MEMC Electronic Materials' CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 5.11 | About: SunEdison (SUNEQ)

MEMC Electronic Materials (WFR) Q1 2011 Earnings Call May 4, 2011 5:30 PM ET

Executives

Mark Murphy - Chief Financial Officer and Senior Vice President

Christopher Chaney -

Ahmad Chatila - Chief Executive Officer, President and Director

Analysts

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Stephen Chin - UBS Investment Bank

Nimal Vallipuram - Gilford Securities Inc.

Sanjay Shrestha - Lazard Capital Markets LLC

Krish Sankar - BofA Merrill Lynch

Edwin Mok - Needham & Company, LLC

Timothy Arcuri - Citigroup Inc

Jesse Pichel - Jefferies & Company, Inc.

Satya Kumar - Crédit Suisse AG

Christopher Blansett - JP Morgan Chase & Co

John Hardy - Gleacher & Company, Inc.

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the MEMC First Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. At this time, I would like to turn the conference over to our host, Director of Investor Relations, Mr. Chris Chaney. Please go ahead.

Christopher Chaney

Thank you, and good afternoon. Thank you for joining MEMC's First Quarter 2011 Earnings Conference Call. With me today are Ahmad Chatila, President and CEO; 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 2010 Form 10-K. As a supplement to this call, we have provided slides on our website that provide more detail regarding the quarter. Please go to the Investor section of memc.com or see Page 17 of the 8-K that was filed earlier today.

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

Thank you, Chris. Good afternoon, everyone. In the first quarter of 2011, we saw continued operational improvement in all 3 of our business units. In our Semiconductor business, the first quarter of 2011 was one during which many in our industry faced the challenges associated with the tragic earthquake and tsunami in Japan. We are pleased to report that none of our employees were harmed.

Operations at our wafering plant in the City of Utsunomiya, about 130 miles from Sendai, however, were disrupted. As you'd expect, the earthquake did negatively affect revenue and margins in this business. Mark will provide additional details about the first quarter results and second quarter outlook. While we were humbled by these events, we were also catalyzed as our team came together, responded to the disaster and brought the plant back online as quickly and safely as possible.

Through the exceptional efforts of our team, we achieved our primary goal, which was to minimize the impact on the industry and our customers who rely on high-quality silicon wafers from Utsunomiya. About a month after the quake dropped, Utsunomiya resumed production of 300-millimeter wafers. We implemented an aggressive ramp schedule, and we are pleased to say that we are currently operating about 2 weeks ahead of that schedule, operating at the pre-earthquake levels with great yield at this moment.

Outside of Japan, our Ipoh, Malaysia facility continues to be on track with smaller-diameter wafers. And our Korea facility continues its 300-millimeter ramp. We are accelerating customer qualification as some competitors struggle with capacity. While we continue to add capacity, we do so cautiously and at a responsible pace to ensure optimal long term utilization.

On our Solar Materials business, it showed outstanding progress on all fronts and grew substantially in the first quarter, building upon gains made in the fourth quarter. Our advanced wafering plant in Kuching, Malaysia continues to ramp following the production of its first multicrystalline solar wafers in January. As this facility reaches volume scale in the third quarter, it should turn from a drag on results into a significant long-term competitive weapon.

Demand for our Solaicx monocrystalline product is strong, and our Portland facility continues to ramp aggressively. Both Portland and Kuching add differentiated products for our customers and will help to significantly de-risk our business by reducing our reliance on external vendors.

And lastly, our Solar Materials business continues to work in lockstep with SunEdison, collaborating in the present environment of softening wafer sales and module pricing to drive higher project returns.

Lastly, our SunEdison business has become a strategic weapon for MEMC as it ramps pipeline at a rate of 150 megawatts per month so far this year compared to a rate of about 62 megawatts per month last year. Pipeline increased over 450 megawatts in the first quarter alone and now stands at 1.9 gigawatts, further strengthening our downstream market position.

In the current environment, where the market situation in Italy is unresolved, for example, market diversification is key. While SunEdison's pipeline growth was impressive during the quarter, so was the diversity in project size and geography. We have a pipeline that encompasses projects from less than 1 megawatt to greater than 10 megawatts, and we have transitions from North America-centric organizations to building a balanced pipeline in multiple regions around the world, from China to India and the rest of Asia, to Europe, Canada and United States. This diversity reduces risk and offers more stability to this business.

So with that summary of our 3 business units, I would close by saying we started the year solidly in the first quarter in spite of the Japan tragedy and 2 unfavorable legal outcomes. With this largely behind us, we are focused on executing on our business plan and de-risking our business.

I would like to turn it over to Mark, who will provide a detailed operations and financial review and address our 2011 guidance. We will then turn to your questions. Thank you.

Mark Murphy

Thank you, Ahmad, and good afternoon, everyone. My comments today will reference the charts provided on our website, which summarize the data provided in the press release and its attachments and provide additional analysis. Since Chris has already reviewed this cautionary Safe Harbor language, I'll begin with a brief discussion of the March 11 Japan earthquake.

As we've stated in our press release on March 15, production at our Japan facility was suspended as a result of the earthquake. We resumed production on April 12 and achieved full production on May 2, well ahead of our original schedule.

In the first quarter 2010, we incurred pretax charges of $9.3 million related to the earthquake, or $0.02 per share, with an additional estimated $4 million of loss sales margin, or $0.01. In the second quarter, we anticipate an estimated $18 million in additional pretax charges, or $0.05 per share, impact for the Japan earthquake.

Now please turn to Page 3, entitled 2011 Q1 Summary Results. Before reviewing the P&L, I think it's important to remind you of the non-GAAP measure introduced last year, which is reflected in the far right column of the chart. In general terms, because we often procure the land for SunEdison projects and because the equipment is deemed to be integral to the land on which the project sits and we often have an ongoing relationship with the plants we build through operations and maintenance contracts, many of our projects fall under real estate accounting rules, including both our direct sales and MEMC-financed projects.

To better describe the operational performance and cash profile of SunEdison and to provide increased transparency, we introduced non-GAAP adjustments to revenue and certain expense items. The adjustment essentially treats all direct sales and sale-leaseback transactions as if they are current period sales under traditional SAB 104 Revenue Recognition. The adjustment is entirely contained within the SunEdison segment. Over time, we expect non-GAAP EPS to approximate GAAP EPS.

With that, I'll now review the first quarter results. GAAP revenue in the first quarter was $736 million, a decrease of 13% sequentially. Sequential revenues were down on lower volumes with SunEdison due to seasonal factors and fourth quarter 2010 completion of the 70-megawatt Rovigo project. We were also down sequentially due to semiconductor materials, primarily due to the Japan earthquake effects. Sales were higher in Solar Materials on higher volumes.

Year-over-year, MEMC sales were up 68% driven by higher volumes in all 3 business segments and favorable pricing in the Semiconductor and Solar Materials. Non-GAAP adjustments 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 revenue $97 million to $833 million.

On gross profit, first quarter GAAP gross margin was 15.5%, up 185 basis points from the fourth quarter of 2010 and up 194 basis points from first quarter 2010. On a non-GAAP basis, gross margin was 18% compared to 19% in the fourth quarter of last year. Non-GAAP gross margin was down sequentially due primarily to the effects of the Japan earthquake on our Semiconductor business and a legal charge and Kuching startup costs in the Solar Materials business. Higher sequential margins at SunEdison help offset these nonrecurring effects. GAAP operating expenses were $114 million, up $21 million sequentially, due primarily to the previously disclosed Semi Materials legal verdict and charges related to the Japan earthquake.

Year-over-year, operating expenses were up $40 million, in part due to the legal and Japan quake charges and on continued investment in resources to support rapid growth in our Solar Materials and downstream businesses. Non-GAAP adjustments to segment operating profit were $36 million, for an operating income of $35.4 million.

The Suntech warrants had a positive valuation adjustment of $1.6 million in the first 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.

Excluding the Suntech warrants, nonoperating expense was $8 million, up from $7 million in the fourth quarter. The increase was driven in part by increased interest cost from our bond offering.

We realized a first quarter 2011 tax benefit of $14 million based on a favorable allocation of losses in high tax jurisdictions, partially offset by higher profits in low tax jurisdictions.

Equity income minority loss of $13 million was primarily related to the allocation of profits to a financing partner in the Campania solar project in Italy.

First quarter GAAP net loss of $0.02 per share and non-GAAP net income of $0.09 per share includes $0.05 of net legal charges, including the previously disclosed Semi Materials case, and $0.02 from Japan earthquake charges. Additionally, we estimate a $0.01-per-share impact from the lost sales from our facility in Japan due to the earthquake.

If we turn to Page 4, Page 4 shows the Q1 sequential and year-over-year variances. Sequentially, operating margin is impacted primarily by the lawsuits and Japan effects. Year-over-year profit is up $47 million and margins up near 700 basis points, unadjusted for nonrecurrings on higher volumes, higher pricing in Semi and Solar Materials and improved business mix. We expect margins to expand through the year on volume ramps across all businesses, productivity improvements in Semi and Solar Materials and a full recovery at our Japan facility.

Now please turn to Page 5, titled Q1 GAAP to Non-GAAP Adjustments. This slide provides a walk of our Q1 results from GAAP to non-GAAP. Once again, the difference between GAAP and non-GAAP numbers is entirely due to the accounting treatment of certain solar project transactions at SunEdison. Non-GAAP adjustments to revenue had $96.7 million, including $36.4 million from direct sale and $60.3 million from sale-leaseback transactions. Including cost of goods associated with each transaction type, the adjustment adds $20.2 million of segment operating margin from direct sale and $15.4 million from sale-leaseback transactions. A tax burden is determined by applying the company's incremental rate in the jurisdiction which the profit was earned.

The next several slides provide a rolling 5-quarter look at sales and operating profit for each of the 3 reported segments and some additional operating metrics for SunEdison.

Please turn to Page 6, titled Q1 Summary Results Semiconductor Materials. In Q1, our Semiconductor Materials business revenue declined 4%, or $11 million sequentially, due primarily to lost sales as a result of the Japan earthquake. Revenue grew 15% year-over-year, driven by higher pricing and improved product mix. Semi Materials operating profit was $17 million lower sequentially, driven largely by $9.3 million in charges and $4 million lost sales margin related to the earthquake.

Ongoing productivity initiatives continue, including transferring manufacturing to lower-cost regions and closer to our customers. Following damage to the 200-millimeter section of our production facility in Japan, we've brought forward plans to move 200-millimeter production to our new Ipoh, Malaysia facility.

Moving to the Solar Materials segment on Page 7. Solar Materials revenue growth was strong in the first quarter, increasing 17% sequentially and more than doubling versus the prior year. The sequential improvement was driven by higher solar wafer volumes. Year-over-year, revenue more than doubled due to significantly higher volumes and higher pricing.

Solar Materials operating profit increased 3% sequentially and 223% year-over-year. The sequential increase was due to higher volumes and lower costs in polysilicon production and wafer conversion, partially offset by startup-related costs of approximately $6 million at our Kuching wafer production facility and a $3.6 million legal charge. The ramp in Kuching continues to progress, and we expect to be fully ramped in Kuching by year end. These charges will decline through the year as production increases.

Solar modules from our contract manufacturer, Flextronics, began shipping in the first quarter. And we expect volumes to pick up significantly going forward on these lower-cost internal modules. Please turn to Page 8, Q1 Summary Results for SunEdison. Because the adjustments defined by our non-GAAP metric are limited to our SunEdison business, all the financial numbers on this page are non-GAAP.

SunEdison non-GAAP revenue was $255 million in the first quarter of 2011, down from $407 million in the fourth quarter of 2010 as that quarter's results included the sale of the 70-megawatt Rovigo project in Italy. Direct sales of projects during the first quarter totaled $140 million, while energy sales contributed $18 million. Non-GAAP revenue adjustments were $97 million during the quarter and were comprised of $36 million from direct sales and $60 million from sale-leasebacks.

Non-GAAP revenue in the first quarter was driven by the sale of 20-megawatt solar project in Campania, Italy. SunEdison installed and connected 20 megawatts during the first quarter of 2011, up from 11 megawatts a year ago. And business remains strong as megawatts under construction grew from 78 megawatts in the fourth quarter last year to 105 megawatts at exiting the first quarter of this year.

Just to clarify, Campania was not included in the 20 megawatts interconnected in the first quarter as it was interconnected during the fourth quarter of last year but recognized in the first quarter of 2011. The Campania project was financed, constructed, interconnected and sold to First Reserve in 5 months. SunEdison will manage the ongoing operation. Maintenance to the plant is part of the sales agreement with First Reserve. This project represents the second large-scale project acquisition by First Reserve.

Segment operating profit declined to $29 million in the first quarter of 2011 from $62 million in 2010 fourth quarter, again driven primarily from lower volumes. The sequential operating margin decline was due primarily to the sale of some lower-margin non-strategic projects. Year-over-year, operating profit increased to $18.5 million.

On Page 9, I would like to spend a moment on SunEdison's pipeline. Along with the SunEdison non-GAAP measure introduced last year, we have also added pipeline as an important metric. In order to be included in pipeline, we must have a signed Power Purchase Agreement or a grid interconnection point with all the permitting in place or a signed development agreement with negotiated terms and conditions. These strict qualifications for pipeline may disadvantage us in comparison to other companies with more liberal definitions, but it assures higher quality.

Exiting the first quarter, our total pipeline was 1.9 gigawatts, up 32%, or 0.5 gigawatt, from last quarter and up 137%, or 1.1 gigawatt, from the first quarter 2010. Over the past year, our pipeline has transformed to a diversified global portfolio of projects. Our installation pace remains strong, with 105 megawatts under construction exiting the quarter and on pace to more than double installations in 2011.

Page 10 covers our first quarter cash use. I'd like to provide you a summary of our cash use in the first quarter. Cash use was driven by investment in the business, largely CapEx for the Materials businesses and working capital for SunEdison growth. CapEx for Solar Materials includes silicon ingot and solar wafer production capacity in Kuching, Malaysia and innovative continuous-flow monocrystalline production in Portland, Oregon.

CapEx for Semi Materials was for 300-millimeter expansion and productivity investments. CapEx peaked in the first quarter, and we expect decreasing spend through the rest of the year as our capacity ramps and productivity benefits come through. Working capital increased throughout the business, though SunEdison project activity is the largest driver.

Payables balances decreased as we made payments to vendors on the Rovigo, Campania and other projects. Accounts receivable increased on a delinquent receipt from a large solar wafer customer. Over the past month, this balance is down substantially.

Inventory increased on SunEdison project activity and on semi silicon crystal build to support the industry following the Japan earthquake. We have many initiatives underway to reduce working capital throughout the business and expect to see cash flow improvement through the year. Our cash balance at quarter end was $700 million, with total liquidity near $1 billion and an increasing liquidity position expected through the second half.

Finally, on Page 10, I'd like to cover 2011 non-GAAP guidance. Although one -- first quarter had some headwinds, including $0.05 of legal verdict expenses, $0.02 of Japan earthquake charges and an estimated $0.01 of lost profit per share on sales from our Japan facility, our 2011 guidance remains unchanged at $1 to $1.30 earnings per share on a non-GAAP basis. This guidance assumes $0.05 of additional impact in the second quarter related to Japan but stable pricing in silicon growth in line with industry forecasts.

For Solar Materials, we expect prices to weaken. Our production ramp in Kuching will help offset this pricing pressure, and we're excited about the growth prospects through our low-cost monocrystalline product. We expect SunEdison installations to more than double, with the U.S. remaining the largest market, but growth increasingly coming from outside the U.S., most notably in Asia. We expect pricing and modules to become more competitive through the year.

Public policy incentives remain the greatest risk to the business and our greatest motivation to become a cost leader. EPS will be heavily weighted the second half because of the nonrecurring effects in the first and second quarter, heavier project completion in the second half, productivity benefits through the year in Semiconductor Materials and higher volumes for Solar Materials. CapEx peaked in the first quarter and will decline through the year. Cash flow use will slow in the second quarter, and we expect yearend cash to be well above $500 million.

This completes the financial portion of the presentation, so I'll turn it over to Tom for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will start with a question from Steve Chin representing UBS.

Stephen Chin - UBS Investment Bank

A couple of questions on the new semiconductor wafer capacity at the MKC fab, Ahmad. Can you share some ballpark estimate at how much is being added there? And can summary wafer pricing be higher for that new capacity here in the near term?

Ahmad Chatila

The first answer for the capacity, I think we'll be around 50,000 by year end per month. This is our long-range plan. Actually, we launched it in 2009. And I will say, pricing in second half of the year will be solid. As you can see from a lot of our charts from the past and our discussions, we've been increasing pricing for like 9 quarters or 10 quarters in a row. I expect Q3 and Q4 to be in the same trajectory, not too opportunistic, but I would say rather than declining pricing, it will be increasing or flattish, okay? So less pressure on us in that regard.

Stephen Chin - UBS Investment Bank

And then a second question, just a follow-up on the quality of the SunEdison pipeline, the 1.9 gigawatts you've got in the pipeline. Can you share some color on approximately what percent is PPA and maybe approximately what percent is considered, I think you called it permitted?

Ahmad Chatila

Maybe I'd give you this color. We usually -- let's say that's around maybe 75%, we sell for cash and 25% we don't. Think about it this way.

Operator

And next, we will go to Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch

Ahmad, number one, you said the EPS was weighted to the back half, and since you kept your revenue guidance, which is roughly did 1/4 in Q1, should we assume revenue is also weighted to the back half?

Ahmad Chatila

Mark will answer this one, Krish, okay?

Mark Murphy

Yes. Krish, that's correct. I think we had given guidance that we would be -- the EPS distribution would be roughly 1/3, 2/3 between first half, second half. And we're looking right now like it will be 1/4, 3/4 between first half and second half.

Krish Sankar - BofA Merrill Lynch

Got it. And then another question, I wanted to find out is you said that you're going to see improving margins in Solar Materials in Q3. What percentage of your wafering is in-house today and what do you expect it to be sometime in Q3?

Ahmad Chatila

All right, we didn't say that margins will improve in Q3. I just wanted to -- we have basically had headwinds and tailwinds. The tailwind is to have Kuching ramp. In the first quarter, as you can see, we spent $6.6 million in losses on Kuching ramp. I mean, we started ramping it, but it's still a baby facility. So Q3, Kuching will help our margins in a big way. As you know, today, the pricing environment is kind of fluctuating, so we don't know yet from a margin perspective how Q3 will look.

Krish Sankar - BofA Merrill Lynch

And if I can just squeeze in one last. Exiting 2011, what do you think the mix is going to be from your monocrystalline? Is it really too small to be material?

Ahmad Chatila

I think -- thank you very much. First of all, I would say around 1/3 of our business -- we'll show you next week, by the way. We'll show you in detail how our mix is changing over time. I would say 1/3 or 40% will be internal, between mono and Kuching multi, and very little on spot, and we have a JV in China and we have LTAs. So most of our business will be based on LTAs and internal business, and we'll show you a detailed chart next week.

Operator

And next, we will go to John Hardy's line, representing Gleacher & Company.

John Hardy - Gleacher & Company, Inc.

I was hoping maybe to follow up on that question in a different way. Maybe you could talk about how much volume you expect to be manufactured internally, say in Q4 once you're fully ramped. And then how much you anticipate to still have to toll. And then if you strip out sort of the ramp costs that you saw here in Q1, maybe some of the early cost metrics per wafer, per watt or however you want to term it, come out of Kuching.

Ahmad Chatila

So thank you, John. Let me put it for you in this way. The Kuching plant was designed for 600 megawatts. We will be close to that number by Q4. I don't know if it would be 150 per quarter at that time, maybe it's close and maybe it's 150. I need to check. Spot will be close to 0 potentially, depending on the volume required during that time and the market requirements. And the JV will be maybe 100 or something like that. So I can't -- I don't have the volume in front of me exactly. It's still a fluctuating situation, John. But as I said, 40% is internal, and 60% is between LTAs and JVs in Q4.

John Hardy - Gleacher & Company, Inc.

Okay. And then maybe on the early cost metrics.

Ahmad Chatila

Cost metrics, we said that we have around $0.10 advantage to other people's cost, and we still hold to that metric. And when we say other people meaning leading Asian manufacturers, not European or Western ones.

John Hardy - Gleacher & Company, Inc.

Okay. And then if I could just switch to SunEdison quickly. Good job on building the incremental pipeline. I guess one of the things I'm trying to figure out is what the sort of the blended economics of that business will look like as maybe some lower return profiles roll in, in new regions. Maybe you can just sort of talk about what -- how you anticipate that could impact your business. And then also maybe if you're seeing the process for financing those projects being any slower than maybe more mature markets in Europe.

Ahmad Chatila

The answer is we see, John -- of course, in immature markets, it's harder to finance, but it's not impossible. Actually, it's very doable. It requires a lot of education to many people, but it's happening. We do not expect new regions to have lower gross margins. SunEdison today is in the mid- to high 20s in gross margin percent. And we have some actually tailwinds in that regard by ramping our internal module. So in the future, we feel strongly about this business. From a stack margin perspective between the module, internal module, and SunEdison's business, it's going to be healthy. I want to remind you that SunEdison is not an EPC company. Actually, we use EPC companies to help us. It's a sophisticated downstream organization with sales and marketing, financing, engineering, procuring products in a sophisticated fashion. Procuring product as one of the largest downstream players in the world, so it has a lot of economics, economies of scale in that regard. And because of that, we feel pretty good about the prospects of SunEdison in the foreseeable future.

Operator

Our next question is from Satya Kumar with Credit Suisse.

Satya Kumar - Crédit Suisse AG

I was wondering what you are assuming for Solar Material pricing in Q2 at this point.

Ahmad Chatila

All right. Well, let me give you some color. We actually expect the pricing to decline 20% in Q3. That's our business plan. And it got pulled in, I would say, around 2 months. Right now, it's a moving environment, but let me, so that you can do your models well, let me tell you how you should think about us. So we sell wafers that has lower pricing, potentially, than what we expected. But we buy modules, that's a lower pricing. And also we have agreements that they have some flexibility in them on doing subcontracting, and those are lower. So from absorbing a shock to the system of lower pricing, we are much more prepared this year than last year in Q1 2010. The big question for us is, what is the volume? And that is still to be seen. I really don't know the answer. We feel confident that we're going to weather the storm pretty well, but I don't know yet. I do not know if the wafering volume is going to be there as much as everybody is trying to add capacity. But from a absorbing shock from the system between -- so if we have lower wafer pricing, we'll buy modules more cheaply, and then, hence, SunEdison is more profitable. If the wafer pricing is lower, then our procurement is also cheaper, and that's helping us a lot, Satya.

Satya Kumar - Crédit Suisse AG

And as a follow-up to that, so your pipeline is growing a lot, and the last time you talked the pipeline was mostly usable through 2013. First, I want to confirm if that was the case. And you did 106 megawatts last year. You said you could double it last quarter, and you're sort of maintaining the goal. What prevents you from doing a lot many more megawatts, say, 400, 600 or 800 megawatts? At the rate at which you're Increasing, you should be able to do a lot more. Is that sort of a cash requirement or pricing or what are the moving parts to significantly start ramping the volume in that business?

Ahmad Chatila

Excellent question. And thank you very much, Satya, for the question. I want to remind everyone that SunEdison connected 40 megawatts in 2009, did 167 in 2010. So in a way, it had like 0.6% market share in 2009 and around 1.25% or 1.5% or 1.2% in 2010. I think this year we're going to increase the share. Frankly speaking, we're just growing too fast. And when I say too fast, it means like you have to hire people, grow construction deals that you have to do with EPC, there's cash requirements, and we just have to ensure that we steadily grow in an effective fashion. The pipeline is there, I think starting also to spill into 2014 now as starting in Q1 2011. So the growth potential for SunEdison is out of this world. It's great, we love it. But we feel good about a number where we double our volume year-on-year. That's where we see it.

Satya Kumar - Crédit Suisse AG

And do you anticipate -- I see that you're having a cash balance of $500 million by the end of this year. Between now and that point, from a financing standpoint, do you anticipate requiring any external financing at this point?

Ahmad Chatila

We are not planning it at this moment, Satya. I would say also one of the good things about having more aggressive pricing is the payment terms are extending in the overall supply chain. And also we're becoming more sophisticated about really not needing the cash to grow SunEdison. You will see progress throughout the year for us. We kind of know how to do it. It's just that we are not mature enough to make it happen. One of the strengths about us is we don't have one technology to drive, and it's not our own capacity. We actually mix and match between buying from outside, making our own modules, selling our own wafers, and that gives us tremendous flexibility not to tie up our balance sheet into SunEdison projects, and you will see more of that in the future.

Operator

Our next question is from Timothy Arcuri with Citigroup.

Timothy Arcuri - Citigroup Inc

A couple of things. Ahmad, if I just take the number of megawatts that you did in your solar wafer business in Q1 and if I sort of flat-line it, it seems like you're at kind of like 1.6 gigawatts for the year with wafers, which, if you back into what you did last year, you did about a gigawatt, it looks like. So that's up like 60%, and the market is not growing that much. So I'm sort of wondering what do you think not necessarily in the pricing side, but on the volume side for solar wafers as you move through the year. Can you grow megawatts in terms of wafer shipments through the year? And then I had a follow-up.

Ahmad Chatila

Tim, thank you very much. That's a very good assessment. Maybe our volume could be higher. The reason why we -- we are today running higher than last year's run rate, and the reason why we can do it, Timothy, because we are able to buy modules from people. And when you buy modules, then you are able to have multiple dimensions of negotiation, not only selling. You're not pushing product. You are also pulling product. And because our pipeline is expanding, people are starting to see us as a great partner to have. And we don't see the pipeline trend stopping. So because of that, people are working with us. That doesn't mean that we can get away with it in terms of like expanding volume like no tomorrow and getting the price that we need. You just have to play ball with them. But from a business plan perspective, I think we are better set than others who just peddle wafers.

Timothy Arcuri - Citigroup Inc

Sure. Maybe you'll talk about this next week, but is there some way to think about the pipeline? You guys define pipeline I think a little better than what some others do. And is there some way to think about what the turns, sort of the average turns would be in that pipeline? So sort of on average, at any given time, is it reasonable that you could turn all of the pipeline into revenue within, say, 24 months? Because if you talk to most developers, if it's as far along as your pipeline defines it, 24 months is a pretty decent period where you should be able to turn most of that into revenue. So I'm wondering whether there's some turns metric we can use.

Ahmad Chatila

Timothy, let me try next week, see if I can respond to it. I don't know yet, but I'll try my best. We owe you guys that. Yield or some kind of metric and timeline so that you can project our business for the future.

Operator

We have a question from Sanjay Shrestha with Lazard Capital.

Sanjay Shrestha - Lazard Capital Markets LLC

I apologize if you guys have already touched on it. I did the join the call a bit late. But one question sort of strategically, Ahmad, right. When you think about your existing pipeline, visibility on that and the environment where wafer prices are probably directionally going to be going down, do we see a scenario where the midstream becomes completely contract manufacturing for you and most of the wafer actually gets allocated to your pipeline business, thereby capturing even a better profitability and, regardless of what the wafer prices is doing in the external market, your overall profit continues to do well?

Ahmad Chatila

That's a great question. I'm going to get Mark to help me out a little bit.

Mark Murphy

I think Sanjay -- I think you've articulated well what we anticipate happening. We're playing to our strategic competencies, which are silicon, upstream silicon manufacturing in a cost effective way. And we're effectively growing the market through a sophisticated downstream arm. And then we're providing a discipline to the supply chain, and that's successful for us.

Sanjay Shrestha - Lazard Capital Markets LLC

Okay. So one quick follow-up, then. In terms of this 31% in Europe that you guys have, your sort of your current pipeline, right? How much of -- can you give us some sort of breakdown on that as to what's the tremendous amount of noise in Italy? How much of an exposure do you have in Italy on that pipeline?

Mark Murphy

Well, we do have an exposure in Italy, but it's a manageable exposure, we believe. About 20% of our overall pipeline is Italy, and we believe that of that, only a portion of that is sort of exposed and is sort of tariff sort of adjustments and so forth. So we think that somewhere in the 25- to 30-megawatt range is exposed in our pipeline. And again, we think that's a manageable exposure. We're certainly working all sorts of other opportunities to address that.

Operator

And next we will to Nimal Vallipuram's line with Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc.

Just to -- and not to take your time today as this might be answered in detail next week. I'm just trying to understand, a business model point of view, the cost structure or the margin objectives for your 3 businesses. In terms of SunEdison, I'm sure that it is probably not easily predictable, we can come to that later. But in terms of Semiconductor and Solar, given that if you take the Semiconductor business, you had some negative impact on the margin this year in the first quarter, can you give us an idea as to what is the margin, gross margin, in the Semiconductor business you are looking for? I'm not asking for business. I'm not asking for 2011 or 2012 guidance, but just to give some qualitative idea. And same to the solar industry. Then if I have time, we can discuss what would that be for the SunEdison.

Mark Murphy

I mean, I think let me just add, because we don't typically give margin guidance, let me just answer it in mostly a qualitative way. We're in mid-teens right now in the Semiconductor business. And as you know, we had a tough first quarter with Japan. So we expect through volume improving through the year, pricing holding and a lot of productivity programs coming to fruition that we're going to see gross margins in that business expand to over 20% and, hopefully, be in the low- to mid-20s by year end. In the case of Solar Materials, we also expect those margins to expand through the year as Kuching ramps. Now we have a price decrease built into our outlook. That could be worse. But right now, we think we're well positioned cost-wise and, again, should see productivity benefits and volume leverage help us there on gross margin. In the case of SunEdison, again, we have a large pipeline of projects to select the best projects. The cost structure in that business is very much what I would call a near-variable cost structure. There's not big capital investments that create an extended fixed cost structure. So we'll optimize that business and the projects we have and, again, targeting over 20%, mid-20s gross margin in that business and above.

Operator

And next, we will go to the line of Mehdi Hosseini with Susquehanna International.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Ahmad, you were talking about pricing and how pricing pressure has been pulled in. Can you elaborate on price difference or the decline in prices between wafer and modules?

Ahmad Chatila

Yes. So first of all, I think cell pricing declined first, starting around a few months ago, then wafer pricing and now module pricing. It's just in that succession.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

If I were to look at like, let's say, compare June to January, compare wafer, cell, module, do you think one segment price decline will be more than the others?

Ahmad Chatila

I think, look, I'm reading some reports. I look at my business as wafers. I see and read some reports and I buy, cell -- sorry, modules. I would say that cells is the highest decline, then wafers -- not polysilicon, because wafer is made out of polysilicon wafers. So wafers, and then the last is modules. And modules, there are structural reasons why it's lower, bankability issues. First, people run to a Tier 1 module player, but all that's going to just decline as well. Look, there's so much capacity in the industry and things that are easy to add. That's why in MEMC, we focus a lot on Solaicx and differentiated product offerings and also controlling pipeline, because that will allow us to control price and who plays. And once you control price and who plays, then we can play and we can control the costs.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Sure. And just 2 quick follow-up, one for you and one for Mark. For SunEdison pipeline, how should we think about the largest projects? Is there a bucket of projects that would be like the 10-megawatt average and would account for like 10%? How should we think about the mix? And then for Mark, is there a significant recognition difference between revenue and the cost for the mix of SunEdison that is a direct sale?

Ahmad Chatila

All right, I'll answer the first one. We'll give you data next week. It's kind of diversified actually from small projects all the way to above 10 megawatts. We'll show you more statistics next week. And Mark, please answer that question.

Mark Murphy

Yes, I think that if I understand the second question, we don't -- we haven't been forecasting any change in our mix of products or projects. So the same sort of direct sale and often a non-GAAP treatment associated with those, because a real estate accounting would still occur.

Operator

And we have a question from Jesse Pichel with Jefferies.

Jesse Pichel - Jefferies & Company, Inc.

I have 2. The first is that the justification for the Kuching plant at 600 megawatts was that it was really a technology play. You could do it better with larger furnaces, higher efficiency and lower cost than the Chinese. But now the Chinese seem to be buying 600-metric-ton furnaces at half the price of the 400-ton furnaces a year ago. And I'm just wondering, is your wafering business still a technology play? Or is it just to capture more of the revenue before on a per-watt basis? Sorry for that long-winded question.

Ahmad Chatila

No problem. Actually, that's a very good question ad a very fair question. We use 1.65-ton reactor and, also, we're going to use a Solaicx monocrystalline, which is a Continuous Czochralski. And in both cases, Jesse, not only you have lower cost by design of the equipment and the processing that we use, but also the efficiency of the wafers are higher. So it's a double whammy: higher price, lower cost. That's why it is what we made the investments. If we were going to do something like -- actually, we have a JV with a Chinese company. We buy the same stuff that everybody buys. It is there, it is our business. And frankly speaking, if that's the only thing we'll do, we would just not have done it. We'd just sell poly and get out of it, because anything the Chinese can do or any kind of country, Taiwan, and we have to do the same, we will lose. Our CO is more expensive. Our overhead is more expensive. We're not going to win that game.

Jesse Pichel - Jefferies & Company, Inc.

That will be great when that drops to the bottom line, those technology improvements. My second question is on the SunEdison business. Do you anticipate that you can show GAAP profitability for 2011? And is there anything you can do on new contracts going forward to avoid the real estate accounting issues, like maybe just revising them or doing it differently so that you wouldn't have some of that GAAP issues?

Mark Murphy

My understanding is that in time, IFRS convergence, maybe we won't have that problem in several years. But I think in the short term, we're still faced with this real-estate-accounting peculiarity and we just are doing our best to transparently show you what that cash economics are.

Ahmad Chatila

Look, Jesse, look what's going to happen. In a year and a half, you're going to see a big GAAP profit on Rovigo. And at that moment, I'm not going to take credit for it. I'm going to tell you. You're going to get by seeing these massive pops where potentially GAAP might be higher than non-GAAP.

Mark Murphy

All the deferreds will begin unwinding, and then you'll see a lot of this come through, Jesse.

Ahmad Chatila

Our selection, actually, like Mark said, was based on a detailed assessment that IFRS will be how we're doing it. But it's going to take around -- a year ago, we were told it's going to take around 3 to 4 years.

Jesse Pichel - Jefferies & Company, Inc.

You can't dispute the profitability of that. It was, I think, the largest project in Italy last year. You have such improvements in your SunEdison pipeline, 0.5 gigawatts. One has to ask, can you say where that came from either regionally or are these new framework agreements? Or are they similar type of agreement? Because the growth was pretty tremendous.

Ahmad Chatila

Yes, these -- for a large extent, Jesse, and thank you for the question, were kind of diversified, from Canada, United States, Asia and Europe. They were really not one big deal. You might see some of those in the future with us, but not in the quarter, not in Q1.

Operator

And next we will go to Edwin Mok's line with Needham & Company.

Edwin Mok - Needham & Company, LLC

So first question I have is on the polysilicon side. I think you guys are known [ph] that it's a joint venture with Samsung. I was wondering how in terms of just spending the money or looking at capital structure, is that currently the strategy where most part of your business you're going to focus on using, doing joint ventures sort of minimize your kind of dollar you need to spend and focus that dollar in developing the SunEdison pipeline?

Mark Murphy

Yes, I think, Edwin -- I think you're sort of hitting on the key point, and that is we're going to look for the most capital-efficient way to get our polysilicon. And in this case, we had a capital-efficient way to work with one of the world's leading companies, and so we've established this JV, and we'll invest in polysilicon production. Most of the spend is next year in that JV. Some of that will occur this year. We'll continue to do productivity projects in our existing polysilicon production factories to increase throughput. And then we'll continue to maintain a balance of third-party source product so we don't get out ahead of ourselves on our polysilicon capacity.

Edwin Mok - Needham & Company, LLC

Can you remind us what your metric ton production you expect to be by the end of the year?

Ahmad Chatila

End of this year, it is 15,000.

Edwin Mok - Needham & Company, LLC

Okay, great. That was helpful. And then I just had a little question. If you look at this quarter's result, right, on non-GAAP basis you did $800-something million. And if I should analyze it, I get to $3.3 billion already, right? And your full year guidance is $3.4 billion to $3.7 billion. So I'm just curious about the linearity. Last year, we saw a big ramp-up in GAAP revenue in the fourth quarter because of the way revenue is being recognized on this project. Should we expect similar linearity on revenue throughout this year? Or is this going to be more linear? And if so, why is it more linear this year?

Mark Murphy

Yes, there is not the same ramp in revenue, as you can tell, as there is on EPS, because a substantial amount of the -- as we move through the year, there will be substantial productivity benefits that generate earnings growth. So our guidance is based on our best estimates of where we think revenue will end up and the associated EPS.

Ahmad Chatila

I would add one other comment, Mark. Look, in some regions, it is seasonal. Like you cannot implement plants or farms, solar farms, in Canada in December and January. Sometimes the banks from a tax equity perspective, they like to make their decisions in the fourth quarter. However, since we have diversified worldwide and in many countries that don't have the seasonality issue, because we're in sunny countries like India, Thailand, Italy, Spain, Greece, whatever the names of the countries, and Arizona, New Mexico and California from an execution perspective, we will have less accentuation of the seasonality versus other people in my view, at least in the next couple of years.

Edwin Mok - Needham & Company, LLC

Great. That was helpful. Just one quick follow-on to that then. Maybe a different way to ask this is, last year you got 60% of your revenue recognized in the back half versus 40%. Any way you can kind of quantify that mix this year, is it 50-50, 55-45?

Mark Murphy

Yes, we're looking -- I think it's close, Edwin, to about 60% back half.

Operator

And ladies and gentlemen, we do have time for 2 more questions this evening. And our next question will come from Chris Blansett representing JP Morgan.

Christopher Blansett - JP Morgan Chase & Co

Couple of things, Ahmad. You mentioned you expect your semi wafer business to grow in line with the industry. What's your current estimate for volume growth this year versus last?

Ahmad Chatila

Chris, great question. I don't have it on top of my mind. Can I give it to you after the meeting?

Christopher Blansett - JP Morgan Chase & Co

Sure. I mean this is broadly -- do you actually expect growth this year? Or are we kind of looking at a flattish horizon?

Ahmad Chatila

We expect it to grow. We expect it to grow, yes.

Christopher Blansett - JP Morgan Chase & Co

Second question is tied to the tax rate for the quarter and the benefit you got. Was that really tied to losses during the quarter? Or did some of that come from prior quarters? And maybe some guidance on the tax rate for the year.

Mark Murphy

Yes. Some of it, Chris, is related to FIN 18, so we have to equally distribute our tax over the year. So some of that is back end of the year brought forward. The general tax position we have is expenses in high tax jurisdictions and income in low tax jurisdictions. So we're sort of calling a GAAP tax rate of about 7.5% for the year, non-GAAP about 15%.

Christopher Blansett - JP Morgan Chase & Co

Okay. And then I wanted to ask a little more about the Solar Materials change. As Solaicx becomes, I assume a small but growing percentage of the mix, does that also help your gross margins for that business?

Ahmad Chatila

The answer is yes. And Solaicx helps in lower cost and higher price.

Christopher Blansett - JP Morgan Chase & Co

Okay. And then lastly, I mean we've seen a lot of movement toward monocrystalline-type modules in order to leverage balance of system costs. I mean, what are your thoughts about this over the next few years? Do you think SunEdison is going to drive more in that direction as well?

Ahmad Chatila

Yes. Actually, Chris, if you noticed, a lot of people think about their own step only, and a lot of people are pushing multicrystalline because it's a lower cost of processing of that step only. But for us, we are believers in monocrystalline in a big way. We think it's the way to go, but you have to do it very cheaply. You cannot afford to do it like some of the companies where the cost is very high. So we have to -- we would like to get our cake and eat it too. You have to have low-cost mono, and it will help in a big way on balance system, no question.

Christopher Blansett - JP Morgan Chase & Co

And I guess my last question is tied to your comments, Ahmad. Given the Solaicx's unique technology, what kind of specific cost advantage do you believe you have for monocrystalline solar wafers versus the traditional means of producing them?

Ahmad Chatila

It has 3 advantages on cost, Chris. One of them is you can utilize the machine 14, 15 days in a row versus other people who can do it once a day. And that improves the manufacturing cost. The second thing is that the resistivity profile across the crystal ranges around plus or minus 10% versus the best known method, around plus or minus 50%. So when you ship the crystals to your customers, they have a very narrow distribution of efficiency of their cells. And the third, it has very low oxygen content as compared to standard mono. And that helps in light-induced degradation at the panel level. So manufacturing cost is lower and the value is higher.

Operator

Our final question today comes from the line of Joe Eisenberg representing Renewable Analytics.

Joseph Eisenberg

Just had a quick question on pipeline. I believe you said you had about 1.8 in that pipeline. I was wondering if you could possibly break that out specifically between where you have PPAs and where you have interconnection and then further break it out between rooftop and ground?

Ahmad Chatila

Thank you for the question. I do not have it in front of me, so I can't do it right now. But we'll think about doing it for next week, maybe not in the same questions that you asked, but at least give a lot more color, like Timothy asked before and others, we'll try to give you a lot more color about the pipeline so you guys can assess it.

Joseph Eisenberg

Because, obviously, you would value those pretty differently.

Ahmad Chatila

Absolutely, you're right, yes.

Operator

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.

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