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Executives

Bill Michalek - Director of IR

Nabeel Gareeb - President and CEO

Ken Hannah - CFO

Analysts

Brett Hodess - Merrill Lynch

Jesse Pichel - Piper Jaffray

Steve O'Rourke - Deutsche Bank

Tim Luke - Lehman Brothers

Paul Leming - Soleil Securities

Stephen Chin - UBS

Jeff Osborne - Thomas Wiesel Partners

Chris Blansett - J.P. Morgan

Adam Hinckley - CIBC World Markets

Pierre Maccagno - Needham

Krishna Shankar - JMPSecurities

Mehdi Hosseini - FBR

Timothy Arcuri - Citigroup

ArnoldKalegeropoulos - EN Advanced

Stuart Bush - RBC Capital Markets

Jerry Nimitz - Stifel Nicolas

Satya Kumar - Credit Suisse

Neal Jacobs - Bodri Capital

J.D. Abushar - GRT Capital

Steve Tabb - Tocqueville Asset Management

MEMC Electronic Materials Inc. (WFR) Q3 2007 Earnings Call October 25, 2007 5:30 PM ET

Operator

Good afternoon and thank you all for holding. I would liketo inform all parties that your lines have been placed on a listen-only untilthe question-and-answer session. (Operator Instructions) This conference isbeing recorded. If you have any objections, you may disconnect.

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

Bill Michalek

Thank you. Good afternoon and thank you for joining our ThirdQuarter Earnings Call. Nabeel Gareeb, President and Chief Executive Officer andKen Hannah, Chief Financial Officer, are with me today.

Before we begin, please note that this call will includeforward-looking statements that involve risks and uncertainties that couldcause the actual results to differ materially from management’s currentexpectations. These risks are described in the earnings release published today,in our 2006 Form 10-K.

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

Ken Hannah

Thanks, Bill. MEMC had a solid third quarter despite theimpact associated with the previously disclosed construction incident. In thethird quarter of 2007, sales came in $472.8 million which is basically flatwith the second quarter and represents growth of almost 16% over the thirdquarter of 2006.

Gross margin in the quarter was $238.8 million or 50.5% ofsales, down from 52% of sales in the second quarter, primarily as the result ofthe impact of the August power outage at our Pasadena, Texasfacility. Compared to the same quarter last year, gross margin dollars grew by24% or by 330 basis points as a percentage of sales.

Operating expenses increased slightly to 8.2% of sales from8.1% of sales in the previous quarter, due to the higher R&D expense.Operating income was $200.1 million or 42.3% of sales compared to the secondquarter's $207.3 million or 43.9% of sales. This represents an increase of 25%versus the same quarter a year ago.

Total stock-based compensation expense in the third quarterwas $8.6 million or 1.8% of sales. Using our estimated effective cash tax rateof 15%, non-GAAP net income in the third quarter was $188.1 million, or $0.81per share, which is flat with the previous quarter and up 45% versus the yearago quarter.

GAAP net income was $151.5 million or $0.65 per share, usinga book tax rate for the quarter of 31.6%. Both GAAP and non-GAAP earnings pershare figures include a $0.03 per share impact relating to stock compensationexpense, and a $0.03 per share benefit relating to the valuation of the Suntechwarrants.

The Company generated operating cash flow of $266.6 millionor 56.4% of sales, compared to $197.6 million or 41.8% of sales in the secondquarter. The sequential increase was driven by higher customer deposits andimprovements in working capital.

Capital expenditures for the third quarter totaled $71.3million or 15.1% of sales, and free cash flow, which is operating cash flowminus capital expenditures, was $195.3 million or 41.3% of sales.

MEMC's consistent strong free cash flow generation led tothe implementation of a share repurchase program in June. The third quartertherefore, represented the first full quarter with the repurchase plan inplace, and the Company repurchased $44 million worth of MEMC shares, more thanoffsetting dilution from stock option exercises.

Turning to the balance sheet,despite using $44 million in cash for our buyback program, cash in short-terminvestment balances increased by over $216 million to over $1.2 billion withalmost no debt. Overall, the balance sheet is in excellent shape.

Turning to business conditions,inventory levels in the semiconductor space appear to have declined from thesecond quarter levels, resulting in improved demand dynamics from somesemiconductor customers in the current quarter. In addition, the solar marketcontinues to be strong.

For the fourth quarter, we are targeting revenues of between$540 million and $545 million. This range of revenue would represent growth of14% to 15% over the third quarter, and a recovery of a portion of the lastthird quarter sales. We are also targeting gross margin to be up sequentiallyby approximately 250 basis points to 53% of sales, representing incrementalgross margins of over 70%. Operating expenses should be approximately $39million in the quarter.

Let me now turn the call over to Nabeel.

Nabeel Gareeb

Thank you, Ken. Although we would have liked to have avoidedthe excitement associated with the power outage in Pasadena in Q3, I am pleased that MEMC wasable to report healthy sales margins and cash flows during the quarter withstrong year-over-year comparisons. To give an update on Pasadena,as you know, a construction incident caused by electrical subcontractorresulted in a power outage to our Pasadenapolysilicon manufacturing facility.

As we ramped the plant, there were complications thatprevented us from recovering to our desired run rates in the plant manner andtimetable. We were able to approximately meet the pre-announced revenue targetsin part by drawing down inventory. However, the lower than anticipated polyproduction resulted in lower utilization at our wafer manufacturing sites,thereby impacting our gross margin to a greater than anticipated extent.

We have recovered from this discrete event to a steady staterate of production and are pleased to indicate that we are targeting to achievethe level of Q4 revenue targeted prior to the construction incident and be ableto recover some of the lost revenue from Q3. In addition, we have made nochange to our target of achieving 2007 year-end polysilicon capacity of over6,000 metric tons per year.

While I am pleased to be able to report on our recovery in Pasadena and our strongtargets for the current quarter, I am also increasingly excited about ourprospects for continued growth over the next several years. Last quarter, weannounced our plans for 300 millimeter and polysilicon capacity expansionsthrough the end of the decade. Today we have announced that we have signed twoadditional solar wafer agreements worth between $8 billion and $9 billion overthe next 10 years.

This represents a doubling of our previously announced totalto between $15 billion and $18 billion in solar wafer agreements, whichrepresents nearly half of our long-term revenue targets on an annualized basis.The larger of the two agreements announced today, is a $7 billion to $8 billionagreement with Conergy, the world's largest installer of the photovoltaic systems.Under the terms of the agreement, MEMC will supply solar wafers to Conergy overa 10 year period, with predetermined pricing on a take or pay basis beginningin the third quarter of 2008.

MEMC will also participate in 5% of the increase in thevalue of Conergy's solar cell and module subsidiary. The second agreementannounced today is a $700 million to $800 million amendment to our agreementwith Gintech Energy in Taiwan.The incremental volume and pricing to Gintech will begin in 2008 on a take orpay basis. This amendment brings the total for the Gintech agreement to between$3 billion to $4 billion.

With Suntech, Gintech and now Conergy our select group ofindustry partners in the solar space is very strong. They are diversified withheadquarters and manufacturing in China,Taiwan and Germany, have distributioncapabilities across the globe and are leaders in solar cell and modulemanufacturing and installation. When combined with MEMC's global network andlong history in the wafer business, we are excited about our future growth.

In summary, I am pleased with our ability to deliver solidresults despite the hiccups in Q3. We continue to generate strong operatingprofit and free cash flow and we continue to strengthen our balance sheet whileinvesting and strategically positioning ourselves for the future. As thecompany expands its production capabilities to fuel the fast growing marketsfor 300 millimeter wafers for semiconductor applications and 156 millimeterwafers for solar applications, the company remains very well positioned and welook forward to capitalizing on our market position as we move through thesecond half of this decade.

With that we will now take your questions. Operator?

Question-and-AnswerSession

Operator

Thank you sir. (Operator Instructions). Brett Hodess withMerrill Lynch your line is open.

Brett Hodess -Merrill Lynch

Good afternoon, Nabeel I am wondering on the two newcontracts, if you can, I know you want to give the specifics, but if you couldtalk to a little bit about how these are setup relative to the previouscontracts, are they similar in terms of pricing and in terms of you know, ifyou offer, higher efficiency through you wafer materials, do you get adifferential pricing and or is their price declines built-in overtime, if youcould talk a little bit about that for us?

Nabeel Gareeb

Sure Brett I'll talk about twosets of things. One is the little bit of the color on the (inaudible) season.The second is the structure. Let's start with the structure first. These arevery similar in structure if you will in terms of fix tenure price reductioncurves as well as based on dollars per watt, so if we provide efficiencyimprovements based on the inherent nature of the wafer we get to keep thatbenefit. So that type of the structure is very similar. In addition when youlook at the three basic fundamentals of these agreements, the pricing, theterms and conditions and then obviously the end objective, these new agreementswere negotiated in 2007 and obviously pricing has to be based on marketconditions and market conditions for us were more favorable in 2007 versus2006.

The terms and conditions are atleast as good as what we had in the prior agreements and then obviously theobjective is for all our partners to help enable them to be able to deliverproducts that enabled solar energy to be at grid purity without subsidies. Ifoil is at $40 a barrel as we have said, by the end of the agreement. So webelieve all these agreements and amendments are achieving those goals inparallel.

Brett Hodess -Merrill Lynch

Great. And then a quick follow-onif I could. When you look at the jump back in the margin this quarter, grossmargin, that has specifically did you guess with, A: That you don't have theinefficiencies hopefully of a breakdown like we had last quarter? But B: Is itjust volume-driven or is there a mix component to that increase in marginagain?

Nabeel Gareeb

Right. So, from a marginperspective, obviously, we are anticipating some sort of a price reduction inQ4 over Q3 in the low single-digits. And inspite of that, as you pointed out,we're guiding the margins up in a reasonable fashion, and some portion of it istied to volume, but there is absolutely a mixed portion of it as well, becausethe growth is primarily going to come from 300 millimeter and 156 millimeter,both of which have margins above the average.

Brett Hodess -Merrill Lynch

Great, thank you.

Nabeel Gareeb

Thank you.

Operator

Jesse Pichelwith Piper Jaffray. Your line is open.

Jesse Pichel - Piper Jaffray

Yes, thankyou. Congrats on pulling up the quarter in guidance, and also on Conergy. Onthe Conergy, can you explain the 5% interest you have in their cell and moduleoperations, and how that investment will be monetized on a quarterly basis? Isthat based on the Conergy stock price or based on the health of that businessin some type of tracking mechanism?

Nabeel Gareeb

Yeah. At thisstage I wouldn’t feel comfortable going into all the details of wherever thealls of that particular part of it, Jesse. But fundamentally, you can think ofit almost as a phantom stock or tracking stock type of vehicle, and it would bedone by a third party.

Jesse Pichel - Piper Jaffray

And, could youjust talk, how can investors and analyst get comfortable with the status ofyour polysilicon plant expansion? Can you give us any more color on, iseverything ordered? What's the status of the site right now?

Nabeel Gareeb

Sure. I think, we had said obviously thatin Q3 as a result of this incident, we expected the expansion to getdelayed, and it certainly did because we are focused on trying to recover thebasic output of the current facility. We are running obviously that facility ata steady state, now. And the expansion although delayed is in the final stagesof checkout, if you will and acceptance, and we anticipate that it was slowlystart ramping in the late part of November.

Jesse Pichel - Piper Jaffray

And if I could just fit in a short one, does the electricalcontractor that made a mistake have insurance that would allow you to make somekind of claim on your Q3 variance versus your plan?

Nabeel Gareeb

Yeah. I wouldn’t feel comfortable commenting on that, as itmaybe a litigious issue.

Jesse Pichel - Piper Jaffray

Thank you so much. Congrats.

Operator

Steve O'Rourke with Deutsche Bank. Your line is open.

Steve O'Rourke -Deutsche Bank

Thank you. Good afternoon. Nabeel, TSMC this morning said,they are going to take CapEx down significantly in 2008, and we have some realand potential CapEx customer memory manufacturers. It raises the specter thatwafer start growth might be a little weaker in '08 than maybe expectationswere. How do you look at this with respect to semiconductor wafer pricing, howit might impact contract negotiations this quarter and next, and what it mightmean pricing overall?

Nabeel Gareeb

So, from a pricing standpoint, certainly, obviously, thegrowth in units -- actually, I guess, a couple of things. One, CapEx in '08will have an impact on wafer start to some degree as you know Steve in '08, Ithink more in the '09 time-table, because the wafer starts that are occurringin the first half of '08, the CapEx, most of that was spent basically a yearago and through this year.

The second is the wafer pricing environment, we won't knowfor '08 until our contracts are negotiated at the end of December, if you will,for the first quarter, as well as some of them for an annual basis on '08.However, we know that obviously, 200 millimeter is soft; 300 millimeter isgoing to continue to be competitive, because there is additional capacitycoming online. And if that capacity is more than the anticipated demand andthere will be continued competition.

But more important than just the pricing itself, which wecall mix normalized pricing is the change in mix, specifically for MEMC. As 300millimeter continues to be an engine of growth for the semiconductorapplications, and a 156 millimeter continues to be the engine of growth for thesolar applications, both of which have higher than average margins, then thatwould help offset some of the price decline, as well as obviously the costreduction.

So pricing, I don’t have a crisp answer for you, but wehave, we believe we have some knobs, if you will, that should help offset some ofthat.

Steve O'Rourke -Deutsche Bank

Is there a way to quantify, or at least give an idea ofquantification of how much mix can offset if you get a 5% decline in ASP, forexamples, blended. Would that be offset by mix, the way you see mix evolvingthrough 2008?

Ken Hannah

Yeah, I think it's hard for me quantify it in that fashion,because I think you've got the models to be able play around a little bit. Ifyou just look at the incremental margins that we talked about this quarter interms of volume, and the mix shift combined, that might give you an indicator,obviously you would have to take pricing reductions off of that.

Steve O'Rourke - Deutsche Bank

Okay. Andone other question on separate subject: With respect to these new contracts,how much of your polysilicon capacity expansion is full spoken for?

Ken Hannah

A good question, Steve. We still have capacity out of ourexpansion to be able to do one other deal, about the size of the original orthe combined Gintech deal.

Steve O'Rourke - DeutscheBank

And if I could ask one variation on that question: Over thenext, say five years, how much of that capacity is spoken for. Is there anumber there?

Ken Hannah

Again, over the next five years, over the expansion periodthat we announced through the 2010 period, we have ability to add another deal,the size of the total deal of Conergy, the old one plus the new addition.

Steve O'Rourke -Deutsche Bank

I see. Okay, thank you.

Ken Hannah

No, so not Conergy, I'm sorry, I meant Gintech.

Steve O'Rourke - Deutsche Bank

Gintech. Okay,thank you.

Operator

Tim Luke with Lehman Brothers your line is open.

Tim Luke - LehmanBrothers

Congratulations on you deals and my question Nabeel, was ifyou could talk about how you perceived inventory levels in the semi arena to betrending and what's, your preliminary thoughts, with respect to seasonality asyou begin 2008? Thank you.

Nabeel Gareeb

Inventory, Tim, I think has moderated downwards. Ourproduction from wafer standpoint probably also helped that situation a littlebit. And I think its resulting basically in the channel inventories becomingbetter to a larger -- to a greater extent, let's put it that way. That'sresulting in better demand indicators here for us in Q4. The trick is going tobe obviously Christmas sales and what happens post Christmas and into New Yearand that's going to be something we are going to have to watch and wait, whichleads into the second part of questions on seasonality.

Seasonality is probably going to be typical unless there isa massive build-up of inventory in the Christmas sales. For us it's typically-- we typically see that effect in December because that reflects orders thatare being used for consumption in Q1. Again we also have continued ramps if youwill on the 156 millimeter side that will help offset that seasonality effectnot just in Q4, but also perhaps in Q1. And then the last point is againirrespective of the seasonality or inventory the engines of growth continued tohave pretty strong demand on 300 and 156.

Tim Luke - LehmanBrothers

And then how should we think about that in terms of typicalseasonality, last year, you actually saw sequential growth and to the beginningof '08?

Nabeel Gareeb

Yeah, so I -- I can't give youguidance for '08 at this stage, but again the 156 millimeter part of it shouldhelp offset some of that seasonality potential.

Tim Luke - Lehman Brothers

Thanks. If I may, just one lastthing, with respect to the Gintech relationship and then [may wafer sale] onConergy. You and Conergy talked about revenue beginning in this third quarterof '08 and Gintech, you just say '08 in terms of the extension. Could youclarify when one might see some lift from the Gintech extension if that's theonly way to do for the second half of the year?

Ken Hannah

It would be a ramp up, similar towhat the original contract was. It would be some sort of a ramp for theextension over the number of years and even within the years.

Tim Luke - Lehman Brothers

Thank you very much.

Ken Hannah

Thanks.

Operator

Paul Leming with SoleilSecurities, your line is open.

Paul Leming - Soleil Securities

Good afternoon. I meancongratulations on the Conergy deal. I had two questions. One, could you justremind me of what the strike price on the SunTech warrant, was as part of thatdeal? And then on the Conergy deal, I think you've indicated in the past thatthe SunTech and Gintech deals the revenues in those contracts increased by aroughly equal amount each year over the 10-year life. Is the Conergy dealsimilar also on in that respect?

Nabeel Gareeb

Yeah, so -- I'll answer thesecond question first. I think yes, so the Conergy deal is similar in thatrespect that you can probably, if you want to model it out you can probablyassume reasonably equal increments over a 10-year period starting over thefirst 12-month period somewhere in the triple digits and it moves from there.And obviously, in a way it's just for the half of the year. And then the strikeprice can probably --

Ken Hannah

Yeah, Paul it's based on theprice of SunTech back in the July time period of a year ago which was around$27.

Paul Leming - Soleil Securities

Okay. Thank you very much.

Operator

One moment please. Our nextquestion comes from Stephen Chin with UBS. Your line is open.

Stephen Chin - UBS

Great, thank you. So, yeah, congratulations on the signingof the new solar deals. A couple of questions on them, given the sheer size ofthis Conergy deal at $7 billion to $8 billion, does the Conergy deal replaceany of MEMC's future semiconductor revenues or should we consider this Conergydeal to be all incremental to MEMC's longer term goal?

Nabeel Gareeb

Yes. This is certainly incremental to the semi business andpart of the longer term targets that we had set for us. As you recall Steve, wewere talking about the fact that we needed to have additional deals to continueto achieve our three to five year targets and obviously this falls into thatpattern.

Stephen Chin - UBS

Okay, thanks. And then given the amount of solar wafers thatMEMC will now have to make, can you share with us any update on your plans tobring solar wafer manufacturing in-house and will you consider terminating themanufacturing outsourcing arrangement that you have with LBK.

Nabeel Gareeb

I will answer the second part first Steven, we don't commenton who our suppliers are and we basically kind of tap dance around that, thosesorts of questions. We do have multiple suppliers and we moderate our businesswith them or increase our business with them based on their performance andaccording to what contracts and contractual obligations they have, which may ormay -- which include things like non-competes et cetera.

Over the long haul, we have said that, actually in the pastwe've said that we would be looking to bring some of our capacity of ourmanufacturing in-house over an 18 month to 24 month period and that wouldbasically puts us somewhere on the '09 timetable. We are still looking at sitestype of thing doing the site selection piece of that and we anticipate thatonce that comes in-house that does not eliminate the need for subcontractcapacity. There is a healthy balance that can still continue, given the growthrates we require. So, I don’t see subcontracting going away completely, and aswe grow, maybe a larger portion of the growth might be serviced from in-house.

Stephen Chin - UBS

Okay. And then one question on the guidance, with the salesguidance of $540 million to the $545 million, are you assuming that both MEMCsemiconductor sales and solar sales will both be able to grow sequentially inthe quarter. Was that assumption that what you are trying to convey, Nabeel?

Ken Hannah

Yeah, the assumption is that, the major engines of growth,if you will, from Q3 to Q4 will be 300 millimeter and 156 millimeter, yes.

Stephen Chin - UBS

Okay. And then if I can squeeze one last one in, can youtalk about some of the short-term actions that MEMC can take to prevent thebuild up of any semiconductor wafer inventory. For example, how effective istemporarily shutting down facilities, and can you help us quantify how thatdecision could benefit, either with sales or gross margins?

Nabeel Gareeb

Well, if I temporarily shut down facilities, it doesn’treally -- that’s a lower utilization, so that has an impact more than anythingelse on gross margin. But obviously, the demand isn’t there, I am not justgoing to chase after the business to build inventory at customers, if you will,because it's going to hurt at one point or another. I would rather basicallyperhaps reroute that poly into a 156 millimeter wafers, and provide ourpartners more upside on that sort of thing.

Stephen Chin - UBS

Okay. Thank you and congratulations again.

Ken Hannah

Thanks again, Stephen.

Operator

Jeff Osborne with Thomas Wiesel Partners. Your line is open.

Jeff Osborne - ThomasWiesel Partners

I had a follow-up question to Stephen's question there onthe outsourcing of the wafers; does the fee materially change at all when youare moving from 5 to 6 inch sort of wafers? And what do you expect thatoutsource fee to do in 2008, in terms of a percentage decline?

Nabeel Gareeb

The fee, you mean the processing fee?

Jeff Osborne - ThomasWiesel Partners

Exactly. I think you paid probably $0.30 to $0.40 a watt,outsource fee.

Nabeel Gareeb

The fee doesn’t -- well, I won't feel comfortable commentingon the specifics. The fee is competitive, we don’t really supply, we weresupplying 156 millimeters, so we are not really supplying the 5 inch. And so,overtime really, the processing fee changes as a result of volume; it changesas a result of the thickness of the wafer because of how many wafers you haveto cut, all those sorts of things. But those are more relevant than the sizefor us.

Jeff Osborne - ThomasWiesel Partners

I understand. And then, in terms of the site exploration,have you decided to do anything with the land that you received as part of theGintech contract?

Ken Hannah

Well, that’s certainly part of the consideration.

Jeff Osborne - ThomasWiesel Partners

Very good. And then the last question I has is, would youconsider in the future deal that you could sign of eliminating the requirementthat a solar cell company could not make ingots and wafers, because I thinkthat’s one of your current requirements which, and it goes against the strategythat many of the Asian solar cell producers are seeming to undertake?

Ken Hannah

Well, so far, it seems to have worked okay for us. So, Idon’t see us going away from that any point soon, and to some degree, because that’sbeen our strategy, and we think it’s a good one. The other thing is now we haveestablished a precedence with our partners, which we believe are pretty darngood partners, so we wouldn’t want to upset them either.

Jeff Osborne - ThomasWiesel Partners

I understand. Congratulations on the deal.

Ken Hannah

Thank you.

Operator

Chris Blansett with J.P. Morgan. Your line is open.

Chris Blansett - J.P.Morgan

Hi guys, thanks. Two things here, somehow your inventorieshave gone down even further, and I wasn’t sure if you're kind of basicallyoperation hand and mouth here to try to meet you contractual agreements?

Ken Hannah

Basically, like I said in theprepared remarks, Chris, that we drilled down inventory to basically,approximately meet the revenue figure, given the short fall in poly production.And obviously, that had an impact on our wafer manufacturing facilityutilization, and so that affected our gross margins as well. Obviously, we areone hour back to steady state, so we don't anticipate doing that, and perhapshopefully building a little bit.

Chris Blansett - J.P.Morgan

I guess, going forward over thenext few quarters, are you planning on rebuilding some inventory or should weexpect them at these low levels?

Nabeel Gareeb

Yeah, I mean, there is theopportunity certainly to rebuild some and, but not to the levels that we usedto have because if I can flush inventory out of factories and keep themoperating at a lean level, that's actually preferred to me.

Chris Blansett - J.P.Morgan

Alright, and then, kind of justto go back on the Conergy contract and modeling the revenue generation, you arebasically assuming that these contracts will account on a revenue basis, bemore of a linear trend over the duration or was it more of a multiplier effecton an annual basis?

Ken Hannah

I'm not sure I understand whatyou mean by multiplier effect?

Chris Blansett - J.P.Morgan

Whether or not, it just kind ofgrows 20% growth every year or --

Ken Hannah

I see. I think when we had announced the SunTech deal, and the same, andthe Gintech deal last year, a same principal I would use. You start with thefirst 12-month period and at least remember Conergy starts in the thirdquarter. Take the first 12-month period, start it let's say in the tripledigits, go out to the last year and for the 10 years and add it up to a totalof $7 billion to $8 billion, and approximately equal increments and you get areasonable idea.

Chris Blansett - J.P.Morgan

Alright. And then lastly, do you have a specific quarter when theseadditional Gintech shipments are going to occur or is it just right when theyear starts?

Ken Hannah

Yeah, basically we've said thatit's for 2008, and it's going to be some sort of a ramp similar to the ramp wehave in the existing agreement.

Chris Blansett - J.P.Morgan

Alright. Thanks a lot guys.

Ken Hannah

Thank you.

Operator

Adam Hinckley with CIBC WorldMarkets. Your line is open.

Adam Hinckley - CIBC World Markets

Hey guys, congratulations on thedeals. Just a quick question on the pricing of the solar wafer contracts, is itfair to assume that say, if you look at the 3Q '08, the price that Conergy,SunTech and Gintech are paying on a per watt basis is exactly the same or istheir differences based upon the size of the agreements?

Ken Hannah

Well, there is certainly, obviously would be some differences based onthe size of the agreements and based on the market conditions under which theywere negotiated.

Adam Hinckley - CIBC World Markets

So, are you seeingany reluctance in terms of signing up with some solar wafer customers given thefact that some Chinese poly guys are signing agreements with costs lowerthan yours?

Nabeel Gareeb

Well, yeah, I mean I think there is plenty of demand; we arenumber one to go around. Second, we are being what I would call, we are tryingto pick the partners that we believe (a) want us; (b) we think that are goingto win over the long haul and keep in mind our criteria works four folds.

Number one, we needed to have partners who understood thedistribution channel perfectly and obviously Conergy being the largestinstaller of PV systems, a very, very good partner in that respect. Themanagement team and we are very impressed with Conergy management team and theGintech management team as well as SunTech and then obviously the coststructure and we used to talk about the fact that we felt companies in Chinaand Taiwan et cetera would have a much better cost structures but we have beenvery impressed with Conergy's cost roadmaps.

And then last obviously is the financial wherewithal of thecompany to be able to sign up for a deal like this and then honor it over aperiod of time and we believe that these partners are representative of that.

The rest of the people who they are signing with et cetera,I don't want to comment on much more than there are new players in the market,they are announcing poly expansions and hopefully they will be successful andif they are not then hopefully we will be there to participate in that.

Adam Hinckley - CIBCWorld Markets

Is there any change in your thoughts on where industrycapacity of poly will be say you are down the road, I mean previously you'vebeen pretty embarrassed on the outlook of lot of these Chinese companiesentering the market, has that changed at all over the past couple of months?

Nabeel Gareeb

I mean we try to provide charts in the public forums weattend where it shows that the capacity, not the output. The announced capacitywill exceed -- is projected according to all industry sources, that wasprojected to exceed and announce the demand in some time in 2008. However, thatcapacity is nameplate capacity, that's not necessarily output. If somebody saysthey are going to have a 6,000 metric ton facility in 2008, it doesn't mean thatthey are going to produce 6,000 metric tons. It will probably take them a yearor so to ramp to full capacity.

So, when you look at the output picture and paint some morebearish picture, but a lot of it will depend on the success of the new entranceramping up in the short and aggressive time tables they've established. As wellas the demand and what it does as larger players get into the picture. So, bothof those are going to be interesting certainly for 2008, we see robust demand.

Adam Hinckley - CIBCWorld Markets

Okay. And one last quick question, as you said in yourprepared remarks that $15 billion to $18 billion of solar wafer contractsrepresents about 50% of revenues on an average yearly run rate. Is there aspecific cross over time, you guys are expecting to that 50% mark coming fromsolar?

Nabeel Gareeb

Yeah, let me clarify what that 50% was referring to. I wastalking about I said it was, it represented 50% of our long-term targets thatwe had established -- revenue targets on an annualized basis. So, at themid-point of those it would represent that having achieved if you will, 50% ofthose revenue targets.

Adam Hinckley - CIBCWorld Markets

Okay, great. Thanks, guys.

Nabeel Gareeb

Thank you.

Operator

Pierre Maccagno with Needham,your line is open.

Pierre Maccagno - Needham

Congratulations on the quarter, Nabeel and Ken.

Ken Hannah

Thank you.

Nabeel Gareeb

Thank you.

Pierre Maccagno - Needham

[After leaving on a corner] Nabeel, this is first time thatyou chose, a [mainline] exporter rather than a cell manufacturer. And justwanted you to give some comments on that, is there a change of philosophy orstrategy?

Nabeel Gareeb

Not really, Pierre.I think we've talked about in the past very clearly our four criteria as Imentioned a little bit earlier on selecting a partner. One we wanted to havesomebody who had a clear handle on the distribution channel. And in the pastwe've paid people that have been cell manufacturers for example, Gintech celland module. For example, SunTech, SunTech has also gone into the furtherdownstream as well and then obviously Conergy who has started in theinstallation and has moved backwards in terms of cell and module production andthey've got basically over 200 to 250megawatts of capacity here in '08. So, that's very, very consistent with thestrategy we've established and the selection criteria we have been using.

Pierre Maccagno - Needham

Thanks and just one clarification on the previous question,I just could not understand, when did you say you would reach the crossoverpoint?

Nabeel Gareeb

Yeah there is no crossover point. All I was trying to pointout is that these take or pay deals whichadd up to about $15 billion to $18 billion over a 10 year period if you divideby 10 assuming a mid-point that dollar figure would be nearly half of thelong-term revenue targets that we had established of $3 billion to $4 billion.So long-term revenue target we had established and we basically got almost halfof it in take or pay deals.

Pierre Maccagno - Needham

Okay thanks.

Nabeel Gareeb

Thank you.

Operator

Krishna Shankar with JMP Securities, your line is open.

Krishna Shankar - JMP Securities

Yes, Nabeel and Ken, congratulations on the [10 year]contract and can you give us some sense for you know the scenario, I mean, whatkind of pricing assumptions are you sort of assuming, I know its tough, butover the next several years in terms of achieving this contract prices, whichyou know presumably good down overtime? And what does it take in the market forall these customers to come back to the table and review these contracts, canyou give us some sense for the background behind these contracts and whatpricing you are assuming?

Nabeel Gareeb

Yes I think the pricingphilosophy in all of these contracts is very, very similar. They are certainlystart at long-term pricing in the current market environment and then they comedown once a year over a 10 year period with the objective that by the end ofthe agreement we need to help enable our partners to be able to deliverproducts that achieve grid parity for solar energy without subsidies, if oil isat let's say around the $40 mark as a proxy. So, you can get some pretty goodideas of how that occurs and obviously you know there are nowhere close to spotprices at the start and obviously go down to very -- basically grid paritylevels. Other than that I can't comment, well, actually there is anothercomment; these are take-or-pay deals. These aren't -- come in the middle andrenegotiate the price. The prices are fixed for that duration of the agreementon for every year.

Krishna Shankar - JMP Securities

I see. So, in each of thesecontracts you started somewhere in your contract pricing now, and then in tenyears that customer would achieve grid parity at that point in time?

Ken Hannah

That's the goal, that’s certainlythe objective is to help enable them, because at that point and that's wherethe shared vision comes in with our partners, where if you can help them enablethat, that creates almost infinite demand, if you will.

Krishna Shankar - JMP Securities

Okay. And I'm not sure whetheryou touched on this before, but can you give us an update on your poly capacityexpansion plans and whether it gets accelerated with these new contracts?

Nabeel Gareeb

Yeah, these agreements basicallyfit into the envelope of those expansions. So, those expansions basically, wehave talked about that, we wanted to achieve over 6,000 metric tons by the endof this year and that's on-track to achieve that. And then basically another,we were going to achieve about 8,000 metric tons by the end of next year, andthen we said 15,000 metric tons by the end of the decade. So, all of these fitinto that envelope, and we have space within that envelope, if you will, toexecute one more deal, the size of the combined Gintech deal which is the lastyear plus this amendment.

Krishna Shankar - JMP Securities

And my final question is, you arestill on target with that long-term earnings model of $5 to $7, with $3 billionto $4 billion in revenues in the 2010-2011 timeframe?

Ken Hannah

Yeah, I will tap dance aroundthat little bit, Krishna, because if I do that, if I respond affirmatively ornegatively, it will be reconfirming guidance or whatever it's called, I forget.So, fundamentally, you can do the math on these deals and on the growth rate,etcetera, and I think we are in pretty decent shape.

Krishna Shankar - JMP Securities

Great, thank you.

Operator

Mehdi Hosseini with FBR. Yourline is open.

Mehdi Hosseini - FBR

Yes, thank you. A couple of questions. Going back to thepricing dynamics of these two new contracts and what one of your existingcustomer, SunTech said this morning, how should I think about the pricingdynamic? Specifically, SunTech we are seeing early this morning that thepricing environment for the new contract is below existing one. So should Iassume that your contracts today also discount the new realities or the newpricing environment, which is lower than when you signed the previous contracts?

Ken Hannah

It’s a good question, Mehdi. I hadn't heard that. Certainly,in my experience that's not the case. If you just go out and ask somebody whatits costs to buy poly, it's certainly not lower than it was a year ago. So, ourdemand, our environment is certainly different from that environment that wasstated.

Mehdi Hosseini - FBR

Okay. So, as I look at these contracts, ten year in length,how should I think about the cost structure to your customer in terms ofreaching the grid parity? Would that be 2010, 2011, can you help us understand?

Ken Hannah

Yeah, I mean I think each customer, obviously will have adifferent cost structure, but our goal was to help enable our partners toachieve parity without subsidies, if oil is at $40 by the end of the agreement.So now, obviously in the middle of their subsidies this can be achieved in themiddle of the agreement if oil is higher price as a proxy, then obviously thatcan be accelerated even more. So, we just established what we would call a veryaggressive goal that by the end of these agreements, we should be able to helpenable grid parity without subsides being the operative word or phrase.

Mehdi Hosseini - FBR

Sure. Okay, and for the purpose of modeling, how should wethink about the current mix of revenue? I assume the mix of revenue fromselling poly into the spot market is less 10% and how should we think about itgoing forward and same thing with sale of solar wafer. And I do understand whatyou said about 50% of all the contracts accounting for about half of yourtargeted revenue for 2010. But how should we think about the mix or theprogresses?

Ken Hannah

So, I think, first of all we don’t breakout the poly and the156 and the 300, etcetera. But as we stated before, we were trying to keeppoly, spot poly sales for example relatively flat. And as a matter of fact,from Q2 to Q3, our spot poly sales actually declined a little bit as a resultof this incident, etcetera.

In terms of the long-term, we've always said that solarapplications could account for approximately a third of our revenue stream. So,somewhere during that long-term target period, you can probably expect to seethat percentage approached or exceeded.

Mehdi Hosseini - FBR

Okay. And this one-third solar includes solar wafer as wellas selling poly?

Ken Hannah

Yeah, it would be to the solar applications.

Mehdi Hosseini - FBR

Got you. And just one final question, how should we thinkabout the semi prices from Q2 to Q3, and then Q3 to Q4 in terms of the just theblended pricing environment?

Ken Hannah

Yeah, so what we call mix normalized pricing orlike-for-like part numbers, Q2 to Q3 pricing we basically said was down in thelow single-digits, which is what we had expected. We anticipate the similarenvironment for Q4. We expect a similar environment for Q4, and obviously forQ1 onwards we won't know until the end of December.

Mehdi Hosseini - FBR

Got you. Thank you.

Ken Hannah

Thank you.

Operator

Timothy Arcuri with Citi. Your line is open.

Timothy Arcuri -Citigroup

Hi Nabeel, I think you said in July you gave full yearguidance, but you thought you could do non-GAAP earnings of more than $3.30 forthe year. (a) Do you still think you can do that if -- it looks like you gotsome benefit from the SunTech warrants in September and it looks like that's abig factor to you making that number, so do you still think you will make thatnumber?

Nabeel Gareeb

Yeah, Tim, if you look at the guidance that we provided the540 on the top end would put EPS at $3.30 for the year.

Timothy Arcuri -Citigroup

Okay, so you are going to reaffirm that. Okay, Ken what kindof assumption you are making for other income within that?

Ken Hannah

Look if you take the revenue that we provided the marginsand the operating expense you can back into the other income.

Timothy Arcuri -Citigroup

Yeah, okay, all right. I guess my other question is -- is itfair to assume that the pricing difference between spot and spotted poly on aper watt basis is roughly 2:1, is that the right way to think about it thatspot is roughly double where the, you know, contract would be on a per wattbasis?

Ken Hannah

Yeah I don't -- you know you couldn't compare per se on a --what the easier comparison would be on a per kilogram basis.

Timothy Arcuri - Citigroup

Right.

Ken Hannah

Because when you get into per watt you get into what yourefficiency assumptions are et cetera. So if you do on a per kilogram basis whatwe simply talk about is long-term poly pricing versus long-term wafer pricingwhen basically we say that long-term wafer pricing is typically 2x of that of adollar in long-term poly pricing. Other than that we don't comment on what spotpricing multiples are or aren't.

Timothy Arcuri -Citigroup

Okay then I guess Nabeel can youthen at least give an idea of the margin on the contract business you have, themargin on the contract wafers. Is that -- would it be fair to say that's atleast 10,000 basis points higher than the higher margin semiconductor wafersthat you're selling?

Nabeel Gareeb

Yeah, we've never quantified thatin that fashion. But I think if you go back to the information we provided forQ1 to Q2, both in terms of guidance on our actual results, I think there isenough information there to make some deductions.

Timothy Arcuri -Citigroup

Okay.

Operator

Thank you. Our next questioncomes from [Arnold Kalegeropoulos with EN Advanced]. Your line is open.

Arnold Kalegeropoulos - EN Advanced

Yes. Hello Nabeel,congratulations again on the great quarter.

Nabeel Gareeb

Thank you.

Arnold Kalegeropoulos - EN Advanced

I was just wondering if you could give indication of what your -- theindustry's 300 millimeter mix was square inches?

Nabeel Gareeb

300 millimeter is anticipated to be somewhere in the 30's as a percent oftotal square inches or for the industry.

Arnold Kalegeropoulos - EN Advanced

In Q4 or exiting for the --

Nabeel Gareeb

Exiting our '07.

Arnold Kalegeropoulos - EN Advanced

Okay, got it. And then another question was, in terms of additionalcapacity are these -- is the additional capacity coming from additions toexisting plans or would there be new plans being built here?

Nabeel Gareeb

Yeah, we basically have saidthat, we've obviously not ruled out additional -- our Greenfield pieces but the vast majority ofthe expansions are primarily coming from existing sites.

Arnold Kalegeropoulos - EN Advanced

Okay. And then, just, maybe twoquick questions, 200 millimeter versus 200 millimeter pricing or 200 wasweaker?

Nabeel Gareeb

Yeah, 200 was softer than 300 because 300 has the growth. 200 isn'tgrowing. That standpoint you had gives a different color.

Arnold Kalegeropoulos - EN Advanced

Okay. And then lastquestion, at this rate cash on the balance sheet could be $2 billion within ayear. I was just wondering if you have any ideas for perhaps, maybe a commenton accelerating the purchase plan because you haven't really buyback that manyshares?

Ken Hannah

We even looked at the cash and obviously there is threethings that you can do with the cash. You can look at stock buybacks, you canlook at dividends, you can look at cash acquisitions and the Board has taken achecking account theory on that in terms of allocation pieces to it. Andobviously, we just started up the buyback program. There are certainly theopportunities to accelerate it and as it makes sense, I am sure as a Board willconsider it and see what we do or don't want to do with it.

Arnold Kalegeropoulos - EN Advanced

Okay, great. Thanks a lot.

Ken Hannah

Thank you.

Operator

Stuart Bush with RBC Capital Markets, your line is open.

Stuart Bush - RBCCapital Markets

Yeah, hi, good afternoon. Congrats on the Conergy deal.

Nabeel Gareeb

Thanks.

Stuart Bush - RBCCapital Markets

Can you give us any color on what the average wafer thicknessfor the 156 millimeters wafer quarter and any commentary on the trends there?

Nabeel Gareeb

Yeah, I mean I don't think we've disclosed that Stuart, so Imight get into a little bit of trouble but basically the industry averages areprobably in the -- obviously start with the two right, as an average. Some guysare talking about being below 200 microns but most of the guys are above 200microns. So you can assume that we are in the pack as well.

And in terms of trends obviously people are continuing totalk about thin wafers but I think also the pace at which that is occurring orthe pace that is in which that is anticipated to occur and the bottom end ofthat has been tempered by reality a bit, which I think is good because weretalking about such thin wafers and you couldn't even handle them but now thatthe experience has come through in terms of breakage rates et cetera. Peoplehave started to get more rational about those expectations.

Stuart Bush - RBCCapital Markets

Okay. And I know you said you still have a capacity fromyour poly extension for another Gintech size deal, is that still on contractedcapacity evenly spread out over the next few years or would an additionalcontract need to start post 2008?

Nabeel Gareeb

There would be an opportunity to contribute something in2008 as well.

Stuart Bush - RBCCapital Markets

Okay. And then lastly about the way the price is structuredin these contracts, I know you said there is decline still there in theirtake-or-pay, but if the ASPs of the cells that your customers happens to comedown faster your assumptions. Are you saying that the only resolution would belitigation per contract law or is there any mechanism at all for reconfiguringthe price?

Ken Hannah

Well, there is always the mechanism for reconfiguring theprice if we chose to do so. But that’s the only mechanism. There is nothingbuilt into the agreement as an automatic reconsideration.

Stuart Bush - RBCCapital Markets

Okay, great. Thanks a lot.

Ken Hannah

Thank you.

Operator

[Jerry Nimitz] with Stifel Nicolas. Your line is open.

Jerry Nimitz - StifelNicolas

Any thoughts on the stock dividends or stock split in thenear future?

Ken Hannah

Not at this stage, but certainly those are items that wouldbe on the table.

Jerry Nimitz - StifelNicolas

Thank you very much.

Operator

Satya Kumar with Credit Suisse. Your line is open.

Satya Kumar - CreditSuisse

Yeah, hi. Thanks for taking my question. Can you give us asense as to whether your sales of poly spot market, will remain approximatelyconstant as we look out into '08?

Nabeel Gareeb

We haven’t provided '08 guidance. So, I don’t know that Iwould feel comfortable commenting on that. But the goal certainly as wearticulated earlier this year, and I have presented in our conferences,etcetera, is to keep our poly flattish, both spot poly sales relativelyflattish, so that the growth primarily occurs from the 156 millimeter and 300millimeter engines.

Satya Kumar - CreditSuisse

So, if you want to, you could actually take the poly spotsales and your additional contracts in '08? Is that possible?

Ken Hannah

That is certainly an opportunity, but here is the other partof it, Satya. We use the spot poly, if you will, as our buffer, just forexample what happened in Q3. Those types things occur in chemical factories,and if we can use our, we need to some sort of buffer in production, somewhere.So, if we have access as a result of producing it, we’ll sell it, i.e. wedidn’t use our buffer, but yes. If we want to, yes. We could certainly convertit into wafers as well.

Satya Kumar - Credit Suisse

Okay. Can you give us a sense of; I’m trying to assess theprofitability of the different businesses. Is the combined solar businessestoday, more than half of your EBIT margins at this point?

Nabeel Gareeb

I don’t know that I could comment on that. I think you wouldhave to make whatever assumptions you are going to make, but the one thing wedo say is that 300 millimeter and 156 millimeter margins are above the average,and obviously the spot poly is as well.

Satya Kumar - Credit Suisse

Okay. I was trying to get some granularity on the polyproduction as well. I know you have said that you will be at 6,000 tons at theend of this year. Does that mean you are producing about 1,500 tons in thefourth quarter?

Ken Hannah

Yeah. So, and just one falloff to your last question, Satya.One of the reasons why I can’t, I was pausing there is, we don’t really breakit out or look at it that way, we do look at diameters in aggregate, but otherthan that, we really don’t .look at business, if you will, per se.

But second, on the 6,000 metric ton, so that was a yearendcapacity figure, and I think I alluded to it a little bit in the call thatwe’re in the final stages of our expansion checkout and startup and acceptancepiece, and we anticipate starting that ramp late November.

Satya Kumar - Credit Suisse

Okay. So you would be slightly under that in Q4 and at thefull ramp rate in Q1?

Ken Hannah

That will certainly be the hope.

Satya Kumar - Credit Suisse

And at the end of ’08, are you still looking at 8,000 tonsannualized capacity?

Nabeel Gareeb

Yes.

Satya Kumar - Credit Suisse

And how is that ramp on quarterly fashion next year?

Ken Hannah

Well, again that was second half, that’s where we had leftit, that it would be in the second half of next year, and we didn’t provide anymore granularity than that.

Satya Kumar - Credit Suisse

Okay. The reason, Nabeel, I askedyou about the EBIT margin questions was, in my estimate, I think that maybe youguys are close to the 50% mark in terms of your solar EBIT. And I guess if yoursolar EBIT is marginally comprised of spot sales, and I think there was anearlier question from Tim on the call, that perhaps the spot profitability is twicethat of contract. The question that I thought I was trying to get at was, as welook into '08, how should we think of the profitability, should there be forexample, a decline in semi-pricing environment or the spot poly pricingenvironment? Can the contracts that will make up for that and that’s where Iwas sort of trying to get some sense as to where your profitability might be by-- I mean, not necessarily for spot of for solar wafers, but just solar as thebucket, are we sort of approximately closer to deploying those?

Ken Hannah

Yeah, I think, again, we don'tbreak it out that way. So I don't have data readily available to show you as acomparison or what have you, but let me just make some points, and maybe therewill be an answer somewhere in there.

Number one, obviously, we'vetalked about the fact that 300 millimeter and 156 are higher than our averages,so as they grow in mix, they will help pull up the margins. Second, lets assumefor a moment that pricing changes so dramatically, that the gross margins atsome point in the future flatten, well, then operating margins aren'tnecessarily flat because of our operating expense leverage, they continue togrow, and our third is our long-term, this is the fundamental point, becausethat's important is our long-term targets that we had articulated, and January,we assumed really no real margin improvement. And in spite of that we weretalking about $5 to $7 a share and $3 billion to $4 billion in revenue whichwas pretty significant EPS growth.

So, people get a little panickedabout the pricing environment rightfully, but there are some mitigating factorswe have within our control such as cost reduction, others, as a result of mixthat can help offset it. And then, all of that combined when you compare it tothe long-term targets, I think we're in decent shape. But we'll see how themarket evolves.

Nabeel Gareeb

And then all of that combined when you compared to thelong-term targets. I think we are in decent shape but we'll see how the marketevolves.

Satya Kumar - CreditSuisse

And then one last question sorry to ask you so manyquestions here but SunTech had signed a deal with Asia Silicon earlier thismorning and I think it was probably one of the first time that I've seen acontract announcement where it actually talked about the pricing level. And itwas a fairly low price level of under $40 in seven years. Does that surpriseyou that they should actually mention that and I know your contracts withSunTech and Gintech were signed last year. Obviously the pricing levels were alot lower and clearly it's moved up. But over the last thee months have theterms of contracts actually changed it all, knowing obviously that you guysdidn't sign a contract three months ago. But over the last few months havebecome clearly changed?

Nabeel Gareeb

Not for us -- for us they have only gotten -- they've onlyimproved in a tighter environment. But obviously if you are a new player tryingto get in the business may be you'll be more aggressive. And I think you knowSunTech is doing smart things in terms of looking at their other part of theirsupply stream that they need to fulfill and they are signing wafer contractsand poly contracts and hopefully that will make them more competitive, which isgreat because we want to be aligned with a competitive partner. So for me thisis all good news.

Satya Kumar - CreditSuisse

Great. Thank you and congratulations on the contract.

Nabeel Gareeb

Thank you.

Operator

Paul Leming with Soleil Securities your line is open.

Paul Leming - Soleil Securities

Hi just a follow-up question you gave us like-to-likepricing on semiconductor wafers earlier down in low single-digits. Could youactually give us a blended ASP number for the quarter for semi wafers?

Ken Hannah

It's probably flat to slightly up Paul.

Paul Leming - Soleil Security

Thank you.

Operator

Jesse Pichel with Piper Jaffray your line is open.

Jesse Pichel - PiperJaffray

Some of the 156 solar wafer suppliers are mixing in only20%-25% virgin poly and the rest is scrap. Do you subscribe to a blended recipeunder your contracts to your solar customers and if so you've talked about this6,000 metric ton capacity, if you included the scrap from your semi business.What would that capacity be?

Nabeel Gareeb

Let's answer the second one first. Scrap from semi businessis really derived from that 6,000 metric tons right. I mean…

Jesse Pichel - PiperJaffray

Right.

Nabeel Gareeb

I mean you don't produce the scrap until you consume it. So,it kind of, you can't double count if you will. And then going back to thefirst question, I mean there is certainly always a blend of the scrap, if youwill, what is called scrap. I mean some of the scrap is really[pops-and-tails], which is very refined poly, so it's pure than the raw polythat goes in. But yes, there is a blend, are blends aren't that low and if thesubcontractor chooses put in a blend, that's not what we would like or doesn'tmake sense. We look at that very carefully to make sure, that it meets the speckand then fix it moving forward.

Jesse Pichel - PiperJaffray

And Conergy put out a press release talking about that itmay opt to get mono wafers from you and I am wondering if there is some shiftin your outsourcing strategy there?

Nabeel Gareeb

Mono wafers are an option for both obviously. Conergy theywere option for in the SunTech arrangement as well. So, that's been if thecustomer wants it, we will look at all those aspects of it and if we need to gooutsource it, we will otherwise we will build it in house.

Jesse Pichel - PiperJaffray

And last, just housekeeping. The inventory on your books, isthat virgin poly at cost, or is it semi wafers at cost?

Ken Hannah

It's probably both, it's probably both, right.

Nabeel Gareeb

Yeah. It's got raw material within and finished goods,Jesse?

Jesse Pichel - PiperJaffray

Can you say, is it mostly raw or just trying to see what therevenue, what's the per (inaudible) revenue off of that inventory number?

Nabeel Gareeb

Yeah, you will see that when we file our Q here in November.

Jesse Pichel - PiperJaffray

All right, great. Thanks so much.

Nabeel Gareeb

Thank you.

Operator

Mehdi Hosseini with FBR your line is open.

Mehdi Hosseini - FBR

Yes, one final question from me, going back to a couple ofyears ago, if I recall correctly, you were purchasing as much as 10% of yourpoly requirements from third party vendor like [Tokayama], can you give us anupdate and if you are still purchasing limited amount what would it be?

Nabeel Gareeb

Yeah we are purchasing a very limited amount basicallythrough the end of this year and then subsequent to that I don't know that wewill be purchasing anything from anybody.

Mehdi Hosseini - FBR

Sure and would it be considered that [how would you listthe] 5% of your poly requirement and is outside of the 6000 metric ton?

Nabeel Gareeb

Yes.

Mehdi Hosseini - FBR

Okay these are obviously contract prices not -- you are notbuying them for more than $75?

Ken Hannah

Yeah these have typically been one year price -- one yearcontract so other than I won't feel comfortable commenting on that.

Mehdi Hosseini - FBR

Got you. Thank you.

Operator

Krishna Shankar with JMP Securities your line is open.

Krishna Shankar - JMP Securities

Yes I don't whether you test on this but how many waferssubcontractors do you have and, have you said anything about LDK publicly beingone of you wafer subcontractors and you know what steps are you taking to --there has been some obviously controversy on that and can you talk about howyou are doing quality control inspection of your wafer subcontractors and yourplans to bring that in-house?

Nabeel Gareeb

We saw that a little bit butbasically we -- you know the number of subcontractors we have typically said wehave a handful. We don't quantify exactly how many. The second -- we have nottalked about who our subcontracting partners are. Third is in terms of -- we dohave a dedicated subcontract management team, which includes looking atdelivery performance, performance to specifications, quality all of those goodthings and that's just normal in a subcontract management operation, so thatoccurs across all our subs.

Krishna Shankar - JMP Securities

And your plans to bring thisstuff in-house?

Ken Hannah

Yeah, we talked about that littlebit as well. We said that it would be 18 to 24 months, which we put it in the2009 timeframe. We are looking at different sites, etcetera, taking our ownsweet time to see what becomes available as well in the meanwhile. So that'skind of the timetable. We don't see subcontracting going away as part of themix, we see that has being very complimentary to our in-house manufacturing.

Krishna Shankar - JMP Securities

Do you still feel that valuationsare frothy out there or would you use the cash you have to make an acquisitionto quicken this?

Ken Hannah

Yeah, I mean I think thevaluations are -- people are valued at 363 PEs. It's hard to justifyacquisitions.

Krishna Shankar - JMP Securities

Thank you.

Ken Hannah

Thanks, Krishna.

Operator

Neal Jacobs with Bodri Capital.Your line is open.

Neal Jacobs - Bodri Capital

Yes, thanks for the call.Congrats on the two new contracts. My question relates to poly capacity. Remindme, you've talked about getting the 8,000 by the end of next year. And have youannounced anything firmly beyond that, and how much poly will you need by 2016at the end of these contracts?

Ken Hannah

Yeah, Neal, we announced in Julythat we would be targeting to achieve 15,000 metric tons by the end of thedecade. And so, obviously and that's the only announcement we've made beyondthe 8,000. We have not talked about what would be beyond that or in the middleof the next decade, etcetera. So I won't feel comfortable commenting on that.

Neal Jacobs - Bodri Capital

Okay. Thank you.

Ken Hannah

Thanks.

Neal Jacobs - Bodri Capital

Congratulations.

Ken Hannah

Thank you.

Operator

[J.D. Abushar] with GRT Capital.Your line is open.

J.D. Abushar - GRT Capital

I appreciate you taking my question. Can you help me on justwhat the additional CapEx will be for next year to add the 2,000 tons?

Ken Hannah

J.D., I think we have basically established our long-termmodel where we say CapEx is going to remain in the range of 10% to 15% ofrevenues. So whatever your assumption on revenues is, if you take a 15% numberoff that, at the high-end you should be in pretty good shape.

J.D. Abushar - GRT Capital

Okay. And then, obviously CapEx has been going up the lastcouple quarters, and depreciation has not changed. What will deprecation be inQ4 as you fire the plan, obviously, you start to depreciate it?

Ken Hannah

Yeah, you have touched on the heart of our operationalsuccess, if you will. And that is, because of our assets turns, if we spend adollar on CapEx, we try to generate $1.5 of revenue out of that. So, if youfollow that, even on a lag basis, increasing CapEx won't necessarily result inan increasing deprecation figure as a percent of revenue.

On dollar term, certainly it will as the revenue ramps andthe depreciation is added, but as a percent of revenue it won't necessarily goup.

J.D. Abushar - GRT Capital

So, you are saying that depreciation will never equal CapEx?

Ken Hannah

As long as revenue growth outpaces the CapEx growth which isthe beauty of our asset turns model, that tends the whole true.

J.D. Abushar - GRT Capital

Great. Thank you.

Ken Hannah

Thanks.

Operator

Timothy Arcuri with Citi. Your line is open.

Timothy Arcuri -Citigroup

Hi, can you help us somehow get a handle on what you thinkthe other income line will look like in '08, because it look like you aregetting quite a bit of benefit from the revaluation of the SunTech warrants. Ithink, if you didn’t have those, the earning would have been a little light inSeptember. So I guess, I'm just trying to figure out, how do we think aboutmaybe what's the right way to model other income this next year. I know itstough, but?

Ken Hannah

Yeah, Tim, I think what you want to do, is you want to lookat your assumptions around our cash generation and, we've broken out theearnings associated with the SunTech valuation each quarter in our release, tomake sure that’s very clear. And so, in any of those quarters, you can justsubtract that out, and you will see what the interest income generated is, and ifyou just project that growth, based on revenue earnings and cash growthovertime. And use a nominal return on that from a cash standpoint, you shouldbe able to get to that interest income number.

Timothy Arcuri -Citigroup

Right. I guess my point, Ken, was when you gave this numberfor the year, when you gave this $3.30 for the year, where you expecting to getas much as you've gotten in the revaluation of the SunTech warrants, because ifyou took that away, you actually wouldn’t get to that number?

Ken Hannah

What we said in July, Tim, was that the, revenue associatedwith our Q3 and Q4 outlook would generate $3.30 a share, and that we were notanticipating any further changes associated with the valuation from SunTech.

Timothy Arcuri -Citigroup

Okay. So the guidance did actually include some of thevaluation of SunTech warrants or it didn’t?

Ken Hannah

It did include the valuation associated with what hadalready been booked.

Timothy Arcuri -Citigroup

Okay. Maybe we can talk offline, thanks.

Ken Hannah

Okay, thanks.

Operator

Steve Tabb with Tocqueville Asset Management. Your line isopen.

Steve Tabb -Tocqueville Asset Management

Okay, thanks. Doing a great job, guys. Your contracts withthe solar distributors, I got to call for you reducing the price of the solarwafers in order to meet this $40 oil comparison price, and therefore you'regoing to have to get greater efficiencies. I am trying to figure out wherethey're going to come from, especially since you are using outside manufacturersto a great extent. Will your gross profits be going down, and your margins begoing down?

How will this -- how will your margins hold up as you haveto, I assume deliver on lower prices, polysilicon will be coming down, as yousay as more production comes on, over the next few years, but I assume you arecounting on some manufacturing efficiencies, where an [alloy will] be produced?

Nabeel Gareeb

I think it's a good question, Steve. Yes. There aremanufacturing efficiencies assumed for example thinner wafers, better yields,higher productivity et cetera. Number two, obviously is bringing some of thatin-house to achieve those efficiencies on top of what the subcontractors canprovides us.

Third is also the improved efficiency of the wafer itself.Please, please remember that we have priced them in dollars per watt, so thatif we prove the efficiency, inherent efficiency of the wafer, we would get tokeep some of that.

So those I would call operational and R&D improvements.The next piece is, even though price has come down and costs have come down,and even if the margins are down slightly from where they might be today, thosemargins would still be probably in excess of where the average is today.

So in aggregate the mix would cause the average margin tocome up. And the last point is that in our three to five year targets, we didnot assume any margin improvements per se, so this would obviously provide somebenefit.

Steve Tabb -Tocqueville Asset Management

Alright. And as was stated,you've accumulated a lot of cash, you're accumulating more cash. You havementioned your options, and also one of the possibilities of building your ownsolar plants, and you said, it's too expensive to buy existing solarmanufacturing plants, because -- wafer plants, because they are selling atterrific multiples. What is the ballpark amount for a certain amount ofproduction to create a Greenfieldplant?

Nabeel Gareeb

Yeah, I mean I think there is alot of ratios out there but -- and I won't feel comfortable commenting on oursbut it's not, it's much, much lower than the valuations of some of thecompanies out there like, we are much, much lower.

Operator

Thank you. Our last questioncomes from Paul Leming, Soleil Securities. Your line is open.

Paul Leming - Soleil Securities

Good evening. I just wanted toask a quick follow-up on the inventory question. Do you book polysilicone as[WEP] or as finished goods in your inventory?

Nabeel Gareeb

It's actually in raw material.

Paul Leming - Soleil Securities

The poly you produce is in rawmaterial?

Nabeel Gareeb

That's right.

Paul Leming - Soleil Securities

Thanks.

Operator

I would now like to turn the callover back to for closing remarks.

Bill Michalek

Thank you all for participating.Good night.

Operator

This does conclude today'sconference call. You may disconnect at this time.

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Source: MEMC Electronic Materials Q3 2007 Earnings Call Transcript

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