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MEMC Electronic Materials Inc. (WFR)

Q2 2007 Earnings Call

July 25, 2007 4:30 pm ET

Executives

Bill Michalek - Director of IR

Ken Hannah - CFO

Nabeel Gareeb - President and CEO

Analysts

Steve O'Rourke - Deutsche Bank

Brett Hodess - Merrill Lynch

Satya Kumar - Credit Suisse

Gordon Johnson - Lehman Brothers

Jesse Pichel - Piper Jaffray

Krishna Shankar - JMP Securities

Stephen Chin - UBS

Paul Leming - Soleil Security

Chris Blansett - J.P. Morgan

Brian Lee - Citigroup

Pierre Maccagno - Needham & Company

Gus Richard - First Albany Capital

Mehdi Hosseini - FBR

Stuart Bush - RBC Capital Markets

Presentation

Operator: Welcome to the MEMC Second Quarter Earnings Call. At this time all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objection you may disconnect at this time.

I would now like to turn the call over Bill Michalek, Director of Investor Relations. Sir, you may begin.

Bill Michalek

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

Before we begin, please note that this call will include forward-looking statements and 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 2006 Form 10-K.

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

Ken Hannah

Thanks, Bill and good afternoon everyone. MEMC had an excellent second quarter despite a mixed business environment. Sales grew 7% sequentially and 28% year-over-year to $472.7 million.

Gross margin continued to improve by an additional 150 basis points over the previous quarter to 52% of sales, compared to the same quarter of last year, gross margin improved by 870 basis points.

Operating expenses in the quarter were $38.3 million or 8.1% of sales, which is up slightly as a percentage of sales from the first quarter’s 7.9%, but down from 8.9% in the year ago quarter.

Total stock-based compensation expense in the second quarter was $7.9 million or 1.7% of sales.

MEMC continued to demonstrate strong operating income growth this quarter, increasing 10.4% over the first quarter to $207.3 million, compared to the same quarter a year ago, operating income grew by 62.8%. As a percentage sales, operating margin grew by 130 basis points over the prior quarter and 950 basis points over the year ago quarter.

Using our estimated effective cash tax rate of 15%, non-GAAP net income in the second quarter was $188.9 million or $0.81 per share. This represents non-GAAP earnings per share growth of 14.1% over the previous quarter and 80% versus the year ago quarter.

GAAP net income was $163.6 million or $0.70 per share, using a book tax rate for the quarter of 26.3%. Both GAAP and non-GAAP EPS figures include a $0.02 per share impact relating to stock compensation expense and a $0.02 per share benefit relating to the valuation of the Suntech warrants.

Operating cash flow generation continues to be strength, with Q2 coming in $197.6 million or 41.8% of sales. Capital expenditures for the quarter totaled $53.9 million or 11.4% of sales and free cash flow, which is operating cash flow minus capital expenditures, was $143.7 million or 30.4% of sales.

Over the last five years, MEMC has consistently generated strong levels of free cash flow. In the second quarter we leveraged this cash position to implement a share repurchase program. The plan became effective in mid-June and over the second half of the month MEMC repurchased almost $5 million worth of MEMC shares.

Turning to the balance sheet, despite beginning to use cash for our buyback program, cash and short-term investment balances increased by over $157 million to over $995 million, while debt was reduced by $3.9 million to just under $31 million. Overall, the balance sheet is in excellent condition and getting stronger.

Now, turning to business conditions. In the semiconductor wafer environment in the second quarter, we saw improvement in pockets of the semiconductor industry, which was somewhat offset by higher levels of wafer inventories that we talked about at the start of the quarter. The solar market continued to be strong.

Business conditions in to the third quarter of 2007 appear to continue to slowly improve. Wafer inventory levels and some customers are still at somewhat elevated levels and could be back to normalized levels in the fall season.

Demand for the solar market however continues to be healthy. Based on these customer indications, we are targeting revenues of approximately $500 million for the third quarter. We are also targeting margins to improve by about 100 basis points, compared to the strong second quarter levels, with operating expenses of approximately $39 million.

Let me now turn the call over to Nabeel.

Nabeel Gareeb

Thank you, Ken. I'm very pleased with our performance this quarter. MEMC delivered strong results, despite higher wafer inventories at the start of the quarter at our customers and a confusing business environment as some wafer fabs were announced for closure and others were transitioned to other companies.

Our growth was primarily driven by the continuing ramp of our 300-millimeter wafers and our 156 millimeter wafers, which is the wafer diameter for solar applications based on existing contracted customers.

Along with the strong sales growth MEMC also grew operating profit by over 10% over the previous quarter, non-GAAP EPS by 14%, and grew cash and short-term investment balances to near the $1 million mark or over $4.25 per share.

In addition to the strong operating results and the share repurchase program that Ken mentioned took affect the quarter, we are also pleased to have announced that MEMC was added to the S&P 500 on May 30th. This recognition is a result of our steady growth achieved through focused execution amid varying market conditions.

In today’s press release, in addition to reviewing our second quarter highlights, we also provided updates to our 2007 guidance as well as our polysilicon and 300 millimeters wafer expansion projects.

Let’s start with the annual targets. For the full year 2007, we are currently targeting revenue of over $1.95 billion compared to our previous target of over $1.9 billion. In addition, we are targeting non-GAAP EPS to be over $3.30 per share based on a cash tax rate in mid-teens and excluding any change in the Suntech warrant valuation. This compares to our previous target of a little over $3 and would represent over 60% growth in non-GAAP EPS over the 2006 level of $2.6

While I am pleased to able to report on our strong second quarter results and provide improved targets for 2007, I am also excited about our prospects for continued growth over the next several years. Two of the supporting engines to our growth over this period will be our 300 millimeter and polysilicon expansion projects.

In polysilicon, which is the raw material that will fuel our wafer growth to both the semi-conductor and solar industries, we have formally announced today that we are targeting to achieve over 15,000 metric tons of annualized polysilicon capacity by the end of this decade. In the near term we are still targeting to achieve annualized capacity of over 6,000 metric tons of capacity by the end of 2007 and 8,000 metric tons by the end of 2008, despite recently incurring weather related delays of almost of month. In 300 millimeter, we are continuing to grow our wafering capacity, and are targeting to achieve over 700,000 wafers per month of capacity over that same period depending upon customer needs.

In summary, MEMC has reached the midpoint of 2007 in a strong financial position. Our business model has allowed us to continue to steadily improve our financial results despite a mixed business environment. Based on our results so far and our outlook for the remainder of the year, we were able to increase our guidance for the year to a range that would result in over 26% revenue growth for the year versus 2006, and over 60% growth in non-GAAP EPS. And we provide a target for polysilicon and 300 millimeter wafer capacity increases through the end of the decade.

These targets when combined with our other business engines will support MEMC's steady march towards our three to five years goals.

With that we will now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session (Operator Instructions). And our first question comes from Steve O'Rourke. Please state your company name.

Steve O'Rourke - Deutsche Bank

Thank you, this is Steve O'Rourke from Deutsche Bank. Nabeel, how much of this 15,000 ton capacity expansion is under contract already?

Nabeel Gareeb

We can't give you a specific answer to that Steve, because then it gets into all the disclosure associated with the contracted customers, but obviously, a decent chunk of that was, we had talked about going from 4,000 to 8,000 by the end of 2008 and we had said the vast majority of that was obviously under the – they had been consumed by the contracts we had, but those contracts continue to grow. So we need to continue to expand capacity but obviously this doubling again if you will is for additional potential contracts as well as for growth for 300 millimeter etcetera.

Steve O'Rourke - Deutsche Bank

And will you consider all the expansions that have been announced including your own now. Are you concerned that we could see an oversupply with respect to the solar TV industry within the next couple of few years, now that may correct after that when we go back into storage, but do you think we could see that near term?

Nabeel Gareeb

Well I think you know Steve that it depends on the data you look at. The data basically if you look at normal ramp rates and normal construction time periods, it seems to indicate it may not be any sort of a balance period for any short period of time. But if you look at aggressive projections etcetera then it gives you a very different picture. So again depends on what part of the data you look at and the experience base of the participants that you assume.

Steve O'Rourke - Deutsche Bank

Okay. Could you update us on additional potential contracts for solar duty customers?

Nabeel Gareeb

The only thing I can really say as we continue to have those discussions and part of the reason we need to disclose this information is we had a lot of questions from our customers on our 300 millimeter expansion plans, as well as investors, and then obviously we had those same questions from our customers regarding what the supporting poly plans were for the growth as well as from our potential partners in the solar world. So, we had disclosed those numbers so that we could have more in depth discussions.

Steve O'Rourke - Deutsche Bank

Fair enough. And one last question, I'll jump back in queue. Is the inventory levels that you are seeing in the semi industry now, are they consistent with what you expected a quarter ago, or they are a little bit worse than you expected at this point?

Nabeel Gareeb

Yeah. I mean we were-- when we had our Q1 earnings call in Q2 and we have talked about hey we felt there were high days of inventory, people were wondering what we were thinking. But I think as is played out, people now understand what we were talking about and we had also notice that the wafer inventories were a little bit on the high side. So what’s happened is the units in the semiconductor device would obviously, are starting comp out and therefore the consumption is starting to increase, but obviously the wafer inventory going to have a little bit of lag effect which is why we said that we might see the flushing out of those higher degrees of wafer inventories by the fall period.

Steve O'Rourke - Deutsche Bank

Is this within your expectations that you had over the past quarters, I think it's a big for the worst than you thought that would be?

Ken Hannah

No, I think they are above where we thought they might be obviously it’s a mixture where you see 200 millimeter being a little bit weaker, 300 millimeter being okay, so it's within what we thought at least at the start of Q2.

Steve O'Rourke - Deutsche Bank

Fair enough. Thank you.

Ken Hannah

Sure.

Operator

Our next question comes from Brett Hodess. Please state your company name.

Brett Hodess - Merrill Lynch

Merrill Lynch. Nabeel, I am wondering with the good solid margin progression that you got this quarter and going into the next quarter as well, if you can talk to us about how much of that is fixed cost absorption are you continuing to have more volume. And how much of it is mix related as you sell more into the solar or maybe the 300 millimeter market versus some of the older wafer markets?

Nabeel Gareeb

Rather than talk about Q3, so maybe again I don’t get into trouble because that's our projection based, let's just look at Q2 results Brett. Basically what we said is the Q2 improvements are pricing if you will, mixed normalized pricing was approximately flattish Q1 to Q2, and as you saw the margin improvement of 150 basis points and our growth was primarily driven by 300 millimeter and the 156 millimeter solar wafers, so I think you can get a pretty good idea of that aspect if you will.

Brett Hodess - Merrill Lynch

Okay. And then the other question I had was as you look forward with all these new poly capacity coming on line. One of the concerns surrounding the stock has been that as your sales to the poly spot market declined that there would be margin pressure because those have been very high margin. Can you talk a little bit about as all these new poly comes on how you see that mix going and what it implies for margin over the longer term?

Nabeel Gareeb

Well, I think again Q1 to Q2 is probably a good transition analysis for that. Basically as we stated the majority of our increase was 300 millimeter and 156 millimeter sales and really our poly sales if you will from quarter-to-quarter were essential flat. So, that gives you an idea that there is margin leverage elsewhere. As a matter of fact, if you look at our Q3 guidance we are talking about margins being up in spite of semiconductor wafer pricing being nominally down on a mix adjusted basis from Q2 to Q3.

Brett Hodess - Merrill Lynch

Great, thank you.

Nabeel Gareeb

Sure.

Operator

Our next question comes from Satya Kumar. Please state your company name.

Satya Kumar - Credit Suisse

Yeah hi, thanks for taking the question, Credit Suisse. Nabeel I just wanted to go over semis a little bit more with you guys. Could give us a sense as to what the square inches of growth for the semi business was in Q2 and in Q3 and are you under growing that phase right now?

Ken Hannah

Basically, we think we gained share on 300 millimeter and perhaps lost a little bit on 200, Satya. Basically, we're a little bit on the flattish maybe around the flattish side and we think the market might be flattish to slightly up, but that depends on whose number do you use etcetera. So, we believe we were okay on share, not significantly different in Q3. Obviously, as we are continuing to grow the 300 millimeter that will continue to come back and grow even faster. So, that’s kind of our projection.

Satya Kumar - Credit Suisse

Good, when I look at these comments on pricing on the semi side. You mentioned that there is a little bit of weakness in the Q3. Can you explain the dynamic of that a little bit? Some of the numbers that I have been seeing on the semi wafer start growth have been perhaps a little higher than just flat. If polysilicon is constrained, what's the dynamics that led to the inventory increase of the chip company in the first place? And as far as the pricing weakness in Q3 is concerned on semi, is this pricing really a quarterly price adjustment, I know you guys negotiate part of your contracts quarterly and part in longer period of times. Is this a quarterly adjustment, how long do you think this wafer pricing weakness could persist on the semi side, how should we think about that?

Ken Hannah

Can you remind me of the first part of your question, Satya, I am sorry I forgot.

Satya Kumar - Credit Suisse

What's the dynamic that's leading to these price weakness?

Ken Hannah

Oh I see, I am sorry, thank you. Yeah, the dynamic, there are two pieces to that, I think. One was, we said at the beginning in our Q1 earnings call that we thought they were higher days of inventory at the semiconductor accounts as well, and they had to flush through that. Well, as they flush through that, they don’t necessarily buy the quantity of wafers they need, as they are ramping their fabs up, they buy less. So that leads to higher wafers inventories, if you will on a lagging effect basis.

The second piece I think is being caused by more confusion than anything else as a result of these 200 millimeter wafer fabs announcements. Some are being announced that they are being closed. Some are being announced that they are being sold or transferred, but, there is not a lot of clarity in terms of the time-table in which that’s occurring and who that’s occurring to. I mean, we are not going to see this number of wafer fabs all get closed. The issue is they are getting transferred, sold, equipments getting sold, etcetera. And that transition is not clear. I think in the next couple of quarters that’s probably going to get clarified and as the consumption rate increases that’s also going to flush out.

So, sometime over the course of the next three to four, five months, we will see all of this, both the inventory flush out as well as the clarity to these time-tables over which period these are particular transactions are going to occur.

And then, on the pricing, really, I mean its 200 millimeter it's the softest one, 300 millimeter is stronger in growth and I think a lot of that is caused by some of this confusion. So, that’s where the background is.

Satya Kumar - Credit Suisse

So, basically Q4 we could see flat to up pricing in semis?

Ken Hannah

I am not going to predict that, because right now I am giving Q3 guidance. We have made some assumptions for Q4 that you can probably deduce based on our targets for the second half and or for the whole year, if you will. And we were making some conservative assumptions, and less then 20%, 25% of our business gets negotiated for Q4 anyway.

Satya Kumar - Credit Suisse

That's very helpful. Let me one quick follow-up on your capacity expansion. How should we think about the linearity of these plants? Beyond '08 is it sort of coming in equal chunks and '09 and '010 is there any possibility that you could pull that in potentially little bit in to '08 itself?

Nabeel Gareeb

Yeah. At this stage I would make the assumption that the poly stuff beyond '08 is in reasonably equal increments in those two years, and the same thing for 300-millimeter in reasonably equal increments.

Satya Kumar - Credit Suisse

Thank you so much.

Nabeel Gareeb

Thank you.

Operator

And our next question comes from Tim Luke with Lehman Brothers.

Gordon Johnson - Lehman Brothers

Gordon Johnson in for Tim Luke. Guys, congratulation on the quarter.

Nabeel Gareeb

Thank you.

Ken Hannah

Thanks.

Gordon Johnson - Lehman Brothers

Just a quick couple of questions. Can you talk to us or can you update us on cost reductions on the manufacturer of silicon and so solar wafers in kind of your plans there.

Nabeel Gareeb

Well, that's an every day topic Gordon in a variety of ways. When you are talking about yields, you are talking about throughput, you are talking about productivity, you're talking the absorption, asset efficiency. So, that happens every day. You get sometimes hurt by energy prices of all ironic things, raw material supplies, et cetera. But, the way you offset that is obviously through the cost reductions.

This also gets a little tricky when you look at wafers by node, because you are coming up the learning curve and down the experience curve on new nodes and new products. So, obviously their cost reductions occur faster than the more mature products. So, all of that is combined together.

In terms of the solar, most of that is outsourced. So, lot of that has to do with the suppliers as well as our efficiency in bringing the type of poly we provide to them to make the wafers, et cetera, so that’s part of this process as well.

Gordon Johnson - Lehman Brothers

Okay. Are there any specific targets as to cost production?

Nabeel Gareeb

Yeah. Well, absolutely. Internally we have a lot of specific targets on cost reductions. But, we haven’t disclosed them publicly and I won't feel comfortable doing that at this stage.

Gordon Johnson - Lehman Brothers

Okay, no problem. And than I think 100% of your solar wafers are currently outsourced. Is there any update on when you guys could potentially bring that and how?

Nabeel Gareeb

Yeah. You are exactly right, 100% of that is outsourced. We had said six months ago that we were looking at a timetable of about 18 months to 24 months, before we would bring it in-house. So, that's still our thought process at this time.

Gordon Johnson - Lehman Brothers

Okay. And then lastly, can you just update us what your CapEx plans for this year maybe next year?

Nabeel Gareeb

CapEx, we have the long-term steady-state model that we have talked about in January and we said it's the 10% to 15% range. So, if you have used the higher end of that range, you will be on the safe side.

Gordon Johnson - Lehman Brothers

All right. Congrats, guys.

Nabeel Gareeb

Thank you.

Ken Hannah

Thanks.

Operator

Our next question comes from Jesse Pichel with Piper Jaffray.

Jesse Pichel - Piper Jaffray

Also I just can make congratulations on your margin in particular. Can you give us some more color on the poly expansion? Where are you going build the expansion and does this affect your longer term EPS targets?

Nabeel Gareeb

Now, Jesse, these expansions are going to be primarily at the existing sites with some Greenfield elements. But, no, most of this was already contemplated in the three year to five year targets as supporting elements.

Jesse Pichel - Piper Jaffray

Right, and have you discussed the plant expansion with the potential customers, and if so, what has been the reaction? I mean, do you have offers on the table at this point?

Nabeel Gareeb

I mean all I will say is we are in certainly discussions with multiple parties and we live it at that.

Jesse Pichel - Piper Jaffray

And have you decided if you want to make your own 156-millimeter wafers, especially in light of one of your large outsourced wafer makers expanding into poly. And what do you think about that?

Nabeel Gareeb

Well, I know that a large wafer contractor for the industry has decided to get into the poly business and that's interesting, obviously based on their strategy being vertically integrated. I can't comment much on it, because we don't comment on who our sub-cons are or not. But, I would note that the poly expansion schedule from that individual contractor seems to be particularly aggressive.

Jesse Pichel - Piper Jaffray

So, no comment on if you will create your own wafering capacity for 156?

Nabeel Gareeb

Well certainly. I am sorry; I guess I didn't answer the question.

Jesse Pichel - Piper Jaffray

Sorry, I didn't ask it correctly.

Nabeel Gareeb

Yeah. So, we've always stated that we intend to establish in-house manufacturing capability for the 156-millimeter wafers. So, that was what we said six months ago that it would take us about 18 to 24 months to do that and we certainly intend to do that.

Jesse Pichel - Piper Jaffray

Okay, and last question. Do you think you could give us a little bit more clarity there on the rate at which you expanded your 300-millimeter capacity in Q2? I mean. I guess it's pretty clear from the margins that some conversion was going on. But, could you help quantify that slightly for us?

Nabeel Gareeb

Yeah, that would be a little difficult if I would get into a level of granularity that we have not discussed before, and I wouldn't want to get into that trap and do it over and over again. So, at this stage all I would say is the majority of our growth was due to 300-millimeter and our 156-millimeter wafers.

Jesse Pichel - Piper Jaffray

Great. Well, thanks very much.

Operator

Our next question comes from Krishna Shankar with JMP Securities.

Krishna Shankar - JMP Securities

Yes, Nabeel congratulations on a great quarter. Can you give us some sense for how your shipments are going to both Suntech and Gintech? Would you say that your contracts are ramping as per plan?

And could you potentially accelerate your solar wafer manufacturing by potentially acquiring an existing company doing that, so that you can capture more of the value ad?

Nabeel Gareeb

So, in terms of the contracts, yes, we believe they are going according to plan. Suntech, obviously, started up in the January part of this year, Gintech is starting up in the third quarter of this year and then certainly there is an opportunity to provide more 156 millimeter wafers either to the sub-contractor parties or in the open markets. So we certainly keep that in our -- in the forefront of our mind that when we look at different opportunities, because in a given a finite quantity of poly, you wanted to decide, okay do you want to participate in the 300 millimeter markets as its growing for semiconductor customers, do you want above 456 millimeter out there, what you want to do, so all of those are certainly considerations that we go through everyday.

Krishna Shankar - JMP Securities

Okay, and my second question is what are your thoughts now on the rate of progress in [Simsun] solar innovation and whether that’s actual rating and what you see the market mix between conventional poly and single crystal solar versus Simsun solar right now and how that’s progressing over the next say two years?

Ken Hannah

Well, I think as I said pretty consistently I think Simsun is a viable alternative technology. I think Simsun has few challenges in front of it, go through obviously it has the efficiency today. People are working on improving its efficiency, it’s got to demonstrate its warranty periods on somebodies rooftop for an extended period of time. There are different sub straights and materials being used for large majority when it’s a more of silicon based, obviously uses silane gas and we are the second largest maker of silane gas in the world.

So people approach us on that front to participate in the Simsun industry as well. So I think there is just like with any other growing industry there are challenges that people will need to overcome. I think it’s a viable technology and it will have some portion of this solar marketplace. What that part will be is unclear at this stage five to ten years from now.

Krishna Shankar - JMP Securities

Thank you.

Ken Hannah

Sure, thanks.

Operator

Our next question comes from Stephen Chin, with UBS.

Stephen Chin - UBS

Great, thank you and congratulations also on a good execution there and thanks for the polysilicon update.

Ken Hannah

Thanks, Stephen.

Stephen Chin - UBS

How much of this incremental 7000 metrics tons of polysilicon should we think about being earmarked for solar and will most of this new polysilicon be made using the lower cost FBR prices. That's my first question?

Nabeel Gareeb

Yeah. So Steven I won’t say that, let me answer the second part first. Yeah, I mean if we have 70 about a 70, 30 mix today of granular or versus chunk which is basically FBR versus Siemens. And you could probably use an approximation that yeah about it, it might stay in approximately that makes for the incremental expansion as well. And then the first part of your question was.

Stephen Chin - UBS

How much do we -- do you think is how much will be used for solar and how much for semiconductors?

Nabeel Gareeb

Yeah so, the vast majority of this will be semi capable. I won't be able to disclose how much is used for solar, because then I would give away what we are doing for our contracted customers now as well as the potential implications for other partners.

Stephen Chin - UBS

Okay. Great and then just on the semiconductor wafers under 300 millimeter expansion can MEMC reach this 700,000 wafer per month goal with the existing facilities in Taiwan and Japan or does that also require another facility?

Nabeel Gareeb

Now, we believe that we can get to those sorts of numbers with some modifications to existing infrastructure.

Stephen Chin - UBS

Okay. And maybe if I could squeeze the last question and can you share with us what your plans are for the 200 millimeter semiconductor wafers, and its sounds like you lost a little bit of share. How should we think about that business going forward?

Nabeel Gareeb

Well, I think it's back to this a little bit of confusion factor I believe that will comeback but it's just, when you go through all these announcements and who's going to buy what fab and who's working with wafers and how much inventory does somebody really have and who they are going to sell the equipment to, it gets very, very mixed if you will. So I think over the next 3 to 5 months that will just become clear and it will come back, I don't think that there are permanent reductions, but in transition period this sort of stuff happens.

Stephen Chin - UBS

Okay. Thanks for this update and congratulations again.

Nabeel Gareeb

Thank you.

Operator

Our next question comes from Paul Leming with Soleil Security. You line is open.

Paul Leming - Soleil Security

Good evening and again congratulations on your execution on the quarter. I just wanted to clarify, did you say earlier that there will be no greenfield capacity in the 700 tones of new capacity.

Ken Hannah

Yes, Paul, basically what I said was that. The vast majority of it will be on existing and existing locations there will be some greenfield pieces and so obviously when you do, some people call advances, some people call a greenfield. I mean if you have land and put brand new infrastructure. Well, what you call that is that a greenfield, or is that brown field who knows. So, but what I can say is the vast majority will be existing locations and then green field pieces that may not be at exiting locations as well.

Paul Leming - Soleil Security

But is a fair to say from what I just heard you are say in there that you are starting to do some work at greenfield locations?

Ken Hannah

That may be greenfield pieces to this.

Paul Leming - Soleil Security

Okay. That's what I was asked for. On related, well just related to greenfield area. I picked up some reports that you do in fact have solar wafer capacity under construction in Taiwan today, you stated exclusively in your financial documents that you are going to forward integrate into solar wafers, can you just confirm whether or not you do have a solar wafer plant under construction in Taiwan today?

Ken Hannah

Yes. I can't confirm one way the other. I don't have anything under the classic ground breaking and was being put up etcetera, but beyond that I can't say anything.

Paul Leming - Soleil Security

Okay. And just a final thing, would you have sort of guess as to what squared inches shipped where for the overall industry in Q2 versus Q1 where we flat, where we up 2% to 3% any guesstimate on where industry shipments were for Q2?

Ken Hannah

Do you mean semiconductor?

Paul Leming - Soleil Security

I am sorry, for semiconductor wafers?

Ken Hannah

I think we were slightly up as an industry.

Paul Leming - Soleil Security

Thanks very much.

Operator

And our next question comes from Chris Blansett with J.P. Morgan.

Chris Blansett - J.P. Morgan

Hi guys, thanks. Couple of things, what is your philosophy for share repurchase going forward, you just kind of burn off extra cash or you are pulling in on an operational basis or should we expect it to draw down your cash balance?

Ken Hannah

I think from a philosophical standpoint, I think you have to go back to the objectives, and the Board has discussed this pretty extensively on what the objectives of our share repurchase program are. Obviously, you saw some of the results of that it was in place basically for the last part of the June. As such, we have kick started it and we're going to modify those rules if you will as we go along. But some of the objectives for examples are volatility reduction, offsetting, dilution if you will and obviously returning some cash to shareholders as well through that process. So, that’s really taking advantage of any drops in pricing that occur on a daily basis through the volatility mechanism. So, I think that’s the general philosophy. There is no other specifics if you will that I could discuss at this time.

Chris Blansett - J.P. Morgan

Alright, and then kind of looking at the utilization rates of your wafer making facilities. Where are they now and is it safe to assume that your 200 millimeter facilities are lower than your 300 millimeter?

Ken Hannah

Yes, our 200 millimeters are probably in the 80's if you will on utilization. Our 300 millimeters are in the 90's.

Chris Blansett - J.P. Morgan

And then did you guys have any 10% customers during the quarter?

Ken Hannah

We don’t disclose any 10% aspects for a quarter. Where you will see it on our K, which would be annually.

Chris Blansett - J.P. Morgan

And then, one last question here on your inventory levels, they went down again, and we are kind of getting, I am not sure how close you are to the edge, maybe having some concerns about that. But, did you have to walk away from revenue during the quarter due to the low inventory levels?

Ken Hannah

Well, I mean, I think, there were couple of aspects to the inventory levels, over time our consignment inventory has come down over the last let's say, year and half. So, we used to have a decent chunk of inventory and consignment and we brought that down quite a bit. So, that’s part of the reason you see it.

Second, we are selling more and more out of the aged inventory, we are doing a better job of managing that.

And then the third piece, you will see is as our costs come down because of the valuation of the inventory, the inventory numbers. So, if you had flat quantity and your cost came down that inventory value would drop. So, all three of those are contribution factors.

In terms of answering your question was you, or are at the edge? And “Oh my god, fall of a cliff” I mean, as somebody asked the question even on last quarter’s call, if you had more poly could you have more revenue? Yes, I mean, so, that’s why we continue to expand. As a matter of fact, just to have the growth of this year versus last year, we would have had to produce 1,500 or 2,000 more metric tons of poly this year versus last year. Just to kind to give an idea.

Chris Blansett - J.P. Morgan

Alright, thanks a lot guys. I appreciate it.

Operator

(Operator Instructions). Our next question comes from Timothy Arcuri with Citigroup. Your line is open.

Brian Lee - Citigroup

Hi, guys, this is actually Brian Lee calling in for Tim. I just had a few quick things. First, on the pricing dynamic you are seeing right now in the semi business. I think most people would agree that chip unit demand trends are improving, but when I look at your peers and what we are hearing from the channel, it looks like wafer pricing could be down, let's say a low to mid single-digits in the second half of '07 versus the first half. I guess first, can you explain what might be driving that pricing dynamic in what appears to be a better unit environment. And is this been driven more by supply or could there be something else that had perhaps the technology issue? That would be helpful. Thanks.

Nabeel Gareeb

I think, Brian it’s back to what we talked about little bit in the Q1 earnings call, where it turned out to be a soft market at the end of the Q1 and it was a surprise based on some of the pre-announcements at the end of Q1 because the unit demand wasn’t that strong and then the semiconductor device guys were recovering if you will in Q2, but that caused a lag effect and a little bit of wafer inventory build. So, they are consuming more but they are not consuming as much as they have thought, so I think this is a situation where you got the wafer consumption lagging the recovery in units. That is then being compounded by these 200 millimeter wafer fab announcements these wafer fabs are getting shutdown, these are getting sold, these are going into a JV etcetera, and this one is having equipment sold, but there is not specific clarity of the time table on which that's going to occur. So, I think that’s also causing some confusion.

I think those are the two elements that are causing the dynamics on 200 millimeter to be a little bit weaker and 300 millimeters continuing to grow. So yes the pricing is down Q2 to Q3 primarily on 200. But I think those were dynamics that are causing it, and I believe over the course of the next three to four months hopefully we will see the inventory flush out and greater clarity applied to the 200 millimeter transitions.

Brian Lee - Citigroup

Okay, that’s helpful. And then with respect to your poly capacity expansion that you announced, with this drive any upward bias in your long-term 10% to 15% CapEx the sell out ratio that you guys have targeted.

Nabeel Gareeb

No, this was contemplated in our long-term targets that we had given at the start of this year. We had said that we typically don’t announce our capacity expansions until basically we started those processes. So, this is kind of a midstream update and the reason we had to provide the update was just we were getting in to a little bit of box without not being about talk about it, and on quite a few questions about it. So, we needed to disclose that to our customers and potential partners.

Brian Lee - Citigroup

Okay. So, basically that’s already been embedded in to that forecast.

Ken Hannah

And any updates towards long-term model in terms of earnings et cetera, we would give probably at a halfway mark between January of this year and three to five year period.

Brian Lee - Citigroup

Okay, helpful. And then last quick things from me and I will go away. Can you talk a little bit about margin implications, if any, longer-term once you move solar wafering in-house from the current outsourcing arrangements you have?

Nabeel Gareeb

Well, certainly. So, as you can imagine the cost would hopefully be a little bit lower, and so that would help offset any price reductions we might have contemplated in the price reduction curves. So, it would help offset that blend.

Brian Lee - Citigroup

So, I mean that net-net it doesn’t sound like you would have really any margin implication whether you are outsourcing and or doing it in house. Is that the right way to read that?

Nabeel Gareeb

Outsourcing it over time as prices come down, you’ve got some sort of a floor, right. When you brought it in-house you've got the ability to continue to reduce that cost. So, that’s really part of the strategy to continue to reduce the cost to provide those price reductions over the 10-year period.

Brian Lee - Citigroup

Okay. Thanks a lot guys.

Ken Hannah

I think a margin to those sub-contractors today that when we bring it in we would not be paying so...

Nabeel Gareeb

And some of those sub-contractors may have publicly filed results, so you can probably guesstimate the opportunity there.

Operator

And our next question comes from Pierre Maccagno with Needham. Sir, your line is

Pierre Maccagno - Needham & Company

Congratulations again on such a good quarter. Could you tell about the pricing of polysilicon on the spot markets? Have you seen that increasing or is it somewhat flat?

Nabeel Gareeb

Pierre, all I can say is it’s healthy.

Pierre Maccagno - Needham & Company

Okay. And regarding your wafers, are you planning any time to migrate to 200 millimeter wafers for the solar?

Nabeel Gareeb

Not in the very near term, Pierre. I mean, I think 125 millimeter has been the large volume and 156-millimeter is on a pretty big ramp, if you will, for the industry. I don’t see 8-inch equivalents being on the horizon in the very short term.

Pierre Maccagno - Needham & Company

I see. Well, I think that’s about it. Thanks.

Nabeel Gareeb

Okay. Thanks, Pierre.

Operator

And our next question comes from Gus Richard with First Albany Capital.

Gus Richard - First Albany Capital

Yes. In the semiconductor area can you just talk about your mix of 300-millimeters customers, logic versus microprocessor versus foundry?

Nabeel Gareeb

Yes. I can’t give you that information because we don’t disclose it. I can tell you for the industry in general logic, if you will, I would call logic and foundry in the same basket is probably in the neighborhood of 15% to 20% and then processors, in general total processors is probably about the same percentage and then memories in the 30 plus percent range.

Gus Richard - First Albany Capital

Okay, got it. And that’s it for me. Thank you

Nabeel Gareeb

Sure.

Operator

Our next question comes from Mehdi Hosseini with FBR

Mehdi Hosseini - FBR

Yes. Thank you for taking my question and couple of questions. Nabeel, going back to the poly capacitor you are bringing on. Help me understand if your poly is going to be adoptable for both solar and semi? How should we think about margins given the high purity requirement for the semi industry?

And then in terms of the FBR, Siemens and so forth, the whole manufacturing of poly, what are your capacity runs for the feedstocks for the required chemicals, gases that would need to go into these reactors? Then I have a follow-up question.

Nabeel Gareeb

Sure, I think, I forgot the first of the question.

Mehdi Hosseini - FBR

The first question has to do with, if your poly is going to be good for both semi and solar? How should we think about margins, given the high purity requirement of a semi poly?

Nabeel Gareeb

The vast majority of it, Mehdi, is going to be semi and solar capable. So, we are making that investment. Not all of it will be with the vast majority, we are making that investment with the idea that we need to have that flexibility over the long-term and this is not a three-year or five-year investment, it’s a 30 plus year investment. So, we need to just make sure that we have that flexibility. Will we pay a little bit of a cost penalty from our, in terms of the big picture, form our opportunity cost? Yes, but incrementally, hopefully, it will be better and therefore we'll be able to do just fine with it.

Mehdi Hosseini - FBR

So, the problem I have is everybody claims to be the cost leader when it comes to polysilicon, the guys in Europe and you in US for us and the sideline. How should we think about the factors that impact the cost? Is there any other color that you can provide us?

Nabeel Gareeb

Well, I mean people talk about FBR being more cost effective. Our competitors have talked about [hay]. The reason they want to go to FBR is because they think its more cost competitive and asset efficient and energy efficient, et cetera and we've been doing it for 15 to 20 years. So, I mean, I won't comment on whether we are the cost leader or not. We think we are pretty darn cost effective. Our results show some of those numbers. I mean, I’m going to leave it at that. Other people may need to pound their chest. We’ll just leave it up to our numbers to demonstrate the results. And then the second part of your question was about.

Mehdi Hosseini - FBR

The required gases as you bring up poly capacity to see the stocks so forth.

Nabeel Gareeb

So we signed up longer to long-term arrangements with our suppliers as well to basically support these levels of expansions for the most part.

Mehdi Hosseini - FBR

That there shouldn’t be any surprises there?

Nabeel Gareeb

Hopefully there won't be.

Mehdi Hosseini - FBR

Right, okay and just one more, when we look at your non semi business, it will be nice if you were to disclose if [list] just take it for whatever is worth. Help us understand qualitatively where was the mix that went into poly spot market versus solar wafer, and in the solar wafer you obviously have the contract to SCCP and also whatever you sell into the spot. Given three different types of revenues from a non semi area, how should we think about the mix and also the margins that are different for each area?

Nabeel Gareeb

Okay. So couple of things, one from Q1 to Q2 basically what we said was our growth was primarily driven by the 300 millimeter and 156 millimeter wafers. Those spot poly pieces basically flat, and the second it was all we also said it was through existing contract and customers. So there were no spot sales if you will have any wafers for 156. And then from the margin perspective, I think you can just look at the margins from Q1 to Q2 and get a pretty good idea of the incremental margins that were contributed by the 300 millimeter and 156 millimeter wafers.

Mehdi Hosseini - FBR

But there was no -- how should we think about the mix, I understand the margin improvement but any more clarity as how the mix changes between semi and non semi?

Nabeel Gareeb

Yeah no I think could be the average would be a pretty good indicator of both.

Mehdi Hosseini - FBR

Okay. And then just one final, if I could squeeze in one more. When we look at this poly capacity run over the next three years or so, how does it you change your overall mix of semi revenue versus non-semi?

Nabeel Gareeb

Yes, I think, what we have said is when we look at the solar applications, we have consistently said that solar applications sales could end up being about one third of the company over 3 to 5 year period, and obviously only time will tell how that transpires?

Mehdi Hosseini - FBR

Well that one third hasn’t changed? You are still on target?

Nabeel Gareeb

Well, I mean we got the $7 million to $9 million over 10 years in take a pay agreement. So that if you divide it by 10 just for a simple average that gives you the just under between $700 million and $900 million a year, somewhere in the middle of those periods. So, you get an idea of what that might be and then if there is the opportunity to add more, and we add more than obviously that get us to. Just that alone would get us to a third of our $3 billion range and little bit more would get us to a third of our $4 billion rates that we articulated for the 3 to 5 year period.

Mehdi Hosseini - FBR

Got it. Thank you.

Nabeel Gareeb

Sure.

Operator

And our next question comes from Stuart Bush with RBC Capital Markets.

Stuart Bush - RBC Capital Markets

Hi Nabeel.

Nabeel Gareeb

Hi.

Stuart Bush - RBC Capital Markets

Where you guys receiving any silicone from third parties during the quarter, was all your poly supply in house production.

Nabeel Gareeb

We buy a very small quantify from other poly silicone markers we always have primarily to keep it qualified as just for small disaster recovery purposes, make sure that were in tune with market prices and those are the two primary things.

Stuart Bush - RBC Capital Markets

Okay. Has that volume changed from quarter-to-quarter over the last couple of quarters?

Nabeel Gareeb

No, not materially.

Stuart Bush - RBC Capital Markets

And you don't expect it to change going forward?

Nabeel Gareeb

I don't expect to change to any significant degrees going forward.

Stuart Bush - RBC Capital Markets

Okay. You guys mentioned, just a follow-up on your new poly being semi capable. Is it your assessment that the bulk of the new poly announcements out there are at just solar purity level?

Nabeel Gareeb

For the tier two or new entrants that is our understanding. For tier one, or the folks that have been in this industry for a while and have made poly for a while, they have mixture and it’s not some are articulating what that mixture is, some aren’t. So, it’s fair to say that you just have to make assumptions about that.

Stuart Bush - RBC Capital Markets

Okay. And lastly with all these announcements from these tiers ones [encumbrances] the new entrant and there seems to be such a range of different players coming into the market. Are you seeing more competition for the large solar contract customers versus when you signed the Suntech and Gintech contracts?

Nabeel Gareeb

We are seeing conversations, competition would indicate that there is confidence in those new entrants’ abilities to deliver and that’s what there is not a lot of.

Stuart Bush - RBC Capital Markets

Okay. Thanks a lot.

Operator

Our next question comes from Chris Blansett with JP Morgan.

Chris Blansett - J.P. Morgan

Just a couple of follow-ups here. One, I think should we expect when you give the fourth quarter earnings call, you probably given outlook for calendar '08?

Nabeel Gareeb

The fourth quarter earnings call in January of next year, yes we did that the last couple of years and if we follow that path then obviously next we would give that as well.

Chris Blansett - J.P. Morgan

And then on your solar wafer production or in-house production, are you planning on producing both mono- and multicrystalline wafers or is there a specific plan on what types you are going to produce?

Nabeel Gareeb

That would get into a little bit of detail, but for competitive reasons I wouldn’t want to disclose at this stage. But, once we get into that part feed business and start producing it, we might be able to talk about it.

Chris Blansett - J.P. Morgan

Alright, thank you, guys.

Nabeel Gareeb

Sure, thank you.

Operator

And our last question comes from Satya Kumar with Credit Suisse.

Satya Kumar - Credit Suisse

Yeah. Just a quick follow-up, on the semi wafers again. Just wanted to make sure if the semi wafers are actually growing let's say, in Q2 and Q3, why could this not be potentially irrational competition from some of your Japanese competitors here using poly that can have available to compete on prices and why should this be sort of an inventory driven price decline?

Nabeel Gareeb

Okay, maybe I am not sure I understood the question, Satya, help me refresh it.

Satya Kumar - Credit Suisse

You mentioned that there is price decline that you are seeing in Q3 and Q4 is more a function of supply a little bit ahead of demand here inventory grew at the chip companies

Nabeel Gareeb

Okay.

Satya Kumar - Credit Suisse

Is there any possibility that this price decline might be more because of irrational competition on the semi wafering side?

Nabeel Gareeb

Well, I guess, I look at both of those things as two sides of the same coin, right. I mean, if you got a little bit more inventory and the guy that's got it, that delivered it, and now he has basically excess capacity because the people aren’t buying that quantity of wafers. So, yeah, what’s he going to do, he is going to wait for it to flush out or is he going to try and dump prices to move that inventory and then get more business? Well, I think, there is going to be a little bit of both. So, I see both of them as part of the same equation.

Satya Kumar - Credit Suisse

Okay. And when you look at the solar wafer contracts that are being negotiated and I am sure you probably have some contracts that you could sign in the future. How should we think about the terms of these contracts, are the terms generally still increasing, what is the way they are progressing?

Nabeel Gareeb

Yeah, the goal certainly is to have good terms for each of the successive agreements, but I won’t feel comfortable saying what the specifics of each are at this stage.

Satya Kumar - Credit Suisse

Okay and I think Brett had a question earlier on about your exposure to this spot market. I think I missed that, could you just repeat your answer to that, what would be your spot market exposure to poly year from now into years.

Nabeel Gareeb

Yeah, all I think I said in the answer to Brett's question was just about Q1 and Q2 and basically the goal was to try and keep poly approximately flat and therefore that’s what basically what were able to accomplish from Q1 to Q2 and overtime as that occurs the rest of the business grows and this becomes a smaller and smaller percentage of it, so it becomes less meaningful. The other angle that people really haven't contemplated that might plan overtime is a lot of the poly we produce uses Silane which we make and as you look at the applications for Silane growing as well whether it's the flat panel, whether it’s the thin film, whether it's the classic wafer fabs that’s another opportunity as well, because not a lot of people there is only two large players maker of Silane gas in the world. So, that’s another opportunity to continue in that market.

Satya Kumar - Credit Suisse

Okay and in term of the polysilicon spot sale is being flat, did you mean that in term of revenues or quantity of a polysilicon?

Nabeel Gareeb

Approximately in both.

Satya Kumar - Credit Suisse

Okay and in terms of feed gas, this is my last question. 15,000 tons of capacity expansion I would assume that you already have the feed gas and raw materiel for the feed gas all lined up and taken care of.

Ken Hannah

I think Pierre already asked that question, and basically we said. Yeah we have been signing longer term long-term arrangement for those feed sources.

Satya Kumar - Credit Suisse

That's excellent, thank you very much.

Ken Hannah

Thank you.

Operator

And this concludes the question-and-answer session.

Ken Hannah

Thank you all for participating, good night.

Operator

And thank you for participating in today's conference, please disconnect your line at this time.

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