.

Adam [Kropf] – Arbor Capital

No further color as far as any further capital expenditures on that side?

Kenneth Hannah

No, obviously with what we’re looking at here in Q1 we are evaluating the need to do that and at what speed, and so as the visibility becomes a little clearer we will come back and share that information with everyone.

Operator

Your next question comes from Paul Clegg – Jefferies & Co.

Paul Clegg – Jefferies & Co.

Can you characterize your inventory breakdown? It looks like you built a lot of inventory this quarter, is there much poly in there than can be diverted to solar or is it all semi?

Kenneth Hannah

The majority of it is semiconductor finished goods.

Paul Clegg – Jefferies & Co.

When you are talking about under-utilization charges, I will be honest, I’m not quite getting what you are saying here. Are you actually talking about a specific charge or does that just show up in COGS as a function of spreading the same overhead over smaller volumes?

Kenneth Hannah

It’s the function of showing up in COGS as having a certain level of expense put over a smaller volume of units.

Paul Clegg – Jefferies & Co.

Do you have any visibility into how much of the decline in semi volumes that you are seeing, or at least what you saw in the fourth quarter, was related to inventory shutting versus end market demand?

Marshall Turner

I guess we see the same things you do. It’s hard for us to have a clearer visibility on that or on their customers’ demand than they do. So we are the prisoners of that. But we do anticipate that is an even bigger effect in Q1 than it was in Q4.

Paul Clegg – Jefferies & Co.

CEO search update? Anything new there?

Marshall Turner

I was wondering when you were going to ask. No, there is nothing to update. It’s proceeding. What is it, 12 weeks now since it started. That’s par for the course. We are very pleased with the quality of the candidates that have surfaced and Ward’s processing through them and making normal progress on it.

Operator

Your next question comes from Christopher Blansett - JP Morgan.

Christopher Blansett - JP Morgan

If you do get such a sizeable revenue decline in the first quarter, do you still believe your capital intensity will remain in that 10% to 15% range for 2009? Will you adjust it accordingly basically?

Marshall Turner

We will adjust it but we also are mindful of how we want to emerge from the downturn and what configuration we want to have. So both things under consideration, we not only want to meet the requirements of the current environment but we have a configuration in the company we want to be ready in the upturn and for the next phase of our business and we will also have capital expenditures in relation to that.

Christopher Blansett - JP Morgan

One of the questions earlier was about shuttering facilities. We are looking at a fairly sizeable downturn and some of your semi customers have talked about shutting facilities. What is your process of thought when you determine when do you have to make a hard decision like that, how long will you wait do you think to find out before you need to start to making these decisions. Because it’s obvious from your earlier comments you are not willing to do that yet.

Marshall Turner

I think I was asked a specific question about a specific site, a specific country, one of which we are expanding capacity in. So we just don’t comment on those plans. Obviously we don’t have plans to do it, we do have plans that apply on the migration of some of our equipment to lower cost sites that have been going on for years and will continue to go on. It’s just part of our general chase down the cost-reduction curve. It’s a key part of our strategy. So as things like that go on there might be times when you would address that but we aren’t at this point.

Part of the reason is that MEMC has got a very flexible model and a lot of experience changing the volume of production in their sites. And so there is an inherent ability to withstand these kinds of market change and customer demand within our current system that is typical of companies that can only adjust production by shuttering sites.

Christopher Blansett - JP Morgan

We may end up having a lower volume semi industry for a while here, so I was just trying to determine when does it make sense to you to make those hard decisions, like how long would you have to wait for that.

Related to your spot sales, given the market prices do you have any idea if you could characterize the price elasticity, or demand elasticity, related to these lower prices. Do you have any feel for that right now?

Kenneth Hannah

You’re talking spot poly sales?

Christopher Blansett - JP Morgan

Poly or ingots or whatever you sell into the spot market, whether it’s wafers even.

Kenneth Hannah

We are trying to move away from selling spot poly and making sure that we are strategically putting that polysilicon into wafers, one, to support our wafer customers and two, to make sure we are not part of driving those prices down.

We did include in the release, Q4, poly as a percent of revenue was 10%. It’s becoming a lesser and lesser piece of our revenue. That’s by design. It was opportunistic and at this point we would rather see it go into a wafer.

Christopher Blansett - JP Morgan

Any comments about spot wafer elasticity?

Kenneth Hannah

Right now we are working with our long term partners to make sure that they are our number one priority and so we will share the results of that when we have more information.

Operator

Your next question comes from Timothy Arcuri – Citigroup.

Timothy Arcuri - Citigroup

The first question leads into the second question. You said back in 2004, I think was the last time you talked about break-even and back then you talked about the break-even being roughly in the $400.0 million range and that was before you got into the solar business, so I’m wondering is the break-even of the company in the semi business, can I assume it is still in that range?

Kenneth Hannah

We don’t really look at a break-even from a semi versus a break-even from a solar. The poly piece of this, obviously there has been investment since 2004 in the polysilicon area as well as expansion on 300mm so as a result that break-even has increased from those historical levels.

Timothy Arcuri - Citigroup

I guess that was the answer to my second question, too. I’m still perplexed by the margin guidance. Even if I assume that you only do like $50.0 million, or some very low level of revenue in your semi business, and you have negative gross margin maybe to the tune of 10% or something, just in your semi business, the gross margin in the solar business can only be 30% kind of at best, which implies a material change to your long-term contract terms, to the tune of poly prices being cut by a significant amount relative to what your current contracts are actually signed at. So I am still trying to reconcile your guidance for gross margin relative to what you are assuming for your long-term solar contracts. It seems like you are assuming some material break in those terms and I’m wondering if you can help me out with that?

Kenneth Hannah

I don’t think it’s fair to say it assumes a material break to those terms. What it does is, at very low levels of utilization, there is a certain amount of expense that you have to take over that lower level of volume. And then pricing on both the semiconductor side as well as the solar side, we’re just wanting to give people an indication of what it could be if things don’t go the way that we hope.

Timothy Arcuri - Citigroup

As you lay out the realm of possible outcomes this quarter relative to these long-term contracts, are any of the potential outcomes on the table that one of our customers would outright walk away from a contract and you would be forced to sell all that product on the spot market. Is that all within the realm of possible outcomes that you are kind of looking at?

Kenneth Hannah

It is certainly in the realm of outcomes.

Timothy Arcuri - Citigroup

Is it contemplated in the guidance?

Kenneth Hannah

It has been contemplated in the guidance.

Marshall Turner

If someone would walk away.

Kenneth Hannah

Not necessarily that they would walk away but that the pricing would be lower.

Operator

Your next question comes from Stephen Chin – UBS.

Stephen Chin - UBS

On the cash flow question that you got earlier, are you budgeting MEMC to burn cash here in this March quarter given the cautious first quarter guidance or do you think you will be able to cut capex enough to stay cash flow positive?

Kenneth Hannah

We are going through and doing that evaluation. We certainly would hope to be cash flow positive and a lot of that is going to depend on the outcome of the various scenarios.

Stephen Chin - UBS

Maybe I could ask that a different way. What are you budgeting some of the inventory levels in this March quarter? I guess we saw it doubling the inventory last quarter, and should we expect a similar type increase here in this March quarter?

Kenneth Hannah

We certainly wouldn’t anticipate a doubling of our inventory. It went from $40.0 million to roughly $80.0 million. What you are assuming would go from $80.0 million to $160.0 million, which would be an $80.0 million change in cash.

Stephen Chin - UBS

About the sales guidance being down 50% sequentially, does that assume renegotiation of all four of the solar wafer customers or just maybe one or two?

Kenneth Hannah

It doesn’t assume renegotiation of any of them. What we have allowed for is some flexibility.

Marshall Turner

Particularly flexibility in their volumes.

Stephen Chin - UBS

Of all four?

Kenneth Hannah

For all of them.

Marshall Turner

They are all facing the same market. What’s unclear is really how much they are going to be able to address their markets and how solid their forecasts are so we allowing for that.

Stephen Chin - UBS

Maybe you can share your views on the polysilicon industry utilization rates. If we look back at this 2002 down cycle, the polysilicon industry saw utilization rates decline to I think it was 45% or so. Are you going to try to size MEMC for that type a decline and do you think utilization rates for this polysilicon industry can decline even lower than that 45% range, if given the larger number of polysilicon entrants?

Marshall Turner

No, we are not going to do that, although it’s possible overall. We don’t think ours will and we don’t see any evidence of it, given the increased solar wafer demand.

Kenneth Hannah

I think it’s important to clarify that most of what we’re seeing in terms of polysilicon is not coming from new entrants, it’s coming from a softening in the semiconductor industry and so the real answer to that question revolves around what your belief is in terms of semiconductor recovery.

Bill Michalek

We haven’t seen a whole lot of new entrants coming into the market. You have seen or heard comments about construction projects in China being halted and a lot of smaller guys that were trying to get into the market that have had to stop their projects. There is a rumor going around a week ago that some were dismantling a plant. So I think there is not as much of those new entrants coming as you may have expected six months ago.

Operator

Your next question comes from Steve O'Rourke - Deutsche Bank Securities.

Steve O'Rourke - Deutsche Bank Securities

Can you comment on percentage declines in wafer pricing in Q4 and what you expect in Q1? Just average prices for overall wafers.

Kenneth Hannah

Are you talking about for semiconductor wafers?

Steve O'Rourke - Deutsche Bank Securities

For semiconductor wafers.

Kenneth Hannah

Q4 we had communicated kind of mid- to high-single digit price declines.

Steve O'Rourke - Deutsche Bank Securities

Any expectation for Q1?

Bill Michalek

Q1 is down about high single digits.

Steve O'Rourke - Deutsche Bank Securities

On cash, what is a planned use for cash? Would you consider some share buybacks with the stock where it is here?

Kenneth Hannah

We have been buying back shares. The more uncertain the environment the more we want to conserve our cash and part of the action required here requires us to get a better feel on what the visibility is with our customers. So we are being very prudent with our cash and we think that it’s a real area for strength for the company and we would like to use it to continue to improve our position.

Steve O'Rourke - Deutsche Bank Securities

On the long-term contracts you have with the solar customers, is it fair to assume that at least in the near term the take-or-pay elements of these contracts don’t really apply?

Kenneth Hannah

I don’t think that’s a safe assumption at all.

Steve O'Rourke - Deutsche Bank Securities

How should we think about that? It seems like you have volumes coming down. Is it significantly less than what some of these contracts had dictated previously?

Kenneth Hannah

Take-or-pay is not an option on the table.

Operator

Your next question comes from Stuart Bush - RBC Capital Markets.

Stuart Bush - RBC Capital Markets

So one of [inaudible]’s arguments was that if a solar customer could not perform and would actually breach a contract you could potentially collapse their deposits. As you have outlined before, the deposits didn’t all come up front. So can you give us an idea of what stages they come in and if all of your solar customers are up to date on their payments?

Marshall Turner

That part has not changed. I want to make it clear, there haven’t been any changes to the solar contracts other than the ones we announced last year. So all of those elements are still in place. In our guidance we are allowing for the possibility, given the economic conditions they are facing.

Stuart Bush - RBC Capital Markets

I understand but you hold deposits, or prepayments, that they put in as part of those contracts. They come in stages, right?

Marshall Turner

These are annual contracts, not quarterly.

Stuart Bush - RBC Capital Markets

So are all your customers up to date on the prepayments that they are required?

Kenneth Hannah

We filed all of the contracts as they have been signed and so in there it states the contract years in which each of these contracts are performed over. And so we have two that are 12/31 year end and those payments have been made. And we have one that had a payment that’s not a 12/31 year end that had a payment due, that has not been made and we are working with them to collect that.

Stuart Bush - RBC Capital Markets

So what is the total amount of prepayments you have in hand right now?

Kenneth Hannah

It’s approaching $300.0 million. That’s the cash portion. There are also letters of credit that we hold that is of a similar amount.

Operator

Your next question comes from Paul Leming - Soleil Securities.

Paul Leming - Soleil Securities

I just wanted to take a minute to pursue the issue of contract renegotiations with some of the solar customers. Is it fair to think in terms of you wanting to get your solar customers competitive with the pricing in Hemlock and Wacker’s long-term contracts? I know you sell wafers but if you back out kind of the tolling fee you can get back to a value of polysilicon in your contracts and my understanding is that your contracts are at significant premiums, from a polysilicon standpoint, the value of the poly, to Hemlock and Wacker. To me it makes sense in the new environment we are in to want to get your customers competitive with Wacker and Hemlock’s customers. Is that a reasonable way to think about the negotiations that are going on?

Kenneth Hannah

[inaudible] characterize it as to be competitive with Wacker and Hemlock. I think it’s more of that they’re under pricing pressures and we have a situation right now where you have a semiconductor and a solar environment that are going through some extreme macroeconomic pressures.

A semi and solar downturn, if you will, along the same time line was not something that was premised as part of the long-term contracts. And so there is a short-term opportunity here for us to work together to make sure that they are competitive period.

Marshall Turner

We are not looking to one specific piece of the cost chain to pay attention to because those vary a lot and especially in this market and especially with the inventory spurts that have come about in both the raw material and wafer. And as I said before, there is some segmentation and efficiency differences among materials and among different wafer technologies and those are emerging as stronger and stronger factors. So it’s difficult to generalize about that but at the end of the game someone is selling us a module and we want our long-term customers to be able to line up appropriately in their market places, consistent with our needs as a supplier to them. So we are looking at it holistically rather than thinking about a particular artifact of a supply chain.

Paul Leming - Soleil Securities

Let me try one last angle on this. Would you disagree with the statement I have made that if I back out a tolling fee out of your solar wafer contracts that the embedded value I’m left with for polysilicon is at a very substantial premium, has been at a very substantial premium to the polysilicon prices embedded in Hemlock and Wacker’s long-term contracts with their solar customers?

Marshall Turner

I think you can see the data. But again, I don’t want to comment on our relationship to any particular part of the supply chain because there are other costs that are involved and different capabilities of different suppliers in the chain.

Paul Leming - Soleil Securities

Are you still absolutely committed to hitting that interim polysilicon capacity target that had been previously articulated on the past to 15,000 tons. It’s been said pretty clearly that you would kind of get half way there from 8,000 to 11,500 by the end of this year. Is that still absolutely on track or is that absolutely open to consideration, looking at the environment we’re in today?

Kenneth Hannah

What I would tell you is that we had been on a break-neck pace to expand our polysilicon and as a result of what’s happening in the market place we are looking at the amount of overtime and expediting costs that are associated with continuing at that pace and are considering whether or not we should back off of that by a month, or two months, or three months.

We are evaluating that in light of what’s happening in the current market place but we are not saying, one, that we are going to stop or two, there is some long delay that is outside of our control. Again, we are going to be prudent and make sure that we spend appropriately and that we make the appropriate trade-offs given what’s happening in the current environment.

These polysilicon expansion plans are very long-lead items and there is some level of flexibility around us being able to delay some of the expenditure, especially in regards to expediting and overtime, that may make sense.

Paul Leming - Soleil Securities

Rather than a percentage range, is there a dollar capex number or a dollar capex range that you could give us for 2009 at this point?

Bill Michalek

No, there’s not.

Paul Leming - Soleil Securities

Are you running[Morano] in Pasadena, are you running at 8,000 tons today. Are you running at 100% of capacity in poly?

Kenneth Hannah

No, we’re not and what we had said historically is that those expansion plans, when they were put in place, it would take up to six months to get to anything close to kinds of levels. And as you know, that six month period would be out in the April time frame.

Paul Leming - Soleil Securities

I asked that question badly. I just want to know are you taking planned down time in any of your poly facilities or are you operating to produce as much poly as you physically can within the constraints of that ramp up you were just talking about?

Marshall Turner

We have planned down time as a function of operating at full capacity, of course.

Paul Leming - Soleil Securities

Beyond planned down time. I’m just trying to understand, are you consciously swaddling back rates to produce less than the full amount of poly you are capable of at a point in time?

Marshall Turner

We believe the market for poly is a good one and we are producing poly according to our original plans.

Bill Michalek

Just to finish up, the inventory we built, as Ken mentioned, was virtually all semiconductor, mostly semiconductor, so our poly inventory is still lower than we would like it, so we would still like to build some inventory. And it goes on our balance sheet at cost.

Marshall Turner

Part of that goes to my remarks opening up, that we want to become more predictable and part of becoming more predictable is looking for opportunities to smooth our production processes consistent with our planned shut downs and in the wafering side it has become a tradition in the last couple of years. So increasing inventory, particularly poly, is part of that.

Operator

Your next question comes from Benedict Pang - Caris & Company.

Benedict Pang - Caris & Company.

First on the semiconductor side, you mentioned the pricing declines you expect in the first quarter. Would you typically see seasonality that’s in the second quarter and hopefully some pricing stabilization?

Bill Michalek

Typically in a unit basis in semiconductor, it’s the second quarter is almost always better than the first quarter and we hope that will be the case this year. Even in a down environment the second quarter should be better than the first. But we will have to see. I think a couple of the guys that have offered guidance have alluded that they are hoping that would be the case and we certainly do as well.

Benedict Pang - Caris & Company.

Under that scenario, what would be the ending Q1 inventory we should look at? For wafers?

Kenneth Hannah

We’re not providing ending inventory projections at this time.

Benedict Pang - Caris & Company.

Just a clarification on the contracts, if I understand you correctly what you’re saying is that those contracts aren’t holding in the first quarter and that’s why you’re not able to give the guidance.

Kenneth Hannah

I don’t think we were trying to allude that the contracts aren’t holding in the first quarter. We were trying to allude the fact that we are in discussions, given what’s happening in the first quarter, to make sure that we have a win-win situation.

Benedict Pang - Caris & Company.

Is the renegotiation around the pricing or volume, etc., is that all dependent on the spot price of polysilicon? As long as the spot price goes down you renegotiate or alter these contracts based on that one variable? Is there something that would cause the contracts to stabilize?

Kenneth Hannah

They are based on the pricing of the wafer itself. Obviously the poly is a large component. The stabilization comes when the semiconductor environment improves and that polysilicon goes back to what it was originally manufactured for and that is for semiconductor and then the solar environment kind of goes back to the supply-demand economics that it was prior to the down turn in semiconductor.

Benedict Pang - Caris & Company.

And would our first sign for that be stabilization of just the spot polysilicon price?

Kenneth Hannah

That is certainly an indicator.

Operator

Your next question comes from [Atas Maliek] - Morgan Stanley

[Atas Maliek] - Morgan Stanley

I just want to go back to Tim’s question, for our March quarter is one of your better case or worse case scenario modeling the polysilicon price and coming down to the cash cost level?

Kenneth Hannah

No, it does not assume that polysilicon pricing is at cash cost.

[Atas Maliek] - Morgan Stanley

On the balance sheet are there any liabilities from employer pension issues, or legal issues, or lease agreements that we need to be aware of or concerned about?

Kenneth Hannah

Not that I can think of.

[Atas Maliek] - Morgan Stanley

Can you give a guidance for D&A for 2009?

Kenneth Hannah

We are not providing any 2009 numbers at this time.

Marshall Turner

Back to the previous question, I think the emphasis on polysilicon pricing is understandable but as I mentioned earlier, there are a lot of other influences, including the cash needs of some of the intermediates and their situation you have had the opportunity to read a lot about and the varying costs that are applied by different manufacturers at different stages in the process. Obviously polysilicon pricing has an underlying influence but it isn’t the sole influence or what I would hook as much of it on as you did in your question.

Operator

Your next question comes from Gordon Johnson - Hapoalim Securities USA Inc.

Gordon Johnson - Hapoalim Securities USA Inc.

My question deals with inventory and polysilicon pricing. When I look at guys like Wacker Chemie and Hemlock and [R. E. Cieve] and LDK and look at what they are guiding, from a shipment perspective not from a nameplate capacity perspective. They’re really not guiding any significant declines in year-over-year supply growth. So when I look at your inventory and I look at polysilicon pricing and I ask myself in a commodity market when supply is exceeding demand, usually price equals marginal cost. Why won’t polysilicon pricing continue to fall below where it is now? And if you could just update us on where you see polysilicon pricing right now.

Kenneth Hannah

We are not going to comment on polysilicon pricing.

Gordon Johnson - Hapoalim Securities USA Inc.

Can you comment on where you see spot pricing right now?

Bill Michalek

We mentioned that spot pricing had come down in Q4 and beyond that we haven’t indicated what a Q1 might look like. Obviously as you can get a feel based on the way we’ve answering these questions and the way we structured the release, we are allowing for a wide degree of uncertainty as our customers are having a difficult time figuring out what’s going on in the end markets. So I think if you can tell us what is going to happen in the semiconductor market and when that polysilicon flows back into solar, then we could probably have a better idea how quickly the prices change in the poly market.

Gordon Johnson - Hapoalim Securities USA Inc.

And what is your current marginal cost for producing polysilicon?

Kenneth Hannah

We’re not going to provide that information.

Gordon Johnson - Hapoalim Securities USA Inc.

So I guess you cannot provide any information on the polysilicon pricing trends and how you see that?

Kenneth Hannah

We have. As we went through Q4 we tried to share with you directionally what we were seeing. There has been a lot of information in the press. As we come into Q1 we are not continuing to see that pricing decline but that doesn’t mean that we haven’t contemplated those scenarios and the range of outcomes that could be considered in our planning.

Gordon Johnson - Hapoalim Securities USA Inc.

You clearly built some inventory. You said the majority of it was semiconductor inventory. I guess the question I have is a lot of your semiconductor sales seem to really happen towards the end of the quarter. You build that inventory specially for semiconductor companies and then you can’t shift it over to solar. The semiconductor inventory you built, is that for specific semiconductor customers and you can’t shift over to solar or is that stuff that you actually shift over to the solar sector if the demand in semiconductor isn’t there?

Kenneth Hannah

It’s a mix, depending on the type. But for the most part it was built for semiconductor and as we mentioned in our update on December 17, we had some customers that, really for the first time, were coming back to us after we had already produced, or had started production, of product for them saying that they were not going to be able to take it. So that’s what a good portion of that is related to.

Gordon Johnson - Hapoalim Securities USA Inc.

And you have stated before that you are looking to sign another long-term contract, the size of Jantech, I believe. And you said that was dependent on what happened in the semiconductor market. Can you give us an update on the size of that contract and if that is still a plausible option.

Kenneth Hannah

It’s not about the size of the contract, it’s about how much supply do you have available and can you find the right long-term partner.

Gordon Johnson - Hapoalim Securities USA Inc.

Is that something you are still aggressively seeking out or is that something that has been put on the back burner? Another long-term contract.

Kenneth Hannah

Those are discussions that we are willing to entertain.

Operator

Your next question comes from Dan Rice - Collins Stewart.

Dan Rice - Collins Stewart

I think you mentioned that you were shuttering some plants. Are those just the semiconductor wafer plants, because you then later said you are not shuttering any of your polysilicon plants at this point.

Marshall Turner

We didn’t say we are shuttering any plants.

Dan Rice - Collins Stewart

Maybe did you say that you were considering it or that is an option on the table for future quarters?

Marshall Turner

If you took that, we misspoke. We are not.

Dan Rice - Collins Stewart

The take-or-pay agreements, what you described earlier, will you try to hold your customers to the revenue of the contract, if it means giving them more wafers at a lower ASP but the revenue would be maintained, is that is what is still in fact in the take-or-pay agreement for the year?

Kenneth Hannah

I don’t want to negotiate here on the phone. These are ten year take-or-pay contracts. They all have eight to nine years left. We are talking about 2009. A very specific issue that we are all dealing with and that is a macroeconomic crisis. We said in the release that we were wanting to work with them and keep the total revenue value of the contract whole for 2009 and we are talking about one quarter out of this entire contract, looking to help our partners.

Dan Rice - Collins Stewart

But you later said that the take-or-pay aspect is still, but it’s an annual take-or-pay so some are taking too little in the first quarter wouldn’t necessarily effect an annual contract but at some point there would be a point in the year where you would want them to be whole on the contract for the year, whether that’s December 31 or earlier.

Kenneth Hannah

That’s correct.

Operator

Your next question comes from Satya Kumar - Credit Suisse.

Satya Kumar - Credit Suisse.

Is there any way we can think about polysilicon price, you have assumed for your Q1 guidance where poly spots, sili wafer, wafer contracts. There is so much sensitivity to earnings, we’re going from $0.64 to $0.10 +/-. Having some disclosures would really help. Are you assuming a three-digit or two-digit number, maybe a very wide range at least. Obviously we know directionally prices are going down but they are going down a lot and obviously sensitivity to earnings is quite high. How could you help us there on that?

Kenneth Hannah

I’m not sure that I’m going to be able to help you with that specific question.

Satya Kumar - Credit Suisse.

How about a different one. In terms of your headcount right now, where is that? What portion of the headcount is in the U.S. and can you give us a sense of what portion of your work force is involved with the polysilicon manufacturing part and what portion with the semiconductor wafering part?

Kenneth Hannah

The headcount associated with the polysilicon, as we have stated a number of times, is very small. That’s a very knowledged and sensitive business. There are not a huge number of people involved in that process.

Satya Kumar - Credit Suisse.

And what portion of your headcount is in the U.S. versus outside the U.S.?

Kenneth Hannah

If you were to go look at the breakdown of our revenue as we’ve provided, the headcount percentages across the U.S. is not grossly different than kind of the way the revenue stacks up. I don’t know that we’ve ever provided that headcount information publicly.

Satya Kumar - Credit Suisse.

At this point do you have any plans to lower your headcount?

Kenneth Hannah

We have not stated any plans. There is certainly a lot of evaluation that is going on and it ties to how long we think the current environment is going to persist.

Marshall Turner

We have said we do expect to adjust manufacturing staffing levels in some locations to match reduced sales and manufacturing volumes.

Satya Kumar - Credit Suisse.

Are the 300mm gross margins above or below your average gross margins in Q4 and in Q1?

Kenneth Hannah

I’m not comfortable answering that question.

Operator

Your next question comes from Luke Langford - Langford Capital Management.

Luke Langford - Langford Capital Management

On the buyback, it looks like we bought back about 2.0 million shares this quarter and a significantly higher amount last quarter. And I heard either Marshall’s or Ken’s comments that you are wanting to be conservative. Going back on your previous 10-Ks and just the way you have structured the company, a lot of the guidance was that you wanted to be opportunistic on times just like this to sort of right-size the capital structure. So it seems like we have a really good opportunity here to pull in shares and reward long-term shareholders going forward when the cycle does turn. I’m just curious if you could break out of your cash on hand, what part you would consider actively deploying now in the buybacks. And why you would view the need to have over $1.0 billion in cash on the books now in a conservative posture without putting some to the buybacks now? Or I should say a greater amount, given the reduced valuation.

Kenneth Hannah

Number one, we are very fortunate to have over $1.0 billion of cash on our balance sheet right now. That is a significant area of strength for our company. In terms of the buyback program specifically, we have a billion dollar program that has been authorized and we have spent somewhere in the $400.0 million range towards that and we’re evaluating the best uses of that cash. With the levels of uncertainty, obviously there are going to be some opportunities to put that to use and we will have to evaluate whether buying back shares or acquisition or some other opportunity is the best use, given the times that we’re in today.

Luke Langford - Langford Capital Management

But it’s fair to say you are running modeling at different share prices to look at what kind of return on investment that may give you versus an acquisition and so forth, to compare the uses of capital.

Marshall Turner

We’re certainly looking carefully at our uses of cash for our customers clarifies but also the kind of future opportunities that we see clarifies. But I think the first way to think about our cash balance is that it gives us a great deal of patience and the ability to make great long-term decisions for the future growth of MEMC unaffected by some of the short-term [inaudible] that we would otherwise have.

Luke Langford - Langford Capital Management

I don’t want you to take me the wrong way. I am not all upset at our cash balance, more if you are looking to get more aggressive given the sort of ridiculous levels of the valuation.

Operator

Your next question comes from Jeff Osborne - Thomas Weisel Partners.

Jeff Osborne - Thomas Weisel Partners

I’m in your 10-K now trying to track down which of the contracted customers doesn’t end on 12/31. I was wondering if you could help me out on the name of the customer that didn’t make the scheduled prepayment and then my assumption would be that you are no longer shipping wafers until you receive that payment?

Kenneth Hannah

I’m not comfortable providing the name of that customer. That’s not appropriate.

Jeff Osborne - Thomas Weisel Partners

Would it be the 10-K document, though, where I could find where each contract is in the public domain and when they would end?

Kenneth Hannah

That’s right. It’s safe to assume that until there is a make-do plan that we won’t be shipping wafers to them, either.

Operator

Your next question is a follow-up from Sam Dubinsky - Oppenheimer & Co.

Sam Dubinsky - Oppenheimer & Co.

On the gross margin front, can you just walk me through again how you get the 20% gross margin next quarter? Maybe just discussing what is the fixed cost in the semi business or the solar business versus the variable costs. And then also if you can explain if 20% will be a trough for the year, worst case scenario. Then maybe just address opex going forward.

Kenneth Hannah

From a gross margin perspective we gave a revenue kind of scenario that says revenue could be down by as much as 50%. And the make-up of that revenue number is going to determine how much of our fixed cost, if you will, and inefficiencies associated with running at levels that are considerably lower than normal. That expense is a period expense. And when you get down to low levels of utilization, that becomes a very meaningful number.

Sam Dubinsky - Oppenheimer & Co.

What is the absolute dollar of the fixed cost? If you can just disclose that.

Kenneth Hannah

I’m not comfortable disclosing our cost structure in that kind of detail.

Sam Dubinsky - Oppenheimer & Co.

If you really believe you are going to beat this revenue run rate going forward, is it a safe assumption that opex would come down? Because historically opex has been at around 7% to 8% of sales and now it has got to be, next quarter, somewhere near 20% of sales.

Kenneth Hannah

Yes. I mean, if we see that these current levels of the environment are going to continue for a long period of time, assume that Marshall and I are going to do the right thing for the company and make sure that it is structured in a way to be at a position of strength. We are very fortunate in that our opex is very lean and keep in mind, that number includes R&D and it also includes a pretty large number associated with stock option expense, which is a non-cash item. And so I think you’ve got to pull those pieces out and then look at kind of what’s left to run the business and it’s pretty lean.

Sam Dubinsky - Oppenheimer & Co.

So if you did restructure the business to downsize it to current revenue run rate, what would be an opex you can associate with that $200.0 million to $240.0 million run rate?

Marshall Turner

I can’t go with your assumption. We have a Q1 with customers liquidating inventories is a huge artifact of our sales forecast, as you have read. To do that you would to assume that the whole semiconductor industry has had a giant reset button pressed and we don’t think that’s the case.

Operator

Your next question is a follow-up from Paul Leming - Soleil Securities.

Paul Leming - Soleil Securities

On an industry-wide basis I am hearing from people in the semiconductor wafer chain that Q1 shipments for the industry of semiconductor-grade wafers could be down 55% from where they were last summer. Is that a reasonable forecast in your mind, given what you are looking at for industry shipments of wafers? I’m talking about something in the 1.0 billion to 1.1 billion square inch range for the industry in Q1.

Kenneth Hannah

I think that’s certainly in the realm of possibility.

Paul Leming - Soleil Securities

If you had to take the over-under on it, 1.0 billion to 1.1 billion, would you take the over or the under?

Kenneth Hannah

I would take the right on. Again, it’s consistent with the announcements by some of the customers. Right.

Paul Leming - Soleil Securities

Yes, I think that’s where the industry is but I just wanted to make sure I was taking the company comments to the right industry number.

The other thing I wanted to go back to is all these questions you’re getting about polysilicon prices collapsing and I want to ask what I admit is a very leading question. If the semiconductor industry ships 1 billion square inches of wafers in Q1, that frees up something like 10,000 tons of polysilicon to move from semi to solar and I think that volume is moving from semi to solar and you’ve made the comment earlier in the call that tolling placing is actually firming because all of this shift is taking place. My sense is if you’ve got polysilicon at $65.00 to $70.00 a kilo, which a lot of the big semi wafer producers have poly at those prices, you can pay a tolling fee, produce a wafer and demand is incredibly healthy for those wafers at a price. Is that a reasonable assessment of the market?

Marshall Turner

It’s a reasonable assessment of the market that we are learning a lot about its elasticity at the selling module end for sure. And partly because of those factors that you just said. So again, we’re in the early stages of a new market with shake-outs among suppliers going on at a rapid pace, particularly in Asia, fluctuations in inventory, and fluctuations in the subsidies and really the finance at the end user level. It’s a fascinating operation. And so it appears that we’re testing with some of the prices, we’re testing levels of elasticity.

The polysilicon price, again, is important but it’s important for participants in it, like us, to really understand what part of the market we want to participate in and with what. While we’ve had a tendency to be a strong player in the spot poly market in the past, that’s not a big aspect of our future strategy.

Paul Leming - Soleil Securities

Do you see any signs that as tolling fees are firming that the solar wafers that are flowing out of that are piling up in inventory anywhere? Do you hear reports of big build-up of solar wafer inventories throughout Taiwan and China today?

Marshall Turner

We have not but that does not necessarily mean it’s not happening. But as Bill said a while ago, this is 40% growth in demand last year and in the past and that demand can still be impacted hard by some of the end user issues and still be a healthy growth rate with those wafers flowing out.

Operator

Your next question comes from Dan Sobel – [firm inaudible]

Dan Sobel – [firm inaudible]

I am looking at your press release and it says cash and investment balances of $1.4 billion and I wanted to get some clarification on that. I’m using 225.0 million shares so I get about $6.25 a share. Is that correct, of cash investment balances?

Kenneth Hannah

That’s correct.

Dan Sobel – [firm inaudible]

And are the investment balances short-term investments that are effectively liquid? Cash-like investments?

Kenneth Hannah

Yes. The fair value of those investments, there is nothing that is greater than a 90-day liquidation. Most of it is very short term but there are some things that could take up to 90 days.

Dan Sobel – [firm inaudible]

Within that $1.4 billion, you mentioned earlier about prepayments, $300.0 million on hand.

Kenneth Hannah

That would be included in that balance.

Dan Sobel – [firm inaudible]

You also mentioned letter of credit for $300.0 million. How should I think about those?

Kenneth Hannah

Those are not on our balance sheet. Those are held at banks and if the terms aren’t met, then we have an opportunity to go collect against those. They are irrevocable and so we don’t carry them on our books in any way but they are available to us.

Dan Sobel – [firm inaudible]

Can you disclose the total value of the backlog of the wafer contracts, those ten-year deals?

Kenneth Hannah

Yes, we’ve said $18.0 billion.

Dan Sobel – [firm inaudible]

If I add in the letters of credit, $300.0 million, I get effectively $7.50 of cash investment balances and let’s call them letters of credit, and your stock is trading at $11.00 after market. That’s $3.50 so to speak, enterprise value that’s left over. Am I missing something? I’m just looking back over the last ten years and other than the few months during the dot-com meltdown, your stock has never been anywhere close. Is that the way to think about it?

Bill Michalek

Your math certainly works.

Dan Sobel – [firm inaudible]

The Obama administration has spoken about renewable energy and so on as being a key focus in the first couple of years. Do you see yourself as a potential beneficiary of that stimulus package?

Marshall Turner

We’re all for hope, but it’s corrosive as a business value so we’re just going to wait and see.

Operator

There are no further questions in the queue.

Bill Michalek

Thank you all for participating. There will be a replay on our website at www.memc.com.

Operator

This concludes today’s conference call.

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Source: MEMC Electronic Materials Inc. Q4 2008 Earnings Call Transcript
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