MEMC Electronic Materials, Inc. Q1 2008 Earnings Call Transcript

| About: SunEdison, Inc. (SUNEQ)

MEMC Electronic Materials, Inc. (WFR) Q1 FY08 Earnings Call April 24, 2008 5:30 PM ET

Executives

Bill Michalek - Director of IR

Ken Hannah - Sr. VP and CFO

Nabeel Gareeb - President and CEO

Analysts

Brett Hodess - Merrill Lynch

Stephen Chin - UBS

Jesse Pichel - Piper Jaffray

Jeff Osborne - Thomas Weisel Partners

Tim Luke - Lehman Brothers

Mehdi Hosseini - FBR

Paul Leming - Soleil Securities

Steve O'Rourke - Deutsche Bank

Christopher Blansett - J.P. Morgan

Brian Lee - Citigroup

Paul Leming - Needham & Company

Dan Myers - Crosslink

Stuart Bush - RBC Capital Markets

Operator

Ladies and gentleman, thank you for standing by, and welcome to the MEMC First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Bill Michalek. Please go ahead.

Bill Michalek - Director of Investor Relations

Thank you. Good afternoon, and thank you for joining our first quarter earnings conference call. Nabeel Gareeb, President and Chief Executive Officer and Ken Hannah, Chief Financial Officer are with me today. Before I begin, please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. These risks are described in the earnings release published today and in our 2007 Form 10-K.

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

Ken Hannah - Senior Vice President and Chief Financial Officer

Thanks, Bill. For the first quarter, MEMC sales were $501.4 million, which is in line with our updated first quarter guidance of approximately $500 million. These sales represent a growth of 14% over the first quarter of 2007. Gross margin in the quarter was $259.3 million or 51.7% of sales, down from 54.8% of sales in the fourth quarter, primarily as a result of the impact of the accelerated chemical deposit buildups at the company's Pasadena polysilicon facility.

Compared to the same quarter last year, gross margin dollars grew by 16.5% or by 120 basis points as a percentage of sales. Operating expenses came in at $40.9 million or 8.2% of sales as compared to 7.2% of sales in the previous quarter, primarily due to the lower revenue level and timing of stock compensation expense within 2008.

Operating income was $218.4 million or 43.6% of sales compared to the fourth quarter's $254.8 million or 47.5% of sales. This quarter's operating income represents an increase of 16.4% compared to the first quarter last year. Total stock-based compensation expense in the first quarter was $12.6 million or 2.5% of sales.

Using our estimated effective cash tax rate of 15%, non-GAAP net income for the first quarter excluding the non-cash effects of the quarterly valuation of the Suntech warrants was $193.9 million and non-GAAP diluted earnings per share, excluding warrants, was $0.84 per share. GAAP net loss for the first quarter using a book tax rate of 304% was $41.8 million or $0.18 per share, which includes a $0.77 per share impact relating to a decrease in the valuation of the Suntech warrants. The book tax rate for the quarter excluding the Suntech warrants would have been approximately 25%.

The company generated operating cash flow of $197.2 million or 39.3% of sales compared to $238.5 million or 44.5% of sales in the fourth quarter. Capital expenditures for the first quarter totaled $81.9 million or 16.3% of sales and free cash flow, which is operating cash flow minus capital expenditures, was $115.3 million or 23% of sales. MEMC's consistent strong free cash flow generation even in a weak quarter enabled the company to repurchase approximately 1.1 million shares at a total cost of approximately is $79 million, and still grew cash and investment balances to over $1.4 billion compared to $1.3 billion at the end of the fourth quarter.

The investment balances include a $119 million that was reclassified from short-term to long-term based on the current state of the capital markets. With this cash generation and virtually no debt, the balance sheet continues to be in excellent shape.

Now turning to business conditions, demand indications from semiconductor application customers are a bit weaker than is typical resulting in additional price declines from first quarter levels. Demand from solar applications customers, however, continues to be strong. Although we are pleased with the results of the actions we have taken to address the issues that led to the lower polysilicon volume in the first quarter. We feel it is prudent to be extra cautious regarding our polysilicon output expectations in the second quarter. As a result we're targeting revenues of approximately $540 million to $570 million for the second quarter. In addition, we're targeting gross margin of approximately 54% to 55% with operating expenses of less than $40 million.

Now, let me turn the call over to Nabeel.

Nabeel Gareeb - President and Chief Executive Officer

Thank you, Ken. While we were disappointed to have had issues with our polysilicon ramp in the first quarter, I am pleased that MEMC was able to limit the impact to 10% of our targeted revenue, generate strong cash flows, and report healthy year-over-year comparisons despite utilization being about 20% lower in our Pasadena factory than the fourth quarter levels.

Demonstrating the underlying strength of our business model, our cost reductions and product mix enabled us to offset sequential price reductions in the mid-to-high single-digit percentage range and a significant reduction in spot polysilicon sales volumes and keep revenues and margins between the third and fourth quarter levels.

To give you an update on Pasadena, as you know, accelerated chemical deposits experienced inside our expansion unit, Unit 3, resulted in reduced output for the quarter. On our update call earlier this month, we reported that Unit 3 was ramping, but Unit 2 was running with good output and that Unit 1 was undergoing maintenance. Since then, maintenance on Unit 1 has been completed and Unit 3 has demonstrated good results. While we are encouraged by the progress and are trying to be more cautious than normal, we are still providing second quarter targets that would result in strong sequential growth in revenue and margins.

In the near term, I remain encouraged by our progress on our polysilicon expansion. We are currently targeting to achieve mechanical completion of our Unit 4 silane unit before the end of the current quarter, as well as additional polysilicon reactor capacity in the third quarter. This combination will mark the mechanical completion of our targeted 8,000 metric tons of polysilicon capacity, which was originally targeted for the end of 2008.

Depending on the output ramp of the silane unit and the polysilicon reactors, this improved installation schedule may allow us the opportunity to make good progress toward achieving our annual targets in the second half of 2008. That said, we will provide any specific update to full-year 2008 targets at our semi-annual update in July.

I also continue to be excited about our prospects for continued growth over the next several years. We have made no changes to our announcements beyond our target of achieving 2010 year-end polysilicon capacity over 15,000 metric tons per year. This expansion will continue to fuel our wafer sales to solar applications customers, which continue to grow at very significant growth rates.

Our wafer backlog/contracts for solar applications remains the largest in the industry with additional opportunities to continue to grow it. The expansion will also allow us to continue to take advantage of the consistent growth of the semiconductor market and that industry’s continued shift towards higher value products. Overall, our strategic positioning as the asset efficiency leader in wafer technology and a core balanced supplier to these important markets gives us a unique opportunity and a unique positioning for the future.

In summary, I am pleased with our ability to minimize the impact of the first quarter and deliver solid year-over-year growth despite the growing pains in Q1. We continue to strengthen our balance sheet and the company remains very well positioned as an enabler of two strong markets. We look forward to capitalizing on our market positioning as we continue to move through the second half of this decade.

With that, we will now take your questions. Operator?

Question and Answer

Operator

[Operator Instructions]. Our first question comes from Brett Hodess from Merrill Lynch. Please go ahead.

Brett Hodess - Merrill Lynch

Hi, Nabeel. Nabeel, I am wondering if you can give us a little bit more color on the semiconductor side of your business in terms of the… what we might expect in terms of volume and pricing going forward, you obviously commented on some continuing weakness in 2Q. And given the strength you are seeing in solar, just how much ability you have to offset, what you are seeing in the semiconductor business with the solar business, given the difference in pricing and what not on the different products?

Nabeel Gareeb - President and Chief Executive Officer

I think, Brett, on the semiconductor side basically, obviously, the market as everybody seen through the announcements of the different customers, a little bit softer than you would typically expect in this part of the year. Some of it is because of some of the people built a little bit of inventory and they are trying to correct it very rapidly, others have some more fundamental demand issues tied to the economy. But overall, units were basically down a little bit in terms of square inches of silicon, Q4 to Q1. And based on our projections they are going to be up from Q1 to Q2. Obviously, if you combine the mid-to-high single digits pricing down from Q2... Q4 to Q1 that we said we were going to experience with the low single digits from Q1 to Q2, you end up with pricing down probably almost in the double-digit range or approximately in the double-digit percentage range and compared to Q4 of last year, and in spite of that basically, we are saying we are going to be basically holding margins close to where we were in Q4. So, we are basically offsetting the margin through mix, as well as cost reductions. In terms of dollars of revenue, obviously we are also providing what we think is pretty good snapback guidance, if you will, on being able to recover that in dollars of revenue as well.

Brett Hodess - Merrill Lynch

Pretty clear. On the pricing, you are talking about pricing for all types of wafers being down. You know mid-to-upper single digits for 1Q and then for 2Q, double digits over the fourth quarter. So that semi and solar wafers all combined?

Nabeel Gareeb - President and Chief Executive Officer

Yes, we basically look at this in aggregate on a mixed normalized basis. So, that's really... so, we are talking about, if you just looked at pricing alone, you’d be looking at close to... approximately close to double-digit type of impact on pricing alone.

Brett Hodess - Merrill Lynch

Right. And because the solar contract wafer is a higher percentage of the mix now and they because their smaller wafers have a lower ASP. That's part of the driver on the ASP decline as well right?

Nabeel Gareeb - President and Chief Executive Officer

Yes, so again, Brett, this... what I'm talking about is mix normalized not ASP. So, this gives you an apples-to-apples comparison on the absolute price decline. The ASP would be a different part... a different connotation.

Brett Hodess - Merrill Lynch

Got it. Is it… my last question was as you ramp up the Unit 3 and the extra poly capacity, do you expect your poly spot mix to rise again from here as we move through the year or do you think that the demand for wafer as well will keep the spot market for poly, that's little lower levels than they were at previously?

Nabeel Gareeb - President and Chief Executive Officer

Well, certainly the demand is very robust for spot poly, however in our targeted guidance here for Q2, we’ve made assumptions that are spot poly volume will be between the Q4 and the Q1 levels not even as high as Q4 levels. So the demand is certainly there, but we believe that the opportunity is there also to continue to grow the wafers. So again our goal is, let's see if we can bring some spot wafers into the mix. In terms of Q3 onwards, we'll provide specific guidance then but we don't anticipate any significant growth in spot poly in terms of our desire to sell it. We'll certainly have the ability to do it because the market we think will still be very strong.

Brett Hodess - Merrill Lynch

Great, thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Our next question comes from Stephen Chin from UBS. Please go ahead.

Stephen Chin - UBS

Great, thank you. Nabeel, I was wondering if you just elaborate more on the revenue guidance. I was wondering if you could share with us, what kind of utilization rate are you guys assuming at polysilicon Unit number 3 in the second quarter? It is conservative revenue guidance although and what has to happen to hit the high end of the revenue guidance?

Nabeel Gareeb - President and Chief Executive Officer

Yes, I think the easiest way, I'll give you several pieces of information, Stephen, and then I'll try to synthesize them into a summary because it gets pretty complicated, pretty fast. Fundamentally, if you look at Unit 3, when we last had the call about three weeks ago, Unit 3 was running at about, was in the midst of ramping, and running at about 60%, 70% utilization rates, and for the last three weeks basically it's been averaging between 80% and 90%. Okay. So it's demonstrating pretty good results. Unit 1, as we had said, was down for maintenance. Obviously that maintenance is now complete. That maintenance took a few days longer because we had run it to failure and so it took a little bit longer to clean up. There was more to clean up. But in essence, as we also mentioned on the last call when somebody asked the question, our dollarized capacity is roughly between $700 million and $800 million a quarter. So if everything, all the stars lined up and we didn't have any planned maintenance or unplanned maintenance already downtime, etcetera, you could have achieved the upper end of those. So what we are doing in our guidance is basically, obviously number one, we are allowing for some additional planned maintenance because Unit 1 was down during the early part of this quarter. In addition, we also lined for some planned maintenance should we need to go into Unit 3 or Unit 2 to clean it up or look at things and make sure that it's running the way we think at least to run for a six-month or a nine-month period and then more important than that is the unplanned part of it. We are basically [inaudible] because we’re at the forefront of this expansion in this technology and basically we experienced some unforeseen problems in Q1. Now, as you know, nobody else does granular polysilicon at this scale even though it is cheaper than chunk and the reason they don't do it is because it is difficult as a process. So although, we feel very good about the actions we have taken to address the issues, we definitely need to prove it and we want to make sure that we're capable of proving it in Q2 and so we are just trying to be prudent by providing extra cautious guidance this quarter. So in summary, the utilization rates, again you can do the math on what dollarized capacity potential is as we talked about in the $700 million, $800 million. So what utilization would we have to run across the board as a company to achieve our range of guidance.

Stephen Chin - UBS

I want to just say a last clarification. As you're saying Unit 4 is going to be mechanically ready by the end of this current quarter, is it fair to assume that Unit 4 is going to contribute to MEMC sales in the third quarter and what kind of utilization rates should we be assuming for Unit 4?

Nabeel Gareeb - President and Chief Executive Officer

Yes. So let me, I'm going to give you some more detailed information as well not to complicate but to explain it a little bit better. Last time we talked it was just Unit 4. Now, what I did talk about last time was Unit 4 is basically just is the unit that actually makes the silane gas. Right? And then that silane gas is converted to poly. So then there is also poly reactors required to make that poly. So last time, we talked I said Unit 4 might be completable by the end of Q2. What we're now saying is we are now targeting Unit 4 to be completed prior to the end of Q2. That will give us some silane gas to use with existing poly reactors depending on the ramp, of course. But that capacity will be available prior to that in the Q2. Then, in the early part of Q3, we’ll have poly reactors that will be also to be coupled with that unit to basically give us capacity up to about 7,500 metric tons, approximately. Okay. That's the combination of the expansion in Pasadena. There was also about 500 metric tons planned in Merano for Q2 that was going to be complete prior to the end of Q2 and basically what we have done is we have pushed that out into Q3 as a conscious decision here in the last few weeks because that required downtime and I didn't want to take any downtime to cause any more uncertainty in our ability to produce poly for the quarter. So yes, Unit 4 will allow me to ramp... potentially ramp a little bit. It’ll add a few hundred metric tons annualized capacity, then the poly reactors will add more up to 7,500 metric tons. Now the... but the specifics of those ramps, I will be able to articulate more clearly in the July call.

Stephen Chin - UBS

Okay. Thanks, Nabeel. That’s helpful.

Nabeel Gareeb - President and Chief Executive Officer

Okay.

Operator

Next question comes from Jesse Pichel from Piper Jaffray. Please go ahead.

Jesse Pichel - Piper Jaffray

Hi. The last answer... answered my questions. But it looks like you repaid $80 million of customer deposits in the quarter, can you please comment on that?

Nabeel Gareeb - President and Chief Executive Officer

Basically, that’s just the... a change in terms of deposits we would have had last quarter that we carried over. And so, it is just a lower level. It is not necessarily a repayment, Jesse.

Jesse Pichel - Piper Jaffray

Yeah, because the customer works off the deposit, is that correct?

Nabeel Gareeb - President and Chief Executive Officer

Right.

Jesse Pichel - Piper Jaffray

Okay. So...

Nabeel Gareeb - President and Chief Executive Officer

Had deposits could have been for something that was actually delivered in the quarter. So it doesn't necessarily reflect an accurate [ph] cash return.

Jesse Pichel - Piper Jaffray

You might don't want to answer this. But can you help us with all of these capacity additions, I mean, can you help us potentially modeled polysilicon production growth for next year? I mean, based on these numbers, it looks like it is going to be over 50%, would that be a fair characterization?

Nabeel Gareeb - President and Chief Executive Officer

Well, Jesse, so what we had said previously was that we would have 8,000 metric tons of capacity installed by the end of this year. And then obviously, we had said also that it would take us somewhere between three and six months to ramp that and that would provide us the growth for '09 and what we've said in the last call that we basically pulling that in and what we're giving you is some more details on how we are pulling that in or the pieces of what we are pulling in. And so, obviously that gives us an opportunity to start that ramp in the second half of this year. That ramp will once we get more clarity on it and we will provide more clarity on it in the July call and then obviously more in October and more in December and then that will allow us to give you better ideas of '09. But at this stage, I won't feel comfortable commenting on '09 because then I'll start be giving '09 guidance.

Jesse Pichel - Piper Jaffray

There has been some noise recently about significant declines in the spot polysilicon market. Could you comment on that?

Nabeel Gareeb - President and Chief Executive Officer

Yes, we certainly haven't seen it.

Jesse Pichel - Piper Jaffray

Great. Thank you very much.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Our next question comes from Jeff Osborne from Thomas Weisel Partners. Please go ahead.

Jeff Osborne - Thomas Weisel Partners

That's great. I just had a question on the inventory that's been down several quarters in a row and you've obviously had a few production hiccups. So I just wanted to make sure and clarify that the sequential decline [inaudible] to ensure that you delivered to your solar customers or can you talk about which way it’d trend next couple of quarters out?

Nabeel Gareeb - President and Chief Executive Officer

Yes, I think, like you said, it was just simply obviously the production hiccup and we... the amount of inventory decline was pretty nominal if you just look at the valuation change as the cost goes down, as an example, the valuation of similar units of inventory also goes down. So, even if the units of inventory were flat, the dollar value would actually go down, because the cost of those units went down. So, we believe basically the change from Q4 to Q1 was pretty nominal at best, and the hope is that as we continue our expansions, there will be the opportunity to put some high elements back in inventory, but probably not a lot. We're pretty much like where we have got into in terms of running up a very lean supply chain now.

Jeff Osborne - Thomas Weisel Partners

Very good, and just two quick ones, Nabeel, you mentioned you're adding 500 metric tons in Merano. Is Merano right now at about 1,500 in the year of 2000?

Nabeel Gareeb - President and Chief Executive Officer

Well, yes we didn't break out specifics. We were trying to stay away from all these specifics, which kind of get very complicated very fast, but what we had said was when we were at about between 4,000 and 6,000, we had said is about a third Merano and about two-thirds Pasadena. So, those were the general guidelines. And then, you can obviously add to that.

Jeff Osborne - Thomas Weisel Partners

Got you. And just the last one, we're getting $0.85 on the EPS versus $0.84, is there just some rounding going on there?

Ken Hannah - Senior Vice President and Chief Financial Officer

Because there was a loss, you are seeing the basic shares. If for the.. for the non-GAAP calculation, you have to use a fully diluted number, which would be different.

Jeff Osborne - Thomas Weisel Partners

Got you. Thanks a lot.

Ken Hannah - Senior Vice President and Chief Financial Officer

Thanks.

Ken Hannah - Senior Vice President and Chief Financial Officer

And can we have the next question?

Operator

Tim Luke, your line is open for questions.

Tim Luke - Lehman Brothers

Thanks. Just with respect to your commentary, Nabeel, on semi pricing, could you just give... what your expectation was for the coming calendar second quarter?

Nabeel Gareeb - President and Chief Executive Officer

Yes, it was low-single digits down, Tim.

Tim Luke - Lehman Brothers

What was it… declining the degree of price decline, what was the less price decline, if you have the seasonings of that period, what was some of the dynamics there?

Nabeel Gareeb - President and Chief Executive Officer

Yes, basically what happens is over two-thirds of our business between 75% and 80% of our business got negotiated in December for reset in January based on the semi-annual quarterly and annual contracts being negotiated. And then obviously, from Q1 to Q2 it’s primarily only the quarterly contracts being negotiated. And so, the fact that only about a quarter to less than a third of our total business is being negotiated. As a result of that, the impact is of approximately in the low-single digit percent range.

Tim Luke - Lehman Brothers

And what was your commentary with respect to inventory levels in general in the semi arena, and maybe any color on given what you see now, how you have to see pricing to develop in the second half of calendar '08?

Nabeel Gareeb - President and Chief Executive Officer

Yes, I think the inventory levels in most... some customers built some inventories levels in their diebank customers [ph] added in their wafers and looking to basically continue to ramp, most of that was in the memory space and was getting flushed through Q1. More of it will get flushed through Q2. And I think, probably the second half will have their inventories under control, it’d just be matter what demand is. In terms of the pricing dynamics per se, I won't have any specific ideas on that until virtually the last week and a half or two weeks of June, which is [inaudible] negotiating the Q3 and perhaps some Q4 pricing.

Tim Luke - Lehman Brothers

Ken, I know that your interest income seem to hold up pretty well 12.8% in an environment where for other people it means low because of the lower interest rates. Do you have any feel for how we should think about modeling that in the second quarter and the balance of the year?

Ken Hannah - Senior Vice President and Chief Financial Officer

Well, what everyone experienced were in the US here two rate reductions.

Tim Luke - Lehman Brothers

Yes.

Ken Hannah - Senior Vice President and Chief Financial Officer

Because our cash is not all concentrated here, we were somewhat sheltered from that but the two rate reductions have been reflected in the 12.8%. So I think you can use that same assumption going forward.

Tim Luke - Lehman Brothers

And with respect to gross margins as you ramp a variety of elements of new capacity. Obviously this quarter, you're guiding for an improvement in gross margins sort to back to more like the fourth quarter levels. Should we assume that gross margins can continue to improve just in terms of the directional fence that was taken out of the year or do you think that ramping new capacity would mean that, would moderate the gross margins, perhaps?

Ken Hannah - Senior Vice President and Chief Financial Officer

I mean I think a couple of aspects to that, Tim.

Tim Luke - Lehman Brothers

Yes.

Ken Hannah - Senior Vice President and Chief Financial Officer

First of all, we never... we have a... even in our full-year targets we had not recently assumed any significant gross margin improvements. I think they were extremely nominal from the Q4 levels. Second is, I mean you just look at where we are with the additional capacity, with that depreciation on our books, with the additional costs, all of those things and this almost double-digit price decline, if you will, from Q4 levels, we’re still guiding gross margins to the Q4. So I think there continues to be opportunity, again it depends a little bit on the price elements, depends on our cost reduction and depends on the speed of the ramps. But, certainly additional capacity ramps shouldn't moderate. They should help our cost reductions.

Tim Luke - Lehman Brothers

Great. One thing, if I may, to Nabeel, just on the, Nabeel, on the… how should we frame expectations around your potential to add incremental longer-term contracts and relationships?

Nabeel Gareeb - President and Chief Executive Officer

I think the issue really here in Q1, Tim, was that with these production-related issues I was a little distracted.

Tim Luke - Lehman Brothers

Yes.

Nabeel Gareeb - President and Chief Executive Officer

I think getting this call past us and then focusing on normal business of obviously ramping, Pasadena, etcetera, will allow me also to get back to some of those very productive discussions. There are people that are very interested in doing it. We just need to make sure we kind of go through with the conversations.

Tim Luke - Lehman Brothers

So Q2, then?

Nabeel Gareeb - President and Chief Executive Officer

Well, no, I'm not saying... I mean I don't want to get into trouble but some of the discussions are going on, so we will see it.

Tim Luke - Lehman Brothers

Thanks. Good luck.

Operator

Our next question is from Mehdi Hosseini from FBR. Please go ahead.

Mehdi Hosseini - FBR

Nabeel, could you help us understand, with the change of business, if you were to help us understand the dollars of revenue opportunity for one kilogram of poly from semi and non-semi and non-semi assuming solar wafer and poly and that makes this year, and how should you trend mixed especially with some of your semiconductor customers, especially on the memory side of facing out the 200 millimeter capacity and I have a follow-up.

Nabeel Gareeb - President and Chief Executive Officer

That gets a little tricky, Mehdi, but let me go back to the rule of thumb I've used and it's worked pretty well so far. What we typically say as if you take a dollar of poly at long-term prices, okay, not spot prices but long-term prices and you converted into a solar wafer at long-term prices, basically 156-millimeter wafer, you can get about $2 for that same dollar. If you converted into a semiconductor wafer you get anywhere between $4 and $7 depending on the size of the wafer, the technology of the node, the customer specification, Epi, non-Epi, all those kinds of things. So that's probably as close as I can get you in terms of a multiplier effect and then if you just plug in the base line numbers, I think you've got pretty close to what the industry averages are.

Mehdi Hosseini - FBR

I think I was going to figure out the semi multiplier as 200-millimeter capacities are phased out, would that give you a full multiplier or semi multiplier?

Nabeel Gareeb - President and Chief Executive Officer

Yes. So I think what happens is the 200-millimeter would be closer towards the lower end and 300-millimeter, we would be closer to the upper end.

Mehdi Hosseini - FBR

All right. So, we should assume that it is tracking more to the higher end.

Nabeel Gareeb - President and Chief Executive Officer

So, what happens is on an average basis and that's why we keep talking about the fact that on a revenue basis 300-millimeter will help the mix but the 156-millimeter wafers will hurt the mix on an absolute revenue dollars per kg equivalent basis, if you will.

Mehdi Hosseini - FBR

That’s it. And then one question regarding, doing the ingot conversion to wafer in-house versus subcontract, any update there?

Nabeel Gareeb - President and Chief Executive Officer

Yes, we continue to basically negotiate for sites to bring that… to break some of that in-house and as we make progress, we will certainly keep people posted on it.

Mehdi Hosseini - FBR

If the polysilicon versus the silane [ph] in 2010, 2011, why not just subcontract it, will that not be more economical?

Nabeel Gareeb - President and Chief Executive Officer

Certainly, I mean that's why we’ve taken subcontracting as an approach, but also Mehdi, we had talked about the fact that we want, we believe we have semiconductor related skills and techniques to bring to bear on the 156-millimeter platform, which could allow us to produce inherently more efficient wafers. And for that we need to have some of the equipment in house to be able to make some of those proprietary process changes. So, that will be one of the reasons for bringing in in-house, in addition to some nominal cost reduction as well.

Mehdi Hosseini - FBR

Can we expect that in 12 months, in less than 12 months?

Nabeel Gareeb - President and Chief Executive Officer

Yes, what we had said last year was that it would be on an 18-month to 24-month window and that would put it somewhere in the 2009 timetable. And we are still looking at somewhere in that timetable.

Mehdi Hosseini - FBR

Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure. Thank you.

Operator

Our next question is from Paul Leming from Soleil Securities. Please go ahead.

Paul Leming - Soleil Securities

Good evening. I was wondering that if you could give us any granularity on whether you would like inventories to be at the end of the quarter, at the end of the second quarter in terms of days of sales and whether or not you get there, is the target you're heading towards, well you would like to be on a longer-term basis or would there even be a need… that rebuild inventory further in the third quarter?

Nabeel Gareeb - President and Chief Executive Officer

Yes, I think, Paul, the only thing that I can probably comment on inventory is obviously we've depleted inventories to a pretty lean level. We'd like to rebuild some of it. We’ve got the opportunity to do so, if our ramps go well, we might try to build some inventory, if not, then we won't. In terms of our comfort level, I think we basically demonstrated that we don't want inventory just sitting around in factories that causes basically what I would call lazy habits. And we have kind of got rid of those. We have improved our efficiency, it’s also allowed us to improve our costs. So, I think it has several benefits and inventory is always treated, being a classic operations guy. Inventory is evil, right? So, getting rid of that stuff is always good. Nominally, ten days, 12 days, 14 days that type of thing is okay. Couple of weeks of inventory but when you start talking about four, five, six weeks of inventory, it's not, we have had that traditionally as well so I'd like to keep it at the lower end than at the higher end.

Paul Leming - Soleil Securities

Fair enough. Second thing, I wanted to touch on... are you in the process of putting more silane the impact of being of fundamentally more silane than reactors and what I'm specifically trying to understand is are you going to be entering the merchant market post silane in a more significant way than helping the cases. So, likewise. [inaudible]

Nabeel Gareeb - President and Chief Executive Officer

It's a very insightful question, Paul because obviously for people that may not be familiar with, we obviously produced the silane first and then converted into poly in our Pasadena facility. We have sold silane to basically both the semiconductor device makers to the flat panel market, and as well as to thin film suppliers, think film solar cell makers, all through obviously are distributors. There are people interested in buying silane on a longer-term basis to service all three of those markets in much more significant quantities, and if the price is right then obviously it makes sense to do so, but also keep in mind that the asset intensity increases as you go further back in the value chain, while the multiplier on the unit being produced for revenue decreases. So, for that same dollar poly that I was talking to Mehdi about, I am going to get less than $1 revenue for that same equivalent silane quantity, yet my dollars of CapEx to get that dollar are going to go up. So that asset turns also has to make sense. So, having said all of that, there is certainly an opportunity to do so and we'll keep our eyes peeled and keep having the conversations with the people who are interested and see if the opportunity makes sense.

Paul Leming - Soleil Securities

And I will try little more time here, are you in a position where you got some excess silane even once you get all the reactors targeted for Pasadena up and running? Will you have a bit of surplus silane?

Nabeel Gareeb - President and Chief Executive Officer

We've always had a bit of surplus silane that, which is what we sell to the semiconductor device makers. So, yes. Once we get it all running, but you know, it's not running static state, because we’ve talked about the 8,000 metric tons we've got 15,000 metric tons, we also talked to about getting to 15,000 metric tons. So at various points, yes, we'll have excess. At the end of it, will it be completely balanced? I don't think so, we will have probably a little more silane and poly probably.

Paul Leming - Soleil Securities

Fair enough. And just kind of following up on that the 500 tons you're putting into Merano, is Merano is going to stay completely a Siemens facility based on Tricor?

Nabeel Gareeb - President and Chief Executive Officer

Yes.

Paul Leming - Soleil Securities

And then, if I could just the last question, I've got a lot questions from the investors the last few weeks trying to understand the impact of the maintenance you talked about at Pasadena on units, 1, 2 and the future Unit 3. If you look backwards towards Pasadena having something around 3,000 tons of capacity before this expansion started. Given the maintenance turnaround, let me talk about having the delivery six months on each unit. What is the capacity at Pasadena? Could you physically produce 3,000 tons in a year or once, where the maintenance turnaround factored into that number or a 3,000 tons of capacity at semi that you never take the units down for maintenance?

Nabeel Gareeb - President and Chief Executive Officer

Yes I think traditionally, what we... when we've talked to people we basically talked about the 8,000 or the 6,000 of the year-end capacity numbers as our eventual effective output numbers. Not just raw capacity numbers, so that's basically how I would recommend you think about it as well. Same thing for this revenue or dollarized figure that I started coding last… since the last call which was basically $700 million to $800 million, and that range obviously depends a little bit on the maintenance and the mix of product and all of those good things as well.

Paul Leming - Soleil Securities

But as you said, you do think in terms of effective capacity, which has got turnaround kind of every six months for a silane unit built into that effective capacity?

Nabeel Gareeb - President and Chief Executive Officer

That, yes, that effective capacity basically has some level of that built-in. It doesn't have obviously unplanned pieces of it. The other part that's also important to notice, we are moving more towards run-based rather than time-based. So, over time, probably that six-month will disappear as a metric and it will become a little bit every quarter and a little bit every month.

Paul Leming - Soleil Securities

Fair enough. Thank you very much.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Next question comes from Steve O'Rourke from Deutsche Bank. Please go ahead.

Steve O'Rourke - Deutsche Bank

Thank you. Good afternoon. Nabeel, have you seen any significant increase in the cost of input materials for your silane production process over the past couple of quarters?

Nabeel Gareeb - President and Chief Executive Officer

Over the past couple of quarters, yes, I mean we see... we've seen increases in some. Yes, we've seen increases in some.

Steve O'Rourke - Deutsche Bank

Is this something that you think to become material when you consider this host of other companies and entities that are trying to enter this business?

Nabeel Gareeb - President and Chief Executive Officer

Well, I mean I think it absolutely will be. I mean even people talk about thin film, I mean to me, the silane gas alone pricing become fear, fear more players are going to get into that. But that's even more restricted or you talk about the TCS piece of it or you talk about the construction materials piece of it. I mean all other elements are going to play a role, absolutely.

Steve O'Rourke - Deutsche Bank

Okay, fair enough. And have you been able to demonstrate higher efficiency sales on wafers that is with a partner for example in the lab with your wafers?

Nabeel Gareeb - President and Chief Executive Officer

Higher than what?

Steve O'Rourke - Deutsche Bank

Higher than what their standard is for example. On a wafer they have presently from someone else.

Nabeel Gareeb - President and Chief Executive Officer

Yes, we basically don't. That part of the inherently more efficient wafers we are basically, it's in the R&D stage, if you will. We have pretty good ideas on what we want to do. Pretty good thoughts on what we want to do. We've got some R&D equipment coming in that. We basically will demonstrate it on. But in addition the feedback this is anecdotal more than fact, but the feedback is that those customers and partners, people that buy our wafers like them because of the composition of the material will actually goes into making those wafers, which is obviously directly tied to the quality of the poly that we put into it.

Steve O'Rourke - Deutsche Bank

When do you think you’d have real data on that comparisons, I mean is this several quarters out?

Nabeel Gareeb - President and Chief Executive Officer

Yes, we had told people, I think when that we brought that topic of last year that it would be over a two- to three-year horizon.

Steve O'Rourke - Deutsche Bank

Okay.

Nabeel Gareeb - President and Chief Executive Officer

It’s not an immediate sort of thing. And I think that also, Steve, I forget you asked the question earlier about the spot poly thing, there is a lot of goo-lah-bah [ph] spot poly pricing and I think was getting lost is we're seeing a lot of 39s and 49s type of material coming out that are being sold for low prices as substitutes for scrap are lower than traditional version poly prices but much higher than the traditional scrap prices. And so I think that's also confusing people about spot prices in the quality and so I think that will also have an impact on the efficiency of the wafers that are being delivered to the customer.

Steve O'Rourke - Deutsche Bank

Fair enough, thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Our next question comes from Christopher Blansett from J.P. Morgan. Please go ahead.

Christopher Blansett - J.P. Morgan

Hi, guys. Thanks a lot. Just a kind to clarify, you kind of said earlier, Nabeel, and tied into the press release. Do you need this for mono silane unit and the incremental reactors in Pasadena to come online and actually start out putting capacity in order to, I guess, exceed your '08 guidance?

Nabeel Gareeb - President and Chief Executive Officer

What we had said was that this will allow us to... so what we said three weeks ago was that our back-end, our back half is going to be... or our recovery is going to be back-half loaded to make progress towards the full-year targets. If you look at the $700 million to $800 million type of numbers, you could conceivably argue that royalty if you run at a high enough utilization, you're not going to need it, but however we need to be cautious and so yes, we're going to assume that we will need some output from those, but the specific quantity and the specific ramp we're not going to specify until probably July. And even then we may just give you an idea of what that is.

Christopher Blansett - J.P. Morgan

Okay. So if the current units all operate accordingly, you can still hit those numbers without new concerns.

Nabeel Gareeb - President and Chief Executive Officer

Well, I mean we were accounting on Units 3, on Units 4, and the additional poly reactor capacity to give us the second quarter boost otherwise we end up running at very high utilization levels which we think would make it a very risky proposition.

Christopher Blansett - J.P. Morgan

All right. Now, I think one of your... one of the potential new entrants of the poly market and a couple others might seem to be behind, this is kind of gesture view of the poly market for next year and 2010. You know [inaudible] said they are going to get out of business or they are not going to get into it?

Nabeel Gareeb - President and Chief Executive Officer

Yes, I think it doesn't adjust it. I think it reinforces what we have been talking about in a very low key manner, I think that A, it is difficult, B, it is asset intensive and C, all the deals that they are signing also as you probably noticed are all out in late 2009, some in 2010, and beyond starting then with start-up companies. So, I think it just reinforces what we have been talking about.

Christopher Blansett - J.P. Morgan

And then like one last question. Since you did have some issues in the first quarter, getting as much poly as you had thought online. Do you have any customers who you think walked away fairly disappointed and will probably end of being short themselves to make cells or wafers?

Nabeel Gareeb - President and Chief Executive Officer

You mean on the solar side?

Christopher Blansett - J.P. Morgan

Yes, sir.

Nabeel Gareeb - President and Chief Executive Officer

We've talked about that briefly. We said that we had a significant decline in our spot polysilicon sales volume for that very purpose, basically we are try to keep our wafer customers supplied, basically both semi and solar. Yes, we were a little short to our commitments to them. However, we don't know what their alternate suppliers were either. So we wouldn't feel comfortable commenting on that and you'd have to rely on them specifically for those statements.

Christopher Blansett - J.P. Morgan

All right. Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Our next question is from Timothy Arcuri from Citi. Please go ahead.

Brian Lee - Citigroup

Hey, guys. This is actually, Brian Lee, calling in for Tim. I had a couple of things. First thing, quick follow-up on inventory, are you guys actually seeing any push back from your customers to replenish your inventory here so that they can be somewhat hedged against any additional hiccups in your manufacturing ramp?

Nabeel Gareeb - President and Chief Executive Officer

You mean us build more inventory to--?

Brian Lee - Citigroup

Yes. Your inventory.

Nabeel Gareeb - President and Chief Executive Officer

I see. It's a buffer them, if you will.

Brian Lee - Citigroup

Sure.

Nabeel Gareeb - President and Chief Executive Officer

On the, not so much on the semi-side because I think the market conditions are little softer than anticipated, but on the solar side everybody would love to... like to have more inventory, but if I have more inventory, I can sell it from the solar side as well. So, yes, we are getting a little bit of that, but not to the degree that they are just walking away or anything.

Brian Lee - Citigroup

Okay. Great. And one more for me, kind of bigger picture, but Nabeel, it would seem that what a big part of investors like in the MEMC store is the visibility you're supposed to have and have provided to your long-term model, but if I include Q1 you've now missed or guided below the Street in three of the past four quarters. So can you give us anything to instill a bit more confidence at these longer-term targets you provided [inaudible]?

Nabeel Gareeb - President and Chief Executive Officer

So, I'm not; I don't reconcile three out of four quarters. But that's fine. Let's put that aside. Long-term targets basically we said that... basically between 2009 and 2011, we would be between we'd like to achieve $3 billion to $4 billion of revenue and between $5 and $7 per share of earnings. We achieved basically a little around $3.30, was it, on non-GAAP last year. Just last year alone and even on a nominal basis what we were targeting this year was about between $4.50 and $4.60 on a non-GAAP basis which was actually well ahead of actually a $5 number you would anticipate linearly extrapolate between $3.30 and $5 for next year. So I don't see, yes, we've had hiccups, you are absolutely right; we had a hiccup in Q3 last year, which was the electrical or growing pains. We’ve had teething pains in Q1. But we feel pretty good on the trajectory we are on and yes that's why this area is fought with trouble especially for new entrants. So I don't think we're out to lunch, had we had hiccups? Yes, but we regard these as speed bumps not brick walls.

Brian Lee - Citigroup

Okay. Thanks, guys.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

Our next question is Pierre Maccagno from Needham. Please go ahead.

Pierre Maccagno - Needham & Company

Hi, Ken, Nabeel. Could you give us a little breakdown of the product you’re selling in the spot market, specifically wafers versus polio and how that can change from quarter-to-quarter?

Nabeel Gareeb - President and Chief Executive Officer

Yes, Pierre, we haven't sold any significant quantity of spot wafers to speak of, because we were going to do that in Q3, then we basically have the electrical incident in Q4, we didn't, we sold a very small quantity and then basically in Q1 because of this hiccup, we basically didn't sell any, we actually reduced our spot poly volume significantly.

Pierre Maccagno - Needham & Company

But going forward is that the plan to neglect more to the wafers or--?

Nabeel Gareeb - President and Chief Executive Officer

Yes. We might sell more spot wafers if the opportunity allows because again we’ve… if the opportunity allows we might do that.

Pierre Maccagno - Needham & Company

Okay. And then just to get a little bit more clarification on this silane the fourth unit. So, all of that silane is not used up by the three poly units, you have extra capacity there?

Nabeel Gareeb - President and Chief Executive Officer

Yes. We never quantified how many poly units we had, so the three units we had talked about were also silane units, okay?

Pierre Maccagno - Needham & Company

But they all are silane units?

Nabeel Gareeb - President and Chief Executive Officer

Yes. Those… we were trying to… so you make the silane and then you make the poly. So we… the units 1, 2, 3, and 4, those all make silane and then there is multiple poly reactors that consume that silane. And so the area where we are having trouble was where we make the silane and we were trying to simplify that to explain it just in those simple terms what unit 1, 2, 3, and 4 is.

Pierre Maccagno - Needham & Company

But when you're adding capacity, you are also adding capacity with poly reactors?

Ken Hannah - Senior Vice President and Chief Financial Officer

Yes. So for Unit 3, we didn't have to add poly reactors because we had existing capacity on poly reactors for Unit 4, we're adding silane as well as poly reactors.

Pierre Maccagno - Needham & Company

Okay. We can then… the SG&A and R&D, I guess soon will come down to less than $40 million per quarter… for next quarter, which one is dropping more, SG&A or R&D or both similar?

Ken Hannah - Senior Vice President and Chief Financial Officer

It's really, Pierre, this is Ken. It's really the SG&A component. And that's been running around $39 million for several quarters and what we had said when we provided the Q1 guidance initially was that we expected it to come up a little bit due to the timing of stock option expense within 2008. And so we are just expecting it to come back down next quarter to what's traditionally been a $39 million, $40 million run rate.

Pierre Maccagno - Needham & Company

Okay. And then final question for the EPS, there was a question before, trying to reconcile the EPS you have, I guess… I have $0.01 higher EPS?

Ken Hannah - Senior Vice President and Chief Financial Officer

Yes. And so what that is you're pulling the shares outstanding off of the income statement, which if you look at the basic and diluted numbers, there is a different way that you have to calculate the number of shares outstanding. If your GAAP number reported as a loss versus a typical income situation, so if you were to go to last quarter and look at the number of shares outstanding on a diluted basis and then adjust it for the shares repurchased and the quarter which we have said earlier was about 1.1 million shares, you'd get to the 231.5 million shares outstanding that would be used to do the calculation, had our GAAP number been in an income situation.

Pierre Maccagno - Needham & Company

Okay. Thanks.

Ken Hannah - Senior Vice President and Chief Financial Officer

Sorry for the long answer, it's kind of complicated. But because of the non-cash nature of the Suntech warrant valuation hit through our GAAP reported EPS into a loss situation and there is a whole set of different accounting that has to be done from a shares outstanding calculation.

Pierre Maccagno - Needham & Company

So for non-GAAP, how many shares we have to use in?

Pierre Maccagno - Needham & Company

That’s 231.5 million.

Pierre Maccagno - Needham & Company

Okay, thanks.

Operator

Our next question is from Dan Myers from Crosslink. Please go ahead.

Dan Myers - Crosslink

All my questions have been answered. Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Thanks.

Operator

Our next question is from Stuart Bush from RBC Capital Markets. Please go ahead.

Stuart Bush - RBC Capital Markets

Yeah, hi Nabeel. Can you help me correlate what I hear you saying is conservative guidance from being gun-shy from Q1, for the Q2 revs of $540 million to $570 million. Is it right to assume that that incremental $30 million between $540 million to $570 million would be directed to the spot market or, it would be more balanced next between wafers and spot?

Nabeel Gareeb - President and Chief Executive Officer

No, Stuart, I would not assume, I would not make the assumption that it would be directed more towards the spot market.

Stuart Bush - RBC Capital Markets

Okay. So will it be, with the high-end needed to basically deliver on your solar wafer and semi contract?

Nabeel Gareeb - President and Chief Executive Officer

No, we… not necessarily. It's just more a growth opportunities both in semi and solar, we could supply, we could do some catch-up from Q1. I mean all of those things are baked in their surface, juts a blended mix is what we have assumed.

Stuart Bush - RBC Capital Markets

Okay, okay. Thanks a lot. All of my earlier questions have been answered.

Nabeel Gareeb - President and Chief Executive Officer

Thanks, Stuart.

Operator

Our next question is from Tim Luke from Lehman Brothers. Please go ahead.

Tim Luke - Lehman Brothers

Thanks, to follow-up on, could you just give any color on how things are going with Conergy [ph] and why do you have started shipping wafers to them?

Nabeel Gareeb - President and Chief Executive Officer

Conergy's agreement was that they would make a first deposit in the first quarter, which they did at the end of the January. Then they would basically may have to make another second deposit a few days before the first wafers are delivered, which would that which is anticipated to be in Q3. So we’re basically going to wait for that second deposit and then there is the open issue still of the minority equity investment that we’re still working through. So we will see how that comes as well. So basically we have to wait for the next deposit before we can start delivering wafers.

Tim Luke - Lehman Brothers

If you don't get the deposit, you have other partners who would be looking to purchase that volume?

Nabeel Gareeb - President and Chief Executive Officer

Oh yes, there is plenty of people interested in purchasing that volume.

Tim Luke - Lehman Brothers

One of the things I was going to ask is, could you tell us how many tons of silane are acquired for a ton of poly, what’s the relationship in terms of production?

Nabeel Gareeb - President and Chief Executive Officer

That is our secrets, Tim.

Tim Luke - Lehman Brothers

That's math, that's not the recipe.

Nabeel Gareeb - President and Chief Executive Officer

No. That pretty much tells you the silane conversion efficiency and that would be the heart of the whole thing.

Tim Luke - Lehman Brothers

Okay, thanks.

Nabeel Gareeb - President and Chief Executive Officer

Very good try. Thank you.

Operator

And we have a follow-up question from Mehdi Hosseini from FBR. Please go ahead.

Mehdi Hosseini - FBR

Yes, I had follow-up to the one of the previous questions. For the purpose of modeling, would it be fair to say that the mix of solar wafer which like you said right now it is mostly based on long term contract, would that mix be around 20% to or more than 20% of the overall revenues?

Nabeel Gareeb - President and Chief Executive Officer

Let me see... let me think how to answer that question. I don't think we have provide any specifics on that, the only thing we said Mehdi is that when we announced the Suntech and the Genentech deals, we talked about how people might want to model them. So I can kind of reiterate that thought process and that may give you enough information to kind of get a range and I think the thing we said when the Suntech agreement started, we said just start the first year of the Suntech agreement in the triple digits for revenue and then over the ten-year period assume that there is approximately equal incremental increases every year until you get to the total number of between $5 billion and $6 billion and then do the same thing for Genentech except its a year later and then it's sorry... that's not your data. A half later it started in the third quarter and it's about half of the size. So you'd have to start it much smaller and then ramp it slower. And then if you did those two exercises on an excel spreadsheet you probably get a pretty good range of dollars.

Mehdi Hosseini - FBR

Then mix with solid number with the digit two.

Nabeel Gareeb - President and Chief Executive Officer

Well, for Genentech basically what we said is take the Suntech model you get and basically you'd have to offset it, first of all value you got to cut it in half because the size of the dealers into have, both of the start and the end point and the incremental increases and then basically, you have to start it later in the year as well for '07.

Mehdi Hosseini - FBR

Thanks.

Nabeel Gareeb - President and Chief Executive Officer

Okay.

Operator

Our next question comes from Satya Kumar from Credit Suisse. Please go ahead.

Unidentified Analyst

Hi, this is Himmachal [ph] on behalf of Satya Kumar. Nabeel, if I take a look at your contractual solar, you should have three large contracts, which take a big portion of your production and also from a significant portion of your supply for your customers. However other polysilicon suppliers are signing small contracts. In some cases with over a dozen customers like the big new producer in Korea. So given this, how do you think about that this is going to work for both yourself and your customer when it comes to signing these contracts?

Nabeel Gareeb - President and Chief Executive Officer

Well, I think basically I would say we have landed the big fashion there scrambling for the smaller fish.

Unidentified Analyst

Okay. And just a follow-up on Conergy, has Conergy paid requisite prepayments and does it delay in your poly production, give them or any other of your contract customers to delay prepayments or change terms of the contract.

Nabeel Gareeb - President and Chief Executive Officer

No, I mean they have to… there is pretty specific and straightforward terms, they have to make the deposits and without the deposits there is no delivery of wafers.

Unidentified Analyst

Fine, got it.

Nabeel Gareeb - President and Chief Executive Officer

Okay.

Operator

Our next question is from Paul Leming from Soleil Capital, Securities, I am sorry. Please go ahead.

Paul Leming - Soleil Securities

Thanks. There has been some speculation out in the market but you actually bidding to something like 9,000 tons of capacity by the end of this year and as you plot on the call today about the timing of the silane plans and maybe having some sort of plus at point in time and having some extra reactor capacity around when three started up. Could you explicitly address whether or not you go really give the upside to go beyond the 8,000 tons of capacity that you've already talked about for the end of this year?

Nabeel Gareeb - President and Chief Executive Officer

We've never communicated anything beyond 8000 metric tones, Paul.

Paul Leming - Soleil Securities

And I guess what I want to follow up on is understand that you've not communicated that. Can you address whether or not as you look at the pieces of the systems today that there is the capability given what you are doing in online to get above that number before the end of the year.

Nabeel Gareeb - President and Chief Executive Officer

I think, Paul that probably part of the confusion or speculation is probably tied to this whole effective output versus capacity thing that we were talking about earlier. So we are talking -- most people talk in terms just [inaudible] capacity we've provided effective output equivalent numbers and so people maybe taking that and translating that in some fashion or in other, number one, number two. All of this stuff that we are talking about obviously is capacity and requires this ramp in output. That ramp in output will... is going to get to that effective output number if you will and then if there is an opportunity to make efficiency improvement ROE improvements or yield improvements. Yes. There might be a little bit upside. But I won't know that until I actually ramp it. So, that's pretty much that unknown at this stage.

Paul Leming - Soleil Securities

Thank you.

Nabeel Gareeb - President and Chief Executive Officer

Sure.

Operator

And our next question comes from Stuart Bush from RBC Capital Markets. Please go ahead.

Stuart Bush - RBC Capital Markets

Yes Nabeel, I had a follow-up question on the energy part of your costs on producing silane and poly. Is that... is it mainly how what percentage of cost is it first of all approximately and then do you guys use natural gas or electricity for a lot of those processes.

Nabeel Gareeb - President and Chief Executive Officer

Yes, we don't, I don't know first portion. Unfortunate, so we don't break out the energy cost as a percent that would be a little too much detail, but what would I can say is for example the granular process as people have now started to discover is much more energy-efficient than the Siemens process and we certainly use basically electricity to do that.

Stuart Bush - RBC Capital Markets

Okay. Thanks a lot.

Nabeel Gareeb - President and Chief Executive Officer

Thank you.

Operator

And there are no further questions in queue. Please continue.

Nabeel Gareeb - President and Chief Executive Officer

Thank you all for participating. Good night.

Operator

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

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