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Executives

Bill Michalek - Director, IR and Media Relations

Ken Hannah - SVP and CFO

Ahmad Chatila - President and CEO

Analysts

Stephen Chin - UBS

Krish Sankar - Bank of America - Merrill Lynch

Jesse Pichel - Piper Jaffray

Satya Kumar - Credit Suisse

John Hardy - Broadpoint

Timothy Acuri - Citi

Mehdi Hosseini - FBR

Stephen O'Rourke - Deutsche Bank

Paul Clegg - Jefferies

Atif Malik - Morgan Stanley

Sanjay Shrestha - Lazard Capital

Chris Blansett - JPMorgan

Sam Dubinsky – Oppenheimer

Edwin Mok – Needham & Co.

Stuart Bush - RBC Capital

Paul Leming - Soleil Securities

Gordon Johnson - Hapoalim Securities

Adam Krop - Ardour Capital

Andrew Root - Alkeon Capital

MEMC Electronic Materials, Inc. (WFR) Q3 2009 Earnings Call Transcript October 22, 2009 5:30 PM ET

Operator

Welcome to the MEMC third quarter earnings conference call. (Operator instructions) I would now like to turn the conference over to your host, the Director of IR and Corporate Communications of MEMC Mr. Bill Michalek. Please go ahead sir.

Bill Michalek

Good afternoon and thank you for joining our 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 2008 Form 10-K.

As a supplement to this call we have provided slides on our website which provide more detail regarding the recently announced acquisition of SunEdison. Please go tot the investor section of memc.com.

I will now turn the call over to Ken Hannah to review the financial results and outlook and then Ahmad will outline the business strategy behind the SunEdison acquisition.

Ken Hannah

Thanks, Bill. For the third quarter MEMC sales were $310 million, which is within the original guidance range of approximately 300 to $350 million provided at last quarter's earnings release and at the high end of our revised guidance range of approximately 285 to $310 million provided on September 8th following the previously announced disruption at the company's Pasadena, Texas facility.

This represents growth of approximately 10% over the previous quarter's revenue of $282.9 million. The sequential increase in sales was primarily the result of significantly higher wafer volumes for both semiconductor and solar applications partially offset by price reductions in wafers for solar applications.

Gross profit in the quarter was $20.5 million or 6.6% of net sales down from the 12.3% in the second quarter primarily the result of price reductions in wafers for solar applications and higher costs due to the previously announced disruption at our Pasadena, facility.

Third quarter 2009 operating expenses were $87.2 million. This includes restructuring and impairment charges of $39.7 million relating to the previously announced St. Peters, Missouri and Sherman, Texas plant consolidation, as well as $4.5million of cost associated with the startup of our new Ipoh, Malaysia facility.

The company reported an operating loss during the quarter of $66.7 million compared to an operating loss of $23.1 million in the 2009 second quarter. MEMC's net loss for the third quarter was $64.6 million or $0.29 per share, including the restructuring and impairment charges I just mentioned, additional tax expense of $19.2 million for an unrecognized tax benefit and a negative impact relating to the decrease in the value of the Suntech warrants of $6.3 million. The net income number also includes the impact of the deferral of profit on the Q-Cells JV until it is sold.

During the third quarter the company generated operating cash flow of $0.2 million compared to a $16.4 million in the 2009 second quarter. Capital expenditures for the third quarter totaled $53.1 million. The company's balance sheet remained strong with cash and investments of approximately $1.2 billion and virtually no debt.

Now turning to business conditions, demand indications from both semiconductor and solar applications customers continue to show gradual improvement. In semiconductors demand growth is broad based and utilization rates continue to improve. Pricing in the semiconductor is expected to be approximately flat during the fourth quarter compared with the third quarter but is expected to increase in the first quarter of 2010.

In solar the relative strength in volume seen in the third quarter continues. Pricing in overall solar market, however, continues to be uncertain. Considering these factors we are targeting fourth quarter revenue to be approximately 310 to $350 million. In addition, we are targeting gross margin to be approximately 10 to 14% with operating expenses of approximately $47 million including approximately $5 million of startup cost associated with our Ipoh, Malaysia facility.

These targets do not include the SunEdison financial results as the acquisition is not expected to close until late in the quarter.

Let me now turn the call over to Ahmad to talk about the business and outline the strategy behind the acquisition of SunEdison.

Ahmad Chatila

Thank you, Ken. Recently we announced the establishment of an internal leadership structure designed to align our business around our primary end markets and best address the needs of our customers. With the addition of SunEdison the structure now consists of three primary growth engines of which I'll address in turns, including semiconductor led by Shaker Sadasivam, solar materials which is our traditional solar wafer business including the polysilicon operation led by Ken Hannah and upon closing SunEdison which is solar development and services led by Carlos Domenech.

In semiconductors continuing the recovery of the January, February bottom wafer demand continued to show improvement in the third quarter across all end markets and geographies. In turn our factorization rate continued to improve across the industry following pricing declines that had been significantly above average for the past few quarters, pricing moderated and stabilized in the third quarter. For MEMC we expect flat pricing in the fourth quarter followed by what we anticipate will be increased pricing going into the first quarter of next year.

On the cost side we continue to focus intently on driving down costs in all areas of the business from procurement, production, to logistics. We announced that we have taken the painful short-term actions of planning the closing of our Sherman, Texas plans and portions of our St. Peters, Missouri plant; in order to position the company best for long-term earnings growth. This will allow us to reduce manufacturing costs and serve our customers effectively, with the right cost affected in the right places to meet their needs.

Now on the solar materials our main effort has been focused on expanding our customer base, increasing proper stability and bringing solar wafering in-house. We're very pleased with our progress with new and existing customers. We're seeing the benefits of our actions pertaining to improving efficiencies and consistency at our fluid bed polysilicon facility in Texas, but we still have a way to go in order to really achieve the potential of this highly differentiated process.

Regarding wafering, we are in the advance planning stages and continue to expect that we will have a portion of our wafering in-house in 2010. We do not plan to bring 100% of our capacity in-house, and in fact plan to continue to partner with our key outsource vendors as our volumes continue to increase. Our in-house manufacturing will offer us key advantage in terms of cost, advanced manufacturing and technology improvements.

When I spoke with you last quarter, I expanded on the key priorities I have set for the business, including being customer and externally focused, being the low cost leader and showing that we have the best talents, and participating in downstream solar opportunities through potential investment or acquisitions. In addition to the steady progress that we have been making on those priorities including many that I just mentioned today, we have taken another significant step, which will enhance all of those priorities.

So let me now turn to our acquisition announcement and our new business area of solar services. As Bill mentioned, we have prepared some slides that contain additional details and they are available on our website. As shown on slide three, today we announced an agreement to buy SunEdison, North America's largest solar energy services provider. SunEdison has been a Pioneer in making solar power a realistic alternative for many organizations.

We believe this acquisition presents a very promising opportunity for us to leverage our deep silicon wafer technology and engineering experience, as well as our financial strength to build a scalable business that can generate growing and recurring revenue streams. This high value solar power solution should play a major role in continuing to make solar power more affordable and therefore, spur a meaningful growth in demand. This should not only drive growth in our core wafer business, but also generate demand for our customers who manufacture solar cells and modules using our wafers.

As you can see on slide four, SunEdison is an integrated solar power provider that can manage the entire process of developing a solar power facility for customers. That includes the design, installation, financing, operation and maintenance of solar energy systems located on customer premise. This creates a platform to deliver electricity to customers at attractive predictable rates, as well as deliver other energy related services.

SunEdison also has capability to essentially control the distributor system which offers additional opportunities as they continue to build volume. Let me clarify that SunEdison does not manufacture solar cells or modules. Rather they design systems to fit customer’s needs using commercially available panels or technologies that best fit the application.

Slide five, contains a summary of many benefits that we anticipate. Management of both companies are aligned and extremely excited about this combination and you see in SunEdison's share of vision of a highly scalable and flexible business model with a value added solution. SunEdison has a substantial pipeline of customers and leads that they can accelerate with the additional resources MEMC can provide especially financial. Together we can make compelling combination and will be particularly well imposition positioned to capitalize on the growth in the US market and around the world.

From an MEMC perspective as shown on slide six. This is a big step forward in our strategy to generate incremental demand for our wafers and our wafer customers to play a greater role in end market development by simplifying solar. It will allow us to be positioned at both ends of the market and directly benefit from the declining prices and technology improvements that are driving this industry. As a result of these trends and SunEdison's capability and positioning, we expect to generate attractive returns on solar project installations. I want to make one comment that reduction of pricing is very attractive going forward for us and that's why we're making this combination.

Simply stated this acquisition of SunEdison will help position us where we want to be, in a leadership position in this young dynamic solar industry. For MEMC's power plant customers it's clearly a winning combination that could create new demand for their products by enabling organizations of all types to realize solar power without up front capital investment at a rate competitive with other sources of electricity. We see significant scalability in the business model and envision significant growth in solar installations.

Now slide seven, contains some of the financial details of the transaction. As indicated in the press release, the initial purchase price will be $200 million in cash and stock. There are also retention bonuses at closing and incentive payments based on performance over the next one to three years. We expect the transaction to be accretive to earnings by the second half of 2010. We will finance the purchase with cash on hand of which we currently have more than 1.2 billion including investments. While the timing of the transaction is subject to certain regulatory approvals, we expect the deal to close by end of 2009.

So I summarize on slide eight, this acquisition very directly meets our key objectives and priorities. At the top of that priorities list is our focus on customers, which is the largest greatest strength of SunEdison. Their focus is on enabling customers' success in obtaining clean energy, not on selling any particular product. In pursuing that goal our combined business will drive technology innovation, reduce the cost of solar energy and provide exciting opportunities for our talented employees.

As we move forward we'll continue to build a leadership position in all of our business areas, focusing and executing to our core priorities and position ourselves to best deliver value to our customers and to our shareholders. And with that I'll open the floor up for questions. Operator?

Question-and-Answer Session

(Operator Instruction) First we go to the line of Stephen Chin with UBS. Please go ahead.

Stephen Chin - UBS

Just my first question is about the fourth quarter sales guidance. The guidance Ahmad, is about the same level as the original third quarter despite you talking about higher volume demand for both semi and solar products. So is this simply just being a case of being more conservative on the polysilicon outlook in the fourth quarter?

Ahmad Chatila

I'll let Ken answer that.

Ken Hannah

Yes, Stephen. I think we're being conservative there, as well as there's still lot of uncertainty around the variability on pricing, particular in the solar segment. We're seeing pricing, in the mid to high single digits declines and as we look at how that's going to play out over the course of the quarter, obviously that will have an impact on both the revenue and the margin.

Stephen Chin - UBS

And just a follow-up question on SunEdison, can you share some of the recent financials of SunEdison, maybe the revenue run rate and current growth and operating margins to give us an idea how that company is performing and maybe can you elaborate on the 1.5 gigawatts of the pipeline. What regions are those mostly in?

Ahmad Chatila

Well, I'll answer a few of these questions and then Ken can answer others. Remember, this is a private company and we're not going to disclose today the path as much. We'll give you just a feel of the size of the business. A lot of the pipeline, majority is in the US. There's a big piece of it in Europe as well.

This business as you know is direct sales and PPA as well Stephen, and I'll get Ken to explain the difference between both. So from a revenue perspective the direct ones go immediately like our rest of the business like you're selling a product, but PPA you have to recognize revenue over the life of the purchase power agreement. So it's not straightforward.

I would say that there's no reason why we can't be north of a 100 megawatts installations next year and so that's how you have to see the business. The margins, this is much better than what we see today in MEMC type of margins. So I will leave it at that. Ken, I don't know if you want to add some comments.

Ken Hannah

No. I mean as you look forward in this business as Ahmad mentioned, we're very pleased with the backlog the company has developed the pipeline and their leads and if you look at that today, that's in excess of 1.5 gigawatts. How that materializes and comes through as revenue depends on the mix of the direct versus the sale leaseback, and then also the timing and so there's utility projects in here that are being firmed up for 2010, 2011 time frame.

So what we like about the business is it starts to give us a level of predictability and then a lot will depend on, you know, our decision to sell projects directly or what the percentage of sale leaseback is going forward. So that ultimately will dictate what the GAAP financials look like.

Bill Michalek

Operator, can you take the next question?

Operator

Next we turn to the line of Krish Sankar with Bank of America - Merrill Lynch. Please go ahead.

Krish Sankar - Bank of America - Merrill Lynch

Ahmad, I had a couple of questions. One on the acquisition, given that PPA is a very capital intensive business where we need to have access to a huge balance sheet, is it fair enough to assume that you probably got a pretty good bargain or can you talk a little bit about the valuation for getting into SunEdison. Given that a small private company like that might have difficulty getting access to capital today?

Ahmad Chatila

That's a very good point. There if you look at the markets Krish, it's like very fragmented. Most of the players have the technology and have the ability to execute, but they don't have the balance sheet to be able to do it and as you can tell that MEMC's balance sheet is the best in the industry. If you put actually all solar companies in the world MEMC has the best balance sheet. So from that we can get a good cost of capital and potentially get higher return than what they can get by themselves. So because of that it's a nice combination.

Actually let me explain few things. One, what these guys need is someone who is 50 years old that has long heritage so that when they walk into big accounts and big utilities, the utilities and the accounts, they feel yes, there's a stability behind this deal. Two, they need well a control over the costing of the overall value chain and no fluctuations in the long run, and three is the balance sheet as you mention. And because of that we think that it's a nice combination. We can help them a lot in growing. They have a great team, really heavy hitters, I'm very excited about them and they just need the financial and technology support a little bit and I think we can grow this business very well in the long run.

Krish Sankar - Bank of America - Merrill Lynch

Got it, if I could just squeeze in two more along this line. One is I do know that last year Applied Ventures had actually invested in SunEdison. So was there any kind of bidding or was there any other person who was involved in the deal? And secondly in terms of your guidance given that as the previous speaker pointed out, it seems to be more conservative and so is your gross margin. Is it fair enough to assume that semiconductor business is probably, you know barely break even or losing money in Q4? Thank you.

Ahmad Chatila

Let me mention a few things first and then I'll get Ken to help me out about the rest of the question. On the semi business I just want to repeat a few things for you. So we're not out of the doldrums by any means. The price reduced very fast throughout 2009 beyond the productivity gains that we had, but there's two things that are happening going forward, actually three things. One is we're going to get more loading. Two, we're going to try to raise pricing in Q1. So we're saying it today and we're starting to approach our major customers to let them know that. And three is as you heard we're shutting down couple of plants. Now that's not going to be shown quickly, but believe me, we said it’s million based on the current volume that we have and our volume is increasing.

So we think we're going to have a nice EBITDA bump towards the end of 2010, early 2011. So semi is a very healthy business and it's going to become healthier over time. We just had a very bad year. From a bidding perspective and who invested I'll get Ken to answer that question.

Ken Hannah

Yes. I think, Krish, in terms of the acquisition process we're not going to get into the details of that process on the call here today. I think what's important is that the management teams on both sides worked very, very hard back through our Board and their Board to reach an agreement and we were very excited today to be able to announce that to everyone. And hopefully you'll gather from this call today the enthusiasm and excitement that Ahmad and I have for what we're buying which is a fantastic group of people at SunEdison who had have put a very strong platform and that we believe is going to allow us together to really participate in the growth that we're going to see here in US primarily and then the ability also to grow in other areas around the world.

Ahmad Chatila

This is a company that at the end it's about people and services of these people and I personally met and the management team here with less than 30 of their VPs and directors and managers and I spent one-on-one a lot of time with them, trying to understand what we should change, what we should not change, what are their aspirations. And I’ll tell you I'm very impressed. We have very nice cultural alignment and that's what we've been studying for months and months and months. This is not a last minute deal. So, we're very excited about that.

Going back to semi by the way, I just want to tell you what I've shared with other investors in the conferences. There's no reason why semi cannot get back to the historical gross margin run rate that we see in the past. So semi for me I'm very excited about it.

Operator

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

Jesse Pichel - Piper Jaffray

I'd also like to ask some SunEdison questions. I think investors generally like the idea of owning projects for the IRR like you did with Q-Cells and potentially aggregating and flipping them. But I'm just wondering what's the rational there for buying what's likely an unprofitable project developer that's probably a great drain on working capital and on your balance sheet because I think for the same money you could have bought 100 megawatts of projects with very little debt and then sold them off later accomplishing the same goals?

Secondly I'm just wondering why SunEdison relative to the numerous other project developers out there that don't have the same type of investors? And three, SunEdison had a number of take or pays and I believe they were still in effect. Are you obligated to honor those take or pays for solar modules from other brands?

Ahmad Chatila

Thank you for the question, that’s very well done. First of all, we want to create a sustainable business. We're not trying to buy 100 megawatt because actually there are a lot of that, we can do it. But we want to create a third leg to the business. We want to ensure that, we spent so much money on R&D trying to reduce the costs of polysilicon and wafering and our concern is at the end we're not going to see any return on those improvement. So, we would like somehow to absorb some of the value of our work and we want to create a sustainable competitive advantage and we feel that SunEdison will be accretive for us in second half of 2010 and then after that nicely profitable. So, if we didn't think that there we’re going to be profitable, we would not have done the deal at all. That's something we have to put in mind. In terms of the last question, sorry, repeat the last question, please.

Jesse Pichel - Piper Jaffray

So in regards what’s drain on your balance sheet and SunEdison relative to the other numerous developers out there, was it because of the investors behind it and what about the take or pays that SunEdison has with companies like Evergreen?

Ahmad Chatila

I cannot talk a lot about the take or pays, but let me tell you we are not concerned about anything there. We review them in detail and these things we ensure that we are not in jeopardy at all. So, I'm not concerned about them. In terms of the investors that they have, they have a good group of investors, but at the end they need a corporate parent. They need a balance sheet that somehow you can put a little bit of money and then get more support from banks at low interest rates and they cannot do it by themselves. They just cannot scale the business. This company is a fantastic company. They grew very fast by themselves and then the credit market hit and because of that they've been stuck and our job now is to unstuck them and I think they're a great platform for growth for us.

Jesse Pichel - Piper Jaffray

And if I could follow up, I think you said pricing looks better for next year. Was that a comment on semis or do you also expect solar pricing to be more firm or…

Ahmad Chatila

Yes. I was making the comment that we're going to attempt to raise pricing in Q1 of 2010 and I wouldn't have said that if I wasn't comfortable in executing on it.

Ken Hannah

Yes. And that comment was specific to semiconductors, Jesse.

Ahmad Chatila

That is semiconductors, yes.

Jesse Pichel - Piper Jaffray

Do you have an outlook for solar?

Ahmad Chatila

No, I don't. I really don't.

Operator

We have a question from the line of Satya Kumar with Credit Suisse. Please go ahead.

Satya Kumar - Credit Suisse

Thanks for taking my question. Firstly on disclosures, I've always felt that MEMC has an added level of complexity to the model given your semi and solar businesses. Now, you're adding another level of complexity. I was wondering what your thoughts are and then providing more segment specific disclosures on units of pricing and mix and do you have any thoughts on potentially hosting an Analysts Day given the substantial changes that are happening to the business model?

Ken Hannah

Thanks, Satya. This is Ken. We're absolutely committed to providing more information. We do recognize that the addition of SunEdison has added some additional complexity. We've communicated in the past that our intentions are to try to provide some additional information. It was particular to this semi and solar space and we're planning in January to start that process as part of the kickoff of the 2010 outlook and hopefully what you'll see is us trying to better communicate what's going on within our business.

Satya Kumar - Credit Suisse

I was just wondering if you would host an Analyst Day. I think would be a good opportunity for people to get deeper into the story, but the follow-up question on semis, what type of unit growth are you seeing on semis in Q4? What do you think unit growth will do in Q1? My understanding is normally Q1 is seasonally weak, so I was just curious why you think you can raise pricing, and if I look at the announcements you people made of capacity expansions from you and your peers and I look at the wafer shipment data that's out there, I calculate that (inaudible) based utilizations on semis are, they are not particularly high, as to sufficient slack maybe over 20 percentage points or more. What's the rationale as to why semi pricing needs to increase at all in Q1?

Ahmad Chatila

If you look at the historical data, semiconductor wafers have been like clock work, not semiconductor ICs but wafers. From a shipment perspective two good years, two bad years for many, many years and now with the memory business coming back on track and a lot of expansion in NAND and DRAM as well as you can see the results from some of the microprocessor giants, we feel confident that 2011 will be more up years.

Now this is forecasting. No one has ever been promoted as I used to say for doing forecasting, but I tell you all the signs show more demand for wafers across the world. So, because of that I feel comfortable in saying that and the price has been very low. It's not sustainable for many companies and that's not healthy. So I'm actually optimistic, cautiously optimistic, that we'll be able to raise pricing in Q1 2010.

Satya Kumar - Credit Suisse

I think I understand where you're coming from. Thanks a lot.

Operator

We have a question from the line of John Hardy with Broadpoint. Please go ahead.

John Hardy - Broadpoint

I have a couple semi-related questions and then a couple more solar questions. I guess starting off on the semi side, it sounds like you're pretty confident about being able to raise pricing in Q1. Otherwise I don't think you'd mention it. And you also mentioned that you think that you can get back to historical semi gross margins at some point in the future.

So one, I was curious about the magnitude of the price increases in Q1. Then also, if you thought you had a timeline on getting back to the historical semi gross margins and also what you thought those might be. Are you talking maybe mid-20s or mid-30s? It's been sort of all over the board the last few years.

Ahmad Chatila

I would on the gross margins I think the numbers that you mentioned are in the ballpark. There's no reason why we can't get back to that ballpark and semis depend on the cycle, especially when we shutdown our plants in Texas and St. Peters. I think that is a nice bump in our gross margins. From price increases, we're going to try to attempt double-digit increases. I don't know if we're going to be able to get away with it, but definitely and it depends on the customer. So some customers it's going to be 20% and some customers it's going to be zero, because some of them are lower. We gave a lot more concessions on others.

John Hardy - Broadpoint

And timing, you think on the 20 to 30% gross margin?

Ahmad Chatila

I can't tell you the exact timing, but there's no reason why in the foreseeable future let's say in 2011, actually that’s how we're thinking. From a shutdown of plants perspective it's going to happen only 2011 but at this moment I really can't tell you.

John Hardy - Broadpoint

Okay. Thanks so much. And quickly on the solar side of the business, [two sort non seculars], one, what sort of CapEx are you expecting for bringing wafers in house and then also for Q4 how should I think about the Q-Cells JV rolling up in the guidance?

Ahmad Chatila

Well, you know, now I have a President of the solar materials group sitting here with me. So, Ken how are you going to execute well.

Ken Hannah

I'm actually sitting here today as the Chief Financial Officer, Ahmad. In all seriousness, the CapEx, you know, when you look at the company's CapEx, I mean we've continuously talked about keeping that at around 15% of revenue and, we certainly would anticipate that over the long term that that's what that would be. There may be some, quarters where there is lumpiness in terms of the CapEx spend as we continue to ramp not only the wafering, but also the polysilicon, but I think, we're still committed to that overall model that we talked about in the past. In terms of the Q-Cells JV and we believe it's progressing nicely. We had said before, we thought that the project would be completed in Q4. That's still the case today. There have been a number of discussions with the ultimate owners for that and it's just a matter of whether or not the timing allows that to get completed in Q4 or whether that's pushed into Q1. Right now we've not assumed any benefit associated with the ultimate sell of that power plant in Q4.

Operator

(Operator Instructions). I'll next return to the line of Timothy Arcuri of Citi. Please go ahead.

Timothy Acuri - Citi

Hi, Ken. You said last quarter that your semiconductor utilization was about 60% and I'm wondering what it was this quarter.

Ken Hannah

Our semi utilization ended up in the 70 plus percent range. Obviously, was approaching the high 70% and then with the incident that we had in August we saw that drop a little bit, but well within the 70% range.

Timothy Acuri - Citi

I guess just two quick follow-ups on that. First of all, you had a fairly substantial increase in utilization. Obviously, you're not near full yet, but you had a fairly substantial increase in utilization. Pricing was pretty stable and yet margins were not very good. So, I guess I'm surprised that you didn't get a little bit more benefit on the margins just from the absorption of fixed cost. So, that's sort of the first follow-up and then the second follow-up is are your poly capacity targets still 10 K at the end of this year and 12 1/2 K at the end of next year?

Ken Hannah

Yes. So I'll start with the last question. The poly capacity targets are still 10,000 this year and 12,500 at the end of next year. On the quarterly gross margins, one of the things you mentioned was that there was really no change in pricing and that is absolutely not true. We saw double digit price declines in solar and very similar price declines on the semiconductor side. So, we talked about flat pricing in Q4 and then Ahmad was mentioning the possibility of increasing pricing in Q1, but we absolutely saw price declines in mid-to-high single-digit I think was the semiconductor and clearly double-digits in solar.

Ahmad Chatila

I think semis was lower, Ken, but on solar you're absolutely right that's what happened and maybe you can mention a little bit the discussion about what the impact of the [P&L role].

Ken Hannah

Yeah. So we went through and quantified just the hard dollar impact of the incident that we had. It ended up being over 700 basis points and so it was not an insignificant number.

Timothy Acuri - Citi

Okay, yeah. I was just really focused more on the semi side. I just thought that the semi margins would be better because the pricing was a little more stable there, but thanks.

Operator

And next we turn to line of Mehdi Hosseini with FBR. Please go ahead.

Mehdi Hosseini - FBR

Yes. Thanks for taking my question. I have one question for Ahmad. You’ve got to admit that your business model is changing with SunEdison acquisition and with the PPA and everything how should we think about the earning power? And then as a follow-up, if you go back to early this year when First Solar acquired project pipeline from OptiSolar, they paid 400 and most of that was in stock and they actually were able to acquire some assets and also a pipeline of projects. So to that extent, can you please help us understand the extent or the size of the pipeline that SunEdison brings for you?

Ahmad Chatila

Okay. So thank you, Mehdi for the question. First of all, I expect SunEdison to be the third leg for the businesses that we have. So we have semi, solar and Edison now. From a business model perspective, yes, we are going to be downstream, but from an overall, I'd call it operational expense gross margin in the long run they should be close to each other, not the same. They can never be the same, but close to each other.

The other thing I would tell you is, it's not right to compare the First Solar acquisition with SunEdison. SunEdison is more focused on PPAs and commercial and industrial rooftops, some on utility, but not on the scale that OptiSolar will have. Because OptiSolar had a technology I think, factory and a technology I don't know if First Solar bought it or not. It's a little bit different company. So, it's not the same thing.

I would tell you though from an evaluation perspective we tried to look to see what are the comparables and we couldn't find anybody. And the guys in Germany, big companies there, 50%, 55%, 60% of their revenue is distribution businesses, like being an [add-on after-market] in semiconductors and only 40% or so is really direct installation and SunEdison not even I mean has maybe I would say one-third direct, two-thirds PPA, I don't know the exact number, but it's something in that range. So a different business model, different customer base, different way of going to market, it's just not the same. You can't compare to any other deal.

Mehdi Hosseini - FBR

Can I have a second part of my follow-up question?

Ahmad Chatila

Please.

Mehdi Hosseini - FBR

Okay. Going back to the semi wafer side, obviously as Texas facility ramps up lower cost of making poly, that's going to help somewhat. You are also consolidating facilities, but I'm still struggling how the cost restructure is going to enable you to get back to a gross margin that has already talked about in the call. So, maybe can you somehow tell us to what extent consolidation is going to help? Can you quantify it? And then other cost components that could help us build a case that actually margins are going to expand and it's not going to depend on so much a fee increase?

Ahmad Chatila

Yeah. So I cannot answer everything that you asked for in the way, but let me give you my perspective a little bit. So in semi it's very clear story. Pricing went down a lot in 2009. I don't think it's sustainable and you can see some companies really hemorrhaging cash. So that's not going to be so to favorable long run. And some of our customers actually are not too excited about super low pricing. Including, some of them are more worried that they're going to be consolidation there. So they don't like that idea at all.

The other thing also, we're going to shut down plants. So that by itself is a nice bump in gross margins. So we'll leave this on the side. In the polysilicon and solar wafering perspective, Mehdi, it really has to come from us improving the consistency of Pasadena. And we're seeing some good results so far, but we have to see it over a long period of time.

And from a solar wafering perspective, you know, for us we think that not only we can reduce the cost versus what we buy from our side, but also we can have innovation to step-change what people do elsewhere. So because of these dynamics, I think our gross margin in long run will improve. I mean, if I wasn't that confident, I wouldn't be talking about it. I'll tell you, I will have plan B; but right now plan A is the way to go and I think we're going to improve our results.

Operator

And next we turn to the line of Stephen O'Rourke with Deutsche Bank. Please go ahead.

Stephen O'Rourke - Deutsche Bank

Thank you. Good evening. Just a follow-up question on SunEdison, I know we're kind of beating it to death here, but in your slides you talked about attractive gross margins. Can you quantify attractive gross margins? And secondly, with the SunEdison business model, do you see a need to change aspects of that business model whether it be from a cost perspective or how it fits with your general business?

Ahmad Chatila

You know, Steven, thanks for the question. There's no reason why they can't be above 20% initially, and in the long run it will reach the same numbers like what we have in semi. So that's what I call attractive gross margins.

Stephen O'Rourke - Deutsche Bank

Okay. And with respect to the business model, do you see a need to change any of SunEdison's business model?

Ahmad Chatila

No. Not at all, actually. You know, when we look at it, that's the nice thing about it. They just need help from a corporate parent. They need to get good costing. They need to get a good balance sheet to help them out with cost of capital, and they need someone to come and say, I'll be around for 25 years when you build the plants, and I'm not a 5-year-old company that somehow might disappear.

You know, if you look at these customers, I mean they don't want to have a problem with a panel and then have no place to call. And I think with these three things, we can help them a lot. They have actually the right business model. If you think about the PPA model, a nice, consistent cash flow stream that you can build step by step over time. And you can look at other industries and we can talk about it at some other point where that model succeeds in the long run.

Stephen O'Rourke - Deutsche Bank

And one last question. You mentioned 100 megawatts or more in 2010. Is that incremental or is that total?

Ahmad Chatila

That is a total number. I said above 100 megawatts.

Stephen O'Rourke - Deutsche Bank

Okay.

Ken Hannah

That's incremental additional installs, not meant to be total installs.

Ahmad Chatila

Yeah. New installs.

Stephen O'Rourke - Deutsche Bank

Well, so more than 100 megawatts of total installs next year? Okay.

Ahmad Chatila

Yes.

Stephen O'Rourke - Deutsche Bank

Fair enough, thank you.

Ken Hannah

Thank you, Stephen.

Operator

And next we turn to the line of Paul Clegg with Jefferies. Please go ahead.

Paul Clegg - Jefferies

Thanks for taking my question. Just again on SunEdison, sorry, but the tax credits that their projects create, can you use those to offset income from the semi and solar wafer side?

Ahmad Chatila

There is opportunity where we're creating, you know, tax bases to use some of those credits, yes.

Paul Clegg - Jefferies

And is that part of making it accretive or would it be accretive without that?

Ahmad Chatila

No. It would be accretive without that.

Paul Clegg - Jefferies

And then, what kinds of returns do you expect or do you look for on an IR basis? What kind of hurdle rate, I guess, did you use in assessing how much you paid for the deal?

Ahmad Chatila

I'm not going to get into the specifics on the valuation here on the call.

Operator

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

Atif Malik - Morgan Stanley

Hi. Thanks for taking my questions. On the semi wafer price increase in 1Q, if I try to draw a parallel between your situation and DRAM makers, they were successfully able to raise pricing because they started cutting production. So my question to you is do you see yourself or other peers cutting production right now that will instigate the price increase in 1Q? And also do you plan to give an ultimatum to your customers for price increase and are you prepared for market share loss?

Ahmad Chatila

Okay. So let me first answer, you know, there's a lot of capacity reduction. You should just read the news a little bit on different companies. We have not within done it. We are moving our capacity around but we are smaller than some of the other big giants. They have been actually shutting down plants and just taking the machines offline and forever.

The other thing about capacity that one of the customers was really worried about that they mentioned to me last week is that there's a difference between machine capacity and labor capacity and a lot of guys do not think that they can add the people to ramp the business as fast as the DRAM and NAND Flash market is coming back.

So that’s from that perspective. In terms of giving ultimatum we will never do that. You know, we could raise pricing potentially in Q4. Actually we could do a lot of things, like in Q3 we could have moved material around different customers, improved gross margin. You guys would not have known what happened. We don't play these games. We are giving people a long heads up because we respect them. We want them to be our customers forever.

So that's the situation. So it's not an ultimatum. It's just this is how it is and we're having an open dialogue explain exactly what's going on with us and how it's not sustainable and it's not healthy and we will not be able to invest in capacity in the long run and many companies get it. For them next year if the demand is going to be high, they want to ensure that they're going to get revenue per wafer on their plants rather than trying to haggle on $5 and $7 and $10 here and there. So I hope I answered your question.

Atif Malik - Morgan Stanley

Yes. That's very helpful and just a follow-up. As you guys layer this energy services business, any change in plans on increasing your polysilicon supply into the market? What is wrong with that business, in expanding that business? You have been holding it to less than 10% of your business.

Ahmad Chatila

Poly supply?

Ken Hannah

You mean like on the upper market?

Atif Malik - Morgan Stanley

Yeah. Just like just like Walker does in providing polysilicon to the market.

Ken Hannah

Yeah. We're not necessarily looking to sell more poly. We're looking to sell more wafers which means they will consume more poly. So we will match our polysilicon capacity plants to what we see our wafer demand being which we believe one of the acquisition is that it will give us much better downstream visibility in long lead times so that very capital intensive expansion can be done with much more visibility.

Atif Malik - Morgan Stanley

So, basically just continue to model polysilicon like less than 10% of your sales?

Ahmad Chatila

Yes.

Operator

Next we turn to the line of Sanjay Shrestha with Lazard Capital. Please go ahead.

Sanjay Shrestha - Lazard Capital

Sounds to me like you guys got the company for a pretty good deal actually, just wanted to run something by you guys. So this 80 megawatt of installed capacity, call it only $4, $5 in a replacement value, so you guys only paid 50% of an existing asset not even including any backlog or the revenue generated off of that existing power plant. Is that a fair way to think about it?

Ken Hannah

That's certainly one way to think about it. We'd like to think, we bought it for the future generation of cash flows.

Ahmad Chatila

Let me just say one thing here so that everybody can see our point of view. The pipeline volume and value past and future was very minor in our thinking of acquiring SunEdison.

Sanjay Shrestha - Lazard Capital

Exactly. That's kind of what I was trying to get at, so great. Kind of a follow-up question on that, then, guys. So when you talk about this 1.5 gigawatt pipeline, right. So what phase is that 1.5 gigawatt is in. Is it fully permitted? Is it discussion, sort of what's the likelihood of all that moving forward, you guys talked about 100 megawatt number for next year, also help us understand the ramp of that pipeline turning into development and the actual pipeline being installed.

Ken Hannah

We're not going to be able to answer these questions this time.

Sanjay Shrestha - Lazard Capital

Okay.

Ken Hannah

But you know what? At some point we'll start giving you transparency so you guys can model our future business and we will be confident about it as well. Actually that's one of the attractiveness of such a business, but today we're not ready.

Sanjay Shrestha - Lazard Capital

Fair enough. Now another one question on that, then guys, when I think about this 176 gigawatt hour of electricity delivered, so to model that revenue under PPA and which is obviously a phenomenal cash flow business, so is it $0.14, $0.15 a kilowatt hour kind of a number?

Ken Hannah

Well, we said that the majority of that was in the US. So you can go figure out kind of what those rates would be. What has not been provided is the split between how much of it is, PPA versus how much of that would have been direct sale and therefore would have already been recognized in the past.

Operator

We have a question from the line of Chris Blansett with JPMorgan. Please go ahead.

Chris Blansett - JPMorgan

I have a question maybe for Ken here. Ken, now that you have, SunEdison has a very strong balance sheet behind it, is it possible for you to try to quantify the benefits on the financing side you'll receive?

Ken Hannah

Well, we certainly mean this business is very sensitive to interest rates and we certainly believe that SunEdison will have a benefit in terms of cost to capital by having MEMC as a partner and so, you know, we've not quantified that, but we certainly believe it to be a benefit.

Chris Blansett - JPMorgan

All right. I mean typically I think today we're seeing a lot of projects going LIBOR plus 300 maybe seven to 10-year terms. I wasn't sure, how much better the terms you think you're going to get and/or do you think you're going to be able to get longer term loans for these projects given the strong balance sheet?

Ahmad Chatila

Yes. We certainly believe that our relationships with our banks as well as just the overall strength of our balance sheet is going to allow us to participate in projects at rates that would be better than a lot of our competitors and that's one of the interests that we had in this business.

Chris Blansett - JPMorgan

Kind of as a follow-up, then, now with the SunEdison acquisition and the internal capability all the way up to the wafer side, I mean the only thing you're really missing now is a solid module production to become vertically integrated from the supper nuts throughout the process. What are your thoughts on that and/or what are your thoughts on making sure your solar wafers you made go into the models that you may purchase from a third-party vendor?

Ahmad Chatila

Yeah. Let me take this one, Chris. Our thinking today is we will never be and I know never is usually a tough word to use. We will never be in the selling module business. It's a high fast moving industry. Cost is everything. Even the plants that were built two years ago are not competitive today. Some Chinese companies last year they were building 33 megawatts at $10 million and they were really saying that they're best in class. Today, you can build 33 megawatts for $6 million. That's not our cup of tea. We will not be in it. However, you know, we will work with these guys. And the nice thing about it is a lot of them are our customers. So actually we will use SunEdison to make them more competitive, and from that hopefully they will give us more orders.

So exactly it's a win-win thing. You see, we're not trying, if you think about it, our wafers go to many, many companies and many types of technologies from mono, multi, this and that. So we have a lot of flexibility in our model. We are not tied. We're not like a one line where whatever you produce you have to push through. No, we can actually, for example, move around and get more wafers than what we need and sell by a lot.

So that's our thinking. No sells on modules, we will not do it. We don't want to compete with our customers. Part of the thing is not to have antagonism in these things. So we don't want to be in it, and it's not attractive to us either.

Operator

We have a question from line of Sam Dubinsky with Oppenheimer. Please go ahead.

Sam Dubinsky – Oppenheimer

Hey, guys, just briefly. I'm not sure if I caught this from the last question, but should we expect SunEdison to change module suppliers over the next 12 to 18 months in favor of companies which you supply solar wafers to? And then I have a follow-up question.

Ahmad Chatila

Sam, potentially it will be like that. The most important thing in these deals is to ensure the end customer is happy. So we will not force them. We will not put a gun to their head, but we have an agreement already that this is the flow. You know, people who give them good support, good service and as well synergistic with our wafer business that Ken runs, they will be let's say more attractive for us, but at the end we need to ensure that the end customer is happy.

Sam Dubinsky – Oppenheimer

Okay. And then just in terms of the [business] model, with size now coming into your model, should we expect MEMC to carry very large gut loads or does it not get capitalized on your balance sheet?

Ken Hannah

If you think about the model, SunEdison, the vast majority of what they're doing is the sale leaseback model. So when you look at that capital when it comes over, it's actually then offset with cash, and so it's not what I would consider true debt. And so we'll have to walk you through the details of kind of the way that the accounting will work and we certainly would plan to do that in the future, but it's not something where we think you're going to see the capital commitment get out of hand.

Operator

Next we turn to the line of Edwin Mok with Needham. Please go ahead.

Edwin Mok – Needham & Co.

First regarding the solar wafering capacity, you guys talked about potentially adding capacity and stop producing next year. Can you give us say maybe on timeline of that? Are you already in planning stage or are you find a location to build this or where are you in that process?

Ken Hannah

We have spent the last two plus years in research and development, applying the 50 years of experiences that we've had, and we're now at the point where we're right in the middle of the final site selection process. And once that is completed, we will, very quickly go into a mode where there's equipment being installed, and as we mentioned earlier, looking to have production commence in the back half of next year.

Edwin Mok – Needham & Co.

Is there any benefit that you convert an existing semi wafering line into a solar wafering line?

Ken Hannah

Well, from a mono crystalline capacity that is certainly an option. We've not committed to whether it would be an existing facility or a new facility.

Edwin Mok – Needham & Co.

I see, great. And then just a quick follow-on SunEdison. It sounds like the synergy is more in financing and maybe, you know, obviously having a very strong company behind an operation like that. I was wondering is there any other synergy you might be able to realize in terms of maybe operational or anything like that, because it appears SunEdison is almost like a subsidiary for you guys rather than actually a integrated operation.

Ahmad Chatila

Well, actually a very good question and I tell you there's a lot of synergies and we will walk you guys through them in detail. I'll give you one example. Today in the solar industry if you're able to produce thinner wafers and get them through the module manufacturer, selling module manufacturers and get them installed, it will reduce the costs of silicon based PV, but today it's very hard to do that. The module guys are small and scattered. They don't have the R&D muscle to be able to absorb it. There's no incentive at the end customers to do anything about it.

So (inaudible) these kind of improvements are getting us to be stuck and I think the work with SunEdison will allow us to start to releasing these kind of ideas and actually there's around maybe five other like that from an R&D perspective. So there's a lot of synergies just like that. Ken, I don't know if you want to add.

Ken Hannah

No. I mean I think one of the things that we're very excited about is what we believe will be a pull through of our core business which is pulling through more wafers and the poly and then also what SunEdison gets is access to the cost road map so that they can go out and competitively compete for a business with a better understanding of where the costs are going than some of the other people in the industry. So, I think there are a tremendous number of synergies here that over time will start to become obvious.

Ahmad Chatila

The other one, for example, would be capacity planning. Capacity planning, I mean it's not going to be perfect, but it will improve when we have a clear line of sight to the end market and today where there are so many intermediaries we are not sure what's going on. That will help a lot.

Operator

Next we turn to the line of Stuart Bush with RBC Capital. Please go ahead.

Stuart Bush - RBC Capital

Thanks for taking my question. It's just a follow-up on that synergy question. Are you thinking that SunEdison will eventually go 100% towards module suppliers that do use your wafers? I mean is that the idea on driving additional pull through?

Ahmad Chatila

No, no. It will help a lot and we will use it extensively, but success of SunEdison relies on having flexibility to use whatever they have to use to make their customers happy and in some cases it might not be a silicon wafer. It could be some noble technique, thin film. We're actually not too religious about it. I think it will improve a lot of our business, but we're not going to make it digital like either our wafers or never. We will not do that. Otherwise we'll damage the business.

Stuart Bush - RBC Capital

And you mentioned that by acquiring SunEdison it gives you better insight downstream into the end market. So, to that end are you seeking to expand SunEdison geographically around the world?

Ahmad Chatila

Yes. Yes.

Operator

Next we turn to the line of Paul Leming with Soleil Securities. Please go ahead.

Paul Leming - Soleil Securities

Two questions. First what was the market growth in volume terms in semiconductor wafers in the third quarter?

Ahmad Chatila

Was that industry volume?

Paul Leming - Soleil Securities

Yes.

Ahmad Chatila

It was about 17%.

Paul Leming - Soleil Securities

And how did MEMC fare relevant to that?

Ahmad Chatila

Better than that?

Paul Leming - Soleil Securities

Second question, can you give us an update on polysilicon production aside from the outage in the third quarter, has the company demonstrated an ability to sustainably produce 800,000 tons a year of polysilicon between Pasadena and Merano? Have you done that for a quarter? Have you done that four success active months? Can you kind of update us on the production capability versus nameplate capacity?

Ken Hannah

We're just coming off of an incident down that there that we're not very proud of and so what I would tell you is that we're very pleased with the ramp up. The team did a phenomenal job repairing the equipments and getting the plant back up and running. Despite a number of rumors that were out about problems that were continuing, hopefully you can see from our revenue being at the high end of the range and our inventory levels that that certainly was not the case. The team did a phenomenal job. The process we put in place to stabilize that operation and then improve the activity and the business process, I'm very, very pleased with the progress there and in the last couple weeks we've seen output that we've not seen in the past and I would only expect that to continue as we continue with the project that we have going on. So, I'm very pleased with that progress and very excited about that particular facility continuing to increase their production output to get closer and closer to its nameplate capacity.

Operator

And next we turn to the line of Gordon Johnson with Hapoalim Securities. Please go ahead.

Gordon Johnson - Hapoalim Securities

I guess I just have a couple of questions. Number one, it seems like clearly you guys are getting into the solar project business. How do you think that could potentially impact your semiconductor customers, because it seems now potentially the first product you guys have will go to the SunEdison projects? Do you think that could impact your semiconductor customers’ perception of their ability to get product from you and then a couple of follow-ups?

Ahmad Chatila

The answer is no. Actually in the past they used to always be concerned about our growth in solar and the lack of support they got in semi and we have demonstrated now for the last nine months that we mean business with them and they saw it even with the incident we had in Pasadena, the semiconductor business there was no customer issues. So they know we're totally committed to the business and there are not going to be a lot of I would say allocation issues between businesses. So that's my answer. What's the other question?

Gordon Johnson - Hapoalim Securities

Okay. Two more questions. It looks like your gross margins are basically guided flat Q3, I'm sorry in Q4, whereas you're seeing an increase in revenues. I'm just scratching my head because it looks like you're saying your utilization is going to be up. So can you give me a little help on kind of what the reason is for that? And then one more question.

Ken Hannah

Yeah. I think I mean from a semiconductor standpoint we're expecting, you know, some slight improvement in utilization and some flat pricing. The variable really here is the solar pricing which continues to go down and, you know, we've tried to account for, price decreases that we've seen in the last several quarters and, you know, if that happens, then obviously that puts a lot of downward pressure on the margins.

Gordon Johnson - Hapoalim Securities

Thanks, Ken. And then lastly, it looks like you guys -- I just want to clarify. During your prepared remarks it seemed like you were suggesting that you're definitely going to get an increase in semiconductor wafer pricing in Q1. However, it seems like in the Q and A you guys have said you're targeting an increase. Can you help me understand that because I know that there are some companies that are reducing capacity, but there's quite a few that are actually increasing capacity quite considerably. So, can you give me some help on the level of confidence you have in your ability to actually increase semi wafer pricing? Thanks for taking my questions.

Ken Hannah

Yes. I guess what I would say is obviously we haven't negotiated all of the Q1 pricing, so we can't sit here with certainty and tell you what that's going to be. However, if we hadn't had conversations with customers regarding the situation and had not received positive feedback, we wouldn't have felt compelled to actually, put it in the release and talk about it in our prepared remarks. So I don't know, Ahmad, if there's anything else you'd like to comment there.

Ahmad Chatila

Thanks, Ken. Gordon, the other thing is, I don't think anybody is adding capacity. Maybe we have different sets of data. So what you'll find is actually people are reducing capacity and also remember there's a difference between the machine capacity and labor capacity. And labor capacity is a lot lower than machine capacity, almost two-thirds in the industry. So that's going to take a long time for it to ramp back up.

Operator, other questions?

Operator

Yes. Next we turn to the line of Adam Krop with Ardour Capital. Please go ahead.

Adam Krop - Ardour Capital

Quick question on your polysilicon capacity. I think in the past you’ve said you're about 30% FBR process and 70% Siemens.

Ken Hannah

No. It's actually the exact opposite of that.

Adam Krop - Ardour Capital

Can you just talk about the 2,000 metric tons that are coming online, where are you targeting in terms of Siemens versus FBR there?

Ken Hannah

You're talking about the online in 2012?

Adam Krop - Ardour Capital

Well, the additional 2,000 that's coming online in 2010.

Ken Hannah

Yeah. That is almost entirely the Siemens process.

Adam Krop - Ardour Capital

Okay. Very good and then just one more follow-up on the SunEdison deal. Just to clarify, are you looking to finance with your own balance sheet any of the projects that are involved in the pipeline there?

Ken Hannah

Well, so yes. But I think the majority of those are done through a sale leaseback. And we do not believe that there's any need to change that model. Now there may be some opportunity to do more direct sales where you complete the power plant and then sell it in its entirety. But as Ahmad had mentioned earlier, we're not looking to change their overall business model in that this regard.

Operator

And next we turn to the line of Paul Clegg with Jeffries. Please go ahead.

Paul Clegg - Jefferies

Just a quick question on your restructuring and impairment charges, they were obviously pretty significant this quarter. Can you just remind us of what the total level of restructuring expenses you have yet to take and how you expect those to be distributed over the quarters going forward?

Ken Hannah

Yes. So we've taken all of it. If you recall when we had originally announced the consolidation of Southwest and St. Peter's, we had the restructuring piece that was $17 million, $18 million and we said that we had not yet completed the overall impairment analysis and so that was completed and that's what's in the $38 million that was announced today and then there's still going to be more costs to come and a lot of that has been outlined in the 8-K.

Operator

And next we turn to the line of Timothy Arcuri with Citi. Please go ahead.

Timothy Arcuri - Citi

Ken, it just sort of seems like the deal with SunEdison is somewhat of a hedge against ongoing poly pricing compression and I'm sort of wondering was there something that changed in your mind, the last, say, three months or the last two months around sort of pricing outlook for poly that sort of made you want to go out and sort of hedge that outlook?

Ahmad Chatila

Timothy, this is Ahmad. Let me take this. The idea of SunEdison is like this. Solar is an energy market. In energy markets you need to have low installation costs and low LCOE. And there is no one in the silicon space that is connecting all the dots in an effective manner. I mean some of them are, but most of them aren't and we feel we can do that and because of that we can grow very fast. That's why we're doing it.

So if you look at wind, wind installed like more than 8 gigawatts in US alone last year, like 22 or 25 worldwide, why? Because installation cost is $1.92. So if you're able to get solar at $2.5 or some lower number, the industry can boom in a big way. So this is more a growth path. This is not a defensive move. This is thinking how we can create value to our shareholders and the way to do it is to connect the dots. You cannot do it by being a chemical company solely. You cannot do it by being purely a wafer company. You definitely can't do it by being a cell company or being in love with your module. You have to connect the dots. So that's the thinking.

Operator

Next, we turn to the line of Atif Malik with Morgan Stanley. Please go ahead.

Atif Malik - Morgan Stanley

I was wondering if you can qualitatively rank the normalized gross margins for the three businesses now you have just qualitatively, is it semi, solar and energy service in that order?

Ken Hannah

So that’s going to depend on at what time frame.

Ahmad Chatila

It’s normalized, longer term.

Ken Hannah

We are not prepared to go into that level of detail today.

Atif Malik - Morgan Stanley

How about OpEx intensity, operating expense intensity?

Ahmad Chatila

Let me try to say one thing. We will give you a model for the company. We have been telling investors in our conferences that we are going to do that in January time frame. So we will share with you that. We will try to give you a feel for how the financial model of MEMC will look.

From an OpEx perspective both companies have to be very lean and that's what the attractiveness to SunEdison. They have actually done a lot of work to lean out their operation and we are lean already. So we like that.

Operator

Next, we turn to the line of Chris Blansett with JPMorgan. Please go ahead.

Chris Blansett - JPMorgan

Another question related to the distribution I guess of some of your downstream activities. Obviously, SunEdison is heavy in the US with some activity in Europe. Would there be another partner in Europe? Would you stick with say Q-Cells JV or do you longer term, expect to see SunEdison expand farther into the European market?

Ken Hannah

Well, SunEdison is currently in the European market today and with what's happened in the credit markets, they've had to kind of prioritize some of their activities and so as a result have not been able to focus internationally as much as they probably would have liked to make our partnership. We will allow them to accelerate the plans that they had in place. We're still interested in finding ways to continue to pull our core products through and we're going to have ongoing discussions with our new partners on exactly how we do that.

Chris Blansett - JPMorgan

Just a quick follow-up on the polysilicon capacity expansion plans, with the continued expansion in the Italy site, does that imply that there's really not a big cost difference between the production of the two different types of technology and sites or kind of wondering why you're not adding more fluidized bed reactor versus Siemens?

Ken Hannah

So the last couple years almost all of the expansion has been fluidized bed. We've had plans to continue to build out the existing infrastructure that we have, and so obviously we will expand our existing sites as much as we can to leverage the infrastructure that has already been put in place. So the situation in Merano is, it's the Siemens process. It's a matter of having some diversification in location and it's also a tribute to a great team in Italy that has for a number of years done a fantastic job.

Operator

Next, we turn to the line of Paul Leming with Soleil Securities. Please go ahead.

Paul Leming - Soleil Securities

I was wondering if you could just give us some color or granularity on the quarter-to-quarter Q2 to Q3 increase in cost of goods sold that was up pretty noticeably, and wondering if there was a lot of costs in there related to the outage at Pasadena or if it was other issues, but just can you help us understand what has been driving the costs side of the equation?

Ken Hannah

As I alluded to earlier, Paul, there was about over a 700 basis point impact in cost and that would have all been in cost of goods sold associated with that outage. So that's a big portion of it.

Paul Leming - Soleil Securities

Likely to all go away as we look into the fourth quarter?

Ken Hannah

That cost certainly will go away. It doesn't repeat. It was cost of repair and that sort of thing. We tried to stress there's a tremendous amount of volume increase in both the semiconductor and the solar side. So with that volume becomes cost of goods sold and what I tried to articulate earlier and possibly not as well as I should have is that, there is price reduction happening in Q3 and so more volume at lower price means more cost of goods sold. So it’s volume and it's incremental and I quantified the impact of Pasadena a little over 700 basis points.

Operator

Our final question in queue comes from the line from Andrew Root with Alkeon Capital. Please go ahead.

Andrew Root - Alkeon Capital

It’s kind of a basic question, but the actual revenue split, some of it would be EPC and then there's no future revenue stream and some it would be electricity I would imagine, is that correct? Of the 80 megawatts they have installed, what’s the split been?

Ahmad Chatila

The answer is, you're correct. Some of it is direct business and some of it is power plants and the ratio, I don't remember. It's like 1/3, 2/3 or 20/80, something like that and the bigger count is the PPA model.

Andrew Root - Alkeon Capital

That business is higher margin presumably like much higher margin than the EPC which should be very thin margins. Is that the right way to think about it?

Ahmad Chatila

No, I wouldn't think about it this way.

Operator

We have no further questions in queue. Please continue.

Ken Hannah

I would like to thank everybody for joining the call today. I would like to mention that there are supplemental slides on our website on the webcast area. To access those, go to our website and thanks again. Good night.

Operator

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

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Source: MEMC Electronic Materials, Inc. Q3 2009 Earnings Call Transcript

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