MEMC Electronic Materials Management Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: SunEdison (SUNE)
by: SA Transcripts

MEMC Electronic Materials (WFR) Q1 2013 Earnings Call May 9, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MEMC First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Chris Chaney, Director of Investor Relations. Please go ahead.

Chris Chaney

Good morning, and thank you for joining MEMC's First Quarter 2013 Results Conference Call. I am Chris Chaney, Director, 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 company's -- on the company's first quarter performance, and Brian will then review the financial results.

Brian's discussion will reference slides that 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. The 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 release and the slides published today for a more complete description.

And now I'll 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 to Brian to review the quarter in more detail. Overall, the first quarter was generally in line with our expectations and the targets we laid out during our Capital Markets Day in March.

In our Semiconductor business, we again generated cash and grew sales slightly during the quarter, in a market that we estimate declined by a high-single digit percentage. While the semiconductor downturn has been abnormally long, now entering its 8th quarter, our team continues to execute extremely well, which has placed us in a prime position to respond when the market rebounds. So far, our cost reduction plan continues to benefit us through significantly improved efficiencies and a lowered breakeven revenue level.

I'm also proud to say that our team remains sharply focused on quality and service improvements for our customers. It was announced during the quarter that we received another validation of these efforts, receiving a Supplier Excellence Award from Analog Devices for our performance in 2012. This follows similar awards, that I had the pleasure of noting last quarter, from 2 of the highest-volume device manufacturers in the world, Samsung and TSMC.

As we start to look ahead to the second quarter and beyond, order patterns indicate modest volume growth through the remainder of the year, with pricing pressure moderating. To mitigate the pricing pressure, we will continue our aggressive focus on cost reduction. These measures, in addition to the numerous operational improvements we have made to date, will position us to drive meaningful improvement and profitability in the next up-cycle. This business remains operationally very sound and continues to methodically drive cost and efficiency improvements, without sacrificing our long-standing commitment to quality, products and service.

Turning to our Solar Energy business. The results of our Solar business in Q1 primarily reflect our lower development spend from early last year. As we outlined during the Capital Markets Day presentations, we expect to see similar softness in Q2, followed by a rapid ramp-up in the second half and continued strength in 2014, as we see the benefit of our increased construction starts today.

In addition, we have been implementing actions to reduce quarter-on-quarter volatility on our Solar business and expect those measures to have an increasingly beneficial impact on the business, particularly as we move into 2014. These actions include doing a better job managing project development activities and growing, what we call, flow businesses or those that will provide more steady streams of revenue, like services, energy sales and distributed generation. We will talk more about the flow businesses in future quarters as they ramp up, and Brian will talk more about outlook for project development and construction starts in a moment.

During the first quarter, we grew our project pipeline to 2.7 gigawatts and grew our backlog to 925 megawatts. Both of those figures are up by about 100 megawatts from last quarter. We continue to maintain good diversity in our pipeline, both in terms of geography and project size. And we have continued to expand an already strong and diverse customer base, and recently initiated new relationships with leading companies, such as Toshiba and Petrobras, with more to come.

So as I look at the company as a whole, during the first quarter, the Semiconductor business executed nicely to grow revenue and generate cash in a continuing tough environment. The Solar business grew its already strong pipeline of ramped construction starts to fuel a continuation of the growth it has seen in recent years, and continues to add new customers and partners.

Both of our businesses continue to work on efficiency improvements. We continue to be very purposeful in our cash management. We are maintaining sufficient liquidity while appropriately investing to grow our business. Our investments are focused on downstream solar, where gross margins are healthy, as well as on semiconductor capability. We have managed through an extended semiconductor industry downturn, as well as through the first major shakeout of the solar PV industry.

And I remain very excited about the progress we have made and about our positioning as a company. Everything we have done over the past couple of years have prepared us for the eventual recovery in our markets, from being a first mover and implementing our restructuring and other significant cost reduction efforts, to strengthening our positioning, purposefully managing cash and significantly improving our market share position. While other companies have seen their positions weaken and many have been forced out of the business, we have continued to act in a disciplined and purposeful manner to improve both facets[ph] of our company. I firmly believe we remain poised for significant improvement with improved operating leverage to take advantage of the eventual market recovery.

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

Brian Wuebbels

Thank you, Ahmad, and good morning, everyone. My comments today reflect information found in the press release and the financial tables distributed earlier this morning, and we will reference the first quarter 2013 results conference call presentation posted in the Investor Relations section of our website.

So let's begin on Slide 4 in the presentation titled Quarter Overview. Overall, the quarter progressed as we had outlined during our Capital Markets Day. Due to recent trends in the semiconductor and solar markets and our strong positions within them, we have become increasingly optimistic about the back half of the year, and we have increased our outlook for Semiconductor Materials revenue and solar project megawatts. I will discuss this in greater detail later in the call.

We believe our Semiconductor Materials segment outperformed the market based on our results and other publicly disclosed data. Although pricing remains soft in the near term, we remain focused on strengthening key customer relationships and on increasing our profitability through our cost reduction programs. We are very excited about the market opportunity we see in Solar later this year and next year. And later, I will share with you further details on our trajectory. With our strong and growing solar project pipeline, our commitment to investing in the business, our increased construction activity and our efforts to drive greater linearity, we believe we are well positioned to capture disproportionate share of the growth in Solar.

So now let's flip to Page 5 and let's review the Q1 results. As I indicated, the first quarter was about as we expected. Semiconductor revenue, our semi revenue grew slightly to $230 million in the first quarter, as expected. The team executed very well, growing units nicely during the quarter and again generating positive segment margin and cash flow, which grew quarter-on-quarter. We sold 45 megawatts of solar projects in the quarter, above our 10- to 38-megawatt target range. This includes both fully developed and EPC-only projects.

In the past, our project sales were predominately fully developed projects for which we target a 20% gross margin. However, in the first quarter, we opportunistically executed 18 megawatts of EPC-only projects to help fill the temporary void created by reduced development spend last year and to cover our OpEx in the short term. Historically, projects where we were only the EPC provider were very negligible and were less than 5% of our megawatts in 2012. In the first quarter of 2013, however, the EPC-only projects represented about 40% of our total megawatts. EPC projects will remain a large portion of our mix for the second quarter as well. However, entering the second half of the year and beyond, our mix will swing back to delivering almost entirely fully developed projects as we deliver against our project pipeline and backlog, as well as new projects generated from our development activities.

On the solar pricing, to make an apples-to-apples comparison of our ASP relative to our guidance, we included only the fully developed projects for an ASP of $3. However, note that this includes a 12-megawatt project that has greater than 20% margins in south Asia that we sold for only $2 a watt, that was originally planned to be a second quarter sale. Excluding this project, our ASP would have been $3.84 due to the high mix of DG and Canadian projects. Again, the main takeaway in regard to our ASP, which we've discussed numerous times before, is it is highly dependent upon the region that we -- regional concentration, project type and timing of our project closures.

On the CapEx, our capital spending for the quarter was $31 million, better than our guidance midpoint. This includes $5 million due to the CapEx allocation related to the TCS plant we acquired through the contract settlement with Evonik that we had mentioned last year. Our CapEx remains primarily focused on our Semiconductor Materials business, as our strategy remains asset-light in our Solar business.

So now let's turn to Page 6, and we'll review the 1Q summary results. First quarter 2013 non-GAAP revenue was $431 million. Semiconductor Materials represented 53% of our revenue and Solar Energy, the remainder. Non-GAAP sales reflected growth in our Semiconductor Materials despite industry headwinds, and solar project sales were gated by the slow development spending last year, as we previously discussed. The non-GAAP EPS was a loss of $0.16 a share.

Now let's turn to Page 7. For the first quarter, non-GAAP total sales were down sequentially and year-over-year due to lower Solar Energy segment sales. Gross margins were lower sequentially driven by 3 factors: first, lower megawatt sales for the quarter, as we've discussed; second, the high mix of low-margin EPC megawatts, in which a specific project in south Asia also experienced delays; and finally, the temporary dip in our solar module sales and soft internal demand resulted in higher costs due to underutilization and lower cost of market adjustments in our solar upstream business. We expect that our margins in our Solar Energy business should increase with deliveries in the back half of the year, as I will explain later in the presentation. Our operating expense continued to be under control and was better than we expected.

Now let's turn to Slide 8, and we'll review the semiconductor business. Semiconductor Materials revenue rose slightly relative to the previous quarter. Higher volume was partially offset by declining prices. Revenue was higher year-over-year as volume growth more than offset our pricing declines. Both volume growth and pricing declines were primarily driven by 300-millimeter wafers. With cost discipline and improving manufacturing utilization, Semiconductor Materials generated positive operating profit and free cash flow in the period.

Our view of the semiconductor market is cautiously optimistic. We are beginning to see order patterns indicate an upturn. We believe this will translate to volume growth initially, followed by modest ASP strength in the second half of the year. Thanks to our restructuring and strong customer relationships, we believe we are well positioned to generate improved performance as the market turns. Now let's flip to Page 9 and review the solar materials business -- sorry, Page 9, let's review the semi market share trend. In 2012, while executing a significant restructuring, we grew our market share in semi by remaining disciplined and focused in our customers and quality of our product. As we start 2013, we believe, again, that we gained share based on our results announced so far, as the chart shows below.

Now let's turn to Page 10 and review the Solar Energy business. Because the adjustments defined in our non-GAAP metric pertain to the Solar Energy business, all financial figures on this page are non-GAAP. Of the $202 million in Solar Energy segment sales, solar projects generated $109 million. Our upstream solar materials business generated external sales of $51 million, of which $25 million was due to the contract amendment with Tainergy. The remaining $42 million came from energy O&M and other revenues. In the first quarter, Solar Energy segment revenue and operating profit declined sequentially as delivered megawatts fell, the high mix of EPC projects caused the average pricing and margins to decline and higher costs in our solar materials business due to a temporary drop in external module shipments and lower internal demand.

So now let's move to Page 11, and let's talk about the project pipeline. Our pipeline at the end of the first quarter was 2.7 gigawatts, up from the 2.6 gigawatts or almost 100 megawatts at the end of last year. During the quarter, we interconnected 41 megawatts. At end of the quarter, we had 135 megawatts in projects in various stages of construction, up from 73 megawatts the prior quarter as our construction activity accelerated.

We have a well-diversified pipeline, both geographically and by size, with over 800 projects globally. The majority of our pipeline is in North America. We believe this diversification is a prudent strategy given constantly changing global politics, economies and policies, which is why over 40% of our pipeline lies in geographies like Latin America and the emerging markets, where we believe opportunities for healthy growth exist. Our pipeline also remains diversified in terms of size, with projects less than 50 megawatts constituting half of our pipeline. We also believe there is a lot of opportunity for growth in projects less than 10 megawatts in a category we call distributed generation or DG.

Now let's flip to Page 12 and review our project backlog. Our backlog at the end of the first quarter was 925 megawatts, up 98 megawatts from last quarter and is also well diversified, with over 500 projects globally. As a reminder, backlog represents projects with signed PPAs and back -- and/or backed by feed-in-tariff contracts and includes projects under construction. Most of these projects are planned for completion over the next 2 years.

As you can see in the bar graph on the left side, the largest portion of our backlog is located in the United States. Note that distributed generation projects constitute about 40% of our backlog. However, this is the category which -- sorry, this is a category which includes commercial and residential rooftops, where a project also can enter the backlog, finish construction and be sold in less than a quarter and hence, may never show up in our reported quarterly backlog.

Now let's move to Page 13, and we'll talk about our strong project development. In this slide, we show our plan for project completions through the first half of 2014. On the left side of the chart, you can see that, through the second half of 2012 and the first half of 2013, our project completions have ranged between 50 and 100 megawatts quarterly. This relatively low level was a result of our decision to curtail development spending last year in order to reduce the stress in our balance sheet, as we restructured our materials business and exited long-term legacy contracts. As discussed at our Capital Markets Day, we are increasing our development spend, which is resulted -- which is expected to result in significantly higher completion levels later this year and into next year.

During last year's fourth quarter, we started construction on 38 megawatts of projects. Last quarter, we increased our construction starts to 104 megawatts, and in the second quarter, this is expected to approach 400 megawatts. As a reminder, we do not start construction of a project unless we have firm financing secured, per our Board of Directors mandate. Also, the construction of these projects will be financed through either our nonrecourse construction revolver or through one-off facilities that require only 10% to 20% equity contribution from SunEdison.

With a rapid ramp in construction activity later this year, we do not expect to experience a dramatic drop in the first half of 2014, as we have this year and in previous years. For the 4 quarters from Q3 2013 through Q2 2014, we expect to deliver over 900 megawatts, of which over half will come from our current backlog and the remaining 40% is expected to come from projects that can -- from our pipeline to backlog in the next couple of quarters or the short-cycle DG projects, some of which don't even appear in our backlog. The ranges you see on the chart reflect uncertainty in timing, not whether we will complete the project or not. In an effort to provide more transparency, we will commit to updating this forward forecast on future earnings calls.

So now let's talk about the major projects for 2013. The slide shows a partial list, representing about 350 megawatts of our projects greater than 10 megawatts planned for 2013, as well as our expected start date and completion date. A significant portion of them are expected to complete in the third and fourth quarters of this year and thus, a similar portion of our full year solar project revenue will be later this year.

Now let's go on to Page 15 and talk about cash. We began the quarter with $573 million and ended with $422 million. The vast majority of the use of cash was driven by working capital related to project construction and collections timing. Accounts receivable was up due to the timing of various payments and the majority of which have since been received. And payables was down due to nonlinearity.

Now on to Page 15. At quarter end, we had $1.4 billion of Solar Energy assets offset by $1.6 billion in nonrecourse debt. It is important to understand the nature of the nonrecourse 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 lease payment -- 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 nonrecourse debt will always exceed the corresponding asset balance. For the purposes of our debt covenant calculations, nonrecourse debt is not included.

Our liquidity position remains strong at $661 million. Total capacity in our nonrecourse revolving construction facility was $150 million in the fourth quarter, of which only $9 million was drawn, bringing the -- sorry, for the first quarter, of which $9 million was drawn, bringing the total availability to $141 million. Overall, we are comfortable with our balance sheet and our liquidity position.

So now let's move to Page 16, and we'll talk about our second quarter outlook -- sorry, Page 17. And now we'll discuss our outlook for the second quarter and the full year. For the second quarter, we expect Semiconductor Materials to increase to $235 million to $245 million range, driven mostly by volume. We expect total solar project volume to be in the range of 29 to 54 megawatts. Solar projects retained on our balance sheet are expected to be in the 0 to 3-megawatt range. And again, this range only reflects the timing of project closure and not the existence or an actuality of a project being completed. Fully developed project ASP is expected to be in the range of $3.40 and $3.55. And CapEx will again be primarily focused on our Semiconductor Materials business and should be in the range of $30 million to $40 million.

Now on to Slide 18, which is our full year guidance. We are incrementally more positive regarding our full year as compared to our prior guidance. We now expect Semiconductor Materials full year to be about $10 million better than we estimated earlier, with the additional revenue driven by a combination of both stronger price and volume in the second half of the year. We are also more optimistic about the project megawatts in the second half of 2013 and now expect to sell between 430 and 500 megawatts for the full year.

We still plan to retain certain projects on our balance sheet, most of which are in Latin America. These projects are in regions with high solar radiance and low overall install cost, resulting in high IRRs for SunEdison. The range of 50 to 100 megawatts represent the uncertainty in timing of project completions as opposed to the uncertainty in our decision to keep a project. Project pricing should be in the $3.10 to $3.40 range, unchanged from our prior estimate, and includes all projects, both fully developed and EPC-only projects. Our CapEx forecast remains unchanged at $120 million to $140 million as well.

And in closing, our Semiconductor Materials business has made significant improvements in productivity and customer service measures over the last 2 years. Many of which we shared at our recent Capital Markets Day. Our focus on cost reduction has enabled us to generate cash at the bottom of the cycle. We believe we are well positioned for the upturn in the semiconductor industry.

Our Solar Energy business is fundamentally strong, with a large pipeline and significant backlog to fuel the business in coming quarters. Our brand name has helped attract customers and will help us grow globally. The recent uptick in our construction activity should lead to significantly higher project completions later this year. And in this business, we believe we are positioned to capture a disproportionate share of the market opportunity. We have a solid liquidity position and remain focused on maintaining a healthy balance sheet, driving profitable growth and delivering strong returns for our stakeholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] We will go the line Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

Just wanted to better understand the impact of the recent MLP discussion on how you guys can execute on some of the pipeline and the backlog. And then, on one of your slides you mentioned your backlog margins were $0.65 to $0.70 -- $0.75 to $0.80 per watt. I'm just curious whether that would be on a $3 ASP for a cold [ph] system price. Or what kind of ASPs are we talking about?

Brian Wuebbels

Vishal, thank you very much for your questions. Look, the MLP announcement is a very big positive for the industry. It's not official yet, still a lot of work to go on this thing. But look, it will be an enabler. We've said this all along, that we feel very comfortable with SunEdison's ability to raise capital for project finance. We talked about it at the Capital Markets Day. We've been able to open up numerous new markets, and we just see this as another piece of the equation that will help the advancement of the solar energy industry. So look, if it happens, we certainly will be participating, and we'll see that as a piece of our capital equation in the future. If it doesn't, we still feel very comfortable in our ability to finance projects at a very cost-competitive cost to capital. The second one is the question on the gross margin per megawatt -- or per watt on our backlog. Yes, I mean it is based on that ASP guidance that we gave for the year, which is like $3.10 to $3.40, and certainly, that pricing will continue to come down as we move forward in the years. But we feel very comfortable in the next 12 to 24 months that we can deliver, on the fully developed projects that are in our backlog, those type of margins. So hopefully that helps, and appreciate your questions.

Vishal Shah - Deutsche Bank AG, Research Division

Brian, I just wanted to clarify. Your margins today in the backlog are in the same range or lower than that?

Brian Wuebbels

They're in that range. I mean, that estimation -- the reason there's a range in there is obviously some of the earlier ones tend to have a little bit higher margin as they move on and on a per-watt basis, right? We've said all along that greater than 20% gross margin is something that we expect to be able to continue to maintain in this business. So obviously, as the ASP comes down, you're going to see the per watt come down a little bit, but not dramatically.

Operator

Next, we go to the line of Brian Lee with Goldman Sachs.

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

I guess first off with 135 megawatts under construction, you're running at almost 4x the base you had coming into Q1. So I'm wondering why the Q2 megawatt guidance for Solar Energy systems is not significantly higher than what you just did in Q1. And I had a follow-up.

Brian Wuebbels

Sure, Brian. Just timing of construction. A lot of the projects that we're starting in Q1 are utility scale-type projects, right, so anywhere between 10- and 50-megawatt projects. The construction cycle time in those is somewhere between 5 and 7 months. So that's why you see the timing of those projects coming off as we listed. And if you take a look at, I don't remember the exact page, but I believe it's Page 14, you can see that a lot of our projects in the back half of the year are starting, and they all have about that 5- to 7-month construction cycle.

Ahmad R. Chatila

I would say the operations construction cycle is a lot shorter. It's just that term-out and sell the project, finish the final the paperwork, that's what takes time.

Brian Wuebbels

Yes.

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

Okay, fair enough. And then on the semi's guidance for the year, just wondering how much of the uptick here is being driven by better volume. And how much is being driven by better pricing? And also what your embedding in your view for potential implications of yen fluctuations?

Brian Wuebbels

Great question, Brian. The answer is we are seeing, after, like Ahmad said, being the 8th quarter of a down, we're still seeing pricing being soft in Q1. We do see that moderately improving through the year as the market recovers. So volume is driving a bigger piece of that recovery than pricing. We still expect pricing recovery, but it's not the driver for why we think the year is going to be stronger. And certainly, the weakening of the yen is playing a role. It is putting, obviously, pressure on short-term pricing, but we think as the market recovers and volumes recover, that, that impact will moderate. But it certainly is a wildcard and an impact in the industry right now.

Operator

Next is the line of Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Thank you so much for a lot of disclosure here, by the way, on the projects. Two quick questions I had. One, don't mean to be nitpicky here, guys, but for that megawatt range in Q2, what is the variability there as to the low end versus the high end?

Brian Wuebbels

I mean, we've -- again, with that few of megawatts, you're really not talking about a ton of projects, so we've got a couple of projects in there that are in the 10- to 15-megawatt range. And so if that project closes at the end of June, then it will be towards the higher end. If those projects don't close, then that's why they're in the lower end. So it really is just, with such few megawatts and such few projects, 1 or 2 projects missing by a day or a week or 2 is moving that range.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Fair enough, fair enough. So now and then, as we think about the second half of the year as the megawatts starts to ramp up, right, can you sort of also tie that together with how should we think about sort of the cash flow for the year, or especially for the second half of the year?

Brian Wuebbels

Yes, I mean, I think, clearly, as megawatts increase and the term-outs increase, the cash flows should improve in the business. I mean, the good thing about the changes that we made in the business, that I've talked about with most of you in the past about, is the not starting projects without firm financing, so we're not putting a risk on the balance sheet; and two, having the construction financing for each of these projects. So the equity that I have to put in, even for this large ramp, is not significant compared to the cash opportunity of the term-out. So we believe as we exit the year, that you will see the cash improve in the business. But again, we feel very comfortable with where we're at from a liquidity position and managing through this upturn.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Great. One final one then for me, guys. Any update you could share with us in terms of when do we expect this 10,000 metric ton poly plant that you guys have JV with Samsung? When does that come online? And what's the latest on that?

Brian Wuebbels

So progressing along, as we've discussed in the Capital Markets Day. No material changes at this point in time. We still expect to be making first sale again late this year, likely right towards end of the year.

Ahmad R. Chatila

The way you should think about it is end of the year, first silicon; and real impact, material impact on the company, middle of 2014.

Operator

Next, we go to the line of Krish Sankar with Bank of America Merrill Lynch.

Thomas Yeh - BofA Merrill Lynch, Research Division

This is Thomas Yeh dialing in for Krish Sankar. You mentioned that the mix between the fully developed versus EPC mix is expected to shift back to more normal proportions within the second half. I just wanted to get a better sense of what assumptions do you have around that mix for 2Q and then the full year.

Brian Wuebbels

So I think the mix for 2Q will be very similar to the mix for Q1. Again, we just don't have a lot of projects, and there's a couple of projects coming through. So when we say these EPC-only, it's not -- we're not doing dozens of projects. It's really just a few projects that are in this 15- to 25-megawatt range. The back half of the year, we expect that number to go back to previous levels, so less than 5% of our megawatts in the back half of the year and into 2014 would we expect to be these types of projects.

Thomas Yeh - BofA Merrill Lynch, Research Division

Great, great. And thanks for the incremental color on the project completion timeline into 2014 based on geography. What's your view on the Solar Energy margins and ASP expectations as it relates to the different geographic regions?

Brian Wuebbels

Yes, I think there's definitely -- geographically, I don't think we see tremendously much different margin expectations. You tend to see -- what you tend to see with the geographic diversity is, in some of the more emerging markets, you have lower ASPs. But you have significantly lower system cost, so you still tend to get to maintain those good healthy margins on those projects. The one mix that you do see is that the distributed generation projects tend to have a higher margin than the utility scale projects. That is something we've talked about in the past, and that's the reason why we are incrementally more interested in this flow business that Ahmad talked about and these smaller distributed generation projects are that reason, and the reason that we expect those margins to be a little bit better than that. But other than that, we think they are pretty consistent.

Operator

Next, we'll go to the line of Satya Kumar with Crédit Suisse.

Brandon Heiken - Crédit Suisse AG, Research Division

This is Brandon Heiken speaking on behalf of Satya Kumar. Just a follow-up on that last point. You mentioned that distributed generation may have higher margins than the utility scale. Could you talk about how you expect that distributed generation to ramp over time? I know it's something that you want to increase. And also, for the other flow businesses, how those margins may flow-through and affect the corporate average?

Brian Wuebbels

Yes, and as Ahmad mentioned earlier, we're going to be talking a lot more. We entered -- we talked about these concepts at our Capital Markets Day. Today, they're -- given the low volumes, they're not a significant portion of our business today. I think distributed generation, in Q1, of these megawatts was less than 20% of our megawatts in Q1. So it's a pretty small share. We expect that to grow into next year. And I think we said this at the Capital Markets Day. If you remember the chart on the DG megawatts, we expect the DG megawatts to more than double as we head into next year. And so that's how we see the business kind of playing itself out. So it will ramp much like the rest of the volume in the back half of this year, and then be at a much more substantial level as we head into 2014.

Brandon Heiken - Crédit Suisse AG, Research Division

Okay. And with this anticipation of Europe tariffs against China products, are you guys seeing any change in availability of solar modules, either here in the U.S. or Europe? And is that possibly going to shift your strategy with solar materials?

Ahmad R. Chatila

Thank you for the question. This is Ahmad. The answer is it's not going to shift our strategy, and we have a flexible supply chain, so we're able to absorb such shock to the system. We've done it on purpose like that, knowing that, at some point, these things will happen. We do see suffering with other players, we really do. And we do see fluctuations in price for the average guy. So that's something we have detected. Still, one has to step back and look at the full implications of it. In certain regions where there's no tariff, maybe the pricing will be lower. In the places where there is tariff, the prices will be higher. So there's this kind of arbitrage and imbalance that is going to emerge. But since we have a flexible supply chain and a global deployment of projects, I don't think we're going to get hurt or gain out of it. I think we're just going to be okay. Because in some cases, we use China; in some cases, we don't. So that's what's going to happen to us.

Operator

Next, we'll go to the line Shahriar Pourreza with Citigroup.

Shahriar Pourreza - Citigroup Inc, Research Division

I'm curious on your Samsung fine chemicals poly JV, if you -- under the assumption that China does enact poly import tariffs, I'm curious, on some of the metric tons that you look to produce, and I think net ownership, it's 5,000 metric tons, and if you're producing poly at less than $15 all-in cost per kilogram, are you competitive to sell strategically into China? I mean, the assumption is that a lot of the importers into China will become uncompetitive with GCL. So I'm kind of curious on what your strategy could be with the JV, under the assumption that the poly tariffs are enacted.

Ahmad R. Chatila

Well, thank you for the question. This is Ahmad again. I don't think we need to sell to China for us to utilize that factory, because we have significant deployment of wafering relationships outside of China, in the various Asian countries, as well as our own Kuching plant, and that Kuching plant is ramping really nicely. So -- and as time progressed, we have made the productivity of that factory a lot better than our initial estimation. So we don't have to play that game, frankly speaking. We don't have the ship into China. It's not a -- it may be not ideal, but it's not strategic by any means. If I had a lot more capacity, like in the past, and I have Samsung Fine Chemical, then it would have been a bigger headache. But today, I don't have that issue. You need to talk to really the poly players who really sell poly for a living. This is only a small part of my business.

Shahriar Pourreza - Citigroup Inc, Research Division

Got it, got it. And then I think at your Capital Markets Day, you presented pipeline and backlog guidance close to over 3 gigawatts and then over a 1,000 megawatts on the backlog. Are you still on track for that for 2013?

Brian Wuebbels

Yes. I mean, I think we still feel very confident in our ability to grow our pipeline and our backlog exiting 2013.

Operator

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

Edwin Mok - Needham & Company, LLC, Research Division

I was wondering, when I contrast that kind of cumulative project you expect for 2014, 910 megawatt versus your backlog of 925, it means that you expect to finish construction of mostly your existing backlog by the second quarter of 2014. Is it just because you have this continued flow of addition to our backlog, that's why you think your business can continue to progress and probably see more growth in the back half of '14? Or how do you kind of think about that progression?

Brian Wuebbels

Great question, Edwin. Two factors. The first factor is, as we grow the distributed generation business and the smaller project business around the world, those projects don't even show up in our pipeline or backlog and get flipped right into projects. So that's one factor that will allow us to continue to grow the business with -- even if the backlog or pipeline stayed steady. The second factor is we do have a tremendous amount of development activity, as we talked about with the investment going on, where we are now moving these projects through the pipeline at a much swifter pace than we were a year ago or able to do a year ago. So because of that, we will, and that's how we expect to get our backlog to be up greater as we exit this year. So even with the build-outs this year, we still expect to be able to grow the backlog, and that's because we see projects moving out of the pipeline and into the backlog. And the other example is we have seen instances -- the Chile project was a great example, right? Chile project in Q1, we talked about it at the Capital Markets Day, is a 100-megawatt project in Chile that never was in our pipeline, never was in our backlog and just immediately appeared. So not only the DG businesses, but some of the utility scale projects in developing countries, they don't go through this long laborious development cycle that the utility projects in North America go through. So that's why we feel very optimistic and very confident that this business can continue to grow at the pace that it's grown at over the last 3 years.

Edwin Mok - Needham & Company, LLC, Research Division

I see. Great, that was helpful. And then one quick question on the semi side. Any way you can kind of quantify your EBITDA or free cash flow for the quarter? And I presume that's still negative. When do you think you can get back to positive cash generation for that business?

Brian Wuebbels

Actually, Edwin, if you go to, I think, it's Page 20 in our deck, it's actually in the appendix, we've shown the segment cash flows broken out by each of the individual segments. So during the period, semi generated $7.7 million of positive cash flow. And then you can look at our operating income, and the depreciation and amortization for semi is $30 million, so...

Operator

Next, we'll go to the line of Mahesh Sanganeria with RBC Capital Markets.

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

This is Shailender sitting for Mahesh. Obviously, this quarter's ASP was impacted by the EPC mix and also the lower margin business in south Asia. I'm just wondering how many of those south Asia lower-ASP projects are in the pipeline? And can you give us some color on the timing to recognize those business?

Brian Wuebbels

Good question. So as we mentioned, we expect the EPC mix to be very similar as Q1 into Q2, so you're going to say -- see the same impact in Q2. But then as we move through the back of the year and into next year, it will be consistent with our regular mix of ASP that we've talked about. As we mentioned, the EPC things were not unknown to us. The issue is on timing of when they close versus what period they happen in versus other fully developed projects closing in the period. That's why we're confident that, for the year, the ASP guidance that we gave is still good. So you have a little bit of this quarter-to-quarter movement on ASP. But for the full year, this is all in there, and we still feel comfortable on the $3.10 to $3.40 ASP for the year.

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

Great. One quick follow-up about the 2013 pipeline guidance you guys gave out in Capital Markets Day. And I know this question has been asked, but I just want to get more color. About this 3 gigawatts pipeline, you added 100 megawatts of this quarter. What's the roadmap like for the rest of the year? Maybe like another 100 megawatts for Q2 and then 300 for the second half? Just any color would be helpful.

Brian Wuebbels

It's really difficult to pinpoint the exact date that these projects are going to move through in. But I would say that, clearly, we see the momentum building. And clearly, as we are spending more development spend on these projects, we're moving them through the pipeline. And in some cases, there are projects in leads, right, which we don't even talk to you guys about, which is the large piece of the funnel that's above our pipeline, that is feeding this pipeline. So it's not just this pipeline is going to move. There is probably 2x the amount of stuff above our pipeline that's feeding into that pipeline on a daily, weekly basis. So it will continue to grow throughout the year, but really difficult to give you guys guidance on how that might transpire by quarters. But we still feel confident on the trajectory.

Ahmad R. Chatila

Maybe I can add also a comment, Brian. Good answer actually, because it's hard to really forecast when exactly something will come into pipeline or backlog. But we are not worried about that, we're really not. We actually have been very disciplined in our development efforts for the last 3 years or 4 years. We never called our team an EPC team. We kept them intact. Even when we didn't spend money on development, spend money on our elite forces to stay in the company, we have limited turnover at the highest levels of the development organizations across all regions, because we're deeply committed to it. And because of that, we have an engine that is beautiful. We don't have to prove ourselves, frankly speaking. We don't -- you don't have to wait for us for a given number in the future to come in. We have an engine that is probably the best in the world. The team has gone from #20 to #2 in 4 years, and we have momentum more than anybody. And as Brian said, we don't like to share with you what we call leads and qualified leads, but it's significantly larger. We're negotiating today deals that are significantly larger than the we can really show you at our pipeline/backlog. Now why don't we show you that stuff? Because frankly speaking, it is liquid, it's fluid. What we show you today, we have our audit teams that review on a periodic basis, so that we can't really count on it on our filings. But we have a lot more than that, really a lot more. Actually for the whole solar industry, I'm just going actually tell -- give you this broadcast message. I think that solar industry overall has made a huge turn to the better. There are going to be the bifurcation of players. The person who's committed to selling only a commodity, I think, is going to suffer, and I don't think it's going to ever get better, okay? That's just -- you can count on that. And the person who really have a platform and a development engine, I think that person is in great shape, and we are one of those guys. So I'm actually very, very optimistic about the industry and our position within it the next few years, really I am. Very exciting actually. You can see it in our release today of the first half of '14, which hopefully, it's not going to stop. There's no cliff after that.

Operator

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

Stephen Chin - UBS Investment Bank, Research Division

First question on the Slide 13. Brian, I'm just trying to understand, in terms of the cliff -- or I shouldn't say cliff, but the falloff in the development spend in '14, is there something -- can you help us understand that? Is that just getting back to your normalized expectations of between 120 to, like, 150 megawatts? Or is there something else going on there?

Brian Wuebbels

Great question. It really is what I would call is -- we should be at a normalized level of spending about $140 million to $150 million a year on development spend. And so that's kind of what we get back to in '14. What you see happening this year is really a recovery of things that we didn't do over the last year, right? So we are accelerating things to get the engine going again. And then what will happen is, once we get the engine going again, the amount that needs to stay at that level will normalize at about that $35-ish million a quarter rate. So nothing -- that's plenty of development capital to continue to grow the business at the 200-plus megawatt per quarter clip that we will be on.

Stephen Chin - UBS Investment Bank, Research Division

And then just to follow up to that. Is there something to read into the development capital spend intensity in the 2013 time frame and the solar operating margins?

Brian Wuebbels

I don't know. Please -- so the way the solar development capital works is it's a capitalized cost for our future projects, right? So it's in the gross -- implied gross margins of our future projects. So I'd say 20% gross margins in the future, it has this development spend baked into that equation. So there is no material impact of the 2013 except for maybe a little bit in the Q4. There's no, what I would call, dilution or whatever to our margins because of the spend. It's all part of what we guide as the dollars per watt and the percentage gross margin on our projects. Does that help?

Stephen Chin - UBS Investment Bank, Research Division

Yes, understood. And then just a question on the 450 development. Anything there for 2013 time frame? Or maybe if you could talk about how much and how long do you need to spend to get to 450.

Ahmad R. Chatila

Well, thank you. We are monitoring the situation. We -- the customer base is not very wide. It's a risky investment. We are open to it if customers help us out, but we are in the process of monitoring right now. None of our plans assume 450, and we will not spend significant CapEx on it unless there is deep collaboration with 1 or 2 customers. That's the only way.

Operator

Next, we'll go to the line of Jeff Osborne with Stifel.

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

I just had a couple of questions for you, Brian. On the Tainergy payment, the $25 million, was there any costs associated with that? And do you expect any further residual payments for the remainder of the year?

Brian Wuebbels

So the -- for Tainergy, it's very similar to our other contracts that we had, right? They had -- we have deposits that we get from these guys to secure capacity in the past, and they have required volumes that they're supposed to take. In this instance, they hadn't taken the required volumes, and so we collapsed the deposit.

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

That's flows through at a 100% profit through the P&L? I just want to make sure I understood the dynamics there.

Brian Wuebbels

Absolutely, yes.

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

Okay. And there's no residual further penalties? You ripped up the contract, there's no further milestones that they need to hit?

Brian Wuebbels

No. We -- this is only -- this contract has a 10-year life. What we basically did is tore up the last 5 years of the contract. There is still future deferred revenue on our balance sheet that they -- if they take the material, that they can earn back.

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

Got you. And then I just want to understand on the guidance for the upcoming quarter, you gave the ASP range and a wide range of megawatts, which you responded to with a prior question. Is there a way you could give what the ASP would be including the EPC portion, just so that we're clear with a modeling on that?

Brian Wuebbels

Yes. I mean, the EPC in the quarter, I mean, if you look at what are -- what the impacts it had on Q1, I'd expect it to be very similar in Q2.

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

But you don't have a $2 project in Southeast Asia that you're selling, right?

Brian Wuebbels

Correct. So you can expect that the ASPs for EPC are something less than $2 a watt.

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

Got you. And you said that, that was 40% of the potential 29 to 54 megawatts?

Brian Wuebbels

Yes, that's right.

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

Okay. And then the last question I had was on the fourth quarter ramp here of the heavy system business. Is all of that funded on the debt side or is there still some work to be done?

Brian Wuebbels

So as I mentioned earlier, most of these projects will start here in Q2, and we will not start those projects if we don't have the debt and equity offtake lined up.

Operator

Next, we'll go to the line of Scott Reynolds with Jefferies.

Scott Reynolds - Jefferies & Company, Inc., Research Division

Apologies if I missed this or not, but on the semi guidance, you are still relatively optimistic about maintaining flat to slightly up pricing for the year, with the significant decline in the end. Can you talk about some of the puts and takes of that? Is there more of a mix shift? Or do you see something in the back half of the year happening?

Brian Wuebbels

Great question. The mix will absolutely -- I mean, we talked about it in our Capital Markets Day. One of our goals is to have a higher mix of products, whether it is epi products and/or SOI. We're one of the few people in the world who has any volume scale on SOI, and we see that business continuing to ramp so that will definitely help our mix. So yes, that will -- and you tend to see, as usual, in the cycle, that when the industry starts recovering, you do see general prices firming too, as a trend. But we really see the benefit of mix helping us in the back half of the year. Any other question?

Scott Reynolds - Jefferies & Company, Inc., Research Division

No.

Operator

Next, we'll go to the line of Shawn Lockman with Piper Jaffray.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Just wanted to kind of get back to a question earlier about using the Chinese and around the -- specifically, I wanted to ask sort of impacts from the Suntech troubles. Are you guys being a little more selective in terms of the product that you're using? Is there any concern, in other words, with using Chinese modules from companies that are financially distress, as customers may prefer a vendor that's more likely to be around and be able to service their warranty? Or is there -- is it -- in other words, are you not sort of choosing winners and losers that way?

Brian Wuebbels

Yes, I mean, I think we've talked about this at the Capital Markets Day. For us, the reason we continue to participate in the solar materials or the upstream part of the value chain is to ensure that we have the highest-quality products that are bankable with the least risk to our customers. So yes, we feel it's very important that we are selective in our choosing of vendors and ensuring that only the most capable and highest-quality customers are used -- or suppliers are used in our projects. So for the Suntech instance, I think the movie is yet to play out on that one. I think, for us, we don't see that being a material impact to our business on a go-forward basis. But yes, I think it's just an eye opening that all of our competition, when you start looking at who's focused on quality and who's focused on just the lowest cost, that you really need to have a balance when it comes to this, because we are building 20-year assets here. And it's very important to have disciplined quality and disciplined supplier selection, and we feel comfortable in both of those aspects.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

And if I could just jump back to some comments you guys made earlier about sort of the swifter pace of projects moving through the pipeline and into backlog. Can you talk a little bit about what has contributed to that kind of swifter pace and what you'll be able to do to sort of maintain that going forward?

Brian Wuebbels

Yes. It -- for the U.S. and North America, it's about putting the development capital in place. It's spending the money, right? You've got to spend money to get money. And in this case, by us getting to that more normalized level of what we need, that helps. The second thing is, with the continual drop in installed solar cost around the world, what you see is markets being more open. And you're seeing markets opening up all the time, where solar, 2 or 3 years ago, maybe didn't make sense, today, at today's installed cost level, it makes tons of sense. And so we are seeing -- as Ahmad said, we are seeing that sort of general trend in the industry accelerating in developing parts of the world. And so those 2 factors: one, us spending money on the projects that we have; and two, the sort of market price being -- cost being lower, allowing us to enter more markets rapidly, I think those are the 2 contributing factors.

Operator

And ladies and gentlemen, I'd like to turn the conference back over to Mr. Chris Chaney. Please go ahead.

Chris Chaney

Thank you. Just in conclusion, we'd like to thank everyone for their interest in our company and for participating in our call today. Hope you have a great day. Thank you.

Operator

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

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