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Executives

Bill Michalek – Director, IR and Media Relations

Ken Hannah – SVP and CFO

Ahmad Chatila – President and CEO

John Kauffmann – SVP of Sales, Customer Service and Marketing

Analysts

Stephen Chin – UBS

Vishal Shah – Barclays Capital

Sanjay Shrestha – Lazard Capital Markets

John Hardy – Broadpoint

Jesse Pichel – Piper Jaffray

Stephen O'Rourke – Deutsche Bank

Krish Sankar – Bank of America/Merrill Lynch

Rafi Hassan – FBR Capital Markets

Paul Leming – Soleil Securities

Timothy Arcuri – Citigroup

Edwin Mok – Needham & Co.

Satya Kumar – Credit Suisse

Chris Blansett – JP Morgan

Stuart Bush – RBC Capital Markets

Paul Clegg – Jefferies

Atif Malik – Morgan Stanley

Jagadish Iyer [ph] – REIT Research [ph]

Gordon Johnson – Hapoalim Securities

Ben Pang – Caris & Co.

Dan Ries – Collins Stewart

Sam Dubinsky – Oppenheimer

Hendi Susanto – Gabelli & Co.

MEMC Electronic Materials, Inc. (WFR) Q2 2009 Earnings Call Transcript July 23, 2009 5:30 PM ET

Operator

Ladies and gentlemen, thank you for standby, and welcome to the MEMC second quarter earnings conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session with instructions being given at that time. (Operator instructions) As a reminder, today’s conference is being recorded.

And I would now like to turn the conference over to your host Mr. Bill Michalek, the Director of Investor and Median Relations for MEMC. Please go ahead sir.

Bill Michalek

Good afternoon and thank you for joining our second quarter earnings conference call. With me today are Ahmad Chatila, President and Chief Executive Officer; Ken Hannah, Chief Financial Officer; and John Kauffmann our Head of Sales and Marketing who is joining us remotely from North Carolina.

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. MEMC’s second quarter 2009 sales showed a healthy increase of 32.2% over what we believe was a semiconductor industry bottom in the first quarter. Sales came in at $282.9 million. The sequential increase in sales was primarily the result of higher wafer volumes for semiconductor applications, partially offset by price reductions in wafers for both semiconductor and solar applications.

Gross profit in the quarter was $34.9 million or 12.3% of sales, up from $19.7 million or 9.2% of sales in the first quarter, primarily reflecting higher product volumes. While the increased product volumes helped increase our utilization rates, our factories were still running at less than optimal manufacturing rates.

This has resulted in inefficient manufacturing and higher unit cost, which continues to limit margins. Lower pricing for semiconductor and solar products also adversely affected margins. Second quarter 2009 operating expenses were $49.2 million or 17.4% of sales. This includes charges of $5.6 million, relating to previously announced layoffs in one of the Company’s manufacturing facilities, as well as $3 million of cost associated with the startup of our new Ipoh, Malaysia facility.

This compares to first quarter operating expenses of $46.1 million, or 21.5% of sales, which included charges of $6.7 million relating to layoffs in three of the Company's manufacturing facilities.

The Company reported an operating loss during the quarter of $14.3 million, compared to an operating loss of $26.4 million in the first quarter. Net income for the second quarter was $6.5 million or $0.03 per share, and includes a $10.1 million benefit relating to the increase in the value of the Suntech warrants, offset by a partial deferral of profit related to a new solar joint venture.

During the second quarter, the Company reported operating cash flow of $16.4 million, net of the payout of approximately $12.3 million in severance from the layoffs announced during the first and second quarters, including an offset of $44.1 million associated with the long-term solar contracts pursuant to the terms of the agreements.

This compares to $14.6 million of operating cash consumed in the first quarter. Capital expenditures for the second quarter totaled $45.1 million, or 16.1% of sales. Free cash consumed, which is operating cash flow minus capital expenditures was $29.1 million in the quarter.

The Company's balance sheet remained strong with cash and investments of approximately $1.3 billion and virtually no debt. During the second quarter, the Company signed a binding term sheet with Q-Cells to form a joint venture for the purpose of constructing and selling solar power plants.

Under the terms of the agreement, MEMC will invest up to $100 million of capital in the joint venture during the third and fourth quarters of this year. The joint venture company will contract with Q-Cells international to develop, acquire and build the plants.

When completed, this facility has intended to be sold to a third party. The joint venture will be accounted for under the equity method of accounting. As MEMC sells wafers to Q-Cells, the revenue from those sales will be recognized consistent with the MEMC's revenue recognition policy, and the cost associated with those wafers will be included in cost of goods sold.

MEMC will however defer its pro rata share of the net profit associated with the sale of the wafers, consistent with its ownership in the joint venture, until the project is sold to a third party, at which point previously deferred amounts will be recognized as income, as well as any gains or losses in the sales of the project.

During the second quarter, the Company sold wafers Q-Cells for use in this joint venture project. More details on this joint venture agreement are included in our 8-K filed earlier today.

Now turning to business conditions, based on current customer indications, we believe that demand will continue to improve in the semiconductor industry during the third quarter. This should provide some improvement in our factory utilization rates, while still not expected to be at optimal rates, we are expecting incremental margin improvements.

In the solar industry, we have been successful expanding our overall customer base. The industry as a whole however continues to be characterized by limited demand growth and excess materials throughout the value chain.

This unfortunate condition has resulted in a continued weak pricing environment for solar applications. Considering these factors, we are targeting third-quarter revenue to be approximately $300 million to $350 million, and gross margin to be up slightly over Q2 levels.

I would also like to provide an update on the Company's polysilicon expansion plans, given the current market conditions. We relaxed our polysilicon capacity expansion schedule and at this point, our plans call for year-end annual polysilicon capacity of approximately 10,000 metric tons in 2009, and 12,500 metric tons in 2010.

We believe these levels will support our long-term expectations for existing customer demand, as well as opportunities for growth that we are pursuing in both semiconductor and solar markets, including share gains in semiconductor and downstream activities in solar.

Now let me turn the call over to Ahmad.

Ahmad Chatila

Thank you, Ken. As most of you know, I joined MEMC in March 2nd of this year. Since then I have been visiting our operations around the world. I have met with more than 100 of our customers, as well as some of our key suppliers.

I have also met individually with more than 150 of our employees in a one-on-one setting, each one 45 minutes long. The meetings have helped me see how MEMC is perceived by these important stakeholders.

They have helped me in setting priorities for how we are approaching the business. Clearly the most important of these priorities is the customer. The customer is always number one. A clear message that I hear from my team is that we must be more externally focused.

To do that we are expanding our sales and marketing efforts, and enhancing key support functions such as our field engineering, in addition, all executives have account responsibilities. I believe now is the time for us to be out meeting with customers and addressing their issues.

This external focus is already showing results. Over the past few months, we have expanded our solar customer base and have increased our penetration in the top cell manufacturers from working with two of the Top 10 to now working with five.

And we are actively engaging with many more potential customers across the board in the solar industry. On the semi side, same results, we have accelerated our process of qualifying our materials with Top 30 companies, where in some cases we currently are not shipping significant volume.

As these qualifications are individually completed over the next three to nine months, they will open the door for sale increases over the next several quarters and throughout 2010.

So to reiterate, our top priorities to ensure that we are 100% customer focused. John Kauffman, who is with us on the phone, our Head Sales and Marketing guy, will discuss customer initiatives in more detail in a moment.

Our second priority is to be the low-cost leader in both of our markets. We will work aggressively to drive all unnecessary cost out of the business. Along these lines, we will continue to rationalize our manufacturing footprint to produce our products as efficiently as possible.

This includes reallocating assets on cost enhanced product innovation, sales and marketing. We are eliminating cost redundancies and moving production towards low-cost regions. Our long-term prosperity depends on low-cost leadership. We're also professionalizing functional areas such as procurement and logistics.

Where for some, at least in high-tech space, these areas are an afterthought. We see these areas as opportunities to generate shareholder value through enhanced management. We're looking at every components of our business for opportunities to improve and add value rather than just maintain past practices.

With that approach we are finding many opportunities to make long-term structural improvement, and not quick success. The goal is to serve customers more efficiently, improve our competitive position, and ensure that we have necessary cost competitive capacity in the right places to meet the customer needs.

From my perspective, a key part of this plan is to bring solar wafer capacity in-house. This must be done to support a leadership strategy and protect our technology. By bringing solar wafer and capacity in-house, we can leverage our substantial IP and technological capabilities and semi-conductor wafering developed through years of constant engineering and innovation over the last 50 years.

We believe that we can lead the industry with high quality solar wafers at an attractive price. As we grow this area of our solar business, we are in a unique position to develop to build on our history of innovation and value creation of ourselves and our customers.

Third, our third priority is to ensure that we retain, develop and recruit the best talent in the industry. This is an area where we truly excel. We have tremendous talent on the management team, among our employee base, and on our Board of Directors.

I believe we have one of the strongest well-qualified board’s of any public company, and I would encourage you to review their background, if you are not familiar with them. Many are current or former CEOs and CFOs of leading corporations, as well as top technology investors.

As I travel around the business, it is also clear that we have an exceptional global team of employees who are talented productive and entrepreneurial. Because we are lean there is no place for deadwood to hide in our organization.

Everyone at MEMC knows that he or she plays an essential role in making MEMC a success. This is a very motivating atmosphere to be a part of, as we pursue our common mission to make MEMC one of the most successful companies in both the semi and solar spaces.

Finally, these challenging financial times, it is important to realize that MEMC has the strongest balance sheet in the industry. We have essentially no debt and $1.3 billion in cash and investments. This gives us the ability to maneuver in these times when others cannot. While some see this crisis as danger, we see opportunity to significantly distant ourselves from our competitors.

For example, I believe that we can capture more value by taking an active role in downstream solar projects. MEMC has a strong brand, a reputation for high quality products, a 50-year history, significant international property and technology resources, and has a very strong financial position.

Very few companies in the solar space are as well-qualified in my opinion to take a leading role and unlock or cancel downstream values. In the short-term, much of the current slowdown in the market is due to the lack of attractive projects enhancing.

We feel that we can participate in this area by choosing the right partners and helping to accelerate overall solar market growth. An example is our recent JV to develop solar projects with Q-Cells. In this case, our investment is enabling one or more projects to precede that have stalled due to lack of financing.

We are exploring these and other initiatives to generate attractive investment returns from our capital resources. I would conclude by saying that I believe we are well positioned in all major aspects of our business. Our strategies are straightforward. First and always number one is to be 100% customer focused, ensuring our customers success, while expanding our customer base.

Second, to be the low cost leader, and diligently manage cost both in manufacturing and overhead. And third, is to continue to ensure that we have the best talent in the industry. We have the best balance sheet, the most talented employees, and the experienced leadership, and board guidance to execute on exciting opportunities that lie ahead.

With that let me introduce John Kauffmann, who will provide us a few remarks on our customer initiatives. John.

John Kauffmann

Thank you, Ahmad. As many of you may know 2009 is the 50th anniversary of MEMC. I am proud to say that over that time MEMC has become a leader in silicon technology and a major supplier to the semiconductor industry.

Now we are leveraging that industry experience, as well as a reputation for quality to actively strengthen and broaden our customer base in the solar industry. So far this year we have increased our share at key solar accounts and have shipped wafers to more than two dozen new solar wafer customers, including several Top 20 industry leaders.

Our strong brand and financial strength support that objective. Under Ahmad’s leadership, we have also made it a top priority to get back to basics in product quality and timely delivery to our customers.

This is essential that rather than cutting back in this economic environment our efforts must be directed at constantly improving both quality and speed of delivery to our customers.

To ensure this, we have created a customer advocacy group internally to analyze all logistic and quality functions. They are charged with expanding our industry leadership in these areas.

The recent decisions include greatly reducing factory shutdowns, including some buffer stock and consignment inventory back in place, and further expanding our support capabilities to name just a few.

One of our major competitive advantages is the fact that most of our major customers, four most of our major customers, we are a local manufacturer. Local managers and engineers work closely with customers in their language, with local decision-making authority.

This gives us the flexibility and enables us to respond quickly to customer request. Customers will know that they can count on us to deliver what we promise, because our local managers are empowered to provide the highest levels of customer service.

We plan to build further on these advantages with a renewed emphasis on predictable delivery and quality. In summary we have a renewed commitment to maintain and enhance our technology innovation in both markets.

We are recognized by customers for compelling products and technologies and this will continue to be at the core of our success. With that we are ready to open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Okay, we will open the line of Stephen Chin from UBS. Please go ahead.

Stephen Chin – UBS

Okay. Great thank you. I appreciate the revenue guidance for the September quarter, but – I was wondering if you can give us some sort of pro forma EPS estimate for the September quarter that might exclude some of the gains and losses and the warrants and other one-time charges? If I go through my model I get about $0.05 in EPS in the September quarter, does that sound about right or is there more OPEX savings or something from the JV income that could be realized in the quarter?

Ahmad Chatila

Yes Stephen, we didn’t provide any EPS guidance for the quarter. We provided the revenue and margin. We tried to provide enough information in the OPEX, so that you can see what the unusual type charges were and then when you go below the lines, most of that is tied to interest income on the cash that we have, the $1.3 billion and than as we continue to provide wafers for this solar project into the JV, you will continue to eliminate the pro rata share of that income until we actually sell the solar project.

Stephen Chin – UBS

I guess the final question on that JV Ken, what kind of quarterly sales can we expect the company that shipped into that JV and what is the reasonable timeframe of when you expect to try to sell this project.?

Ken Hannah

The project is expected to complete in the fourth quarter, and then we would hope that it will be sold to a third party shortly after. The revenue, if you just take Q2 for example, I mean we went to great length to try to be transparent here in terms of this agreement, the revenue as a percent of sales is in the single digits. So this is not a huge impact to the revenue and earnings in the quarter. In fact, we actually eliminated half of the earnings. So it is not a huge number. This is a start, I think for the company in terms of moving downstream and making sure that MEMC's core products are installed in as many solar projects as possible, and we're pretty excited about what this holds for the future.

Operator

Next we will go to the line of Vishal Shah of Barclays Capital. Please go ahead.

Vishal Shah – Barclays Capital

Yes thank you for taking my question. Ken can you maybe talk about your assumptions for both the semiconductor and solar business and your gross margin guidance for Q3, specifically what type of wafer prices are you looking at right now? And it looks like you should be seeing quite a bit of improvement on the semiconductor gross margins side.

So I'm surprised your gross margin guidance is only calling for a slight improvement from Q2 levels. And then secondly, when you look at the project business, what kind of profitability targets do you internally have when you look at supplying wafers to these projects and would you be providing wafers at discount to the market price, can you maybe give us some guidance around that? Thank you.

Ken Hannah

Sure let's start with the assumptions for Q3. You know pricing, we try to layout as – we are expecting the semiconductor volume to continue to increase into Q3. Those increases obviously will help the margins. From a pricing standpoint, you know for the last several quarters, we have seen historical pricing declines that have been much higher than what the true history has shown over time.

We are expecting Q3 to get back to kind of a normal level of pricing now. We are also reading about some things in the news where there are some people in this space that have a desire to actually go out and increase pricing in semiconductor. We are certainly not assuming any of that in the guidance that we are providing.

On the solar side, I think that is the area that from a pricing perspective gives us some reason for pause and one of the reasons that we are trying to be very conservative around what we would expect the margins increase to be in the quarter. There is still, you know we still have 13 or so gigawatts of cell capacity chasing 5 gigawatts of potential demand. And so that gives us all reason to pause.

So, that is kind of the key assumptions in the margin guidance. Your second question on the projects, you were asking specifically if we were assuming some discount on the wafer pricing and what I would say is that the expectation here is that we are able to generate a return that is in excess of our cost of capital and that the wafer prices themselves would be transacted at fair market value and that that fair market value would allow us to continue to make attractive returns in the solar space.

Operator

Thank you. And next will we go to the line of Sanjay Shrestha of Lazard Capital Markets. Please go ahead.

Sanjay Shrestha – Lazard Capital Markets

Great thank you. Good afternoon guys. First question, Ahmad to you I think you mentioned in your closing remarks that one of the key strategies to bring solar wafering in-house, I mean, I was kind of curious about that given the underutilized capacity in the market and maybe that’s not necessarily being the key part of the value chain from the real technology standpoint. What is sort of behind your decision on that is it the quality of the wafer or can you go into that some more detail?

Ken Hannah

Thanks Sanjay. First of all, we will not bring full capacity inside, we will bring some. There are two main reasons; one of them is the quality and efficiency targets. And the value that we bring into the party and the other one is cost. I think we have a lot of good ideas of how to reduce the cost of wafers beyond what we see in the industry from people who just buy machines on the market. So, we feel very strongly that we can add value there. And my view also is that that capacity in the markets might not be as underutilized in the long run as we might think.

Sanjay Shrestha – Lazard Capital Markets

Okay. So then, what type of a mix are you guys going to sort of plan to maintain from a totaling versus the in-house wafer manufacturing?

Ken Hannah

We have not made our final decision Sanjay, but our view is we will launch into that product in 2010 and by 2011 we will have like 50% insight.

Operator

Thank you. And next, we will go to the line of John Hardy of Broadpoint. Please go ahead.

John Hardy – Broadpoint

Yes thank you. Guys you said that in Q1, you are running at a 100% utilization on the poly side in order to build some inventory, I was wondering how utilization rates looked through Q2 and where you are running today maybe in your expectations to the balance of the year?

Ken Hannah

John you're referring specifically to polysilicon utilization?

John Hardy – Broadpoint

Yes, just the raw poly productions.

Ken Hannah

Yes, we actually took advantage of the market conditions in the second quarter and we are able to do two major turnarounds in our Pasadena facilities. So, what you have in the second quarter is, we took the units down and did a full turnaround and typically that can be up to a 30 day process, but rather than wait until the back half of the year when those were scheduled to happen. We had built inventory in Q1. We had a buffer stock and could afford to actually take those down, do a full turnaround and set ourselves up for some really nice success in the back half of the year.

John Hardy – Broadpoint

So, you would expect utilization rates to increase from where we were in Q2?

Ken Hannah

That's right.

John Hardy – Broadpoint

Okay. And then one more quick follow-up on the poly expansion, what do you think that pushing out or delaying the ramp at 15 will mean for the second half of ‘09 and maybe a little bit of granularity on 2010 CapEx?

Ahmad Chatila

I mean part of what we did here is we use the word relaxed in the release. So, we took the schedule and we actually we pulled out a lot of the time that we had built into that was associated with expediting and obviously there is a cost associated with that and so we relaxed the schedule and as a result, we are hoping that the overall CapEx required obviously will be less. We have not provided any total year CapEx guidance, but we wouldn't expect it to be all that different than what you have seen in the first two quarters of this year.

John Hardy – Broadpoint

Thank you.

Operator

Next we will go to the line of Jesse Pichel of Piper Jaffray. Please go ahead.

Jesse Pichel – Piper Jaffray

Yes, couple of quick questions. Do you think that other polysilicon incumbent competitors will relax their capacity expansions as well?

Ahmad Chatila

We really cannot, we did not have a view on that at this time Jesse. Our view is, if some will definitely relax and some be more aggressive, but we do not have a strong view, I wish we can hear from you on that.

Jesse Pichel – Piper Jaffray

So, I will skip that. So, MEMC will, can get some of the profits from selling the project, is that correct, it's not just the wafer sale?

Ken Hannah

That's right.

Jesse Pichel – Piper Jaffray

Can we expect other partnerships with downstream developers or utilities will come?

Ken Hannah

Well, that certainly is an opportunity that we are evaluating to. This is really just the first step and in the move to try to participate in downstream projects, and we are evaluating additional opportunities as we speak.

Operator

Thank you. And next, we will go to the line of Stephen O'Rourke of Deutsche. Please go ahead.

Stephen O'Rourke – Deutsche Bank

Thank you good evening. Just a couple of follow-ups, do you have a buyer for the first project and what is the pipeline look like for the JV.

Ahmad Chatila

Steve there have been discussions with the potential buyer and I mean those discussions have not completed, there is no formal document in place, but we are very positive that once completed there will be a buyer for the entity, but I can't set here today and tell you that all the documentation is being completed.

Stephen O'Rourke – Deutsche Bank

Okay and can you at least characterized maybe the longer-term volume expectations you may have with this joint venture?

John Kauffmann

Well this joint venture you know our plans are to put up to $100 million of capital and then as those projects are sold, you know we have the election to either to take the capital back or we can leave the investment in the JV and continue to do additional projects. So, right now we are certainly talking about additional projects, but the focus right now is the one that we are currently working on.

Operator

Thank you and next we've got to the line of Krish Sankar of Bank of America/Merrill Lynch.

Krish Sankar – Bank of America/Merrill Lynch

Yes thanks for taking my question. I have a question and a follow-up. Can you give an approximate mix between your solar and semi-revenues in the quarter and it is probably still below 10%? And my follow-up is on the JV, what sort of return do you expect when you sell your stack in the JV?

John Kauffmann

So let me start by the first question you had asked about kind of what the split was in semi-solar and poly. You know in the round numbers, we are about 50-50 between semiconductor and solar revenue, and the polysilicon as a percent of revenue was again in the single digits.

Krish Sankar – Bank of America/Merrill Lynch

And what kind of return do you expect on the JV when you sell your stakes?

John Kauffmann

Well I mean, we would get into a little more detail here than I would be prepared to go into Krishna. I mean, obviously we are expecting to generate a return to an access of our cost of capital.

Operator

Thank you. And next, we will go to the line of Mehdi Hosseini of FBR Capital Markets.

Rafi Hassan – FBR Capital Markets

Hi, this is Rafi Hassan for Mehdi. I have a couple of questions. Can you talk about your semiconductor utilization rate? In the first quarter, you talk about 30%, below 30%, what does it look like now and what do you on our due for those vital capacity for 200 millimeter, do you plan to move them to solar? The one in Malaysia, is there any plan for solar wafering there? And what is your shipment growth for semiconductor side, I mean unit wise in the second quarter to third quarter that you can talk about?

Ken Hannah

Yes, so let's start the number of parts here to your – the first question was semiconductor utilization rates and what he had said last quarter, is that our utilization rates were down below 30%, we were very fortunate to see those utilization rates inquiries over the course of the quarter. So, went from 30 to 40, to 50 in the 60s number and we are very pleased with the increase in utilizations and great work by John Kauffmann and his team working with our customers.

In terms of the 200 millimeter specifically, we had announced last quarter that we were commissioning a new 200 millimeter site in Ipoh, Malaysia. We are off and running in terms of getting that facility up to speed and in discussions with the number of customers and the hope is that we are going to be able to utilize that capacity in 200 millimeter. There are opportunities to use some of that equipment to produce mono wafers on the solar side and that would be taken into consideration as part of what Ahmad mentioned earlier and our desire is to bring internal solar wafering internally.

Operator

Thank you and next we will go to the line of Paul Leming of Soleil Securities. Please go ahead.

Paul Leming – Soleil Securities

Good afternoon and thanks for taking my question. I was wondering if you could give us any kind of update at all on the expansion last year at Pasadena, specifically are you now consistently achieving 6,000 tons as annualized production out of Pasadena kind of month-in and month-out and just related to that are you continuing to run both Pasadena and Merano full out?

Ken Hannah

Yes. So, I mean we are not going to get into specific production volumes. What I did articulate earlier Paul was that we did use the second quarter as an opportunity to poll-end some scheduled maintenance that was scheduled in the later part of the year and did some complete turnarounds on the equipment and would certainly expect to see those utilization rates running very strong in Q3 and Q4 of this year.

Paul Leming – Soleil Securities

Just trying to get some detail and I understand you don't want to get into plant by plant specifics, but is there any thing you can tell us about the – has Pasadena consistently demonstrated the ability to get to the production levels that we are anticipated in last year's expansion?

Ken Hannah

What I would say Paul is that we are very pleased with the progress that we have made in Pasadena. You know the team down there has really done a nice job. We have brought some incremental resources in and we've had some real technology innovation and what I would say is that we are very, very pleased with the effort that is going on in Pasadena.

Operator

Thank you. Our next question comes from the line of Timothy Arcuri of Citi. Please go ahead.

Timothy Arcuri – Citigroup

Hi guys, couple of things. Ken, first of all, just on the margin guidance, it seems like one or two things has to happen for the margins to be that low. First of all, you kind of have to be consuming that poly prices fall to kind of $40 or $50 down from maybe $75 today, number one or number two there has to be some abnormalities in there from the Q-Cells deals, so I'm wondering, which one it is? And then I have a follow-up.

Ken Hannah

Yes, so what I would tell you is that there are no abnormalities associated with the Q-Cells. Those wafers were sold to Q-Cells at fair market value and so that certainly not a contributor and you know on the poly side, we are not selling a lot of polysilicon, Tim, in terms of single-digit as a percent of sales. I did mention, when we were talking specifically earlier about solar pricing and we have tried to allow for some continued solar price reductions at some pretty highly rates and so that obviously is taken into consideration.

Timothy Arcuri – Citigroup

I understand. I guess I was just backing into, I know you are selling wafers, but I was backing into what had to happen to poly prices, it seems like you're making very conservative assumption on pricing there.

I guess as a quick follow-up on that, just from a big picture perspective, if poly prices begin to go, kind of below say it is $50 range, which is sort of what is required to sort of hit grid parody in most medium resource markets without a subsidy, would you start to build inventory at that level? So, you know there seems to be a perception that poly prices won't bottom until they get the cash cost, but is there a floor that is about cash cost because you will start to build inventory at a certain price level? Thanks.

Ahmad Chatila

Hi Tim this is Ahmad. Actually that is one of the reasons why we're looking at the wafering technologies because if you want to give cost per watt at prosperity, by having the wafer and the polysilicon combination there is a lot more degrees of freedom, we can play with, without impacting margins. So, wafer thickness, curve loss, all kinds of other techniques, improving efficiency. So it is not only a polysilicon price it is all that combination together.

Operator

Thank you. Next, we will go to the line of Edwin Mok of Needham.

Ahmad Chatila

Actually, I want to say also one other thing for Timothy, we will not build inventory. Inventory for us is evil, we will never do that. So, don't worry about it.

Operator

Thank you. We will next go to the line of Edwin Mok of Needham & Co.

Edwin Mok – Needham & Co.

Hi thanks for taking my question. Just a follow-up question to Tim's question regarding margin, you know based on your discussion about utilization (inaudible) will go up and then you said that pricing, price decline will be more stabilized and then half your business is semi, can you kind of maybe quantified as your semi-margin, maybe about solar right now, or is it still relatively low because you are still not 100% utilization? And I have a follow-up. Thank you

John Kauffmann

Edwin we are not going to break out our margin profile between semi and solar.

Edwin Mok – Needham & Co.

Okay and then the fall was regarding the solar wafering capacity that you guys talked about, just wondering how do you guys, I guess you guys worry about all these options, but how do you guys make decision between build versus buy or even like potentially converting some of your semi-capacity given those are not fully utilized at this time?

John Kauffmann

Maybe I'll answer this one Edwin. You know at the end of the day, we have a great partner in first solar and first solar has set the tone for what the industry roadmap cause is and for us we look at that and we have to respond for our customers. So, when we think about make versus buy, we need to ensure that our partners are able to deliver the costs in the roadmap required to make our customers successful. So that is how we are thinking about make versus buy decision.

Operator

Thank you. And next, we will go to the line of Satya Kumar of Credit Suisse. Please go ahead.

Satya Kumar – Credit Suisse

Yes, thanks for taking my question. Ahmad, on the same tone on having a cost competitive road map with for solar, there is at least the perception rate now that you have been players at a higher cost compared to Chinese companies. It is curious why you picked the European company for your first downstream JV activity and not say, a vertically integrated Chinese company with lower cost. And do you have plans to announce similar JVs like this with the other companies?

Ahmad Chatila

So, I will actually answer the first one and I will get Ken, which has been leading a lot activities on the JVs to answer the second if we have other activities. Actually, we view – we kind of talk about our customers, but we view some of the European players as strategic in nature for us and are very powerful players in the long run. Maybe there are some issues in the short term, but we do not see it as a structural long range problem. So our view is we will always deploy our resources on these guys and we will always work with them. Now today, we have also Asian customers, as you know, in our portfolio. So we are kind of balance in that regard. And Ken, please answer the JV one.

Ken Hannah

Yes, I think if you start with the existing joint venture and you say whether its Asian or European, it comes down to the economics and we were very comfortable with the overall economics for this particular project and the way that we had structured this is upon its success. We can elect to continue to do additional projects inside this existing JV or we could elect to liquidate the ownership and take that capital, and invest it elsewhere. We have been approached by a number of other leading companies in the solar industry to consider doing joint ventures and that’s companies from all around the world that have access to projects all around the world. And so, yes, we are in conversations and to the extent that we believe that these are make able projects that can be completed at attractive economics. So we certainly are going to consider them.

Operator

Thank you. Next, we go to the line of Hendi Susanto of Gabelli & Co. Please go ahead.

Hendi Susanto – Gabelli & Co.

Hi, guys. My questions have been answered. Thank you.

Operator

Thank you. And our next question will come from the line of Chris Blansett of JP Morgan. Please go ahead.

Chris Blansett – JP Morgan

Hi, guys. Thanks for taking the question. I wondered if you guys are willing to provide some information on your expected CapEx for solar wafer producing facility.

Ahmad Chatila

Okay. We are not ready to discuss that, but if we make the final decision to do it, it will be at very attractive cost versus the leading companies in the world. And these numbers are available, as you know; some of them are in the half dollar per watt range, so they have to be very competitive with that for us to launch the project otherwise we will not do it.

Chris Blansett – JP Morgan

Okay. And then, the last question I had as it related to your continued moderate expansion of poly production. I think Ken mentioned, you know, there is a lot of excess capacity out there and I am just kind of wondering why you are – even though it is just a moderate expansion versus original plans, why you are still expanding that capacity in spite of that oversupply we are seeing.

Ahmad Chatila

Well, the oversupply that we are seeing, Chris, was created because of severe reduction in the semiconductor industry. You are starting to see the semiconductor industry start to pick some of that polysilicon backup and there is still a lot of people betting on new entrants that have been very vocal about their desire to expand capacity, but have yet to show a lot of actual production output. So we want to make sure that we are able to produce enough polysilicon to support all the plants that we have in place both in terms of semiconductor and also on the solar side, including being able to support downstream projects.

Operator

Thank you. And next we will go to the line of Stuart Bush at RBC Capital Markets.

Stuart Bush – RBC Capital Markets

Yes, thanks, Ken. This is actually a perfect follow-up to what you just said. In regards to delaying your poly plans, I mean it makes sense given the oversupply, but as you said, there is a lot of new entrant producers that keep building the capacity. It is my understanding that your FBR process has a lower marginal cost of production, so I mean, do you believe that some of these new entrant producers are selling or intend to sell at below cost to gain share?

Ken Hannah

Well, so as with any new entrant in the beginning, your costs are very high and so there is no reason for us to believe that that’s not happening today that people are willing to sell at below their startup cost. We are focused right now on making sure that we are able to take care of our own internal plans and to be able to expand the way that we believe we can expand in both the semiconductor and the solar industries.

Stuart Bush – RBC Capital Markets

If I mean that, it seems like there is economic rationale either its not going on especially with some of the Asian countries pushing to further push expansion. I mean how long do you think that could persist and keep the pricing low?

Ken Hannah

Well, so we know that it’s going to continue here in the near term. What we – and as a result of the current macroeconomic conditions you have seen pricing for and cost in the solar space come down to where you have got more and more markets that are reaching great parity. What you have not seen yet is the demand elasticity. And so when you look at these supply demand, we have seen this supply come on and you have seen the cost come down, it’s going to take an improved macroeconomic condition to see the demand elasticity. And when that happens, I think we have a very strong internal view that when that day happens, there is going to be a number of companies that are very hard for us to support what that demand could be. It’s just a matter of when does that actually happen.

Operator

Thank you. And next we will go to the line of Paul Clegg with Jefferies. Please go ahead.

Paul Clegg – Jefferies

Hi, thanks for taking my question. I don’t know if you gave these numbers yet, did you give your semis unit growth quarter-over-quarter in 2Q?

Ken Hannah

No, I think just saw some industry data that’s come out just in the last couple of days and I think its up in high 70s, low 80s in terms of percent increase. So we have seen unit in the industry down 35% in Q3 to Q4, down another 35% in Q4 to Q1, and then it looks like its come up around 80% here in Q2. And so that’s on the unit side. The pricing however across those three quarters has been down at above historical levels.

Paul Clegg – Jefferies

Okay. And I think in the past, you have also given geographic revenue mix. If you wouldn’t mind giving that for the quarter and then what’s you are expecting for the year?

Ken Hannah

Yes, we have not provided geographic mix in the quarter. We provide that usually annually in the 10-K.

Operator

Thank you. And we will go next to the line of Atif Malik of Morgan Stanley.

Atif Malik – Morgan Stanley

Hi, thanks for taking my question. The first question on the inventory, can you give some color on the composition of inventories, is it mostly poly or more wafers? And then a follow-up on your contracts, is it fair to assume that all of your long-term sort of contracts had been negotiated to the market rate?

Ken Hannah

Well, we will start with inventory. The majority of the inventory is in finished goods and the majority of the finished goods inventory is semiconductor related. Ahmad mentioned earlier that we had began to provide some consignment inventory, so part of that finished goods inventory is where we are actually holding some consigned inventory for our customers in order to help them out. And then on the contract side, we did issue an 8-K today pertaining to the Suntech amendment where we had renegotiated the price there and we are in discussions with our other customers as well.

Operator

Do you have another question, Mr. Malik?

Atif Malik – Morgan Stanley

No. Thanks.

Operator

Thank you. And our next question will come from Jagadish Iyer [ph] of REIT Research [ph]. Please go ahead.

Jagadish Iyer – REIT Research

Hi, Ken. Hi, I have two questions. First is, Ken, how much up-to-date can you tolerate for funding projects for these kind of projects that you have had for Q2 [ph] at any given instances, its like 100 million, 200 million. Can you help us quantify that number please?

Ken Hannah

Yes. Hi, Jagadish. You know, we have not decided about that yet. For us, we look at these investments and we compare this to other things we can do, and if they give us attractive returns, we will do them. So we have not made a hard number yet decisions. Right now, we are starting with the 100, we might expand it, but there is no final decision yet there.

Jagadish Iyer – REIT Research

Okay. Thank you. I have a quick question, a follow-up is that, if you look at the semiconductor wafer prices over the last, say, five years and if you had look at it from now until the end of the year, how much of downside risk do you have in terms of semiconductor wafer pricing? All I am trying to get is, are we at the real bottom of the semiconductor wafer prices where there is probably a very little downside. Can you help us–?

Ken Hannah

Very good question, Jagadish. Really appreciate the question. You know, my view is the aggressive decline that we saw in Q1 and Q2 will be much less going forward. I think it will get back to the historical run rate may be even a little bit less potentially. As you can see also from some of our competitors, they are starting at least the rumor melts says that they are trying to raise pricing on some wafer diameters, and we welcome that because I think right now the pricing is too low for to be sustainable in the long run. So my view is there is little downside in Q3 and Q4 in that regard.

Operator

Thank you. And next, we will go to the line of Gordon Johnson of Hapoalim Securities. Please go ahead.

Gordon Johnson – Hapoalim Securities

Thanks for taking my question. Congrats on a pretty good quarter guys.

Ahmad Chatila

Thanks, Gordon.

Gordon Johnson – Hapoalim Securities

You are welcome. I just wanted to ask about some of the recent commentary out of some of the Chinese polysilicon manufacturers GCL, DC Chemical who suggest there are fully loaded manufacturing cost in the $40 per kilogram range. Can you guys comment on that and what you expect that to do to competition this year, and then a follow-up?

Ken Hannah

Anything that we would say will be just pure speculation. We read and hear a lot with the same things that you do. And so I am not sure that it would even be appropriate for us to try to address that, Ahmad, if you have any.

Ahmad Chatila

No, I am actually with you on that one. Some of the guy is going to able to make good money in the long run, Gordon. I mean there is a lot of companies around. But I just want to make another commentary, lot of companies actually went to that space because of the lack of support in ’06, ‘07, ’08 timeframe and I think many of them will have very high costs. And I think we are seeing that. We are seeing a lot of people running around wanting to buy polysilicon. As far as you know, we sell only single digit of polysilicon, so we don’t have that big perspective on it because we sell wafers. So some of them I think will be successful, but most of them will have a hard time in my view.

Gordon Johnson – Hapoalim Securities

Okay. Thanks. And I know just your comments on the bottom in the semiconductor market. However, it looks like margins are still somewhat under pressure. Can you guys give us any answer as to what kind of I guess underlies those comments and I guess specifically it seems like there was a massive inventory restocking in the semi space in the second quarter, but it seems like may be we will have to see some real consumer purchasing in the third and fourth quarter to really see that trend kind of pickup. Is that what you guys are seeing and is that what you expect? Thank you.

Ken Hannah

Yes, I think Gordon, I mean, we are seeing inventory down in both dollars and in days. And so we talked a little bit in the last quarter’s report and results on our call with kind of how the Q1 numbers in the industry had transpired and the units were down 35% in Q1 and that was with February to March being up like 40%. So January, February were pretty low and that you have seen here in Q2, it looks like Q2 over Q1 looks to be up some 80%. And we look at the inventory, it doesn’t look as though there is a lot of build there, we are still being cautiously optimistic but I think we are comfortable saying that the January, February timeframe was the bottom.

Operator

And we have a follow-up from the line of John Hardy with Broadpoint.

John Hardy – Broadpoint

Yes, thanks guys. Thanks for taking the follow-up. I was wondering if you could characterize the participation from the US and Europe versus Asia on the increased visibility on the semi side of the business. You obviously Asia came out of the gate a little bit earlier because of stimulus and I am wondering if we have seen that restocking of inventory from – in the North Americans and the Europeans based on some commentary early on, thanks.

Ahmad Chatila

Yes, John, you don’t we can actually have John Kauffmann. We have him on the call today and as you know, he is our sales and marketing expert. So John, do you want to answer it?

John Kauffmann

Yes, you have seen it certainly right. Asia did come out of the gate first, but specifically in this quarter we have seen several of our European and US customers’ pickup. And I think the better way for inventory selling through, we see a lot of expedites across the board, all segments, all regions for silicon in the current quarter.

Operator

Thank you.

Ahmad Chatila

Thanks, John.

Operator

And we have a follow-up from the line of Satya Kumar of Credit Suisse.

Satya Kumar – Credit Suisse

Yes. Hi, thanks. Just wanted to clarify a couple of things, did you say that your semiconductor units was up 80% Q2 over Q1?

Ken Hannah

For the industry.

Ahmad Chatila

Yes, for the industry, Satya.

Satya Kumar – Credit Suisse

Is that approximately are you guys maintaining share or?

Ken Hannah

We believe that we are increasing our share.

Satya Kumar – Credit Suisse

Okay. So I am a little surprised, Ken, with that kind of semiconductor wafer shipment increase that you wouldn’t see a stronger gross margin performance. As you look out over to Q4, currently there is some worry that semiconductor wafers would go down sequentially with foundry especially and with polysilicon there is some new big factories coming on and there is seasonality in solar, so you could see pricing go down. How should I think about gross margins as they roll into Q4?

Ken Hannah

Well, Satya, I mean we did our best to provide a gross margin outlook for Q3. We have not provided a gross margin outlook for Q4, and so guess what I would say to you is that, sometimes we get caught looking at percent increases and 80% increase sounds very, very nice but when its coming off of a very, very low number, doesn’t do a lot in terms of filling up your factory. So what we have seen is a nice steady increase in utilization and we are very helpful that that’s going to continue. And as that continues and our factories are running at optimal rates, then you will see that come through in our gross margin.

Ahmad Chatila

Operator?

Operator

And our next question will come from the line of Mehdi Hosseini of FBR Capital Markets. Please go ahead.

Rafi Hassan – FBR Capital Markets

Thanks for the follow-up. I just wanted to ask a last question. You talked about five of the top ten (inaudible) of your customer. We know (inaudible) would you share the other name?

Ahmad Chatila

We are not ready to share the other name, but they come from various continents. So they are pretty well diversified. Its actually we support three out of the four main regions right now. I'll leave it at that.

Rafi Hassan – FBR Capital Markets

Okay. Thank you very much.

Ahmad Chatila

Thank you.

Operator

Thank you. And we will go to the line of Edwin Mok with Needham & Co. Please go ahead.

Edwin Mok – Needham & Co.

Thanks. Just a quick question on semi. Do you think you have a chance to get back to optimal utilization within the third quarter or the fourth quarter?

Ken Hannah

We are hopeful that we will see that as we go throughout Q3 and lot is going to depend on a lot of the questions that we have got here today on how much of what we are seeing is truly inventory replenishment versus sell through.

Edwin Mok – Needham & Co.

Great. That's all I have. Thanks.

Operator

Thank you and we will go to the line of Ben Pang with Caris. Please go ahead.

Ben Pang – Caris & Co.

Thanks for taking my question. Just a quick follow-up on the gross margin. Is there anything in the mix that would cause your margin guidance to change on the downward from your up slightly?

Ken Hannah

Anything in the mix?

Ben Pang – Caris & Co.

Right. I mean we just think about as long as your volumes are up, that your factory utilization is going to drive the gross margin up regardless of what the product mix is.

Ken Hannah

Yes, I mean I guess the thing that I would say is that the pricing reductions, if the pricing reductions continue to be at historically excessive levels, then it takes it that much harder to have enough productivity to offset those price declines.

Ben Pang – Caris & Co.

Okay. Thank you very much.

Operator

Thank you. And your next question comes from the line of Timothy Arcuri with Citi. Please go ahead.

Timothy Arcuri – Citigroup

Hi, guys. At the midpoint of range for September of the extra $50 million revenue, how much of that do you think will come from semi and how much from solar? And then as a follow-up Ken, I remember back in 2004, Nabeel used to talk about breakeven in the semiconductor business being roughly $400 million a year, so roughly $100 million a quarter. So, I am wondering how that’s changed today, if it's still kind of in that same range. Thanks.

Ken Hannah

Yes. Let me start with the second question around the breakeven. So what’s changed as 2004 is the prices are much, much lower than they were then. So obviously the breakeven cost has (inaudible) and so nothing else because of the fact that the price reductions have been above historical norms, that’s very challenging. We have also since that time seen a huge expansion on the 300 millimeter side, which as we know this is a very capital intensive business and so that’s going to increase the breakeven as well.

Can you help me understand your first question about the midpoint? Help me out with what it is you are getting at there, Tim?

Ahmad Chatila

Operator, can you bring Tim back? Is Tim already there?

Operator

Well, I am sorry, just a moment.

Ahmad Chatila

Operator, let’s go to the next question.

Operator

Okay. We will go to Dan Ries with Collins Stewart. Please go ahead.

Ahmad Chatila

After Dan, if you can bring Tim Arcuri back, that would be great.

Operator

Sure. Okay. Thank you.

Dan Ries – Collins Stewart

Okay. In terms of revenue per unit of polysilicon consumed, the pharmacy use to discuss kind of like a multiplier effect poly solar to semi of 1 to 2 to a range of 4 to 7. I was wondering how close you are to those ranges now because these saves for the long term, are we at kind of that at this point?

Ken Hannah

Yes, Dan, I don’t have an update at this point of those numbers.

Dan Ries – Collins Stewart

Okay. Thank you very much.

Operator

And Tim Arcuri, would you press star one please. Okay, thank you. Mr. Arcuri, your line is open, please go ahead.

Timothy Arcuri – Citigroup

Hi, thanks. Ken, what I was asking was, at the midpoint of the revenue guidance range for Q3, you need an extra $50 million and basically sequential revenue and I am wondering of that $50 million, how much of that will be semi and how much of that will be solar?

Ken Hannah

I mean it’s a combination of the two. And I would say that the opportunity for upside is certainly there on the solar side and what we have tried to be cautious about in the margin guidance is the unknowns around the actual pricing. And so if we are not comfortable with the pricing, then we are not if we were not going to go chase that business. But if you assume 50/50 Tim, that’s probably okay.

Timothy Arcuri – Citigroup

Great, Ken. Thanks a lot.

Operator

And next we will go to the line of Sam Dubinsky with Oppenheimer. Please go ahead.

Sam Dubinsky – Oppenheimer

Hey, guys, couple of quick ones. Are you guys still shipping to Conergy and Tainergy? And then, I have some follow-up.

Ken Hannah

There were some shipments to Conergy early in the quarter. Really, we prefer not to discuss the Conergy situation any further because of the ongoing litigation. Then we are in discussion with Tainergy regarding shipments.

Sam Dubinsky – Oppenheimer

Okay. So in terms of your back half year expectation, how many customers are we shipping to long term contract? Is it just Suntech and Gintech environment for now or do you expect those other two customers to come back to you?

Ken Hannah

We would expect to be shipping to three out of the four.

Sam Dubinsky – Oppenheimer

Okay. And then could you just discuss the progress you had signing other customers until long term contracts?

Ken Hannah

So long term meaning –

Sam Dubinsky – Oppenheimer

Two years plus, one year plus.

Ken Hannah

We have not had a lot of conversations recently around tenure. We have had a number of discussions around multiple years. And so we are very pleased and we had mentioned earlier that we have increased the number of customers up to a couple dozens and a number of those customers are clearly in the top 20 in the industry and we are transacting with those not only on a month-to-month basis, but also quarter-to-quarter and multiple quarters as well.

Sam Dubinsky – Oppenheimer

Okay. You may have addressed this before. But in terms of semi demand, how we think of it from a unit perspective in Q4. Is that typically a soft quarter for you guys or how should we think about it?

Ken Hannah

(inaudible) seasonally has actually been up due to Christmas.

Sam Dubinsky – Oppenheimer

Okay.

Ken Hannah

So still shaking his head and telling me that it's down.

Ahmad Chatila

Seasonally it's typically down, although this year obviously has been unusual, so we will see how it plays out.

Operator

And next, we will go the line of Chris Blansett with JP Morgan. Please go ahead.

Chris Blansett – JP Morgan

Again, I got a good question about inventory in increasing amount of consignment. There is a big snapback of semi wafer demand in the quarter, but their inventory levels didn’t go down that much. I am trying to understand how much of that was affected by increased consignment that your customers are asking for?

Ken Hannah

Yes, the consignment, Chris, inventory, which had been down kind of in the mid single digits I think is kind of up in the mid-teens today.

Chris Blansett – JP Morgan

But I guess when you look at the comparison I guess between the return of demand for semi wafers and your output levels, is it fair to – I mean I am surprised we didn’t see more inventory roll up, and I don’t know if there is any reason for that.

Ken Hannah

Didn’t see, you were expecting a larger reduction?

Chris Blansett – JP Morgan

Yes, that’s correct.

Ken Hannah

Yes. Just what I would say is that, for the last couple of quarters, we have spent a lot of time trying to get inventory levels where they need to be across the entire supply chain and value chain, and we feel as though that the levels that you are seeing today are kind of where you should expect them to be going forward.

Chris Blansett – JP Morgan

Okay. That makes more sense. So this is more of just rebalancing the normalized levels of inventory?

Ken Hannah

Yes, exactly.

Ahmad Chatila

Also, Chris, this is Ahmad, one other thing that’s happening is that June month was higher revenue certainly than May and May harder than April. So as you are growing usually, you add inventory without getting the revenue recognized. So that’s another impact on–

Chris Blansett – JP Morgan

Okay. So you had a strong end of quarter month and that basically probably flushed out the inventory you would have built up?

Ahmad Chatila

Exactly. So it’s a growth, its not like it’s the last month kind of dealing. It's more the business has been growing since February.

Chris Blansett – JP Morgan

All right. Thank you guys, appreciate it.

Operator

And next we will go to the line of Atif Malik with Morgan Stanley. Please go ahead.

Atif Malik – Morgan Stanley

Hi, thanks for taking a follow-up. Can you comment on your long term semi gross margins? Is there something different strategy about the industry that can prevent you to get to that 30% kind of margins you did in 2004?

Ahmad Chatila

Yes, may be I will answer that. This is Ahmad. We do not see major structural problems today that will not allow us to get back to healthy levels. I do not know what the numbers will be. But as just Ken said initially, we have seen abnormal declines in pricing in Q1 and Q2, something that we have not seen before. And our productivity improvements have not caught up with these price declines, but we expect them to. So sooner or later, they are going to be there and the question is when and that depends on the current economic crisis. But my view as a semi industry and our wafer position in it, is a very healthy place to be in the long run.

Atif Malik – Morgan Stanley

Thanks and one more, the wafers that you are providing to the Q cells JV, are they being sold at the high end of the market rate or they are at the market rate?

Ken Hannah

Well, we believe they are at the market rate based on this particular type of transaction.

Atif Malik – Morgan Stanley

So, at the spot poly pricing?

Ken Hannah

No, they would be higher than spot poly, just by the nature of the transaction.

Atif Malik – Morgan Stanley

I see. Thanks.

Operator

And next, we go to the line of Hendi Susanto with Gabelli & Co. Please go ahead.

Hendi Susanto – Gabelli & Co.

Hi, one quick question. Considering all the inventory destocking that’s happened in the first quarter and second quarter, could you share us the insight on your mix of 300 millimeter and smaller wafers in your Q2 shipment and what’s your expectation going forward?

Ken Hannah

We are not prepared to break out the shipments between 200 and 300, although we wouldn’t expect that we would be much different than the overall industry.

Hendi Susanto – Gabelli & Co.

Okay. Thanks.

Operator

Thank you. And we will go to Jesse Pichel with Piper Jaffray. Please go ahead.

Jesse Pichel – Piper Jaffray

I am sorry, this is beating a dead horse but I am trying to understand the incremental margin on Q3, could you just discuss why only a slight increase in gross margin in Q3. Is it – are you seeing much higher depreciation levels and if you can give us the depreciation in Q2 that will be helpful and what depreciation is going to ramp like for the next couple of quarters, and if you could just review for us the pricing assumptions that we should use in our models? Thanks.

Ken Hannah

Yes. So its not depreciation, if you go to the statement of cash flows, you will see that depreciation and amortization was $28.4 million in first quarter and it was $28.9 million in the second quarter. So I think it is an attempt for us to guide and to take into consideration the fact that we have a semiconductor industry that has seen some pretty significant price declines and we believe that that’s moderating in the quarter and we need to have some productivity improvements that Ahmad had talked about. And then we have a bit of an unknown in the solar applications and in those wafers, that pricing has continued to come down at pretty high levels and we are being a bit cautious, should that continue throughout the quarter. We still have some 12 to 13 gigawatts of cell capacity chasing what we believe is somewhere around 5 gigawatts of addition. So, that in itself can create some pricing pressure that where we are wanting to making sure we have taken into consideration in the guide.

Jesse Pichel – Piper Jaffray

Is there an implied poly price that you are guiding to for Q3 as one of the, I know it’s on the call, kind of alluded to.

Ken Hannah

No, there is not and there is not an implied price. We are just leaving the guidance at a place where if the pricing continues, we are not going to come – have to come back and update you on the fact that we didn’t take those kinds of things into consideration.

Jesse Pichel – Piper Jaffray

Great. Thank you very much.

Operator

And our last question comes from Gordon Johnson with Hapoalim Securities. Please go ahead.

Gordon Johnson – Hapoalim Securities

Thanks. Just a follow-up, with respect to Gintech, are you guys currently selling solar wafers to them? There has been some rumblings that they had stopped taken product.

Ken Hannah

We are currently in discussions with Gintech in order to amend their contract similar to what you just saw in the 8-K regarding Suntech today.

Gordon Johnson – Hapoalim Securities

Okay. And have they made prepayments with respect to previous contracts they have signed for this year?

Ken Hannah

Yes, they have. They have made deposits just like all of the other long term contracts.

Gordon Johnson – Hapoalim Securities

They just haven’t taken any wafers yet due to the negotiations.

Ken Hannah

No, I mean they were taking wafers earlier in the year and we are taking about finalizing an amendment for the rest of Q3 and Q4.

Gordon Johnson – Hapoalim Securities

Okay. Thanks a lot.

Ken Hannah

Thanks, Gordon.

Operator

Thank you. And I will turn it back to management for any additional comments.

Ken Hannah

I would like to thank everyone for joining the call. Good night.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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