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Executives

Chris Chaney - Director of Investor Relations

Ahmad R. Chatila - Chief Executive Officer, President and Director

Brian Wuebbels - Chief Financial Officer

Analysts

Krish Sankar - BofA Merrill Lynch, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Shahriar Pourreza - Citigroup Inc, Research Division

Aditya Satghare - Lazard Capital Markets LLC, Research Division

Satya Kumar - Crédit Suisse AG, Research Division

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Tony Grillo

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

MEMC Electronic Materials (WFR) Q4 2012 Earnings Call February 13, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MEMC Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Mr. Chris Chaney, Director of Investor Relations. Please go ahead, sir.

Chris Chaney

Thank you, Lola. Good morning, and thank you for joining MEMC's Fourth Quarter 2012 Results Conference Call. I am Chris Chaney, Director of Investor Relations. With me today are Ahmad Chatila, President and Chief Executive Officer; and Brian Wuebbels, Chief Financial Officer. After my remarks, Ahmad will provide an overview of the significant events and commentary on the company's fourth quarter performance, and Brian will then review the financial results. Brian's discussion will reference slides we have made available in the Investor Relations section of our website at www.memc.com.

Our discussion today will refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures has been provided in our earnings press release financials published earlier this morning. 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. We encourage you to review the Safe Harbor statement contained in the earnings press release slide published today for a more complete description.

And now I will turn the call over to Ahmad.

Ahmad R. Chatila

Thanks, Chris. Good morning, everyone. I'll be brief in my remarks today and then turn it over Brian to review the quarter in more detail. Overall, the fourth quarter was in line with our expectations and the targets we laid out last quarter. 2012 was a challenging year. Macroeconomic concerns and intense competition created numerous obstacles that were compounded by downturns in the markets we serve. Despite this challenging environment, we continue to improve our positioning to be prepared to take advantage of the eventual upturn. Our earlier decisive restructuring action has driven the benefits we expected and will drive continued improvement in 2013. I'm very proud of the team -- of our team for their hard work and resolve, and for the progress they have made and the results they continue to deliver.

In our Semiconductor business, we focus on executing a cost reduction plan, which has resulted in improved efficiencies and lowered our break-even revenue level. These measures will position us to drive meaningful improvement in profitability in the next up cycle. We also focus on improving quality and service. These efforts have been recognized by our customers and have helped us add to the significant market share gains that we have enjoyed over the past few years, as we believe we gained share both in Q4 and for the full year.

Among other recent awards from customers, we achieved Supplier of the Year status from 2 highest-volume device manufacturers in the world. But what I'm most proud of is the team's accomplishment of safety, including achieving a safety record better than the top quartile of U.S. semiconductor companies.

In our Solar Energy business, we continue to focus on executing our pipeline of projects while reducing costs and improving efficiency. We have a premier brand built on track record of execution, which has allowed us to attract customers and project investors. In 2012, our SunEdison business increased megawatts completed by 52% to 430 megawatts from 283 in 2011. In 2012, we raised more than $2 billion in capital for projects around the world. Our restructuring and other cost initiatives have positioned us -- this business to show strong operating leverage when the markets recover and volume increase. We are also starting to see progress in geographies where there are no feed-in tariff or subsidies. Overall, we continue to strengthen our position as a global leader in the solar energy.

For the company as a whole, 2012 was a year characterized by difficult industry environment. However, the strength of our people, our technology and our differentiated business enabled us to weather the storm and improve our operational and market positioning. By considering to focus on technology, operations, cost reduction, cash flow and our balance sheet, we are positioned to drive additional operating leverage when our markets improve. In 2013, we will continue to focus on strengthening our leadership position by penetrating new markets in Solar and further enhancing our Semiconductor operation. Cash will remain our top priority. We continue to fix our sights on the future of our industries and build a company that capitalize on the opportunity we see coming.

Now I would like to turn the call over to Brian to discuss the quarter, past year and provide additional insights. Brian?

Brian Wuebbels

Yes. Thank you, Ahmad, and good morning, everyone. My comments today reflect information found in the press release and financial table distributed earlier this morning and will reference the fourth quarter 2012 results conference call presentation posted in the Investor Relations section of our website.

Now let's begin with Slide 4 in the presentation titled 4Q 2012 Results Review. In the fourth quarter, we delivered on most of the targets we communicated on our last quarterly call. Semiconductor revenue. In November, we said we expected our semi revenue to decline between 4% and 11% due to continued soft conditions in the industry. Our semi revenue fell 4.9% at the high end of our expected revenue range. Our restructuring actions continue to produce benefits in the business. Despite lower sequential revenue, we generated positive cash flow in the business and posted an operating profit. This compares to 2 quarters ago when our semi revenue was higher, but we operated at a loss. We sold 91 megawatts of solar projects in the quarter within our 90- to 120-megawatt range. As we said before, the precise timing of project sales is very difficult to forecast. Still, our megawatts grew over 20% quarter-over-quarter. In addition, I am happy to report that we sold our last European project in Totana, Spain in the fourth quarter. On the pricing front, our fourth quarter solar project ASP was $3.93, up from $3.87 in the third quarter mostly due to regional mix. Aside from the Spanish project, most of the megawatts sold in the quarter were in the United States and Canada where we continue to enjoy healthy ASPs. On the OpEx front, our OpEx came in at $84 million, which was slightly down quarter-over-quarter, again, within our guidance as we continue to keep a close watch on expenses.

Our capital spending as reported is $38 million. This includes $11 million due to the CapEx allocation related to the TCS plant we acquired through the settlement with Evonik. Recall that we settled this contract dispute with Evonik for EUR 70 million or about $90 million, which is being paid over several quarters as outlined in our related 8-K filing. Part of this settlement amount was allocated to the Evonik TCS plant as CapEx. If it were not for this allocation, our planned CapEx was well within our guidance and we -- and remains primarily focused on the Semiconductor Materials segment.

Our non-GAAP interest and other expense was $40 million, which includes $8 million from a reclassification related to the sale of our Totana plant. In addition, there were $7 million of foreign exchange losses in the quarter.

Finally on the cash front, as you will see later this month when we publish our 10-K, we ended 2012 with only $7 million drawn on our $150 million construction revolver compared to $47 million drawn at the end of Q3. This was lower than our target due to project timing, and thus, our cash balance was lower as well. While not perfectly correlated, and of course, there were other puts and takes, this $40 million decline was the primary driver for our cash.

Now I would like to briefly review a few highlights for the full year 2012. So please turn to Page 5. As you can see from the numbers on this page, we were in line with most of our full year metrics. We grew our non-GAAP megawatts, as Ahmad mentioned earlier, by 40% for those that we sold and by 52%, including the projects that we retained on our balance sheet. We raised over $2 billion of solar funding despite a very difficult market. Our project pricing remained above industry average throughout the year largely due to regional mix. The restructuring actions improved our operating leverage, delivering the $50 million per quarter expected savings and drove our OpEx down 14%. We drove our CapEx down nearly 70% for the year and focused the majority of our spend in our Semiconductor Materials business, which remains a core business for us. Overall, I am pleased with our performance in light of numerous headwinds we faced last year.

Now let's talk in detail about the fourth quarter financials. Fourth quarter 2012 non-GAAP revenue was $704 million. Solar Energy represented 68% of our revenue and Semiconductor Materials the remainder. There is something that I want to clarify for you on this page. Our GAAP revenue was $601 million, of which $54 million of previously deferred revenue was recognized under GAAP related to the 70-megawatt Rovigo project we sold in the fourth quarter of 2010. Per our non-GAAP accounting policies, we recognize 100% of the project revenue as non-GAAP at the time of the sale but only 85% in GAAP, with the remaining 15% as GAAP deferred revenue. Now 2 years later, the performance guarantee period has expired without any amounts due to the customer, so the deferral is now recognized in full in our GAAP revenue. Consequently, this revenue drops straight through at no cost to GAAP gross margin and operating margin but does not affect our non-GAAP P&L. The bottom line is that this additional GAAP revenue boosted our GAAP margins and explains why they are higher than our non-GAAP margins this quarter. This helps to illustrate why we introduced the non-GAAP P&L a couple of years ago, which more closely follows the deal economics and cash. And it is important to understand that in the future, similar benefits to our GAAP revenue and gross margin will be seen. For the quarter, our GAAP EPS was a loss of minus $0.05, and our non-GAAP EPS was a positive $0.08.

Now let's talk a little bit on Slide 7 about the period comparisons. Fourth quarter non-GAAP total sales was down $5 million sequentially, as the small decline in semiconductor sales more than offset the growth in Solar Energy. Year-over-year lower project -- solar project revenue drove total sales lower, as megawatts sold were down from last year's fourth quarter. Reported non-GAAP gross margin and operating margins fell sequentially, as higher project -- as higher solar project margin was more than offset by lower solar materials and semiconductor margins. However, recall that in the third quarter reported number, $37 million of our revenue was due to a contract settlement with Conergy. Excluding this benefit, our fourth quarter gross and operating margins would have grown approximately 200 basis points in the fourth quarter.

Now let's please turn to Slide 8, and we'll review our Semiconductor Materials segment. On Slide 8, the results are all shown in GAAP. Operating profit is shown as GAAP, and adjusted reflects our restructuring and other related charges for that period. Semiconductor Materials revenue fell 4.9% sequentially driven by lower price and volume. ASP declined 3%, while volume declined 2%. Overall, revenue was better than we had estimated earlier in the quarter due to the relative strength in volume. Our December 2011 restructuring actions continue to provide benefits. A clear illustration of this can be seen this quarter. Our revenue was near our Q4 2011 levels, but we generated incremental operating income despite an annual 10% decline in ASPs.

Now let's turn to Slide 9, and we'll talk about our semiconductor market share. As you can see on this slide, our market share has risen over the last few years and most recently in the fourth quarter, proving that our commitment to high-quality products and customer service is winning customer loyalty, and we believe our success has positioned us for continued gains with most of the leading semiconductor device companies in the world. And I'd also like to point out that our share has not suffered at the expense of our restructuring efforts due to careful planning and great execution. Despite having to make difficult decisions during our restructuring last year, our commitment to our customers continued. Congratulations to our semiconductor team for earning the TSMC Supplier Excellence award in 2012.

Now let's talk about our Solar Energy segment on Slide 10. Because the adjustments defined by our non-GAAP metric pertain only to our Solar Energy business, all financial figures on this page are non-GAAP, as a reminder. The Solar Energy segment consists of our solar projects business, sales of solar materials products such as wafers and modules, and various other revenue streams involving O&M and energy. Our restructuring efforts were designed to reduce our exposure to the commodity solar wafer business while optimizing our flexible supply chain and production capability for our SunEdison business. In the fourth quarter, Solar Energy revenue increased $7 million or 2% sequentially, as increases in project megawatts sold were partially offset by lower solar materials revenues in the quarter. Of the $476 million in Solar Energy segment non-GAAP sales, solar projects represented $357 million, while our upstream products business represented $70 million. Energy O&M revenue was $24 million for the quarter, while preconstruction project sales was $25 million. Also be aware of the quarterly fluctuations of our energy revenue. The profile of any year by quarter is approximately 19%, 32%, 31% and 18%, respectively, by quarter. SunEdison delivered 91 megawatts of projects recognized for non-GAAP, totaling 34 projects. Other than Totana in Spain, the vast majority of projects were in North America. ASP was marginally up relative to the prior quarter due to mix as we had said. Reported project gross margins were up in Q4 to 19%, including a $23 million of intangible amortization in the quarter. Excluding that, the gross margins for projects would have been 25%. Operating profit was up $58 million sequentially due to higher project gross margins and flat OpEx. Year-on-year, operating profit was up largely due to the company's early and decisive restructuring actions.

Now let's turn to Page 11, and we'll talk a little bit about the pipeline. Our pipeline at the end of the third quarter was 2.6 gigawatts. We interconnected 106 megawatts, and we had 73 megawatts in various stages of construction at year end. While we generally target between 100 and 150 megawatts construction per quarter, projects under construction fell in the fourth quarter due to our decision in the first half of 2012 to cut solar development spending until we sold the majority of the European projects, which was accomplished in the late second quarter. There is typically a 6-month to 1-year lag between development spending and a construction start.

Sequentially, the pipeline was down about 300 megawatts largely because we chose not to renew certain land options in 1 of our emerging markets. In geographies where there is a scarcity of land, we generally pay option fees for land where we want to develop projects. In this case, however, due to an abundance of qualified land, we decided not to renew expiring land options because we believe land will be available when our projects are ready for construction. These projects have not gone away, but without site control, they no longer qualify as pipeline per our strict internal pipeline definition.

We have a well-diversified pipeline, both geographically and by size, with nearly 900 projects spanning 5 continents, 14 countries and 18 U.S. states. About 60% of our pipeline is in North America, with 48% in the United States and 14% in Canada. Because we believe diversification is prudent long term, the remaining 40% of our pipeline is outside North America where we believe opportunities for more rapid growth exist. In terms of size, just less than half of our pipeline is larger projects above 50 megawatts, and just over half of our projects are less than 50 megawatts. We believe there is a lot of opportunity for growth in the projects less than 10 megawatts in the category we call distributed generation. This is an area which includes commercial and residential rooftops where our new line of high-output Silvantis 330-watt modules can really make an impact.

Now on to Slide 12, and we'll talk a little bit about our installations and our backlog. Over the course of the last 4 years, SunEdison has experienced tremendous growth. We believe we were one of the top solar project developers again globally in 2012. You can see also that in the past 2 years, we have installed a number of projects, which we have retained on our balance sheet. While today we enjoy the energy revenue generated by these projects, these projects are performing well and are saleable if we so choose.

Like the pipeline we just discussed, our 827-megawatt backlog is also well diversified, with over 500 projects globally. The backlog represents projects with signed PPAs or backed by feed-in tariffs and include projects under construction. Most of these are planned for completion over the next 2 years. Also note that the recently announced Chile product is not in this backlog number but will be in Q1, as the PPA was signed in January.

As you can see in the bar graph in the middle of the slide, the largest portion of our backlog is located in the United States. Note that the North American distributed generation or DG projects consist of about 54% of our global backlog. We believe there is much potential in this DG space, not just in North America but globally in the coming years. By their nature, DG products can typically be signed and sold within a quarter or 2 and thus, tend to quickly flow in and out of our backlog often within a single quarter or a 6-month period. Growth in our DG business over the next few years could help to smooth a large quarter-to-quarter fluctuations in our solar projects revenue stream.

Now let's review our major projects from 2012. This slide shows an abbreviated list of our projects in 2012 starting with the largest on the top. We sold projects representing 383 megawatts last year and completed 430 megawatts, including those retained on our balance sheet, in nearly 100 projects across 8 countries and 15 U.S. states from California to New York. Not included in the 383 megawatts of projects sold was a sale of 36 megawatts of preconstruction projects. The list of the buyers was diversified among foreign and domestic utilities, independent power producers, commercial businesses and investors. In addition to projects sold, we retained an additional 47 megawatts on our balance sheet, the majority of which were in India, for a total of 437 -- 430 megawatts completed as you see in the table at the bottom right of the page.

Now let's talk about our cash. On Slide 14, we started the quarter with $610 million and ended the quarter with $573 million. We had several cash payments to make in the quarter that we have previously discussed such as the $20 million from the Evonik settlement and another $6 million for the Samsung poly JV. And as I mentioned earlier, our non-recourse construction revolver balance was $7 million at end of the quarter versus $47 million in the prior quarter. This was less than we expected and was due to project timing. Excluding the change in our construction revolver, the non-operating cash -- and our non-operating cash payments, our cash would have increased about $28 million for the quarter.

Now let's talk about our balance sheet and liquidity. At the end of the quarter, we had $1.5 billion in Solar Energy assets offset by $1.6 billion in non-recourse debt. It is important to remember and understand the nature of this non-recourse debt and how it is tied to our sale-leaseback projects. Unlike the corresponding asset, this debt is non-amortizing, and the full balance is extinguished upon the last lease payment, typically 20 years after the project is sold. At which time, a large GAAP gain will be realized. Accordingly, the non-recourse debt will always exceed the corresponding asset balance.

Our liquidity position remains strong at $851 million at the end of the quarter. And also, we raised over $2 billion of solar funding for projects at competitive cost of capital. Total capacity in our non-recourse revolver construction facility was $150 million in the fourth quarter, and as I mentioned previously, only $7 million was drawn, bringing our total availability at $143 million. Overall, we are comfortable with our balance sheet and believe it reflects what you would expect to see in a company growing a solar energy projects business.

And in closing, we are proud of our performance last year despite the challenges our Solar Energy business faced in the first half and the semiconductor slowdown that persisted in the second half. We still have much room for improvement, but we believe we are better positioned than we ever have been before to take advantage of growth in the solar and a rebound in semiconductor. And as we recently announced, we plan to share our thoughts on our positioning strategy and detailed outlook at our Capital Markets Day on March 13 in our Belmont, California SunEdison headquarters.

With that, we will now open the call for questions. Operator, you may begin the Q&A session now. Thank you, everyone.

Question-and-Answer Session

Operator

[Operator Instructions] First, we'll go to the line of Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

A couple of questions. I know you guys are not giving any guidance, but if I look at the semi business for Q1, should we assume normal seasonality along with the semi industry? Or are you seeing any improvement in pricing given that some of your competitors have been speaking about improving pricing environment in semis?

Brian Wuebbels

Krish, thank you very much for the question. Yes, we think it's more prudent to spend a good solid 4 hours during our Capital Markets Day and really take you guys through a lot of detail that we may not have shared or discussed in the past. What I can say is there's no reason to expect that the linearity or the seasonality that we've experienced in the past wouldn't be the case in 2013. As far as the pricing, my view on that is right now, we'll discuss it a lot more on the Capital Markets Day, but as we've talked before, given our market share gains, there's no reason to believe that we won't act similarly to the market in Q1. So that's kind of how I see things.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. Got it. All right. And then on the Solar Energy side, first and foremost, what was -- in Q4, what was the solar materials revenue? Was it $70 million you said?

Brian Wuebbels

It was, Krish.

Krish Sankar - BofA Merrill Lynch, Research Division

$70 million. Okay. Got it. A question on the cash outflow for the SunEdison business. It looks like the cash dipped below $600 million in Q4. Should we assume that it kind of bottoms out in Q1 and starts building out from there? Or are there any other onetime payments coming up this quarter?

Brian Wuebbels

There are definitely onetime payments. As we've mentioned in the past, we have another Evonik payment in Q1 that we've disclosed in our 8-K. We also have additional investments that we will make for the Samsung joint venture in the quarter as well. And again, I go back to we're going to talk a lot more about this in detail in a few weeks but no reason to expect the linearity of the past, especially considering we didn't spend a lot of investment dollars in early 2012 on projects, will be any different in early 2013.

Operator

Next, we'll go to the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

A question on the solar project backlog of 827 megawatts, what percentage of the backlog can you install in 2013? And as a reference point, can you tell us what was the backlog in 1Q '12?

Brian Wuebbels

Yes, so the last time we disclosed -- I'll take your second question first. The last time we disclosed our backlog I think was Q3 2011, and at that time, it was about 900 megawatts. And we're at 827 megawatts this quarter. So the other question is these projects will get built out over the next 24 months. I think it's fair to say that -- again, tough without me giving details and specifics on this, but I think it's fair to say that it's probably pretty well split over the next couple of years, probably more proportionally loaded to the first year versus the second year.

Stephen Chin - UBS Investment Bank, Research Division

Got it. And another question on the -- your pipeline of 2.6 gigawatts. So if we take out this 827 megawatts backlog, can you share some color on the remaining pipeline and perhaps help us break it down between bankable and non-bankable or risky perhaps?

Brian Wuebbels

Yes, I believe our definition of pipeline is pretty transparent and pretty clear. I think the fact that we have taken 300 megawatts out that we believe are still really good projects but yet don't qualify for our strict definition shows that we are serious about our definition of pipeline. We believe that the remaining, whatever, 800, 900 megawatts, so 1.7 gigawatts of pipeline will experience the same sort of buildout that we've talked about before, which is about 2/3 of the pipeline. If you took a snapshot at any given time of our pipeline, about 2/3 of that you would expect to get built out. So there is churn. I mean we've talked about this before. So if you think the 827 megawatts, that has a buildout that's greater than 90%, right? Once a project gets to backlog, it's got a greater than 90% potential of getting built. But when it's in the pipeline, it has about a 2/3 potential of making it to backlog and then making it to a constructive project. That's the best way that I have to look at it. The other way that I would have everybody look at it is just remember, a year ago, our pipeline was 3 gigawatts or 2.9 gigawatts as well, and yet in the last year, we built out over 400 megawatts of projects. And I just told you, we took 300 megawatts out for a certain group of projects, so you can envision that if that same attrition happened over a gigawatt or 800 or 900 megawatts of projects, new projects came into our pipeline in the last year. So it's a very fluid living being is the way I would say it. It's not a stale pipeline that's based on 1 or 2 big projects. It's 900 projects that we feel -- that we scrutinize on a daily basis to make sure that they're quality. So that's kind of how I would describe the pipeline.

Ahmad R. Chatila

I'll add another thing, Brian. Thank you for saying this. The thing that you should look at also is our 4-year trajectory. We started with 40 megawatts, went to 170, 280, now 430. And clearly, we are a winner in that space, clearly. Our brand is very strong. And in a world where many downstream players are suffering greatly, look at -- you can look at the top 10 list and see how it churned over the last 4 years and how we continue to be there and rising up the ladder. You can see that we have a very strong position in the space. I would just leave it at that.

Operator

And next we'll go to the line of Shahriar Pourreza with Citigroup Global Markets.

Shahriar Pourreza - Citigroup Inc, Research Division

Just a couple of questions to start. Pricing seems to have been -- for the systems business, came in higher than you anticipated for the quarter and the year. Directionally, does this improve your outlook on pricing in 2013 and beyond than prior -- than when you first initiated the outlook in 2012? Are you more favorable?

Brian Wuebbels

I don't think so, Shar. I mean, I think, if you take a look at the way the projects in the back half of the year were highly mixed towards North America in specific and even Canada, you do have a nice healthy ASP given those regions. So I think that mix had more to do with our ASPs leveling out in the back half of the year versus what you would expect to see as a gradually declining slope. As we look at the pipeline and our backlog for next year, only 2/3 of our projects and our backlog are in North America next year. And typically what you see outside the U.S. is ASPs tend to be a little lower, but you also see cost of goods sold being a lot lower as well. So module prices outside the U.S. are definitely lower than in the U.S. Balance-of-system prices tend to be lower outside the U.S. So you still get to see the same margins, but you're going to see ASP decline as that mix continues to change. And then as you guys well know, the further you look out, solar costs are continuing to decline, and the PPA rates are continuing to decline as well. So I think you should expect that there's going to be a decline in ASPs that we would expect to have seen at the beginning of this year as well. Our mix really helped us in the back half of the year.

Shahriar Pourreza - Citigroup Inc, Research Division

Got it. Got it. And congrats on the sale of the project in Spain. Are you completely out of Western Europe?

Brian Wuebbels

Yes. Well, time-out. Yes, from a project sale point of view. We had the 4 projects that were on our balance sheet at the end of the year. Yes, we are now out of those. Are we out of Western Europe? We believe that Western Europe -- and you see it in our pipeline and you see some of it in the backlog. We believe Western Europe today doesn't offer a lot of opportunities in the usual markets, but we do see Western Europe as an opportunity space in the future. As grid parity becomes more real, especially in the South of Europe, I think you're going to see that market come back in the future.

Shahriar Pourreza - Citigroup Inc, Research Division

Got it. Got it. And then just one last question. Around the analyst conference, middle of March, could we expect enhanced disclosures around the downstream business?

Brian Wuebbels

Yes, you can expect that.

Operator

Next, we'll go to the line of Sanjay Shrestha with Lazard Capital Markets.

Aditya Satghare - Lazard Capital Markets LLC, Research Division

It's Aditya Satghare in today for Sanjay. I have 2 questions, please. One is could you give us a little bit more color on the Samsung JV and sort of where we stand in terms of expected sort of costs from the JV?

Brian Wuebbels

Yes. We've -- What we've previously announced is that the plant will produce its first silicon late this year, probably late fourth quarter, and it'll ramp through the beginning of '14. And what we previously disclosed is that we believe the cost of that polysilicon will be less than $15 a kg.

Aditya Satghare - Lazard Capital Markets LLC, Research Division

Got it. Okay. Second question on the pipeline -- and there were a lot of questions asked on it before, but my question was specifically on financing. There was a lot of talk in the market about new financing structures coming up potentially, the first securitization in the market. How do you guys think about sort of ways to monetize the MEMC pipeline and if any of these new structures can change your capital recycling or maybe faster recycling of capital for your pipeline?

Brian Wuebbels

So yes, we are very excited about some of the new capital structures. As you guys well know, SunEdison has been on the leading edge of a lot of the financial structures in the space with the first sale-leasebacks, as well as other financial structures. I absolutely believe that if the development of the solar REITs-type structures or securitization, they absolutely will help accelerate the growth of the solar business. So the question is going to be, on both of those, timing. When will they be ready, how will they get out of the gate. And the key is for all new financial structures, making sure that the right party is the lead sponsor for those structures. As you guys well know, the thing that destroys an asset class faster than anything else is a poor lead on any one of these structures. So we're excited about them. I'd be fibbing if I said that I wasn't grinning when I -- when we talk about these things. I think the question is really going to be when do they come to the market and how fast do they ramp. But no question, I think these things are positive movements in the space.

Operator

And next, we'll go to the line of Satya Kumar with Credit Suisse.

Satya Kumar - Crédit Suisse AG, Research Division

So I just wanted to clarify something. The projects at the bottom of Slide 13, 36 megawatts sold, was that part of the projects that were sold to Canadian Solar? Was that included in Q4 results? Or is that something yet to be included in your results so far?

Brian Wuebbels

So Satya, yes, the 36 megawatts, 24 megawatts of that was the previously announced CSI sale.

Satya Kumar - Crédit Suisse AG, Research Division

Okay. And then you talked about the 2/3 of the projects in the pipeline will eventually get to backlog, and 90% of the backlog will get completed.

Brian Wuebbels

Yes.

Satya Kumar - Crédit Suisse AG, Research Division

From the moment that a project enters backlog, what's the normal cycle time for it to actually get completed as revenues?

Brian Wuebbels

So for a DG project, right, so what we'd mentioned, the distributed generation projects, that cycle time could be as short as 3 months and as long as 6 to 9 months, so pretty quick turn of those. The utility projects or the larger than 10-megawatt projects that are in that backlog, it is mostly dependent upon the utilities. In these cases, it could be anywhere between 6 months to 24 months, which is why we said sort of a blended -- if you look at the distribution, it's not a normal distribution around 2 years. It's sort of skewed to year 1 distribution, but that's what you could generally expect on a buildout of the backlog.

Satya Kumar - Crédit Suisse AG, Research Division

And then the 100-megawatt Chile is not included in the backlog. I think you said that. But you also made a comment that a majority of the backlog gets completed over the next 12 months. Is the comment on majority definitely including the Chile project or excluding the Chile project?

Brian Wuebbels

So the Chile project is not in that discussion because it was not in that number, but the Chile project we'd expect to get built out over the next 2 years.

Ahmad R. Chatila

But also safe to say 12 months, Satya.

Brian Wuebbels

Yes, it was 2 years.

Ahmad R. Chatila

2 years, the 827 megawatts.

Brian Wuebbels

Yes, that 827 will get built out over the next 24 months, and what I said was it's not a normal distribution around the 24 months. It's sort of skewed to the first year.

Ahmad R. Chatila

And the Chile project is not part of that backlog.

Brian Wuebbels

You got it. Yes, that's right.

Operator

We'll go to the line of Brian Lee with Goldman Sachs.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Actually, I had 2 on pricing. First on semis, some of your peers have been talking about improving ASP outlooks here. Is that something you're seeing? And can you quantify how much you think ASPs could actually be up in 2013?

Brian Wuebbels

Very difficult to say for 2013 right now. I mean, as you well know, most of the pricing negotiations are on a quarterly basis in the semi business today. I think we're being a little -- I would say we're being more conservative here. I'd say, for me, time will tell on this. What you can -- what you generally can expect based on historical information is that when semiconductor volumes are tight and growing, you tend to see pricing tighten up. When semiconductor volumes tend to soften, especially on the silicon side, you tend to see pricing soften. So I think as volumes firm up, if everybody's expectations are true in the back half of 2014 or excuse me, 2013, then yes, we would hope that the historical trend plays itself out. But I think it's way too early to tell right now in my mind that there is a movement in one direction or another on pricing.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay, fair enough. And then on solar, you mentioned in the press release being positioned to benefit from lower solar material prices, and I know that's what we saw for most of 2012. It seems like ASPs in that market have stabilized, or in some places actually moved up. And any color on what you're seeing from your suppliers and kind of how that might impact the SunEdison business in the near term?

Brian Wuebbels

Yes, we hear the same rumblings you guys hear with -- depending on what happens with the China tariffs and everything else. And yes, we're hearing poly prices tightening or at least not going down as much and wafer prices similarly. We believe that the way we've designed the supply chain for our SunEdison business gives us a lot more flexibility than being solely dependent on one market. And what I mean by that is we do have the ability to buy modules and BOS equipment on the open market, but we also have a supply chain that is non-Chinese content that we can supply modules into the U.S. on. We also have module capacity in Canada that allows us to be unbelievably competitive on a local market basis. So I would say that -- I'm not saying we're completely insulated from it, but what I'm telling you is that the way we've designed our supply chain to be flexible, I think we are -- been anticipating these type of movements. And I don't see it having a dramatic impact on our SunEdison business in the near term.

Operator

And next, we'll go to the line of Mahesh Sanganeria with RBC Capital.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Just one more question on the ASP. I know that you guys have talked about it before, but this is a question which I get most frequently, is that how do you maintain the differential in the ASP. Your ASPs are significantly better than market and also regionally. The Europe is much weaker. How long can you keep this kind of differential? And if the ASPs were to decline, can you keep up with the cost curve?

Brian Wuebbels

So great question. I think as I mentioned earlier, a lot of our ASPs have to do with the mix of projects, as well as the region as the strength in the back half of the year. Our -- I would also say that you guys know that the ASP for a solar project is nothing more than the discounted cash flows that are going to be produced over that system over its life. And there's 2 main components to that ASP. One is the cost of capital of the financing that you put in place, and the second one is the actual cost of the system. And we believe that based on our innovative financing structures and things that we've done is that we do have a differentiation here on the cost of capital that we apply to these projects. And that does allow us to have a premium to ASPs. I'd also say that over time, as anything else matures, I think it's not realistic to think that we will behave wildly differently from the market over the long term. I think in the short and medium term, clearly, our mix of projects, being more to North America on average, puts us in a better position, but I also believe that we do have a very strong competency in project finance in our company that allows us to extract maximum value out of these projects. So that's the best that I can describe it.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Okay. And the second question on the Samsung JV, your technology, is that -- the FBR process technology, is that unique to you? Or do you see any competition in the market for that process? Also in terms of pricing, do you think you have a competition which will be able to have similar kind of prices in the poly market?

Ahmad R. Chatila

So this is Ahmad. Thank you for the question. Yes, it is unique to us. Not only it's FBR, but it's high-pressure silane FBR, so it has 2 things. It makes the FBR reactor around 6x more productive than our previous generation. I would also say that because of our heritage, and in a way, it's a lucky shot for us, we did FBR for Semiconductor division. So the purity of our FBR is much better than anybody out there and because of that, the material is -- has a better pricing than what you see in the market. Finally, I would say that an FBR, it is well aligned to what is called continuous Czochralski process. And that will emerge in 2014, '15 as the leading technology for crystal making and mono wafers. So based on all that, the cost is lower. The price is higher. And so we're very excited about the JV.

Operator

Next, we'll go to the line of Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

Ahmad, I just wanted to follow up on the backlog number you provided. As I think about your backlog, can you maybe talk about the cash generation capability of that backlog? In other words, what do you think -- if you look at the margin profile of the backlog, do you expect to generate $400 million, $500 million of cash from the backlog? I mean, can you give us some metrics around that?

Ahmad R. Chatila

I'll get Brian to answer the question.

Brian Wuebbels

Yes. Thank you very much. Again, the best way I can describe it is in the next -- that pipeline or that backlog will get built out over the next 24 months, distributed more to the first year than the second year as we've discussed. And there's no reason to believe that we can't continue to extract the 20% gross margins that we talked about this quarter and going into the future out of these projects. And so we feel -- but I think you can back into that math knowing what our EBIT is in that business. I think it's a very healthy cash generation out of that 900 megawatts or 827 megawatts backlog. So I don't think your numbers are far off.

Vishal Shah - Deutsche Bank AG, Research Division

And then as I think about just execution, I know that you were able to raise $2 billion of financing in 2012. Is there any reason to believe that, that number will be different, higher, lower in 2013? Are the market conditions better or worse for you this year?

Brian Wuebbels

Yes. I think you guys see the same information we see on the macro, what people believe the solar market's going to be. I think most people have said that solar market's either going to be flat or down a little bit for the year. I think for us, it's all about our backlog, and it's all about the pipeline that we have built out in front of us. And the trajectory for the last 4 years has been growth in this business, and I quite frankly don't see any reason why that'll stop in 2013.

Ahmad R. Chatila

Yes. I would add also a couple other things, Brian. The solar asset has become a better class of assets, and because of that, more investors are coming in. I would also say that the wind industry, it's a little bit under pressure, and because of that, there is more investors to come to solar. I don't see any reason for us to go backward in that regard. And actually, we raised more than $2 billion in 2012, in a very difficult environment when our liquidity was not that strong. And today, our liquidity is very strong.

Vishal Shah - Deutsche Bank AG, Research Division

Yes. So just so I understand, I mean, if you have that financing capacity, then you should in theory be able to execute on all of the 830 megawatts of projects assuming an ASP of, say, $2.50 a watt, which I'm assuming because most of the projects are in the U.S. you will be in that kind of ballpark. So it's just maybe a timing of PPA and other things that's going to constrain -- be constrained this year. Is that right?

Brian Wuebbels

Yes. I think the buildout of the 800 megawatts is merely constrained by not the PPA because the PPA is signed. It's more of the interconnection, being ready, the utility doing its parts. That's what generally drags these things out. Yes, if we -- if all the projects were ready to go, we would feel comfortable raising that financing. The challenge is they're not ready to go because, as we've mentioned previously, we didn't spend the development capital early in 2012, which then pushes things out further. Because if you don't spend the money to give to the utility to do the interconnection, they don't start. And so these things just move to the right. That has more to do with the timing of that 800-megawatt buildout than anything else, which is why some of it, as we said earlier, not half of it but a little less than half of it, will push into 2014.

Operator

And next, we'll go to the line of Jagadish Iyer with Piper Jaffray.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Two questions, Brian and Ahmad. First, as you are restructuring on your semi business starts to bear fruit, what kind of operating margins could the semi business eventually lead you to, assuming that the ASPs kind of remain stable and you're running at about $225 million run rate a quarter? And then I have a follow-up.

Brian Wuebbels

Yes. So the question was on the margins that we would expect out of the Semiconductor business if it continued at these revenue levels. Is that fair?

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Yes, that's fair. Operating margins.

Brian Wuebbels

So the operating margins, as we disclosed this time, are low single digits at this revenue level, and that's mostly driven by the fact that the plants aren't highly utilized at this revenue level. We'd expect, as we've discussed previously, as utilizations get up into the mid-90s for this business, there's no reason to expect that we shouldn't get above the 10% operating margin business. But as long as the revenues stay at the level they are now, cost improvements will offset pricing in the short term, and you'll get a low single-digit margin operating business. So it's really about volume and factory utilization that's going to make those margins grow because of our cost containment and restructuring actions that we did in the past. We need to get the leverage.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

The second thing is that there has been some recent chatter about poly price kind of bottoming out or even starting to strengthen. I just wanted to find out, a, do you have any updates on your Merano facility? And b, is there any chance that you could be ramping your own production?

Brian Wuebbels

So no updates. Nothing has changed. We continue to have the facility in Merano be not running any volume. And I think until we see a significant change, as we mentioned earlier, the reason that we shut that down was due to a, market pricing and b, 3 critical factors on the cost front that we had to address, and we publicly announced those. And at this point, those cost factors have not been resolved. So until they get resolved, then I don't see anything in the short term changing.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Yes. Just one quick one, a housekeeping question. On your backlog ordering, did you call out how much of that was distributed generated projects, please, DG projects?

Brian Wuebbels

Yes. It's actually on the page. I think it was 400 and some -- 450 megawatts, if I remember the number exactly.

Operator

Next, we'll go to the line of Edwin Mok with Needham.

Tony Grillo

This is Tony Grillo calling in for Edwin Mok. Just a couple of questions, starting off, given that 2 of your largest semi wafer competitors are based in Japan, have you seen any effect of the falling in on the semi wafer business?

Ahmad R. Chatila

The answer is, yes, maybe they're a little bit more aggressive, but we have a factory in Japan, too, a 300-millimeter factory. I forgot -- I think probably half of our capacity is there or 40% of our capacity is there. So we can enjoy that, too. We usually price based on the market condition and value, not based on cost, but we see some movement in that regard but not devastating by any means. Thank you for the question.

Tony Grillo

And then if we look out 12 or 24 months from now, how would the mix of solar project pipeline change, geographic or the size of the project? And do you expect the distribution similar to the current mix? Or how would it change?

Brian Wuebbels

Yes. No, go ahead, Ahmad.

Ahmad R. Chatila

Let me give you a color. I mean, we're not giving any guidance here, but let me tell you how we're thinking about it. I think geographic diversification is very important because markets change. And what you're going to see us is -- and we like also smaller projects. We like a flow business. But one of the things that we don't like is these onetime events, selling a 17-megawatt project and be the event of the quarter or the year. It is hard on our troops, and it's hard on our investors. So the way you're going to see us is we're going to be focusing a lot on flow businesses, albeit distributed generation and others, and the more geographic diversification. And this way, we can have sustainable revenue gross margins, profits every quarter. And it's not an event-driven kind of environment. We still need time to go through it, but that's what you're going to see us do.

Operator

And next, we'll go to the line of Jeff Osborne with Stifel, Nicolaus.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

I just had 2 quick questions. As the mix has shifted from Europe into North America, how do we think about the lag in terms of module price changes and then when you are procuring that with your flexible supply chain and when that would flow through your P&L? I think in the past, you talked about a 6- to 9-month lag. Does that get shorter or longer with the supply chain that you've set up?

Brian Wuebbels

I think it's still very consistent. I mean, it -- that time frame has more to do with the construction cycle than anything else on a project. So a 30- or 40-megawatt project takes about 6 months, 5 to 6 months to build out, so that's why you have that cycle time. I don't think that's changed.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

I just wasn't sure with the kind of warehouses that you have in Rotterdam and Europe, the availability of modules might be quicker in terms of pricing concessions versus the U.S. and given the oversupply environment, but it sounds like it's pretty consistent.

Brian Wuebbels

It is. But as we have discussed previously, we don't have a lot of projects going on right now in Western Europe, and so most of our projects in the back half of the year were in North America. So that probably had more to do with my comment than anything else, Jeff.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Understand. And just the last one on -- going back to the Fotowatio acquisition some time ago, I think a pretty sizable piece of their over 1 gigawatt backlog was a large military installation on the West Coast. Could you just update us on that? Any land permits or approvals there? Has that been -- is that in the pipeline or not?

Brian Wuebbels

The -- absolutely, our FRV projects are in our pipeline, and we continue to work on them and develop them and still believe that the value that we paid for in that acquisition is excellent. And so no further information update on any project specific, but progressing as expected is the best way I can say.

Operator

Next we'll go to the line of Mehdi Hosseini with Susquehanna.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Brian, I have 2 follow-ups for you. Back to margin profile for the semi business. I do a back-of-envelope calculation, and I come up with 80% utilization rate. Is that reasonable?

Brian Wuebbels

I think that's a reasonable number.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

So to go to low-teen percent operating margin, is the 80% improvement to 90%? Or would you have to go to -- from 80% to 100% improvement utilization rate to see a significant increase in operating margin? Or would you realize it going from 80% to like 90%? Or how should we think about progression?

Brian Wuebbels

Yes. I think what I said -- if you remember last call, we said that the Q3 baseline and the Q4 baseline is a pretty good baseline to use as far as volume leverage, right? So if you take a 60% contribution margin business that we are and you levered up on volume, I think you'll get to that same math. If you get to about a mid-90s utilization, you can get to a double-digit operating margin business with the current cost structure.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Got it. And then one quick follow-up. On the Samsung JV, can you remind me what the capital commitment is for this year?

Brian Wuebbels

Yes. I think we said that it was approximately $40 million of net cash outflow. Is that right, Chris, confirm?

Chris Chaney

That's about right, yes.

Brian Wuebbels

Yes, yes.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

And by middle of the year, right?

Brian Wuebbels

Throughout the year. So it'll happen -- there will be payments and investments that we have to make in each of the quarters of 2013, and this will be something that we talk about at the Capital Markets Day.

Thanks, everyone. Appreciate the questions.

Operator

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

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