MEMC Electronic Materials' CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: SunEdison, Inc. (SUNEQ)

MEMC Electronic Materials (WFR) Q4 2010 Earnings Call February 1, 2011 5:30 PM ET

Executives

Mark Murphy - Chief Financial Officer and Senior Vice President

Bill Michalek - Director of IR & Corporate Communications

Ahmad Chatila - Chief Executive Officer, President and Director

Analysts

Atif Malik - Morgan Stanley

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Stephen Chin - UBS Investment Bank

Sanjay Shrestha - Lazard Capital Markets LLC

Krish Sankar - BofA Merrill Lynch

Vishal Shah - Barclays Capital

Edwin Mok - Needham & Company, LLC

Timothy Arcuri - Citigroup Inc

Paul Leming - Soleil Securities Group, Inc.

Jesse Pichel - Jefferies & Company, Inc.

Satya Kumar - Crédit Suisse AG

John Hardy - Gleacher & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MEMC Fourth Quarter Earnings Results Conference Call. [Operator Instructions] And with that, I would now like to introduce your opening speaker for today, Bill Michalek, Director of Corporate Communications.

Bill Michalek

Good afternoon, and thank you for joining MEMC's Fourth Quarter and Full Year 2010 Earnings Conference Call. With me today are Ahmad Chatila, President and Chief Executive Officer; and Mark Murphy, Chief Financial Officer.

Before we begin, please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. These risks are described in the earnings release published today and in our 2009 Form 10-K and 2010 Form 10-Q. As a supplement to this call, we have provided slides on our website that provide more detail regarding the quarter. Please go to the Investors section of memc.com or see the 8-K that was filed earlier today. As we are having some intermittent website issues that hopefully are fixed at this point as we sit here in the blizzard of 2011 here in St. Louis, if you do have problems please do look at the 8-K that we filed with the SEC. It's Exhibit 99.2 for the slides.

I will now turn the call over to Ahmad for his opening remarks, and then Mark will review the financial results and outlook.

Ahmad Chatila

.

Thanks, Bill. Good evening, everyone. 2010 was a repositioning year for MEMC. We doubled revenue year-over-year, drove a substantial positive swing in operating profit and delivered positive free cash flow. We realized market share gains and operational improvements and increased profit margins in all segments throughout the year.

The Semiconductor business was up sharply in 2010 driven by market share gains in a rising ASP environment. After a difficult first half 2010, our Solar Materials business recovered, delivering solid second half and accelerating fourth quarter results.

Our SunEdison business ranged from 40 to 168 megawatts and increased pipeline from less than 700 megawatts to 1.4 gigawatts. And our Polysilicon manufacturing performance improved substantially, delivering consistent results and increased output.

Looking in 2011, we expect to build on our momentum from 2010. In our Semiconductor business, we continue to drive toward our aspirational margin goals. In our Solar Materials business, we continue our aggressive solar wafer manufacturing ramp and cost reduction. In our SunEdison business, we continue to grow our pipeline while reducing module and BeOS costs.

With this in mind, we will continue to improve our operational performance and expect significant revenue growth and expansion in operating profits, also continued improvement in our Semi business gross margin, increased market share and margins in our Solar Materials business and at least a doubling of megawatts in Solaicx and SunEdison.

While we are cautiously optimistic on 2011, we certainly do not discount the risks intrinsic to our business. We are well aware of macroeconomic and industry factors that both help and confront the company. We are acutely aware of the potential for a supply-demand imbalance, which many of you have pointed out.

Our business model offers us a more balanced approach to market risks, meaning that should our Solar Materials business come under pressure, our SunEdison business should benefit. Regardless, our focus is and will continue to be on running and de-risking our business and positioning the company best to meet these risks and opportunities head on.

With that, I'll turn it over to Mark.

Mark Murphy

Thanks, Ahmad, and good afternoon to all on the call. My comments today will reference the charts provided on the MEMC website and will summarize the data provided in the press release and its attachments and provide additional analysis.

Since Bill has already reviewed the cautionary Safe Harbor language, I'll move right to Page 3, which is entitled, 2010 Q4 Summary Results.

Before reviewing the P&L, I think it's important to remind you of the non-GAAP measure that MEMC introduced last quarter, and that is reflected in the far right column of this chart. In general terms, because we often procure the land for SunEdison Power projects and because the equipment is deemed to be integral to the land on which it sits and because we often have an ongoing relationship with the plants we build through operations and maintenance contracts, many of our projects, both direct sales and MEMC financed projects, are required to be reflected under real estate accounting.

To better describe the operational performance and cash profile of SunEdison and to provide increased transparency, we introduced a new non-GAAP adjustment to revenue and profitability. This adjustment essentially treats all direct sales and sale-leaseback transactions as if they are current period sales under Accounting Bulletin 104 on revenue recognition. The adjustment is entirely contained within the SunEdison segment and we expect non-GAAP EPS to approximate GAAP EPS over time. As I walk down the income statement presented here, I will describe variances to both last quarter and last year. To keep the font of these charts at a legible size, the variances are summarized on the succeeding charts as well.

GAAP revenue in the quarter was $850 million, an increase of 69% sequentially. Higher revenue was attributable to higher direct sales of SunEdison, primarily the Rovigo, Italy, project, significantly higher solar wafer volume and higher pricing in both our Materials businesses, partially offset by slightly lower Semiconductor wafer volumes.

Year-over-year revenue was up 138% or 54% when adjusted to exclude the acquisition of SunEdison late in last year's fourth quarter. There is an obvious year-over-year impact to SunEdison, and the rest of the increase was driven by much higher wafer volumes and more modest price increases in both of our Materials businesses. The non-GAAP adjustment to add back non-cash real estate accounting deferrals on direct sales and to adjust for lease accounting in the sale-leaseback transactions increased non-GAAP revenues to $950 million.

Gross profit rate decreased about 229 basis points sequentially and 27 basis points versus last year to 14.6%. We will discuss the profitability of each reported segment in a couple of slides. But in general, profitability in our Semiconductor Materials business is improving in concert with volume-driven productivity and improved pricing.

And at Solar Materials, we benefited from favorable pricing, productivity, and for the first time in five quarters, lower tolling costs at our subcons. At SunEdison, the GAAP margin rate was down due to higher non-cash deferrals. After adjusting for these deferrals, our non-GAAP margin rate declined only slightly in this business. The non-GAAP adjustment to segment operating profit for the very same reasons as the adjustment to revenue results in a $68 million increase in operating income to $88 million.

Continuing down the P&L, operating expenses were $103 million, up about $28 million sequentially due to higher earn-out at the SunEdison business, legal settlements, higher overhead mostly to support 2011 and future growth. Year-over-year OpEx was up $39 million driven by acquisitions of SunEdison and Solaicx and incremental expense to support the rapid growth in both our Solar businesses.

Suntech warrants held by MEMC had a negative valuation adjustment in this quarter based on that company's stock price. While we don't include the fluctuation of another company's stock price in our guidance or planning, the value of these warrants reflected on our books is very low and the valuation risk from here remains limited.

On other income and expense was an expense of $6.5 million, up $1.3 million over last quarter and $9 million versus Q4 last year. The Q4 expense is reflective of a typical quarter going forward where interest income only partially offsets the lease and interest costs incurred on those owned Solar Energy assets.

The tax line shows a tax benefit relative to the modest pretax income we recognized in Q4. Similar to the previous three quarters of this year, we continue to benefit from the favorable mix of losses in our high tax jurisdictions, partially offset by income in our low tax jurisdictions. On a non-GAAP basis, we have applied a marginal incremental rate of about 31% to the pretax profit.

Equity and earnings of JV and minority interests was an $11 million loss and primarily related to the distribution of interest to a financing partner in the Rovigo project. The walk completes at the bottom of the page with EPS of $0.05 a share and non-GAAP EPS of $0.25 a share.

As mentioned, the next chart, Chart 4, covers the variances described. So we'll move to Page 5 titled, Q4 GAAP to Non-GAAP Reconciliation. This provides a walk of our Q4 results for SunEdison from GAAP to the new non-GAAP metric.

The non-GAAP adjustment adds $99 million to revenue, including $58 million due to sale, real estate accounting and $41 million for sale-leaseback transactions. The adjustment also adds $67 million of segment margin, including 58 -- the approximate tax burden of $21 million is determined by applying the total company incremental rate in the jurisdiction in which the profit was earned.

The next several slides provide a rolling-five quarter look at sales and segment margin for each of our three reported segments and provide some additional operating metric for SunEdison.

So on Page 6, Semiconductor Materials. The Semiconductor business continued to deliver steady upward progress. Revenue increased 26% year-over-year and 1% sequentially. The sequential improvement was attributable to higher pricing and market share gains that were offset by lower volumes and market demand, while year-over-year, both pricing and volumes were significantly higher. And from a profitability perspective, segment margin was slightly lower sequentially due primarily to currency effects, but were up dramatically versus the prior year on higher pricing, productivity and fixed cost absorption.

Next. Moving to Solar Materials on Page 7. Revenue in this segment increased 27% sequentially and 93% versus the prior year. The sequential improvement was driven by significantly higher wafer volumes and better pricing. Year-over-year, revenue was up due to a dramatic volume increase, and for the first time in six quarters, higher prices. Segment margin increased sequentially due to the higher volumes and higher prices, and more importantly, the lower cost of both poly and wafer conversion.

Our efforts after Q1 to diversify our supply base, build flexibility into our supply-demand equation and form mutually beneficial partnerships has helped turn the price dynamic, cost dynamic in our favor.

Excluding the impact of the Solaicx acquisition, Solar Materials segment margin increased about $22 million or nearly six full percentage points. If you move to Page 8, which is SunEdison, because the adjustments defined by our non-GAAP metric are confined within the SunEdison business, all the financial numbers on this page are non-GAAP.

SunEdison non-GAAP revenue was $407 million in Q4 on a non-GAAP basis, driven by the sale of projects totaling 85 megawatts including the 70-megawatt project in Rovigo, Italy. Segment margin increased $59 million sequentially versus breaking even in third quarter due to higher revenue. Operationally, SunEdison completed 167 megawatts in 2010 and exited 2010 with 87 megawatts under construction.

Moving to Page 9, titled SunEdison Pipeline and Installations. Along with the SunEdison-centric non-GAAP measure, we are also adding pipeline as an important disclosed metric. While the non-GAAP P&L helps describe the operational performance of the business, pipeline will help us illustrate the selling, marketing and branding success of this business.

Our strict qualifications for inclusion may cause this metric to be lower than we could otherwise report and may disadvantage us in comparison to others with more liberal definitions, but it assures higher quality. In order to be included in backlog, we must have a signed Purchase Power Agreement or a grid interconnection point with all permitting in place or a signed development agreement with negotiated terms and conditions.

We have announced some large wins recently that are not yet in this metric because they don't yet meet our hurdle. Over the course of this year, we have added over 750 megawatts to our pipeline, an increase of over 115% year-over-year and a rate of improvement accelerated across the year.

Moving to Page 10, 2010 Full Year Summary Results. We provide full year 2010 GAAP and non-GAAP results in the same format as our first chart. Despite some uneven performance and choppy markets, through the hard work of many, we made tremendous progress in repositioning and restructuring the company. Revenue more than doubled, and we will see in 2011 guidance, we expect strong growth again in 2011. Margin rates expanded by 6.6 percentage points and all three operating units returned to profitability.

Operating cash flow was up $315 million, which allowed us to accelerate investments that will sustain above market growth in our businesses into the future. All of these very promising trends continue into 2011.

So if we'll turn to 2011 non-GAAP guidance, which is Page 11, I'd like to start with just summarizing our non-GAAP revenue, which we ended the year at $2.4 billion. We were providing guidance at this time, $3.4 billion to $3.7 billion. On EPS, where we ended the year at $0.39, we're providing a range of 2011 non-GAAP EPS of $1 to $1.30.

Our assumptions for this growth, you will see on the right, we expect Semi growth to be in line with industry MSI forecast and for Semi wafer pricing to be stable. We expect the Solar PV end market to grow over 20%, though we do anticipate supply chain price weakness. We expect the SunEdison installation growth to more than double 2010 megawatt levels with a second half '11 profile of installations. Overall, revenue in EPS, we expect to be weighted heavily to the second half of 2011. Capital expenditures, we expect to increase on investments in solar wafer production, 300-millimeter Semi wafer manufacturing and productivity projects. We expect our tax rate to increase and be in the range of 15%.

As Ahmad mentioned, we do acknowledge our risks in this industry and in 2011. And risks to our guidance would be slower end market growth or uneven demand, a weaker pricing environment from either supply or demand factors, and there are macroeconomic factors, including interest rates and currency, which could move against our assumptions and then there are particularly in the solar end market, there are public policy risks, particularly around PV incentives. However, we believe there's been an assembled management team capable of addressing these risks and executing a strategy to develop a business model that's more resilient in the face of these risks.

So with that, I'd like to turn it over to Ahmad for questions.

Ahmad Chatila

Operator, we'll now open up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question then will come from the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank

If semiconductor wafer sales grow in 2011 by high-single digits to $1.1 billion, Ahmad, and total wafer sales are up about 20% to also about $1 billion, does this means SunEdison sales are going to triple to that $1.4 billion? Is that kind of the ballpark thinking for 2011 by segment?

Ahmad Chatila

I think maybe the solar wafers will be a little bit higher growth and semi maybe a little bit lower. I think you said semi, 20%, right?

Stephen Chin - UBS Investment Bank

Solar.

Ahmad Chatila

Solar, got it. Yes, solar I think maybe a little bit more than 20%. And semi, as we said closer to the industry. SunEdison will grow. I wouldn't model 3x, I would model twice the installation, and you have to think about the pricing reduction year-on-year on the installs, right? You do not use the same price per watt year-on-year. So that's how I'd model it. I would say that the Solar Wafer business is going to be sharply up. That's how I see it.

Stephen Chin - UBS Investment Bank

And when you and Mark talk about a second half '11 loaded sales and EPS profile, is that -- are you talking 40%, 60% or 30%, 70%? Any color there, Ahmad?

Ahmad Chatila

I'll get Mark to answer.

Mark Murphy

Yes, I think, Stephen, we're looking at roughly 30%, 70% or 1/3, 2/3 sort of profile for the year.

Stephen Chin - UBS Investment Bank

Is the SunEdison 1.4 gigawatt pipeline, any color you can share? What percentage of that is to Germany or Italy? And what MEMC is planning for from Italy in the 2011 guidance?

Ahmad Chatila

One, we're very strong in North America. So North America, the majority of that pipeline. And it’s diversified worldwide; in Asia, in India; there is in Europe. We are not in Germany, not in Czech Republic, never been before. Italy had some, and we see the risk as well in that regard.

Operator

Our next question will come from the line of Sanjay Shrestha with Lazard Capital.

Sanjay Shrestha - Lazard Capital Markets LLC

Right on that guidance, if I may talk about that some more. So when you think about your Solar Wafer business, what's embedded in your thinking in terms of pricing for wafer and the poly for the first half of '11 and in the second half of '11?

Ahmad Chatila

I'll share with you qualitatively how I'm thinking about it. As you all heard, poly is kind of constrained at this moment. It potentially could be constrained for a quarter or two, we don't know. We are modeling price reductions on the wafering piece. So in the second half, we think the price decrease could be in the double digits, maybe 15%, 20%. We don't know exactly, but that's how we're modeling it. We are not modeling flat pricing or a healthy business in that regard from a pricing perspective. But what's good for us is we not only struck good relationships and have a JV in China on wafering, but also we are ramping both Solaicx and our Kuching plant in Malaysia. And one of the things I would like you to think about is part of the Q4 costing and Q1 is ramping these factories. I mean, as you know, at the beginning, when you run these factories, it costs you. The good news is Solaicx is a great technology everybody wants to have, and the Kuching plant is going to be very productive. But in Q4, it hit us a few pennies in that regard and in Q1, it might be a couple of pennies or $0.03 as well.

Sanjay Shrestha - Lazard Capital Markets LLC

So in terms of the OpEx that was up sequentially related to earn out and the legal expense, how should we think about the normalized OpEx now that you guys have had the SunEdison for the full year in '10, especially for 2011? How should we think about that OpEx number?

Mark Murphy

Sanjay, we won't give specific guidance on the number, but I think we could give you a little bit of color so you can back some things out. I mean, the earn out was in that sort of roughly $7 million range that we ended up having to accrue in the fourth quarter. The legal settlement, which will be disclosed, was a few million dollars. We had some other miscellaneous costs around severance and some consulting charges and things that were a few million dollars. So I mean, those things will -- we don't expect it to reoccur through the year. And we've done quite a bit of hiring to get to realize the growth potential we have. And so those costs will be in control and so I think you can sort of model things in that way.

Sanjay Shrestha - Lazard Capital Markets LLC

So in terms of the geographic mix of your backlog, when you talk about North America, Asia, nothing in Germany, nothing in Czech Republic, is that true only for 2011? Or how do we think about that 1.4 gigawatt pipeline? What's the distribution of that on a global basis?

Ahmad Chatila

This is the full pipeline, '11, '12 and beyond. Actually, if you look at also the other thing about MEMC, it might not be in the future but today, our pipeline is not too far out. We don't have much of it in 2014 or 2015. That could change from a mix perspective. But at this moment, we don't have this kind of projects being locked in, kind of conservative a little bit more the next few years. Things that we know we can put on the ground.

Operator

Our next question is from John Hardy with Gleacher and Company.

John Hardy - Gleacher & Company, Inc.

I guess my questions mostly revolve around the Solar margins. You mentioned some strategic benefit that you got from working with some partners in Q4. It seems like you're also adding a little bit of a leverage given the tightness on poly. I was wondering what your expectations were there for the current quarter, the March quarter. And then you also mentioned that you were sort of modeling pricing down 15% to 20% in the second half. I was wondering what impact do you think the internal wafering capacity on the solar side will have to offset some of that?

Ahmad Chatila

Right, so I don't have a crystal ball, but the way I see it today, if you look at a lot of the consulting firms that publish data, it really shows that wafer pricing is stable so far. And it's driven by polysilicon, not by wafering capacity. As you know, wafering capacity is easy to add if you just incrementally add into your factory, maybe it takes a year to build a new factory from scratch, maybe a year and a quarter if it's advanced technology. But if you already have a plant, you can add capacity three to six months. Poly on the other hand, takes a little bit longer time. So we see -- continue to see tightness on poly. We don't sell poly, but we just read about it and we hear about it, as well as people approach us to buy poly, but we don't sell poly. Ramping internal capacity, it will help us on gross margin in a big way, but we need to balance that improvement, which is a big deal with discipline on having cash and free cash flow in the corporation. If you look at our disciplined approach in 2010, we would like to continue to have that kind of discipline in 2011. Now we might be lumpy throughout the year because of the project that we build and the capacity we're adding, but overall, we are a very conservative company. You don't hear us adding huge amounts of capacity in poly or wafering like other people do. We're kind of trying to balance what we have on manufacturing with SunEdison and have an integrated strategy to ensure that our profit is always there in the long run versus trying to push huge amounts of capacity online and hence, deteriorate our profitability. So I don't know if I answered your question completely, but that's our approach.

John Hardy - Gleacher & Company, Inc.

I guess a bit of a follow-on on that last comment you made about ramping capacity on the poly side, you were obviously pretty conservative in 2010. By my summation, you are up about 20% year-over-year, and it looks like to get to that 15,000 number, you'll be about the same this year when the industry obviously grew much faster than that in 2010. Are there any plans to add capacity in the future beyond that 15,000 metric ton number given the high quality product you have and how much demand there is for it right now?

Ahmad Chatila

The answer is yes. We have not announced any. There are rumors around. We do have. And you'll see that now we are ready to be more aggressive. You'll see us announcing some things in the foreseeable future on significant capacity additions, but continue to be very disciplined on cash management and getting good ROIC. So you'll see us doing it with partners. You'll see us do it in given countries where we see that the demand will be there. So we de-risk those kinds of investments. What we don't want to do is build huge amounts of capacity in one place and trying to peddle it worldwide. We want to deploy solar in the countries it's going to be installed and that's our thinking.

Operator

Our next question is coming from the line of Vishal Shah of Barclays Capital.

Vishal Shah - Barclays Capital

Ahmad, you mentioned your pipeline of 1.4 gigawatts and you also said that you've accelerated the rate of improvement over the last couple of quarters. What's the key factor, why can you only do, say, 320 megawatts and not more in 2011? And what percentage of your 2011 installations would be North America?

Ahmad Chatila

Well, I'm not going to tell you today how much of it is North America, but it will be a significant portion. And we always felt that countries like North America and India and other places are key in the foreseeable future, and they are more stable because the demand is needed or the structure of the industry is more healthy and doesn't require a lot of government interference. So I'll just leave it at that. In terms of us installing, I mean we have to balance our capital structure, cash on hand, what is the price of the system at a given year. I would rather build some systems in 2012 than 2011 because I'll make just better profit because I know the module cost is going to decline by then more than what it will be in 2011. In some cases, Vishal, we might pull in something if the module pricing collapse. If the pricing is higher, we might push out something. So we have a lot of flexibility. The good thing is that in downstream play, you know what the price is. So you just have to manage it through knowing your cost. And the module cost is a big element of it. So that's why we won't build everything in one shot.

Vishal Shah - Barclays Capital

So you mentioned that the wafer prices are stable. Can you comment on what module prices are doing for your SunEdison business? Are you able to procure balance especially for the North American market currently?

Ahmad Chatila

Yes, we were able to procure as many as we want frankly speaking. And last year, it was a little bit more challenging because it was the first year of procure module and we're able to do it. But this year, I think it's a lot easier because we learned how to do it. We actually reshuffled completely our supplier base to more strategic partners. And since we have good relationships with on them on the wafer side and since we have Polysilicon, which is the bottleneck at this moment, we're in good shape. I'm very pleased on that regard, Vishal.

Operator

[Operator Instructions] Our next question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch

Ahmad, for the drive in your margins in 2010, how much do you think is going to be accretive or how much do you see the contributions is coming from Solaicx in your 2011 guidance? And where do you think your semiconductor market share was exiting 2010?

Ahmad Chatila

All right, let me start with the Semi. As you know, we're gaining share, but I don't want to make it a big deal because I don't want to create kind of an animosity between our company and others. I want to be careful. I think we just have momentum. We have momentum still. And we made -- look, in 2009, we went out and we just created better relationships. We rejuvenated what we did before and that's helped us in Q2, Q3 and Q4. In 2010, we changed the mix profile of our customers and our products, and that's helped us and will continue to help us in '11. But you know what, we did make some decisions in '09. Investments, for example, in Korea for 10 millimeter and Ipoh, our plant in Malaysia, that got us to be closer to those markets and that will give us added momentum for '11. So my view is that the market share will increase 1% or 2% overall, which is a big number. We will not be too aggressive because we don't want to crash the price, of course. And we'll do it based on being strategic about it. We will not haggle on price. We will not try to dominate the world. We don't want to think this way at all. Just the momentum from that kind of organization of activities is going to continue to give us some upward momentum. So that, I would tell you that about Semi. So from a Solaicx perspective, your question is when it is going to be accretive. I think it's going to be, I don't know, second half of the year. So we continue to be on the same commitment that we gave you when we acquired the company.

Krish Sankar - BofA Merrill Lynch

Just in terms of your Semiconductor material cost reduction, where do you think we are and when do you we'll have a fully cost reduced Semiconductor business, will it happen some time this year?

Ahmad Chatila

It will help this year. Mark, I don't know if you want to any comments there?

Mark Murphy

I think the only thing on that, Krish, is we actually have upped our productivity benefits that we're going to receive from the restructuring in Semi. Except that because of the strong volumes in our capacity loading, we actually had to push out some of these initiatives to later. So we're actually going to get more benefits than originally planned and that will be second half, sort of begin to see those benefits in a greater way.

Operator

Our next question is from the line of Satya Kumar with Credit Suisse.

Satya Kumar - Crédit Suisse AG

Firstly on Italy, obviously, you guys have a good presence there in that country, and there's a lot of confusion in the market on what was actually installed in 2011. I was wondering if you had a sense of what panel shipments were into 2010? And you as a developer, were you having any projects for which you submitted applications to connect at the end of 2010, but actually did not have physical panels installed? And in your 325-megawatt pipeline for 2011, how much of that is Italy? And if you could sort of give some color on first half versus the second half would be good.

Ahmad Chatila

All right. First of all, we didn't have any trouble being not able to get panels to interconnects in Italy or anywhere. Actually, if anything, we helped one company in Germany, and we have seen it in our own eyes some plants not interconnected in Italy. We have seen it. At least our SunEdison folks have told me about it. So as I said, it wasn't an issue, if you just want to know, Satya. Italy, it is some percent of the 325 megawatts, but it's not going to make or break our overall plan. Let me just leave it at that. If Italy comes out to be zero, we'll come and tell you that, "Hey, we're reducing maybe some megawatts," but I don't think it's going to break us. We have nice geographic diversification of our installation as a company. I just want to let you know...

Mark Murphy

Satya, maybe if I could just build on that, it's below 20%. I think what distinguishes the year in 2010 for SunEdison was not only the large volume increase but transforming from what was just a U.S.-based installer to a global installer. And that sort of diversification of pipeline has really stepped up in the back half of the year, and we expect the diversification to continue through 2011. It's critical, we think, to being successful in the downstream.

Satya Kumar - Crédit Suisse AG

I do have a question on Semis, but just to clarify this point, it seems like from your understanding, given that there were plants which have panel in there, but not connected and you didn't have any trouble getting panels, is your belief then that the market in Italy, not yours, but the overall market might've actually taken physically closer to the six gigawatts of panels in 2013?

Ahmad Chatila

No, I don't want to say that. I heard about some trouble here and there, but I'm not saying about six gigawatts so, no. Sorry if I confused you with that. I didn't mean to.

Satya Kumar - Crédit Suisse AG

On the Semiconductor part, you said that your expectations of Semis are in line with market projections, which I think is around 7% right now. Also you're saying Semi pricing will be stable this year. Your operating margins in Semis are sort of flattening out, which is a little bit less than I'd have expected, around 10%. I was wondering if you could talk about some of the drivers that could get it higher, closer to what your target operating margins and what would move it higher and by when?

Ahmad Chatila

We're aligned with you. We are not happy with where we are. Of course, the team has improved their operating margin by 2,400 basis points year-on-year so I can't complain too much. But still, my aspirations are a lot higher. I think what will drive it is mainly the shutting down our U.S. plants and moving to Malaysia, which already we're planning on it. It's already -- a lot of equipment has been moved. But as Mark said, the extra demand that we had on us forced us to delay some of our plans. And it came out to be like, we have to show our customers commitment that we're long-term players, but at the same time, we have to manage our numbers. And we are in the middle, somewhere in the middle. So hopefully that will give us a good boost.

Operator

Our next question comes from the line of Mehdi Hosseini from Susquehanna International.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

I want to go back to the Italy topic. What was the mix of SunEdison business from Italy in 2010?

Ahmad Chatila

Well, it was probably around 50% or 40% or something like that.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

So in other words, we grew from 80 to 60 megawatts, 2010 to 2011. Correct?

Ahmad Chatila

I mean, if it's less than 20%, you can make the math, yes.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

If you could help us with an update on the in-house wafering capacity. I kind of missed the early part of the Q&A so I apologize if I'm repeating the question. And then the second follow-up has to do with -- you mentioned that you have a tolling capacity readily available, also modules are readily available. So if I take the tolling -- availability of the tolling capacity as the leading indicator, how come wafer prices haven't really adjusted or declined?

Ahmad Chatila

Good, and it's very important that I make this clarification. Wafer pricing is not declining it's because poly is the bottleneck at this moment, we think. However, we also have -- it's not like we're just buying tolling at this moment. We struck good relationships with key companies in China and elsewhere throughout 2010 so that we are able to manage our business more systematically. And those relationships actually, by design, have much lower cost than before, and we are ramping those relationships. Our internal plant gives us even yet another boost in that cost reduction. We actually, the team gave me a plan to ship for silicon by January 15, and they were not happy because they shipped it by January 18. So they've done a great job. They put a 30-megawatt line in St. Peters' by shipping the samples to customers throughout 2010. As I've told you, we will make some progress, but it won't be -- have a big financial impact. They did a great job on that. So far so good also in ramping the plant in Malaysia. I also said maybe before you came in that ramping Solaicx in our general plant is costing us in Q4 which just passed in Q1 in which we are in. So you're going to see we saw a few pennies in Q4 because of it. We'll see few pennies in Q1. But after that, it will just be an upside versus what we have right now.

Operator

Our next question is from the line of Timothy Arcuri with Citi.

Timothy Arcuri - Citigroup Inc

First on SunEd, if I just sort back in to what the EBITDA number should be in 2011, I guess it's fair to assume that there's not much D&A in that business? So the EBITDA probably is sort of in the $100 million to $150 million range if you sort of assume typical margins there? That's my first question. And then the second question would be, if I take the entire 1.4 gig channel, it sounds like that's a much more near-term channel than what some of your peers talk about. So if you're only going to do 400 megawatts minus in 2011, would it stand to reason that the majority of the rest gets done in 2012?

Ahmad Chatila

All right. Well, I'll get Mark to answer. David -- David question.

Mark Murphy

Well, I think, Timothy, we're not providing segment guidance, but I think that your numbers are sort of directionally sort of in the ballpark. I won't talk any more than that until later in the year. As the year progresses, what we're hoping to do is provide all of you greater transparency into our business and provide you better forecasts and other information so that you can work with it and gain confidence in the model as we have. Just talking maybe very briefly about the pipeline, that's another thing, Timothy, that we expect to provide you more information where it's a relatively new metric for us. We have very rigid standards about what goes in there, and we're also trying to learn what the conversion rates are. These conversion rates, are they speeding up, are they slowing down? What's the yield on this pipeline? And we'll begin to give you that information on quality of the pipeline as the year progresses.

Timothy Arcuri - Citigroup Inc

But is sort of fair to say -- I mean, you can turn this stuff more quickly now. You have a pretty significant pool of money out there that sort of backing this up. So you ought to be able to turn this a lot faster so you ought to be able to chew through a lot more of that next year even when you do in 2011, is that fair?

Ahmad Chatila

Yes, I mean, look, we're getting better at it. As you know, we did the first reserve fund in 2010, that was a marquee fund, $1.5 billion. You'll see us doing more of these. You'll see us also as being more sophisticated about how to use a revolver and other things. I won't give you exactly what it is, but you'll see us showing you that. Hopefully in the Capital Markets Day, we'll walk you through our modeling. And I would say one last thing, Timothy. A lot of you guys, I read your reports, I actually kind of learn from them. And you published something a few months ago being excited about SunEdison business and I tell you I'm as excited. I think this is a very powerful business. You're going to see it generating nice cash and has an upward momentum because we control our destiny. So I don't know how much I can tell you, but I'm very excited about SunEdison.

Operator

Your next question is from the line of Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company, LLC

First question is just a clarification. Did you -- you said that you sold 85-megawatt project in the fourth quarter and interconnect 140-megawatt. Is that correct? And if so, in terms of delta, do you expect to recognize revenue in the first half of 2011 on the delta there?

Mark Murphy

We're not going to provide a specific guidance, Edwin, but we are going to -- we do expect to recognize a portion of that 60 as revenue if it complies with our rigid standards around REVRAC, a non-GAAP basis. Some of those projects we're currently holding and we may continue to hold. So I can’t tell you at this point how much of that 50, 60 megawatts that we interconnected over the amount recognized that we'll realize in the first half.

Edwin Mok - Needham & Company, LLC

I see, but your guidance for a back half loaded SunEdison revenue is already baked to some assumption, some of that then?

Ahmad Chatila

Yes, I mean obviously, to the extent that 20, 30 megawatts of this is recognized in the first half. I mean, those would roll probably into the first half. But our guidance is sort of a 1/3, 2/3 distribution on the company's EPS profile as a whole.

Ahmad Chatila

We're trying actually to help your model, that's why we're giving you the 1/3, 2/3. You're able to model the quarterly because we're not giving quarterly guidance.

Edwin Mok - Needham & Company, LLC

And just a quick question on the Solar Materials side, can you remind us what is the longer-term operating margin you expect that piece of business can get to with your internal capacity ramp? And I thought that you guys are mostly, or if not all, selling multi-crystalline wafer, but Solaicx is more related to mono-crystalline. Can you clarify that a little bit?

Ahmad Chatila

I'll answer the second and Mark will answer the first if we can tell you. Yes, we used to sell a lot of multi and with Solaicx, we'll sell mono. And we think the market for Mono is around 40% of all the silicon market, maybe 42-something percent, some number like that. And we always didn't have that product segment. So now we have doubled our served available market with it, and we expect it to ramp over time. The first one on the long-term solar?

Mark Murphy

On the Solar Materials, Edwin, I think certainly, we expect the business to get over 15% in the near to medium term on our margin. We expect that business to sort of be in the 20% over the longer term, of course, assuming the pricing environment stabilizes and those sorts of things.

Operator

Our next question is from Jesse Pichel with Jefferies.

Jesse Pichel - Jefferies & Company, Inc.

Of your SunEdison backlog, are you buying any of these projects as SunEdison did in the past or are they all SunEdison developed? And then if we are looking at the non-GAAP revenue guidance in '11 and call it $750 million, $800 million incremental revenues from SunEdison, how much of that is direct sales versus the leaseback structure? And how should we think about the margin profile between these two types of solar transactions for SunEdison?

Ahmad Chatila

I'll answer the first question, Jesse, and Mark, you can answer the second one about the revenue increase, margin profile, all that. We actually do all that. We buy some projects. We develop some. We partner with others. Think about us as an aggregator because of our financial muscle and controlling the cost on projects. So we're one of the developers that know what the costs will be to a large extent so we are able to take more bets. Many of the developers in this world are unable to do that because they don't know what's going to happen. So we buy some, we partner some and we develop a lot by ourselves as well. And Mark, the other question?

Mark Murphy

Yes, I think, Jesse, just the sort of three types of projects: Direct, sale leaseback and hold. We clearly hold the ones that we think are the best projects for us. And then on the sale and those are the lowest percentage. And then of the remaining two, the direct sale's a higher percentage. And then the sale leaseback is the middle one in there. Now I'm not going to give you a specific number, but that should be able to bracket it for you. As far as direct sale and sale leaseback, margins on a non-GAAP basis would be similar.

Jesse Pichel - Jefferies & Company, Inc.

But I would think that the margin profile of the sale leaseback would vary depending on how the project is developed, whether you buy the project or develop the project, right?

Ahmad Chatila

We actually do not pay very high price for buying projects. So the numbers that you've seen in the markets, we are not in that mode. We try to structure deals where we pay as we go if needed, we de-risk projects for people so they're willing to give us a better price. But we're not going out there, Jesse, and just spending a lot of money on projects. We just can't afford it. It's not the right thing to do.

Operator

The next question is from Hari Chandra with Transaction Partners [ph].

Unidentified Analyst

Question relating to the earn outs. Does the 2011 guidance include the remaining earn outs from SunEdison and Solaicx?

Ahmad Chatila

The one on the SunEdison 2009 is done, I know, is done. It was done In Q4. Actually, the good news is they really beat their numbers. And we gave them more than I expected, which is fantastic for the investors and the employees. Solaicx, I don't know actually. Do we have anything for 2011? We do. Yes, it is already embedded in the numbers.

Unidentified Analyst

I mean, so far as the margin expansion guidance for 2011, how much of that expansion is within your control, namely, in terms of lower tolling costs or higher internal wafering capacity versus what goes on in the external front in terms of pricing and volume, assuming poly remains at, say, $55 per kilo?

Mark Murphy

I mean, it's tough to answer a question like that. We designed the plan and of course, we think we are controlling what we can control. We have productivity, objectives. We have capacity additions and we have pricing plans and all sorts of things. And we also have forecasts as we've told you about sort of a weaker second half pricing environment for some of the Solar Materials. So it's hard to answer the question. I think I just may refer you to Slide 11 in the presentation deck.

Ahmad Chatila

I'll add one thing. Versus 2010, we are more in control and 2010 was better than 2009 in that regard. So a lot of de-risking happened, the relationships, the JVs, the diversifying the customer base. We did a lot of short-term LTAs on the wafering side that we got money upfront. So there's a lot of that activity. But still, the market, supply/demand imbalance, we modeled, of course, price reductions, it could be better. It could be worse. We don't know. We'll see. We actually, we like the model that you guys have created. And we look at them from a module price perspective and we have utilized a lot of that in our thinking.

Mark Murphy

And maybe a way to answer question, too, is that I think we built into our plan with a relatively high level of confidence, things like our cost-reduction initiatives, our capacity additions, our headcount adds and things like that, things that we clearly have control over.

Ahmad Chatila

SunEdison installations.

Mark Murphy

SunEdison installations. What we sort of took of more pessimistic view on are things that we couldn't control. So pricing, for example, we took a little bit of -- we have a realistic view, I think. So I hope that's helpful.

Unidentified Analyst

How comfortable you are at the lower end of the guidance versus the higher end?

Ahmad Chatila

Mark, do you want to answer?

Mark Murphy

I think our guidance is at the best view of where we think the year will be between in that range.

Operator

The next question is from the line of Paul Leming with Soleil Securities.

Paul Leming - Soleil Securities Group, Inc.

First, I just wanted to ask if you purchased any significant quantities of Polysilicon in the quarter? I know sales of poly have ratcheted down. Are you now actually out buying poly to help drive volumes in your Solar Wafer businesses?

Ahmad Chatila

Well, look, we actually buy poly. It's not a significant portion by any means, but we do it because we want to de-risk our plants in the long run. And as you know, we had some challenges in '09 in that regard. And purely for that, we try to buy some poly. Now it's a small piece, it's not a big piece, but a significant portion of our revenue.

Paul Leming - Soleil Securities Group, Inc.

And you didn't step up purchases in a significant way in the fourth quarter to help drive that solar wafer volume increase?

Ahmad Chatila

You know, we definitely talk to a lot of people. And the good news is I did not get my way. The guy who runs all procurements for me, Sean Hunkler, he comes to me and tells me like, "I need to buy some poly." I told him he's crazy and that was like early 2010. And he won the argument because he had better logic than me. And by the way, it helped us somewhat. It's not a big number to write home about. And then as the market starts turning, we start talking to people, "Can you give us more?" But in reality, there's not much there. You can't go buy poly easily these days. It's not like you call one of these guys. Actually, a lot of the guys that we tried to talk to, when they walked into the meeting, they asked us to sell them poly. So we were shocked. We felt like we're going to have a good meeting with them to buy poly, and it comes out that they're going to buy poly from us. And we're talking big companies, we're not talking small companies. So I would say in the short term, I don't know for how long, poly is in tight supply. Now that could last a month, six months, one year. We don't know. We're modeling that it's not going to last for too long. That's how we model.

Paul Leming - Soleil Securities Group, Inc.

Could you update us on your expectations on your production costs in your Kuching plant, and how you see your expected cost of production versus the industry? And what I'm really trying to get at here is it seems to me the industry has maybe brought down solar wafering conversion costs at a faster rate over the last 12 to 18 months than you might have expected when you started work on Kuching. So could you kind of talk about where you see your production cost today versus industry competition? As you started work on Kuching, you were sure you'd leapfrog the industry, do you still have that belief today?

Ahmad Chatila

So we have told you before just a reminder that we will have much lower costs than the best known methods. I want to tell you today that it's still valid. So whatever latest numbers you're seeing, we'll have lower. Now think about it this way. There are some manufacturers that are not efficient. These we don't count in our assessments. Then there is the typical Asian manufacturer who's really good. Those, we know that they'll have low cost. And then you have the best known methods and it's not the largest company. It is actually in our head one company in China that has, let's say, it's number four or five in the world. They have a very nice cost. We will have lower cost than them in our view. Now that's not going to happen in the first two quarters. Actually, the first quarter is going to cost us money to ramp the plant with limited volume. Second quarter, it will be better, we'll catch up. Third, fourth quarter, we'll have great costs. And in our assessment, we figured out that the industry will learn. We actually think that even on Polysilicon, people talk about certain the numbers. They'll be lower and lower and lower. The installation cost will be lower. The time to implement factories will be shorter. The industry actually has to go through that fall for us to be competitive in solar, period. And we estimated that when we designed our plant. And that's why it took us a little bit longer than we wanted to because we didn't want to go in and implement a factory that's going to be me-too, and we told you that. And it's kind of what's painful at some point, but now we know in 2011, it's going to help us nicely.

Operator

At this time we'll have one last question that will be from the line of Atif Malik with Morgan Stanley.

Atif Malik - Morgan Stanley

For your full year guidance this year, I'm just trying to understand what percentage of your customers would have moved to your Ipoh, Malaysia facility by the end of this year? What is the underlying assumption? How far will you be through the transition?

Ahmad Chatila

I don't have the number in front of me, Atif, I'm really sorry, but let me tell you what. There's two steps. One is to qualify customers and one is to ramp the factory. I think we have done a lot of qualifications. And as you know, part of the reason why Semi pricing is stable is because the barriers are high because it takes a while to qualify a customer. So we have qualified a lot of customers, and you'll start seeing ramps throughout the year. I don't have the exact percentages for you so forgive me. Do you have another question?

Atif Malik - Morgan Stanley

It's going to be more or less than 50%. Can you give me some idea?

Ahmad Chatila

It will be significant. I don't know if it's 50% but it will be significant. It will have an impact on our financial results.

Atif Malik - Morgan Stanley

And then can you talk about the long-term synergy between your Semi wafer business and Solar business? It seems like the Semi profitability is kind of stalling here? Can you talk about what are the synergies between keeping the Semis and the Solar businesses?

Ahmad Chatila

Yes, look. I mean, Semi is going to be a nice cash engine. There's a lot of synergies now. Forget about the cash engine. One, we would not have a Kuching, best known method factory if we don't have the Semi business. We will actually not be able to acquire Solaicx and then the utilize it aggressively because other companies looked at it, and they didn't see the fit like we saw the fit. If without our Semi knowledge, we would not be able to buy Solaicx. Vice versa, Solaicx as an example, we'll go back and be using Semi. And aside from all the technology collaboration, the overhead costs is amortized among the divisions. And that's how we're able to actually utilize Semi to grow Solar in a big way versus just a company from scratch. So there's a lot of these synergies: R&D, overhead, cost management that we see. We actually like that combination very much at this time. It's not as tied like SunEdison and Solar Material, but it's tied nevertheless.

Operator

Thank you. At this time, I would like to turn the conference back over to the speakers for any closing remarks.

Bill Michalek

Thank you all for participating tonight. As a reminder, a replay of the call will be available at our website at memc.com. Good night.

Operator

And ladies and gentlemen, that does then conclude our earnings conference call for today. Thank you for your participation. You may now disconnect.

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