MEMC Electronic Materials Q1 2009 Earnings Call Transcript

Apr.24.09 | About: SunEdison (SUNEQ)

MEMC Electronic Materials, Inc. (WFR) Q1 2009 Earnings Call April 23, 2009 5:00 PM ET

Executives

Bill Michalek - Director, Investor and Media Relations

Ken Hannah - Senior Vice President and Chief Financial Officer

Ahmad Chatila - President and Chief Executive Officer

Analysts

Paul Thomas - Bank of America

Stephen Chin - UBS

Elaine Kwei - Piper Jaffray

Christopher Blansett - JPMorgan

Rafi Hassan - Friedman, Billings, Ramsey

Paul Leming - Soleil Securities

Stuart Bush - RBC Capital Markets (U.S.)

Atif Malik - Morgan Stanley

Benedict Pang - Caris & Company

Satya Kumar - Credit Suisse

Operator

Ladies and gentlemen, thank you for standby. Welcome to the MEMC First Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will be conducting a questions-and-session, instruction will be given at that time. (Operator Instructions). As a reminder, this call is being recorded.

I would now turn the conference over to our host, Director of Investor and Media Relations for MEMC Mr. Bill Michalek. Go ahead, sir.

Bill Michalek

Good afternoon and thank you for joining our first quarter earnings conference call. With me today are Ahmad Chatila, President and 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.

Let me now turn the call over to Ken to review the financials and outlook.

Ken Hannah

Thanks, Bill.

As expected, MEMC's first quarter 2009 sales reflect the continuation of the dramatic reduction in near-term semiconductor and solar demand that began in the fourth quarter of last year.

Our first quarter sales were $214 million, which was inline with our original outlook of down 50% sequentially. The sequential decrease in sales was primarily the result of lower wafer volumes for both semiconductor and solar applications and lower prices associated with those products.

Gross profit in the quarter was $19.7million or 9.2% of sales, down from $193 million or approximately 45.3% of sales in the fourth quarter of 2008. This reduction was primarily the result of significant under utilization charges and fixed costs associated with the abnormally low factory utilization rates as well as lower pricing for semiconductor and solar products.

This quarter's 9.2% gross margin was lower than our original forecast of margins in the 20% range due to continued pricing declines over the course of the first quarter on short-term solar wafer sales. Pricing negotiations for second quarter semiconductor sales that resulted in the need to write-down inventory values for those products in the first quarter and under utilization charges being higher than anticipated, driven by additional inefficiencies in our factories and such low volumes.

First quarter 2009, operating expenses, which include charges of $6.7 million relating to lay offs in three of the company's manufacturing facilities were $46.1 million or 21.5% of sales. This compares to fourth quarter operating expenses of $28.2 million or 6.6% of sales, which included a non-recurring benefit of $15.5 million relating to the forfeiture of options previously disclosed.

The company reported an operating loss during the quarter of $26.4 million, which compares to operating income of $164.8 million in the 2008 fourth quarter. Net income for the first quarter, including a tax benefit of $18.9 million was $2 million or $0.01 per share.

This includes $1000 charge relating to the decrease and the value of Suntech warrants. In previous quarters, the company has presented non-GAAP earnings per share figures, using the company's estimated cash tax rate.

The company believes that in the future, differences in the company's GAAP tax rates and cash tax rates will be immaterial. Therefore, for comparison purposes going-forward, our current GAAP earnings per share figures, excluding the impact of the Suntech warrants will be essentially the same as the previously reported non-GAAP figures, excluding the Suntech warrants impact.

We will continue to report earnings per share numbers with and without the Suntech warrant, because the value of the warrant is difficult to estimate, varies and has no cash affect on our financial statements.

During the quarter, the company consumed operating cash of $14.6 million, compared to operating cash flow generated of $123 million in the 2008 fourth quarter, driven primarily by an increase in inventory levels and delays in the collection of certain accounts receivables.

Capital expenditures for the first quarter totaled $53.2 million, or 24.9% of sales. Free cash flow defined as operating cash minus capital expenditures consumed $67.8 million in the first quarter. The company's balance sheet remained strong with cash and investments of $1.3 billion and virtually no debt.

Now, turning to business conditions; wafer demand for semiconductor applications, which showed significant weakness for most of the last two quarters has begun to show some signs of improvement in the early part of the second quarter. While the demand for semiconductor wafers is encouraging, our factory utilization rates still remain below normal operating ranges, and unfortunately wafer pricing for semiconductor and solar applications are declining at above of normal rates in these uncertain macroeconomic times.

These factors are expected to continue to pressure margins in the near-term. Due to continued uncertainties in the marketplace and limited demand visibility amid the current macroeconomic environment, the company is not comfortable providing a specific revenue or margin outlook for this quarter.

It's important to understand that this decision is in no way an attempt to hinder transparency, but simply the result of the uncertainty of semiconductor and solar volumes as well as pricing dynamics and the potential variability of these factors throughout the quarter.

Let me now turn the call over to Ahmad.

Ahmad Chatila

Thank you Ken, and good afternoon to everyone.

I am pleased to address you for the first time since joining MEMC on March 2nd. Since that time, I've been meeting with our customers, suppliers, and hundreds of employees around the world, and conducting a very intensive review of our entire business. And I like what I see.

While it's clear that we are in a difficult economic environment that is hurting to end-markets in which we compete and this is certainly affecting our near-term financial results, there is no doubt that this company has tremendous strength, and perhaps more importantly in my opinion, tremendous potential.

Although it's early in my tenure and premature to provide the comprehensive business plan to you today on this call, I would like to share some of my early thoughts and insights on a few priorities that maybe helpful for you.

One of my key priorities is to ensure that we are doing everything we can to make our customers successful. In my view, there are few things that are more important than this. This is one area, where I believe there is opportunity for MEMC to do even better. On the semi-side by doing things like reducing frequency of our factory shutdowns, putting some buffer stock and consignment inventory back in place and expanding our support capabilities, we can add even more value for our customers.

Through these efforts as well as initiative to complement our strong R&D capabilities that I'll discuss in a moment, we will further strengthen our core semiconductor operation and improve our market share position.

Now on the solar side. We believe we are providing some of the highest quality product in the industry. But we have also been working tirelessly to ensure that we do our best to make our long-term and emerging customer successful.

In this environment that has changed from one which was capacity constraint, to one which is demand constraint, we have been working with our long-term partners to make them more competitive. In some cases, where there are issues beyond our control, we have thus far unfortunately been unable to help. Going-forward, we would work to broaden our solar customer base, and we have already been having conversation with a number of companies across the industry.

Many of which have approached us or are otherwise interested in doing business with us, due in large parts of the quality of our solar product. As we add additional customers, we will work to ensure that they also received world class service.

Now our second priority; our second priority is to ensure that we have the right organizational and manufacturing structures and resources in place. While MEMC has been efficient and profitable for a number of years, there continue to be a number of opportunities to reduce costs while improving our competitive position particularly over then to immediate and long-term.

I also see the opportunity for MEMC to reallocate some of its current cost to greatly improve the company's capability. This includes enhancing our investment innovation, sales and marketing, new product development and production efficiencies while reducing potential redundancy in other areas, an increasing mix of production towards low cost region and two more of our business processes.

Third priority is to ensure we retain, develop, and recruit the best talent in the industry. We already... very fortunate to have the executive management team that's we do. A very qualified group of individuals that along with the Board of Directors will play an integral part in my strategy and business assessment, the next few months as part of my 180 day plan. We're also very fortunate that MEMC has one of the broadest product and patent portfolios in the industry and R&D is a valuable competitive weapon. Adding additional resource to R&D in addition to sales and marketing will enable MEMC to further enhance its product capability and ensure that MEMC has the best and the most advanced product portfolio for most customers. And in doing this in a way obviously that keeps our operating expense in check as I mentioned earlier.

These priorities are not intended to improve our long-term competitiveness and financial strengths. They are not short-term fixes or a necessary designed to produce the maximum short-term financial gain.

As Ken mentioned earlier, MEMC is in a secured financial position with $1.3 billion in cash and investment and essentially no debt. This enables us to provide our team with the technology resources and support needed to strengthen our competitive position for the long term.

While it's clear that we face difficult near-term business environment, I believe that MEMC is very well situated to further strengthen its position and deliver strong results over the long term. MEMC has one of the most secure financial position in the industry, great people, great technology and tremendous potential.

With that, I will open the floor for any questions. Operator?

Question - and - Answer Session

Operator

(Operator Instructions) And our first question is from Brett Hodess of Bank of America.

Paul Thomas - Bank of America

Hi, this is Paul Thomas - Bank of America for Brett Hodess. On the solar contracts, it was pretty reasonable you guys renegotiated with Suntech and Gintech, were similar terms offered to Conergy?

Ken Hannah

We've been engaged with conversation with all of our long-term partners. All of those discussions have been similar in nature. Unfortunately we were not able to reach an agreement with Conergy.

Paul Thomas - Bank of America

Okay. And then as a follow up on the 8-K with Gintech, there was a comment in there that said that time had been extended for them to comply with the credit terms. Have they paid their full deposit for 2009 yet?

Ken Hannah

Yes, they have paid their full deposit.

Paul Thomas - Bank of America

And the other three contracts as well?

Ken Hannah

There is one customer as we had mentioned at the last call that had not made their final payment.

Paul Thomas - Bank of America

Okay. So the decline in the customer deposits was just revenue chip wafers?

Ken Hannah

Yes.

Paul Thomas - Bank of America

Okay. Thank you.

Operator

And our next question is from Stephen Chin, UBS.

Stephen Chin - UBS

Hey thank you. Hi Ahmad, hi Ken.

Ahmad Chatila

Hello Stephen.

Ken Hannah

Hi, Stephen.

Stephen Chin - UBS

Since you won't give us revenue guidance for the second quarter, can you at least give us an idea of sales by month progressed through this March quarter? What was -- maybe 40% of sales done in this month of March. I am just trying to get a sense of the change in customer demand. And can you give us an idea of how, in the month April is progressing versus that month of March? Thank you.

Ken Hannah

Yeah Stephen I guess if you look from February to March across the industry, and MEMC is not all that different in the industry. But there was a 60, 40% increase in demand in the industry. And we're seeing that continue into the first portion here of April.

Unfortunately, even with a 40% increase in March, we're still 60% below third quarter 2008 levels. So, when we -- what we try to do in our outlook, if you will, is you give you some additional color over what we're seeing, and try to explain that there is very limited demand visibility. And that while we're very encouraged, it's not clear to us that this is something that's going to sustain. And the moment that we feel as though we have some clarity we'll be glad to share that insight.

Stephen Chin - UBS

Okay. That was helpful. And then maybe as a follow on to that Ken and Ahmad, you talked about MEMC's semiconductor wafer factory capacity utilization rates being at these abnormally low levels. Could you help quantify for us of what the utilization rates are at now and what utilization rate is needed in these semiconductor wafer factories to hit a breakeven gross margin?

Ken Hannah

So, what I would -- what I'd tell you Stephen is that in the first quarter, our utilization rates were below 30%.

Stephen Chin - UBS

Okay.

Ken Hannah

And if you look at traditional operating levels, and it's not unique to MEMC. But I mean, most factories are running at 70 plus percent utilization rates. And so, part of what we've had to address is the fact that we've been below what is typically a normal operating range. And as a result, we have to period expense those incremental costs and inefficiencies associated with running at those lower rates.

Stephen Chin - UBS

Thanks. And then lastly, you mentioned in the press release about the new solar wafer factory in Malaysia. Could you share some more details on your -- when that factory will be operational and what the capacity will be, the technology, any other details you can share with us?

Ken Hannah

Yeah it's actually at this point a semiconductor related facility. We're going through the qualification process with customers at the moment. And we'd hope to have some low rate production in that facility towards the end of this year. It's primarily a 200 millimeter facility.

Stephen Chin - UBS

Okay. Thanks Ken.

Operator

And our next question is from Sanjay Chandra (ph) from Roger Capital.

Unidentified Analyst

Hi, thank you. Just a quick question guys, to win that because you don't have as much as the high overhead in your solar business like in the semi-side of the business and not hurt maybe by as much on the utilization front. Is there any further thought internally from a strategic standpoint to increase even volume to an existing solar customer given the footstone on the semi side of the business, because you probably could absorb much of that overhead and maybe even get into a much margin profile and even have that earnings potential sooner rather than later?

Ahmad Chatila

Well there's certainly a desire, Sanjay, to broaden our customer base on the solar side. And you are right, up to this point, we've been using outsourcers to do that conversion for us. And so, there is very little fixed cost on that side. Unfortunately what we are dealing with is that fact that we do have quite a bit of fixed cost on the semiconductor side of our in-house production. And in order to see those charges reduce if you will, we need to see utilization rates increase and get back into a normal range of operation.

Unidentified Analyst

Great, okay. One quick follow up on that if I may, then, can you get to a -- I kind of hopped on the call a bit late. You guys talked about where those volumes were in comparative to last year and where it kind of needs to go before we get back to that sort of a normal operating -- do you guys mind repeating that where exactly you are right now versus last year and what does it need to go before we get to that steady state of the semi business?

Ken Hannah

Well, what I would tell you is that up until the third quarter of last year, the company had been running in a normal operating range.

Unidentified Analyst

Okay.

Ken Hannah

In the fourth quarter of last year, when the industry saw some 35% reduction, MEMC was not immune to that. We saw very similar reductions. And as a result, we were at very low levels of operation. In Q1, we saw more of the same, and what we were mentioning with an earlier caller is we've got utilization rates in Q1 that were below 30%.

Unidentified Analyst

Okay.

Ken Hannah

And while we've seen the market demand increase February to March and the industry was up some 30%. March is still 60% below -- the third quarter 2008. So, we're still below those normal levels and based on our projection of demand and our visibility of demand in the Q2 it's not clear at this point that we'll be back into those operating levels within the second quarter.

Unidentified Analyst

That's great, thanks guys.

Ken Hannah

Thank you.

Operator

And our next question is from Jesse Pichel, Piper Jaffray.

Elaine Kwei - Piper Jaffray

Hi, this is Elaine Kwei for Jesse t Pichel. I was wondering, when will all the contracts be renegotiated closer to market rates than they haven't been already?

Ken Hannah

Well there is an ongoing discussion with these customers. As Ahmad mentioned earlier, we're doing everything we can to make sure that we find a win-win solution for our customers. We make them competitive and that we both share and the success of solar far beyond these current economic times.

Elaine Kwei - Piper Jaffray

And is that something that you see, you proceed going on to the next quarter or two or even beyond that?

Ken Hannah

Well, I think there is there is two approaches that you can take. You've got... obviously, we have long-term contracts that have take or pay provisions, and in a period of uncertainty that we're in today with the credit crisis and everything else, we can sit here said and hold on to the contract and have our customers not be successful.

And at this point, we have been working with them to try to improve their competitiveness. As we had mentioned on last quarter's call, we were working with those customers. We were able to get two of those customers contracts amended. So that they could be competitive, and we are continuing to have discussions with them.

Elaine Kwei - Piper Jaffray

Okay. And could we get a little more color on the CapEx plans that you have and whether you still plan to continue building wafer capacity? Like any thoughts you might have on any further downstream integration?

Ken Hannah

Yeah, what I would tell you on the CapEx is that over the longer-term, we are still committed to our CapEx model, which has been keeping CapEx at 10 to 15% of revenue, and generating very high turns and having asset efficiency as part of our business model. Obviously, when your revenue is cut in half in a very short period of time, the types of CapEx that we are making are very long cycle, two and three years cycles for completion. So, you can't turn that off immediately.

We are evaluating the opportunity to further move into the solar in furnish and wafering, but that's something that given the current environment, where we're looking at very closely to understand whether or not there is an opportunity to either do that in house or possibly buy those assets on the open market.

Elaine Kwei - Piper Jaffray

Okay. And just if I could a last one: what is the rational behind the inventory build? I have heard... I thought you had mentioned something earlier in the prepared remarks?

Ken Hannah

Yeah, there is there was inventory build. Obviously for a number of quarters, our inventory levels have been very low. We made decisions to put some buffer the way at all levels of inventory. So if you look at that increase, about two-thirds of that is actually in finished goods. It's a little bit work in process. And then, we've got some raw material or poly inventory buffer as well.

Elaine Kwei - Piper Jaffray

Okay, great. Thank you so much.

Operator

And our next question is from Hindi Visanto, (ph) Gabelli & Company.

Unidentified Analyst

Can you give some color on like... what is your fixed cost in the overall cost structure and how much was under utilization charge Q1?

Ken Hannah

I am not comfortable disclosing what the actual fixed costs were. What I would tell you is that between the fixed costs and the inventory, and it's hard, because... to break those two out. But between the two of those in the first quarter, took approximately a $50 million charge for the inventory write-down associated with the lower pricing and the under utilization.

Unidentified Analyst

Okay. And...

Ken Hannah

You can... Hindi, if you go look at the cash flow statement, you can see the add back for depreciation and amortization there. And that number has not changed overtime. Clearly, that's a fixed cost from a P&L perspective, and it went from 5% of revenue to 15% of revenue just in the matter of one quarter.

Operator

And our next question is from Adam Kropf, Arbor Capital (ph).

Unidentified Analyst

Hi, guys. Good afternoon. Just to go back to the Conergy contract, let's say Conergy backs away. Can you give us a any indication on interest in terms of demand from any other solar customers out there?

Ken Hannah

Well, we've certainly had interest, and we've been in a number of discussions with various customers certainly a goal for... Ahmad and I to increase our customer base on the solar side. And I think, given the current environment, from a buyer and seller prospective, there is desire, I think to wait and see from a longer term contract perspective. But we are certainly talking to a number of customers regarding providing them product in the near term.

Unidentified Analyst

Okay. And now just the quick follow up on that. In those discussions, are you offering contracts still at a premium to the market or a discount to maybe retain some market share? Can you just comment on that briefly?

Ken Hannah

We're actually... we're having competitive discussions and making sure that we are getting the price that we believe that our product commands in the marketplace.

Unidentified Analyst

Fair enough. Thanks very much.

Operator

And our next question is from Steven O'Rourke, Deutsche Bank.

Unidentified Analyst

Hi, thanks for taking my question. This is Peter Tim (ph) for Steven O'Rourke. So, I was wondering, given the changes that are happening in terms of your long-term supply contracts with some... maybe some contracts requiring additional capacity in the near-term. I know utilization is very low, but still. Do you have plans to expand your polysilicon production capacity, are you currently investing in that?

Ken Hannah

We certainly are investing in expansion; we're in the process of evaluating a longer-term view of exactly what that needs to be and how quickly those capacity expansions need to be brought on. Our long-term view of both semiconductor and solar is that they are both going to grow over a long period of time. As you all know, the cycle here for investment is rather long. And so, what we don't want to do is make an irrational decision to stop investing only to find out a quarter or two from now that were going to miss an opportunity in the future.

Unidentified Analyst

So, your current capacity is roughly about 8,400 metric tons per year? Have you reached that goal with the last phase of your previous expansion plan?

Ken Hannah

Our announced capacity as of the end of last year was 8,000 metric tons.

Unidentified Analyst

Okay. And you're there right now?

Ken Hannah

Yeah, we had announced at the end of the year that we were at 8,000 metric tons of capacity.

Unidentified Analyst

Okay. And with regards to semi, I was wondering if you could break down your semiconductor way for exposure to memory versus non-memory.

Ken Hannah

Well, we've traditionally had a little more than the industry average exposure to memory. In the past, that's been something that we liked in terms of the business model and the way that the memory segment consumes square inches of silicon. Obviously, memory segment right now is going through some very difficult times.

Unidentified Analyst

And I assume a lot of... a good portion of your memory exposure is in Taiwan; is that true?

Ken Hannah

Good portion of the memory around the world is...

Unidentified Analyst

No, memory capacity for you... your wafer capacity?

Ken Hannah

Wafer capacity, we do have one facility in Taiwan.

Unidentified Analyst

All right. Okay, thank you.

Operator

And our next question is from the line of Patrick Utila, (ph) Jefferies.

Unidentified Analyst

Hi guys this is Pat Utila for Paul Clegg. Thanks for taking my questions. Can you guys give us a little bit more detail on operating cash flow visibility for '09? Are you still looking at positive cash flow for the year? And how do you expect that to play out? Is that more of second half positive thing?

Ken Hannah

Well, we certainly believe in our business model and our ability to generate cash. We made a decision in Q1 to invest in inventory that obviously had an impact on cash. And then we add... our accounts receivable at the end of March was higher than what we had anticipated. And that was too specific customers that were behind on payments, one of which, which was a good portion of that amount was actually made on April 1st. And so, it was a bit of timing difference between cash coming in and March versus cash coming in April. And so... and we've not increased the inventory value and that one customer's payments been one day earlier. We would be sitting here today talking about an operating cash flow positive number for Q1.

Unidentified Analyst

. Okay. I just have a follow on, in regards to the inventory, do you guys anticipate any significant write offs going forward? I think it's kind of expense dubbing up here over the last couple of quarters quite a bit? And can you also tell me what kind of inventory that is as far as solar versus semi?

Ken Hannah

There is... of the $118 million of inventory, a very... relatively small amount of that is solar related. Most of it is semi related, which obviously has a longer cycle time to build. So, from a response standpoint, that's where we would prefer the inventory to be.

Unidentified Analyst

Okay, great. Thanks guys.

Operator

And our next question is from the line of Vishal Shah, Barclays Capital.

Unidentified Analyst

Hi, this is Jay Green (ph) for Vishal Shah. I was wondering... I know you mentioned the $50 million for the fixed cost and the inventory write down. I was wondering if there is any further clarifications or clarity to give on the inventory write down.

Ken Hannah

No, the inventory is actually... is buried within that number. I guess what I would tell you is, it's less than 20% of the number. But it's I'm not comfortable breaking it out specifically.

Unidentified Analyst

Okay, that's understandable. And then, in terms of gross margins, did you breakdown at all the gross margins in the semi side of the business and the solar side?

Ken Hannah

We did not.

Unidentified Analyst

Okay. Great, that's it. Thanks.

Operator

And our next question is from the line of Chris Blansett, JPMorgan.

Christopher Blansett - JPMorgan

Hi guys. I know you're not giving any actual forward guidance for it. I wasn't sure if you were able to give us some direction whether up downside ways and or if maybe the pricing pressure you're seeing is even making that difficult to predict right now?

Ken Hannah

What I tried to articulate, Chris, was, what we are seeing in the market. And what we're seeing is based on, what we've seen through April 23rd. Unfortunately, there's another 2.5 months left in the quarter, and we're just not sure that what we're seeing is going to continue. Pricing in both semi and solar has seen some declines that are higher than what we've seen traditionally. And at some point, it will stop. It's just not clear to us right now exactly when that point will be.

So, if you have some specific questions, I'd be glad to share as much information as I have. But I want to make sure that everyone understands there is a significant level of uncertainty here that we're dealing with and as a result, are choosing to provide color as opposed to specific revenue and margin numbers.

Christopher Blansett - JPMorgan

Well I guess, maybe at a different way to look at this is, how have the inventory levels that your customers, either solar or semi, trended over the past few months? And do you see them starting to clean up their inventories of your products?

Ken Hannah

In some cases, yes and in some cases no. It's very mixed, and when you look at the days of inventory, you have some segments where they've seen some declines. And you've seen other or you've seen some increases. All indications from a solar perspective is that, that those customers are working through that inventory. And it's just a matter of how quickly the demand is going to pick up to see some more pull-through.

Christopher Blansett - JPMorgan

All right, and one last question, when you think about the difference between building new solar wafer making assets or buying, any -- could you give us a feel for other assets on the market already or do you think there's still yet to come to purchase potentially?

Ken Hannah

There is assets on the market, and we believe there is more to come. And so, we're watching this very patiently trying to balance the fact that we believe we have 50 years of semiconductor knowledge that we can apply here in this space, which is one of the reasons that would lead us all to believe that we would be better off doing this internally. But there is excess capacity in the market, and we have very good relationships with our outsourcers. And I've been very pleased with their performance.

Christopher Blansett - JPMorgan

All right. Thanks guys. Appreciate it.

Operator

And our next question is from the line of Mehdi Hosseini, FBR.

Rafi Hassan – Freidman Billing Ramsay

Hi, this is Rafi Hassan for Mehdi. Since you guys are not modifying the Conergy contract, can you tell us a little bit about the costs involved in the legal issues or how do you want us to think about the cost model?

Ken Hannah

Well, I mean what I would say is that, we've been in negotiations with Conergy regarding an amendment. And company announced today that based on the current status of the negotiations, we're not expecting to enter into such an amendment. We have advised Conergy that the contract remains in full force and effect. Now, we've not seen a suit at this point. And so it would not be prudent for me to comment on legal matters. And so if we believe there is a expense associated with this that is going to be material in nature, we would certainly share that with you.

Rafi Hassan – Freidman Billing Ramsay

Okay. Regarding the terms in contracts, can you tell little bit -- did you renegotiate with any company for the second time this year?

Ken Hannah

We have not.

Rafi Hassan – Freidman Billing Ramsay

Can you talk little bit about wafering? When do you plan to get wafering enhanced right now?

Ken Hannah

We're currently evaluating that to determine the one, the right assets and two, whether or not it's more economical for us to actually purchase those through a make situation or a purchase those through a buy situation.

Rafi Hassan – Freidman Billing Ramsay

So, is it going to happen this year, any long term? I mean you don't have any time like that just now?

Ken Hannah

No, we're evaluating that and with Ahmad coming on board, that's something that, he and I are looking at our entire solar strategy and assessing exactly what we want to do there. And as he works through his 180 day plan hopefully, that's one of the things that we'll be able to provide some additionally clarity on.

Rafi Hassan – Freidman Billing Ramsay

What's your plan on conversion of the semi related 200 millimeter capacity to solar? Is it on halt or --

Ken Hannah

No, I mean you are seeing in the solar space, you are seeing a lot of people that are interested in purchasing both multi-crystalline and mono-crystalline. And we have the capability to utilize our mono-crystalline assets to produce those ingots.

Rafi Hassan – Freidman Billing Ramsay

Okay. Thanks.

Ken Hannah

Thank you.

Operator

And our next question comes from the line of Paul Leming, Soleil Securities.

Paul Leming - Soleil Securities

Good evening. Thanks for taking my question. First, I was just interested in trying to understand how the polysilicon business looks today in terms of whether or not you're still in an environment where you can sell every pound you produce. Are you still running where poly capacity you have at a 100% or have you gotten into an environment where you started to throttle back production at all in your poly factories?

Ken Hannah

Paul, at this point we're still running polysilicon full out. And while the pricing has come down over the last several quarters, we did see some sort of a stabilization in the first quarter.

We're making a strategic decision not to push polysilicon and that we would rather be selling wafers. And so, at the moment Q1 revenue that came from polysilicon was single-digit. And it's not because we can sell, it is because we're choosing not to.

Paul Leming - Soleil Securities

But you are still running your facilities full out producing all but you're physically capable of.

Ken Hannah

At the moment.

Paul Leming - Soleil Securities

Second question. This has kind been touched on, but I'd just like to ask specifically is the company still committed to 15,000 tons of poly capacity by the end of 2010? Or if you will or you ex -- what (ph) we're saying tonight that that's under review and absolutely open to be reconsidered?

Ken Hannah

I would say that that's open for review and absolutely available to be reconsidered. That's something when we set out for that timeline, the world was in a very different place. And so, we're evaluating based on the current economic situation just how quickly that needs to happen. Obviously, as MEMC continues to grow and continues grow in solar, there is a requirement for more polysilicon. And so, as a result, we have to get that from somewhere.

We're very proud of the quality of our product, and would prefer to get that internally from ourselves. But, a lot of its going to tie to when we believe these markets are going to return to somewhat of a normal condition.

Paul Leming - Soleil Securities

Fair enough. Next, the last question I had... there is statement in the press release about aligning costs in your semiconductor wafer business with the steady state business. I'm wondering if that's an acknowledgement that the market share losses and the MC has experienced over the last three or four years in semi wafers really are permanent and you recognized your likely in today's world to stay somewhere around 8.5 to 9% of the market in the semis for the next couple of years. Or is that reading too much into that statement?

Ken Hannah

You're probably reading a little more into that statement than you probably should. What we're simply saying is that, at these reduced levels that we can no longer afford to carry the number of people that we've been carrying in the hopes that the recovery was going to get back sooner than what we had thought. And so we made some decisions in the first quarter to align some of those factories.

Paul Leming - Soleil Securities

And my last... yes?

Ahmad Chatila

It's not really market share related, it's more... when you look at the square inches for the industry, I mean, they're significantly reduced from where they were last year and even more reduced from there were two years ago. So, it's just really aligning with the staffing to the current demand.

Ken Hannah

If you look a little... yeah, 35% reduction in the industry from Q3 to Q4 and another 35% from Q4 to Q1, and the number of people as a percent of our total that we reduced was no where close to that type of a reduction. And so, we're simply trying to size our footprint based on what we believe the industry's needs are going to be.

Paul Leming - Soleil Securities

Fair enough. And my last question, could you quantify on a blended ASP basis just how much of the step down you saw in sending wafer pricing Q4 to Q1, and any sense at all based on current negotiations of how much further blended ASPs decline in semi wafers in Q2?

Ken Hannah

But what we have said Q4 and Q1 was that we were seeing high single-digit. And then in Q1, from Q1 to Q2, we are seeing something similar.

Paul Leming - Soleil Securities

All right thanks very much.

Operator

And our next question comes from the line of Jagdish Iyer of REIT Research (ph).

Unidentified Analyst

Hi Ken, hi Ahmad. I had two questions. My first question is, a big picture question... has there been a structural shift in your pricing of solar rate of contracts? The spot prices of solar wafers continue to fall quarter-over-quarter. How would you go back and renegotiate on adjusted prices according to? My second question is that... are we have the bottom in terms of semiconductor wafer pricing given the improvement in utilization rates. Thank you.

Ken Hannah

Let me ask this... answer the second... in terms of semiconductor wafer pricing, I don't know that we ever get to the bottom and then the electronics industry. We're certainly hopeful that the rate of decline will return to more normal levels based on the February to March and the March through the early part of April. The demand is very encouraging, which obviously as the demand comes back, there'll be less focus on price and more focus on volume, which is obviously good for MEMC.

In terms of your first question on the prices, you were referring to from our long-term partners, are you referring to a negotiating strategy, what exactly are you referring to?

Unidentified Analyst

No, my question was that is if spot prices continue to for example, if you do negotiate on the first quarter and spot prices continue to go down in the second quarter and third quarter. Would you have to go back and renegotiate your contract prices with your long-term customers?

Ken Hannah

What I would say is that we don't have to, but we have to make a decision as to what this means in terms of our relationship over the longer period of time.

Unidentified Analyst

Because, there was a 25% at least drop in the pricing of spot wafers and that's why I just wanted to make sure that...

Ken Hannah

Yeah.

Unidentified Analyst

These contracts are holding up for the whole year.

Ken Hannah

Yeah, what I would remind everyone is that these contract prices were a significant advantage compared to spot prices at one point in time. And so the reduction in spot price is in no way of direct correlation to the reduction in the contract price that's required. And so, obviously we're going to work with our customers and partner with them to try to do something that makes us both successful.

Unidentified Analyst

If I can sneak one quick question, a follow-up, I just wanted to find out if you have any updates on your Pasadena plant please? Thank you.

Ken Hannah

We're very pleased with the output at our Pasadena facility. Our revenue is not constrained by our poly output.

Unidentified Analyst

Okay.

Ahmad Chatila

Operator?

Unidentified Analyst

Thank you.

Operator

And our next question will come from the line of Stuart Bush, RBC Capital Markets.

Stuart Bush - RBC Capital Markets

Yeah, hi good evening Ken. I just want to follow up on that. I know what you're trying to work around on this renegotiated on the solar contract. But I guess the question is, are the contracts now floating rates as we go forward as opposed to the previous fixed rate. Let's start with that.

Ken Hannah

So, today we've made amendments to two contracts, and there is an adjustment to a fixed price.

Stuart Bush - RBC Capital Markets

They're not volume?

Ken Hannah

There were increases in volumes to offset the fact that the price was reduced from the original contract of the amendment.

Stuart Bush - RBC Capital Markets

Okay. And so the pricing is adjusted on monthly basis, quarterly basis...

Ken Hannah

There was an annual amendment to try to address 2009.

Stuart Bush - RBC Capital Markets

Okay. At what level of inventories are you guys comfortable with going forward? Do you have some sort of target guidelines?

Ken Hannah

Yeah, I think that right now we're just over 50 days, I think we're comfortable at that level, and we're willing to make sure that we're able to support our customers when the demand comes back. So, we've been working with some very specific customers around building inventory to be able to support them as the market rebalance.

Stuart Bush - RBC Capital Markets

Okay. And then when you mention further cost reductions to pursue, has there been any considerations that actually taking assets or factory costs line even on a temporary basis?

Ken Hannah

That's certainly an option.

Stuart Bush - RBC Capital Markets

Okay. Thanks.

Operator

And the next question is from the line of Timothy Acuri, Citi.

Unidentified Analyst

Hi, guys this is Brian Lee (ph) calling in for Tim. Just a couple of things for me; first with respect to Conergy, can you remind us what the value of the prepayment is that you currently carry on the balance sheet for that contract, and if there are any off balance sheet items or letters of credit that you could potentially collapse in the event that you can't amend that agreement?

Ken Hannah

Yes, I'm not going to comment specifically on Conergy, you can go back and look at when we filed that contract after it was signed, and the timing of when they came online and pretty much get back to pretty close the proximity of what the cash value is but there is both cash and a letter of credit associated with each of the customers.

Unidentified Analyst

Okay. I think, in the past you had said, Ken, that the letter of credits were in aggregate close to I guess $300 million, is that correct? Number one, and can I just assume that Conergy is on the order of a fourth, a third of that? So I wanted to just kind of get a ballpark figure.

Ken Hannah

I think that's fair.

Unidentified Analyst

Okay. And then I guess if I'm thinking longer term, given what's going on with the contracts on the solar wafer side, can you give us a sense for what normalized gross margins, how we should be thinking about that in the solar business if we assume, longer-term spot price -- when pricing kind of settles back to $50 per kg historical norm?

Ken Hannah

Yes, so, if you're going to use a $50 per kg number, you can pretty much take the industry information that's available on pricing and the cost to convert $50 kg into a wafer and bake into that number. I'm not going to provide our specific information.

Unidentified Analyst

I guess, maybe to ask you it in a different way. In the past, you've talked about just directionally, the solar wafer contracts kind of being in line with the corporate gross margin and obviously spot with the high pricing that we've seen in past years being above corporate average margins. And so with the renegotiations that have gone on over the past couple of months on the contract side. Can you kind of give us an update on how you would sort of first rank (ph) the gross margin profile across the three different segments?

Ken Hannah

So, I would say as the gross margin profile is very similar to what it was in the past, where the solar is still higher than the company average.

Unidentified Analyst

Okay. Thanks guys.

Operator

And the next question comes from the line of Atif Malik, Morgan Stanley.

Atif Malik - Morgan Stanley

Hi, thanks for taking my questions. Firstly on CapEx, I understand 10 to 15% is a kind of the long-term target. How should we think about absolute dollars of CapEx for second half '09 here?

Ken Hannah

We've not provided a full year look at CapEx. I think you can see what we spent in Q1. And it's safe to assume that we wouldn't expect to spend much more in the quarters going forward.

Atif Malik - Morgan Stanley

Got it. And some of your peers have actually cut CapEx, and I just wanted to understand your decision to remain on 10 to 15% long-term trajectory. Is it something intrinsically different about your manufacturing process where that makes you stay on this? Or is it just a strategic kind of decision?

Ken Hannah

Yeah, when you look, when we were at lower levels of revenue, we were higher than that 10 to 15% to begin with.

Atif Malik - Morgan Stanley

I see. And then your comments on R&D spending, potential spending more on R&D in the future. the way I look at the company has been spending about 3% of the semi revenues in the last few years. How should we think about the model R&D spending as a percentage of revenues going forward?

Ken Hannah

Well, a lot of it is going to be a reallocation of cost within the MEMC family. So I think what we've communicated here is that there is an opportunity to reallocate some costs into R&D to continue to improve our product portfolio.

Atif Malik - Morgan Stanley

Okay. And one last one, with the financial kind of crisis, are you seeing any of your suppliers of raw materials having any issues providing you raw material?

Ken Hannah

We're not going to comment specifically on any suppliers. What I would tell you is that there is very few companies in the world today that aren't having some sort of an impact from what's going on around us. What I will tell you is that our revenue in the quarter is not constrained because of any supply either from our internal production or from any of our suppliers.

Atif Malik - Morgan Stanley

Got it. Then actually one additional question. The previous management used to provide these revenue multipliers. I know you guys can't provide the revenue guidance. But for a dollar of poly, is it possible for you to provide the revenue multipliers for a solar wafer and semi wafer? I guess the previous numbers used to be 2x for solar wafer and 4 to 7x for semi wafer?

Ken Hannah

On what day?

Atif Malik - Morgan Stanley

Today.

Ken Hannah

No, we're not, I am not comfortable providing that at this point.

Atif Malik - Morgan Stanley

Thank you.

Operator

Our last question will come from line of Ben Pang, Caris & Company.

Benedict Pang - Caris & Company

Thanks for taking my question. Two quick ones, first on the semiconductor side wafer business. You commented that you're still seeing pricing, I guess competitive pricing if you will. How much have that changed just between March and April? Are you starting to see the price stabilize?

Ken Hannah

Are you referring specifically to solar pricing or semi pricing?

Benedict Pang - Caris & Company

Semiconductor wafers.

Ken Hannah

Yeah, the semiconductor pricing is fixed for the quarter. Most of the, I think 90% of the pricing for Q2 was completed in March.

Benedict Pang - Caris & Company

Okay. And can you comment on whether your pricing is getting back to the historical type of level there? I mean is there -- I think in your opening comments, you said you're seeing pricing -- I forgot your term but like unusual pricing pressure I guess you'd put it.

Ken Hannah

Right, what we had said is that the pricing declines were greater than what we had experienced historically.

Benedict Pang - Caris & Company

And is that still true now for semiconductor, if we look at 2Q?

Ken Hannah

The Q2 is higher than what we've traditionally seen in semiconductor.

Ahmad Chatila

The price increase, for Q3 if you're talking about that, it's just negotiated at the end of Q2, so we -- I don't have a feel for that yet.

Benedict Pang - Caris & Company

Okay. And on the solar side, is it really a scenario here where the lower pricing competition is -- can gain share at this point. What are your thoughts there? I mean are you getting towards a situation even for the low cost producers where there is no margin in their business?

Ken Hannah

Look, I don't think we are at a point where there is no margin. What I would say is that there is competition around the world and in a situation where demand stalls, there are people that become very aggressive.

Benedict Pang - Caris & Company

Thank you very much.

Operator

And our next question comes from the line of Satya Kumar, Credit Suisse.

Satya Kumar - Credit Suisse

Yeah, hi. Thanks. Ken, most of the wafers you're selling on the solar side is that on the spot market or is it more on the contract market?

Ken Hannah

Majority is contract.

Satya Kumar - Credit Suisse

Okay. And did you provide commentary on what your semiconductor unit declines were in Q1 and what the outlook was for Q2 for units?

Ken Hannah

No, we did not.

Satya Kumar - Credit Suisse

Okay. In terms of your capacity for polysilicon production, I know you mentioned that you are reviewing the expansion to the 15,000 stage. Right now of for modeling purposes in the first and second quarter, what should we be thinking about, is it consistent with the 8000 level or has it gone up?

Ken Hannah

All we've communicated, Satya, at this point is that we were at 8,000 metric tons at the end of 2008.

Ahmad Chatila

So the capacity hasn't changed, the production numbers we never give on a quarter-to-quarter basis. So, it just depends inter-quarter based on what kind of maintenance we're doing in a particular quarter.

Satya Kumar - Credit Suisse

Okay. And I know, I think Paul asked this question on the polysilicon side of thing. Do you have additional inventories of polysilicon on hand at this point or is it mostly semi side, that's the reason for the increase?

Ken Hannah

What we had said earlier is that the majority of the increase was in finished goods but there was also increases in waf and also polysilicon raw material.

Ahmad Chatila

The quarterly increase was waf and that was mostly semi wafers. And as Ken mentioned about 10% of the increase was raw material and that's poly.

Satya Kumar - Credit Suisse

Okay. And in the prepared -- in the press release I think you've mentioned that you're looking to provide more inventories to your customers on consignments and things of that nature. Is there an opportunity for you to gain from a market in semis which you might have temporarily given up, perhaps the last couple of quarters as we look -- go into the next two?

Ken Hannah

We would certainly hope as we support our customers and help them be successful that they would reward us with additional share.

Satya Kumar - Credit Suisse

Yes. Thank you.

Operator

And now we're returning to line of Andy Visanto (ph) Gabelli & Company.

Ahmad Chatila

Andy, are you there? Operator, as we try to get Hindi back on line, can you take the next call?

Operator

Yes, I can. And the next one will be from the line of Chris Blansett, JPMorgan.

Christopher Blansett - JPMorgan

Hi, guys. Couple of little housekeeping questions here; how do we... how you're expecting us to model taxes and tax rates going forward with the significant change in your revenue profile there?

Ken Hannah

What we had provided at the end of last year was that we were using a 15% cash tax rate, and that we expected that the cash tax rate and the book rate were going to converge to that cash tax rate and that would be... you should use going forward. So, in a normal situation, where you have operating income, there's no real difference in what the book rate would be this year compared to what the cash was last year.

Christopher Blansett - JPMorgan

Right. I guess, but we're not quite in a normal situation, so I was just looking to see if you find any updated or guidance on that.

Ken Hannah

I'm not able to provide that, because it depends on the variability of all those factors that we've discussed.

Christopher Blansett - JPMorgan

All right. And then one last thing then... in general, how would you expect us to view other income going forward?

Ken Hannah

Most of the other income is income generated on the cash. So when you look at those various lines that interest income is what is making up most of that.

Christopher Blansett - JPMorgan

All right. So, just kind of model study up.

Ahmad Chatila

You can see our cash balance multiplied times of the...

Christopher Blansett - JPMorgan

I wasn't sure if you guys were planning on doing any other investments that may help to increase your interest rate or anything?

Ahmad Chatila

Any recommendations for us?

Christopher Blansett - JPMorgan

Not at this time, sorry, guys. Thank you.

Ahmad Chatila

Thanks, Chris.

Operator

And the next question will be from Patrick Utila, Jefferies.

Unidentified Analyst

Yeah, hi guys. This is Pat calling in for Paul Clegg again. I know you answered this earlier, but I sort of missed it. Can you tell us again where you see capital expenditures for rest of the year?

Ken Hannah

We didn't give a full year capital expenditure, what we said is that in the long-term, we're still committed to this 10 to 15% of revenue model, and that we're just little over $50 million in Q1. And that we would not expect that number to increase going out through the year.

Unidentified Analyst

Okay. Got it. Thanks guys.

Operator

And the next question will be from Andrew Rudd, Alkian Capital (ph).

Unidentified Analyst

Hi, thanks for taking my question. I was just curious, Ahmad, if the signing of any new long-term strategic solar customers is contingent on completing the 180 day review or if it could theoretically happen before that?

Ahmad Chatila

It could happen before that. We're aggressively pursuing many customers to broaden our base.

Unidentified Analyst

Thank you.

Operator

And our next question is from Gordon Johnson, Capital Securities (ph).

Unidentified Analyst

Thanks for letting me ask a question. I just want to say congrats to Ahmad for taking the CEO position. My first question is can you guys give us the trend of what polysilicon prices have done thus far quarter-to-date?

Ken Hannah

Quarter-to-date from last quarter?

Unidentified Analyst

This quarter.

Ken Hannah

You're talking about in the month of April?

Unidentified Analyst

Yes.

Ken Hannah

We're not participating to any great degree in that market, so....

Unidentified Analyst

Okay. You guys, I guess you don't have any visibility on kind of what pricing is doing thus far?

Ken Hannah

We're not seeing fashionably different prices today than where they were at the end of the quarter.

Unidentified Analyst

Okay, that's fair. And then I guess... I know guys aren't providing specific 2Q guidance, but can you tell us directionally? Just I'm kind figure out how the model this moving forward. Can you give us directionally what things are going to do from a revenue prospective? Are we thinking flatter up slightly or can you guys give some direction there?

Ken Hannah

Well, it depends. And if I could give that, I would have shared it with everyone. Unfortunately there is enough variables here in terms of the volume and the price across semiconductor and solar that we're not comfortable giving that direction.

Unidentified Analyst

Okay, that's fair. And then lastly, can you just update us on some of the, I guess the trends in some of your facilities, I guess outside of Texas, out in Italy and some of the other facilities you guys have, how things are trending from a production perspective?

Ken Hannah

I think its' safe to say that all of the production levels in our facilities are trending up, yet still below normal levels.

Unidentified Analyst

Okay, so, there haven't been any other I guess, production issues with respect to fires, build up, some of the reactors et cetera?

Ahmad Chatila

There aren't any other problems, Gordon. But as Ken mentioned, our sales are not being constrained by our raw materials supply.

Unidentified Analyst

All right, okay. Thanks a lot guys, and congrats Ahmad.

Ahmad Chatila

Thank you.

Operator

And we've another question from Paul Leming, Soleil Securities.

Paul Leming - Soleil Securities.

Good evening. Just wanted to follow up on a comment you've just made Ken that you are not participating in the stock markets to any degree right now. Could you just help us understand what's the driver behind the decision is to in back out of that market? Is that something likely to be permanent or is this temporary?

Ken Hannah

I mean, at the moment, our focus is on semiconductor and solar wafers.

Paul Leming - Soleil Securities.

I mean is it fair to say though that does represent a change from how you operated historically?

Ken Hannah

Well, I think the way I would categorize it is, we are moving from an opportunistic use of polysilicon in the marketplace to a very strategic use of polysilicon. And our desire is to provide polysilicon only in situations, where there's a strategic advantage of doing so.

Paul Leming - Soleil Securities.

Thanks very much.

Ahmad Chatila

Thanks, Paul.

Operator

At this time, there are no further questions. Please go ahead.

Ahmad Chatila

Great. Thank you very much for everyone for participating on the call. There will be a replay on our website at memc.com, and that's it. Thanks for participating.

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