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Executives

Christopher Chaney -

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

Mark J. Murphy - Chief Financial officer, Principal Accounting officer and Senior Vice President

Analysts

Krish Sankar - BofA Merrill Lynch, Research Division

Timothy M. Arcuri - Citigroup Inc, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Min Xu - Jefferies & Company, Inc., Research Division

Jesse Pichel - Jefferies & Company, Inc., Research Division

Satya Kumar - Crédit Suisse AG, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Christopher Blansett - JP Morgan Chase & Co, Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Hari Chandra Polavarapu - Auriga USA LLC, Research Division

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Unknown Analyst

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

MEMC Electronic Materials (WFR) Q4 2011 Earnings Call February 15, 2012 5:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Director of Investor Relations, Chris Chaney. Please go ahead.

Christopher Chaney

Thank you, and good afternoon. Thanks for joining the MEMC Fourth Quarter 2011 Earnings Conference Call. I am Chris Chaney, Director of Investor Relations. With me today are Ahmad Chatila, President and Chief Executive Officer; and Mark Murphy, Chief Financial Officer.

After my remarks, Ahmad will provide an overview of the significant events and commentary on the company's fourth quarter performance, and Mark will then review the financial results. Mark's discussion will reference slides that we have made available in the Investor Relations section of our website at www.memc.com.

Our discussion today will refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures has been provided in our earnings press release financials. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings press release and the slides published today for a more complete description.

And now, I will turn the call over to Ahmad Chatila, our Chief Executive Officer.

Ahmad R. Chatila

Thank you, Chris. Hello, everyone. For the last 3 years, the company has been focused on 3 strategic priorities: First and foremost, revitalize our core Semiconductor business. Our market share has windowed to near 4% in Q1 2009, from 12% in 2005. In 2009, we were at the risk of becoming irrelevant, and our fear was that at some point, customers would simply remove us from the list of suppliers to be qualified for new process technologies, which would lead to even further declines in market share over the long term and eventually, the need for us to exit the business.

Second, sharply reduce our Solar Materials costs through aggressive productivity programs, heavy investment in differentiated R&D and advanced facility investments. We were well aware that our solar wafer was a singular commodity, meaning it is defined by one product specification, a pure commodity, very different than Semiconductor wafers, which are defined by 3,000 products.

In commodity businesses, there's a real reward for the deep customer relationships we have in Semiconductor business. But in the solar wafer business, the modus operandi is that we have, "What have you done for me lately?". Having spent years in R&D in the Semiconductor industry, my view was simple. 30% gross margin for module players cannot be sustained over the long term because the technology is less complex than what a contract manufacturer does with PCBs. And those companies live on less than 10% gross margin. Supplying wafers to such customers while having no internal wafering capacity and smaller scale polysilicon capacity will be difficult and eventually untenable with the business as usual.

Furthermore, in 2009 we could see the emergence of nonmarket forces that could impede our polysilicon from reaching key cell and module manufacturers, and we made a decision to move downstream with our acquisition of SunEdison while creating a supply chain network that would be flexible in nature and support our needs to grow downstream with a cost roadmap visibility.

And third, review the solar PV opportunity holistically and drive towards absorbing maximum gross margin from the total profit pool that was accumulating in the value chain. This was in part a hedging strategy in case our cost reductions had not materialized in time, but more importantly, an effort to firmly place the company in the critical path of where long-term value would accrue with the downstream customer that would appreciate our ability to support their needs. This thinking really drove the acquisition of SunEdison, firmly establishing us with the downstream customer.

In second half 2011, we reassessed our positions, reviewed our past decisions and with deep intellectual honesty, came to the following conclusions and go forward plan to improve MEMC. Our Semiconductor path is straightforward. We must improve our EBITDA and free cash flows. We were able to gain share and become a solid #4 at 11% market share, while increasing pricing in most quarters.

Our 300-millimeter investment in Korea has improved our positioning there, and we've seen recent share gains with key strategic partners. Without our ability to generate substantial productivity improvements to date, the earthquake in Japan last year and the current industry downturn would have had a much greater negative impact on MEMC. Nevertheless, we haven't gone far enough.

Since Q4 2007, prices are down 35% while our costs are down only around 20%. In response, in 2011, we launched a major cost reduction effort which helped us substantially reduce labor and other costs and increase our throughput. These productivity efforts will continue through 2012.

Semiconductor priorities for 2012 are as follows: reduce costs further through manufacturing efficiencies, labor productivity and SG&A cost reductions; expand capacity with factory productivity and reduce CapEx to less than 10% of revenue; and finally, maintain share while optimizing pricing decisions. Our Semiconductor business is on a solid ground, and we expect to expand EBITDA results as volume rebounds in second half 2012.

Solar Materials results are mixed, but the path has become clear. First, results. The team has worked night and day to minimize the damage, but industry dynamics and one ill-timed technology investment had a negative impact on our results. Unfortunately, we made a significant investment to bolster our position in this business, and as evidenced by our recent charge, the economics we expected to realize had simply not materialized.

We did many things well. We have reduced our cost in Pasadena by 40% in 3 years, developed a leading-edge new FBR technology with cash costs that we believe will be lower than any other polysilicon player in the industry. Our wafer JV in China is producing product at $0.15 a watt cash cost, and we have successfully created a supply chain network that will help insulate MEMC SunEdison from potential trade wars or from the inability to service our pipeline.

Industry dynamics have devastated our position in some other areas. A 70% solar wafer market decline in 6 months has been a severe body blow. Everyone, including industry leaders, are posting little to negative gross margins. The harsh economic reality required us to quickly downsize our high-volume wafer business and shutter our Merano poly capacity, even though we reduced cost by 20% in the last 3 years. The current cost is too high to keep the factory open in the current environment.

Our technology investment in Kuching, while a good idea at the time, has fallen short of our expectations and was ramping just as the market collapsed. In this area, we are down, but certainly not out. When we made our decision to build the factory in 2009, industry leaders had a cost of $0.30 a watt and our target was less than $0.20 a watt. This would be accomplished using innovative ways to counteract our smaller scale versus industry competitors.

A couple of R&D developments fell behind our plan, and that, coupled with 70% decline, made the situation untenable. We had no choice but to slow our expansion. Currently, our cash costs are greater than $0.20 a watt, clearly not good enough, but we are targeting to be competitive by year end.

Kuching continues to be important to allow MEMC to control our destiny in the case of trade war that we all hope will never happen. The technology is good, and the manufacturing flexibility is important, but cash economics will drive our utilization of the plant, going forward.

While the wafer technology investment timing was unfortunate, our investment in SunEdison couldn't have happened at a better time. With severe price declines in our core material businesses, our downstream acquisition has preserved us as a major player in the solar industry. Moreover, with the combination of our 2 solar business units into one Solar Energy business, we have positioned ourselves to generate economic profit in the foreseeable future. SunEdison has grown from 40 megawatts interconnected in 2009, mainly in North America, to a global leader with 300-megawatts interconnected in 2011.

Our continued growth is both through significant pipeline expansion from 1.4 gigawatt to 3 gigawatt across 2011. Having built the business to scale, we are focused on efficient development and organic growth. We need to better pace our investment and OpEx and improve consistency of the business. We want to show you that this is a healthy, predictable run rate business with operating leverage and defensible margins.

We will continue to operate our business globally. The current lessons of southern Europe between policy changes and Q4 liquidity crisis show that the geographic diversification helps maintain scale and reduce overall business risk.

Our 2012 priorities for the combined Solar Energy business are as follows: balanced upstream capacity to downstream volumes; reduce OpEx by 30% with combination of 2 divisions on focused development spend; maintenance CapEx only in the upstream material business; drive leading-edge cost structures throughout the value chain; and trend SunEdison installations consistent with balance sheet capacity.

Our view hasn't changed. We believe our investment in semiconductors and SunEdison will reap us short- and long-term rewards, and our solar manufacturing capabilities will allow us to control our destiny and provide shareholder benefit over the long run, in both over and undercapacity environments.

In summary, we will run the business to achieve above market balance with reductions in OpEx and CapEx, and a more selective process in assessing opportunities. This will drive increased cash flows and a stronger balance sheet.

And with this, I give you Mark Murphy.

Mark J. Murphy

Thank you, Ahmad, and good afternoon, everyone. My comments today will reflect information found in the press release and financial tables we released shortly after market close, and we'll reference the Fourth Quarter 2011 Earnings Conference Call presentation posted in the Investor Relations section of our website. Chris has already reviewed the Safe Harbor statement.

The financial statements released today include charges related to our restructuring announced December 8. In an effort to isolate the underlying operational results, we highlight and exclude these effects to our GAAP results and customary non-GAAP presentation.

As discussed on December 8 call, and in Ahmad's comments, both our end markets deteriorated through 2011. Responding to the cyclical semi downturn and unprecedented market conditions in solar, we took decisive actions to restructure the business. The actions were cash flow-driven and broad-based.

As a result of our actions, we expect to have a more profitable Semiconductor business and much leaner and lower-risk solar business. Our focus in 2012 is to execute on the restructure plan and increase the cash flow of the business. Please turn to Slide 4 titled 4Q 2011 Summary Results.

My comments will refer to the non-GAAP figures shown on the right column of the slide. Fourth quarter adjusted non-GAAP revenue was $772 million. SunEdison comprised 1/2 of our revenue for the quarter, while Solar Materials declined to less than 15% of total revenue. As a reminder, going forward, we will be reporting SunEdison and Solar Materials combined. Semiconductor Materials was approximately 1/3 of the total.

Non-GAAP gross margin, excluding $97 million of inventory write-downs associated with our restructuring activities, was $89 million or near 12% of sales. Adjusted non-GAAP operating expenses were $106 million. Operating losses, excluding restructuring and related charges were $17 million.

Adjusted non-GAAP loss per share was $0.21, within the range of $0.17 to $0.23 per share loss we provided in our January 18 release. Please turn to Slide 5 titled, "4Q 2011 Variance."

Adjusted non-GAAP revenue for the fourth quarter of 2011 fell 10% sequentially and 19% year-over-year. Although SunEdison revenues grew 11% from 3Q, Solar Materials revenue declined 46% sequentially on even weaker volumes and pricing. Although not as severe as Solar Materials, Semiconductor wafer sales were down 15% on softer demand and pricing, primarily for smaller diameters.

Gross margin in the 2011 fourth quarter fell to 11.6% from 14.5% in the third quarter and 19.3% last year. All 3 business segments have experienced weaker gross margins. Solar Materials was the primary driver of the overall decrease due to a continued oversupply of solar wafers.

Semiconductor Materials also experienced lower margin on weaker factory loading and moderate price declines, mitigated in part by a mix shift to 300-millimeter. SunEdison gross margin was also lower due to less favorable project mix and higher OpEx.

Operating expense of $106 million in the fourth quarter of 2011 was flat compared to the previous quarter. We expect OpEx to decline substantially in 2012 as we drive our restructuring activities and simplify the business. By fourth quarter 2012, we expect operating expenses to be under $90 million a quarter.

Operating profit declined from $19 million in the third quarter to a loss of $17 million in the fourth quarter. As a result of weaker semi and solar pricing, less profitable mix of downstream projects and existing cost structure, our adjusted fourth quarter non-GAAP loss per share was $0.21 versus $0.03 per share profit in 3Q.

These results, while greatly impacted by macro factors, are unacceptable to us. We are fortunate to be relatively well positioned in our end markets so we are committed to changing what we can control to improve the go forward results. Our early and aggressive restructuring is a major step to improving the business. We believe our restructuring actions will meaningfully improve the earnings capacity and operating cash flow of the business with modest and delayed cash outlays.

Our restructuring will reduce operating expenses across all segments through headcount and other productivity initiatives. Reduce capacity in Solar Materials to better align our production to our downstream business and consolidate our solar business segments into a single operating unit to improve operating efficiencies.

The next few slides present the operating results of our segments. Revenue results are GAAP except for SunEdison, where we showed non-GAAP adjustments. Operating profit is shown as GAAP and adjusted non-GAAP, reflected -- reflecting restructuring and related charges. Please turn to Page 6, Semiconductor Materials.

Semiconductor Materials revenue declined 15% sequentially and 13% year-over-year. The declines were largely driven by over 10% decline in volumes, mostly smaller-diameter wafers and price erosion. Operating profit declines were driven by the same factors and lower factory loading and upfront costs associated with the ongoing productivity efforts across our plant network.

We believe we gained share in the fourth quarter as our new 300-millimeter capacity in Korea ramped and 300-millimeter utilization remained high. We accelerated the closure of our high-cost operations in the U.S., and our 200-millimeter facility in Ipoh, Malaysia will continue to ramp in 2012.

In the Semiconductor Materials business, the most significant restructuring impact is over 11% lower headcount associated with productivity initiatives. With these headcount reductions, other productivity initiatives and a recovery in second half 2012, we expect semi wafer operating margins to be approximately 15% as we exit 2012. Please turn to Slide 7, Solar Materials.

Solar Materials markets remained weak as evident in our fourth quarter results. Revenue was down 46% sequentially due to over 20% lower solar wafer volumes and 25% lower prices. Year-over-year, revenue was down 61% due to 23% decline in wafer volume and 53% decline in average wafer prices.

Near the end of the quarter, both poly and wafer prices began to stabilize and that continues today. This is an encouraging sign, but our restructuring actions contemplate depressed materials prices for the foreseeable future, and we are not letting up on our plans.

Price and volume declines led to greater operating losses sequentially and a sharp decline year-over-year. Our solar wafering plant in Kuching, Malaysia has made great progress in lowering costs, but is not expected to meet world-class costs until late 2012. We have reduced Kuching capacity plans from the original plan of 600 megawatts to 300 megawatts already installed.

We continue to see a path for much reduced wafer cost in 2012, and we believe, together with wafers coming from our China solar JV, our cost structure will be amongst the most competitive in the industry.

As mentioned on December 8, we are consolidating our Solar Materials and SunEdison businesses into one Solar Energy business segment. We are rightsizing our Materials business to supply a portion of our downstream business needs, so going forward, we do not expect external wafer sales to be much of our business.

Also, organizationally and operationally, the businesses have been merged to improve coordination and drive efficiencies. We believe this structure, supplying SunEdison projects with a cost competitive combination of externally sourced and internally produced modules is the best solution while maintaining our technology leadership and production flexibility. Please turn to Page 8, SunEdison.

We've walked through the details of SunEdison non-GAAP accounting in prior calls, so I will not do so again today, but the appendix of this presentation includes an illustration demonstrating how our GAAP P&L -- our non-GAAP P&L, reflects underlying cash flows and better represents SunEdison economics.

Fourth quarter non-GAAP revenue is $436 million, up 11% sequentially and included $17 million of energy revenue. The sequential revenue increase was due to higher project completions, partially offset by lower average selling prices as a function of both project mix and system pricing.

A total of 161 megawatts of projects were interconnected during the fourth quarter, up nearly 90% from the 85-megawatt interconnected last quarter. 102 megawatts were recognized for revenue under GAAP and 109 megawatts for non-GAAP. Of the 109 megawatts, direct project sales represented 67 megawatts and sale leasebacks, 42 megawatts. We interconnected 35 megawatts in the quarter -- fourth quarter of 2011 that we plan to sell midyear.

Operating profit for the fourth quarter was $13 million, $23 million lower than the third quarter. The drop was driven by less favorable project mix and higher expenses to support growth in the business.

The pipeline supporting growth in the business in 2012 remains at 3 gigawatts, with organic growth and lead conversion offsetting interconnections and project fallout in the quarter.

On Slide 9, I'll review some key metrics on our pipeline. Interconnections reached a record 161 megawatts in the fourth quarter. For the year, interconnections were 296 megawatts or 77% year-over-year increase. 102 megawatts were recognized for revenue under GAAP and 109 under non-GAAP, and we interconnected 52.25 megawatt in 2011 that we plan to sell midyear.

We have 255 megawatts of projects under construction we expect to interconnect over the next few quarters. Nearly 70% of our 3-gigawatt pipeline lies in North America, a region we believe to be one of the largest and most stable for the foreseeable future, and generally less vulnerable to changing subsidies and demand volatility.

Our pipeline mix by size held relatively constant compared to the last quarter. About 3/4 of our pipeline consist of a large number of commercial, industrial and small utility scale projects below 100 megawatts, helping us to manage risk across the portfolio. Please turn to Page 10, cash flow.

Our cash balance decreased $200 million from $786 million to $586 million. Weak operating earnings in the quarter, working capital needs and associated delay of European project sales contributed to the decrease. We expect free cash will break even by midyear as the restructure takes hold, project timing improves, semi markets recover and CapEx remains low. Going forward, our primary focus is on cash flow. Please turn to Page 11, debt and interest expense.

On Slide 11, we break out additional detail on our nonrecourse debt. Approximately 61% of our $1.3 billion nonrecourse debt balance supports 300 megawatts of sale leaseback projects. These projects have already been built and sold to financial investors and are generating an energy revenue stream which services the debt. The debt is only recourse to the projects. After the last payment, the debt is extinguished and a GAAP gain is realized on the income statement.

The remaining 40% of nonrecourse debt supports construction financing and 40 megawatts of projects we own. Construction financing fluctuates from quarter-to-quarter depending on project construction needs. On interest expense, our senior notes represent the largest portion of interest expense, followed by the lease payments associated with our sale leaseback projects. Please turn to Slide 12 for our 2012 outlook.

For 2012, we expect a challenging first half, but recovery in Semiconductor and continued stabilization in solar as we progress through the year. There are clear signs that semi markets are bottoming out, and we believe demand will improve in the second quarter and through the rest of the year. We expect that the solar market will remain in oversupply, and that financial instability in the Europe is likely to weigh on PV markets through the year. Europe credit markets, while better than the last 6 months, remain a risk that will shape our operating plans in that region.

With this general backdrop, we expect the following: semi revenue down 10% to 15% in the first quarter 2012 versus fourth quarter 2011, and flat for the full year 2012 year-over-year; Solar Energy system sales volume of about 50 megawatts, with ASPs around $4.25 in the first quarter and 400 megawatts with ASP averages of about $3.75 for the full year;

Operating expense is less than $110 million in the first quarter and less than $375 million for the full year; CapEx less than $50 million in the first quarter and less than $175 million for the full year; interest and other expenses of less than $25 million in Q1 and less than $100 million for the full year; and first quarter and full year non-GAAP tax rate of about 30%.

Our key priorities for this year reflect a need to navigate depressed end markets while building on the improvements and company transformation 2011. We intend to focus, first and foremost, on cash flow and maintaining adequate liquidity; executing our restructure plan and positioning the company for when our markets recover; continue to gain Semiconductor share and expand margins during the recovery; and finally, optimize the growth of our downstream solar business.

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

Question-and-Answer Session

Operator

[Operator Instructions] Krish Sankar, your line is open.

Krish Sankar - BofA Merrill Lynch, Research Division

I have a couple of them. Ahmad, when you look at your guidance for the semi side, given that you're expecting flat revenue, do you expect the big pickup in the back half to be driven primarily by volumes, or do you also expect pricing to come back in semis?

Ahmad R. Chatila

Krish, I expect volume to come back, that's for sure, we're seeing it. It's way below the volume that's required to keep it, keep the Semiconductor industry alive. Pricing, I think, will firm up in the second half of the year. I think the price is lower this quarter in Q1 and Q2 because we usually negotiate, for a large extent, 6 months contracts but I expect it to be firmer and potentially higher for second half of the year.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it, okay. And then on the Solar Energy side, I have a 2-part question. In terms of your Kuching facility, where -- do you think it's going to be breakeven at some point this year in calendar '12, or do you think you need the cost efficiencies to achieve before you can reach breakeven? And in terms of the SunEdison side, I believe you have some Fotowatio-related earn-outs this year, about $100 million or so. Would that all occur in 2012, or would there be more 2012 and 2013?

Ahmad R. Chatila

I'll answer the first question, and Mark will answer the second. On the Kuching, I expect the second half of the year for us to reach competitive costs with our Chinese factory, okay? It's going to take us probably around 6 to 9 months to get there. The cost delay, maybe it's not great. I can still operate it, but I would rather run my JV in China, which has world-class cost. That's high feed [ph], Krish. And Mark, why don't you answer the Fotowatio question.

Mark J. Murphy

Yes, the earn-out? The earn-out's is an estimated up to $70 million in the middle of the year, so either Q2 or Q3.

Operator

Timothy Arcuri, your line is open.

Timothy M. Arcuri - Citigroup Inc, Research Division

I have 2 things. First of all, can you give us a sense -- you've always said that your mix in SunEd would be about 90/10, where you'd only ultimately, ever want to hold capital of about 10% of your projects. And it looks like that mix is much higher in Q1. It looks like you're holding captive more megawatts, and I'm wondering, is that a one-off or is that mix could approximate 50/50 during 2012? And then I also wanted to ask if you can give us your pipeline in SunEd that is backed by a fixed OpEx.

Mark J. Murphy

Yes, Tim, the first quarter is an unusual quarter, and it's just we had a number of projects being developed in India that just, in order for us to get the tariff, we got them all interconnected, and they'll term out here in the first quarter. So it's a quarter with heavy number of balance sheet projects. We don't expect that mix to continue or even repeat in the future.

Ahmad R. Chatila

And the second question, Tim, one more time?

Timothy M. Arcuri - Citigroup Inc, Research Division

Sure, Ahmad. So I was just wondering your prior SunEd backlog it was fixed, I think, was 925 megawatts, and I'm wondering whether that changed?

Mark J. Murphy

It's about the same, Tim.

Operator

Stephen Chin, your line is open.

Stephen Chin - UBS Investment Bank, Research Division

I have 2 questions on the 2012 outlook. My first is if you're able to share a target for operating margin in 2012? I know, Mark, that means operating margin should be about 15% exiting 2012. So if MEMC contained an operating margin of 10% in 2012, that could imply EPS of about $0.50. So is 2012 operating margin goal of 10% kind of a reasonable target, Ahmad?

Ahmad R. Chatila

Well, let me try to answer, rather than giving you an operating margin target, let me tell you how we think about it. We can't exactly tell what our EPS number is going to be for the year because the first half is going to be kind of soft and weak. But what Mark said is we're doing some good transformation in semi. It's a continuation of improving our EBITDA margins. And you're going to see it as the volumes come back. So that's what he meant, okay?

Stephen Chin - UBS Investment Bank, Research Division

Okay. And then my second question on the 2012 sales. Does the outlook include any polysilicon sales? Because if I look at the guidance, the SunEdison only installs about 400 megawatts projects in 2012 and Semiconductor uses around 4,000 metric tons. It seems like you could have about 2,000 metric tons of extra poly. Is there a plan to sell the extra poly? Or is the plan to possibly run Pasadena at lower utilization rates?

Ahmad R. Chatila

We're going to run Pasadena at high utilization rate. Let me tell you maybe one of the minor revenue numbers that we did not tell you about today. We usually sell our wafers to someone, because we want to collect the money upfront and improve our working capital, and then buy from them and sell our modules to feed into SunEdison. So that could be a minor tweak in your numbers in the future. But we might sell poly, but it's not our strategy, as we told you many times before.

Operator

Jesse Pichel, your line is open.

Min Xu - Jefferies & Company, Inc., Research Division

Min Xu for Jesse here. Can you give us some color on your guidance of $3.75 per watt project ASP in 2012 with panel at or below $1, and we're hearing large-scale projects setting at 2s [ph] ? Is there any risk to your target ASP?

Mark J. Murphy

Yes, Min, I think that's the visibility we have on the projects that are currently -- that we currently have in our plan. I'd say about 60% of that, 60% to 70% of that is U.S. projects, decent visibility, decent amount of DG projects. And that's our price in that we expect between those and some Europe project sales. We still see, as we did in 2011, we see prices -- we see price deterioration year-over-year, but we see faster cost reductions, including as you said, modules.

Jesse Pichel - Jefferies & Company, Inc., Research Division

Okay. And what is your direct sale versus sale leaseback shipment volume during the quarter?

Mark J. Murphy

During the fourth quarter?

Jesse Pichel - Jefferies & Company, Inc., Research Division

Yes, during Q4, yes.

Mark J. Murphy

Yes. It was -- just give me one second here because it was in my comments. Yes, Min, I'll state it in a few minutes here. Why don't we go to the next question? I'll just -- I'm sure I got the right one.

Operator

Satya Kumar, your line is open.

Satya Kumar - Crédit Suisse AG, Research Division

I'm having difficulty with getting to your guidance for the flat semi revenues. If I just do some back of the envelope, I need to get something like 2 back-to-back quarters of 15% to 20% type revenue growth and another 5% price increase in the back half. Seems fairly optimistic. Are you seeing any signs right now that you're seeing such a sharp pickup in the second quarter for semis?

Ahmad R. Chatila

Yes, so you don't have to have 10% price pickup in the second half to get to those numbers, but we are seeing a turnaround. I would say that Q1 is the bottom of the cycle. It clearly is. And every the last 2, 3 weeks, every day we come to work, there's someone wanting some more orders. Whether we can deliver it to them in Q1 or not, we're not sure. But clearly, Q1 is the bottom of the cycle. And you can actually hear our customers saying the same thing. Many of them are saying that Q1 is the bottom of the cycle, especially the large corporations that are broadly diversified.

Mark J. Murphy

And that year-over-year is off of, compared to a pretty low second half 2011, so.

Ahmad R. Chatila

Yes. We, I mean, Q4 was weak and we had an earthquake in Japan in Q2, which impacted us in Q1 and Q2, so remember those, okay?

Mark J. Murphy

And then just to close out that last question on, the -- I should've said this right off the bat, so I thought it was. It says 67 direct sales and 42 sale leaseback megawatts.

Ahmad R. Chatila

44 megawatts.

Satya Kumar - Crédit Suisse AG, Research Division

Okay. And then related to your SunEdison, a couple of questions there. The 3 gigawatt project backlog is obviously very big relative to the 400-megawatt completions that you're aiming for, for 2012. Why is the construction -- polysilicon construction declining so much in Q4? And I appreciate you giving this average price number for Q1 and the rest of the year, could you also share with us how we should think about the cost of constructing those systems if you can break it out down between panel cost which we all know where it is, and balance of system costs would be great.

Mark J. Murphy

Yes, I think one, to maybe hopefully, this answers your first question, why did the -- if we have an increase in megawatts year-over-year, why is -- why are your projects under construction decreasing? Part of the reason is that we have about 60 megawatts worth of projects that are already interconnected, that we're going to sell in 2012. So -- and then we have a -- we start construction here on a number of projects for the second, third and fourth quarter shortly. So that projects under construction number will begin to pick up. As far as your question on cost, I think you just wanted to get some sense of the orders of magnitude that we see cost declining year-over-year. We see module prices, yes they declined about 20% to 25% in '11 for us, and then we see about the same, a little bit more in 2012. And then on balance of systems, we're relatively flat in 2011 and then we see declines in 2012 of over 20%.

Operator

Vishal Shah, your line is open.

Vishal Shah - Deutsche Bank AG, Research Division

On SunEdison, just wanted to understand your constraints of increasing your megawatts under construction this year at the balance sheet. And also, just clarifying, I think your Q1 ASP is $4.25 and for the full year, you're assuming a much lower number. Are we assuming a different mix of projects or is it just conservatism on that?

Mark J. Murphy

Yes, I think that yes, that's just our best view. We know that, based on cost going down, that prices will go down through the year, so we've made an estimate based on contracts we have and the type of projects we're doing, the mix of projects. That's our view on pricing. And that's the same for first quarter, we have good visibility, of course, on what we're expecting to term out. Those are, yes, those negotiations are near complete or done, and we're just closing those projects out so we have a very good visibility on pricing.

Vishal Shah - Deutsche Bank AG, Research Division

So and just wanted to clarify your strategy now that you've got -- that SunEdison making up more than 50% of your revenue and earnings. What are some of the synergies that you see between both semis and SunEdison or Solar Materials business? And would you consider splitting up the 2 businesses?

Ahmad R. Chatila

I mean, the semis are still the same. We still have a Solar Materials business that feeds into SunEdison, although it's run as one entity. I'll give you an example of that value of having that Solar Materials business before I answer the Semiconductor piece. I mean, today, there's a lot of discussion about basically antidumping tariff versus -- from our strategic partners that forces us, basically, to use our own material to feed-in into our projects in the U.S. Otherwise, we have to buy very expensive modules, because most of [indiscernible] are not impacted have very high cost modules from high-cost countries. So that's one. And since we have that Solar Materials business, then the synergies with semi are very clear from crystal technology, to polysilicon to overhead alignment between semi and some of the Solar Materials business. All that still the same, no change. So we have no plans of splitting off Semi.

Operator

Next question comes from the line of Chris Blansett.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Ahmad, I just wanted to kind of touch on your goal for a 15% operating margin for the semi wafer business. Is there a general revenue run rate we should use in association with that operating margin?

Ahmad R. Chatila

I'll ask Mark to give you that.

Mark J. Murphy

And Chris, can you repeat the question.

Ahmad R. Chatila

He wants to know what the revenue run rate and the volume run rate to get to 15%.

Mark J. Murphy

Yes. So Chris, we're talking on MSI, $300 million to $325 million and that's sort of...

Ahmad R. Chatila

So revenue in the above $250 million a quarter, or like maybe $260 million, $270 million a quarter kind of run rate, Chris.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Okay. And when you think about getting to a breakeven number year-over-year, how much of that is what you consider internal share gain versus just market recovery? I mean, not getting to a breaking, but having a, same revenue in 2012 versus 2011?

Ahmad R. Chatila

So you're thinking like how much of it gaining share versus the market recovery? Most of it's market recovery, Chris. Share gain at the end now, we got to a point where we need to build more capacity. And we're not going to destabilize the market. We're going to be very disciplined. We're going to gain share a little bit, maybe 0.5 point kind of target. Most of it is market recovery. I mean, the market dropped down, for us 15%, for others maybe 20%, 30% quarter-on-quarter. In Q1, we're dropping down another 10% to 15%. So it has to snap back. I mean, people have to run their factories, and we're seeing it, Chris, today with of -- many of our customers.

Operator

Edwin Mok, your line is open.

Edwin Mok - Needham & Company, LLC, Research Division

So for the question I have is on your guidance for the first quarter and the full year. How much non-system revenue are you expecting under Solar Energy? And when do you expect your wafer production to match your Solar Energy output?

Mark J. Murphy

Yes, Edwin, we, I mean, we're sticking to the guidance that we gave, the metrics that we gave, including the in line with the fourth quarter adjusted number. So I think we -- just to make sure that we're consistent in what we give everybody, I'm going to withhold from anything other than what we've given.

Edwin Mok - Needham & Company, LLC, Research Division

Okay, that's fair. And then a question on your non-recourse debt, right? Assuming, Mark, how would you kind of think about amount of debt you're going to put on the balance sheet assuming continued growth, SunEdison, do you see a cap to that amount? And what metrics are you using to kind of measure that?

Mark J. Murphy

Well, we're just very mindful of the recourse obligations we have, in particular. So and our overall liquidity levels. So we look at it every week, we think about it on every business decision we do. So the -- it's economic for us to do sale leaseback transactions, which is the primary driver of the non-recourse debt on our balance sheet. And those are not recoursed to having MEMC parent, and so I can just say that we're very mindful of certainly the recourse obligations to MEMC.

Operator

Hari Chandra, your line is open.

Hari Chandra Polavarapu - Auriga USA LLC, Research Division

Question is again on the SunEdison pipeline in terms of 3 gigawatt versus the guidance that you gave in terms of system sales. Is that a balance sheet issue in terms of, for you not being able to go beyond that number? Or, and if balance sheet is an issue, are you exploring alternate structures, off balance sheet?

Mark J. Murphy

I'm sorry, can you repeat the question?

Hari Chandra Polavarapu - Auriga USA LLC, Research Division

In terms of the pipeline that you have and versus the guidance that you gave for the system sales, it looks like can you do better than that? And is there a limitation on the balance sheet that limits you for that number to be much higher than what it is?

Mark J. Murphy

I think what we're -- I mean, we are in a market that's challenging, and we've -- we're in the midst of a restructuring. We're trying to make sure that our cost structure is right and can be, we can have a profitable business at a relatively modest volume level. So I think it's just a -- it's prudent in this environment to make sure that we can execute well on over 400, and we certainly have the pipeline to do more if we wanted to.

Operator

Sanjay Shrestha, please go ahead.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Just 2 questions. First on your CapEx rate, what is your maintenance CapEx? You guys said it's going to be less than $175 million, but what is sort of like the absolute basic minimum CapEx you guys needed?

Mark J. Murphy

I think we've stated previously that it's probably in the sort of $60 million to $75 million range of maintenance CapEx.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay. And so when we sort of think about that less than $175 million, where is the remainder of the CapEx going? Or are you guys kind of being conservative in terms of that number?

Ahmad R. Chatila

Yes, we're being -- we're spending the rest on semi, especially on 300-millimeter in Korea because we see a clear path to higher margins and revenue in that region.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Got it. So then my last question, guys, is, so when you look at that 400-megawatt pipeline, right, or the potential for 2012 that you guys can construct, just back of the map, you can come up with $500 million, $600 million potential gross profit. So not looking for guidance or anything, but how do we think about your cash generation capabilities in 2012? How do we think about your cash flow?

Mark J. Murphy

Well, we have a -- we're focused, that's our primary focus in 2012. We have -- I've given guidance or I've given guidance previously that we like to maintain at least $500 million of cash, and we're likely in the first half to be within striking distance of that because of these European projects, which we're probably going to sell midyear. We might get -- we may dip below that in the first quarter, but then through the rest of the year, we anticipate our liquidity position building through the rest of the year.

Operator

Adam Waltzman [ph], your line is open.

Unknown Analyst

Can you talk about how many projects you'll build at SunEdison that you won't sell this year beyond the Q1 projects?

Mark J. Murphy

It's not our intention to build any that we won't sell. And in the case of the European projects that we have right now, I think just -- I think it's, Adam, just keep in mind, we do not build speculative projects. All projects that we build have, we think, are good projects, strong returns. We have identified buyers. Prior to construction, we have either an advanced stage term sheet or a commitment letter or a signed purchase agreement. And while those all give us comfort to start construction, there's always an element of risk until the funds are received. And unfortunately, that happened to us. We had good European projects, they were interconnected at the high tariff rates and unfortunately, the financial environment in Europe deteriorated sharply, as you know. So...

Unknown Analyst

Right. But in Q1, you have 45 megawatts of balance sheet projects?

Ahmad R. Chatila

Yes, those are in India. And in India, the regime there is you can't sell the projects or at least more than 49% of the projects for 3 years. So that's why we call them balance sheet projects. The reality is the cash flow out of these projects is pretty healthy because the way we constructed the EPC contracts into these companies and all that, so we're not really using our balance sheet to build these projects, per se.

Unknown Analyst

Can you talk a bit about the cash flows and how we can kind of ascribe value to those 45 megawatts of projects? Because we won't see it coming through in the income statement, but it seems like they're valuable?

Mark J. Murphy

Yes, I mean, we haven't given specifics on those projects, relatively small equity component, non-recourse debt associated with the projects. And I'm not going to give specific return data on individual projects, because we intend to sell those once the statutory hold is lifted. And we may sell a portion down to the amount we're allowed to under the statutory requirements.

Unknown Analyst

And then just lastly, a follow-up on the SunEdison. You've spoken about 20%-plus gross margins. Does that hold throughout the year and do you think there's upside to that?

Mark J. Murphy

Yes, other than, Adam, other than the guidance we've given, I'm not going to give any more guidance on margins or anything at this time.

Operator

Your next question is from Mahesh Sanganeria.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Just wanted to follow-up on the last question for the SunEdison margins. I know you don't want to get more qualitative, but considering the prices, you have the prices declining, is your cost to declining in line with the prices or better than prices, if you can give us some color on that, that would be helpful.

Mark J. Murphy

You're talking overall just downstream projects in general?

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

I'm talking about in -- I mean, your ASPs for the Q1 is $4.25, and the full year is $3.75 so you have the declining price. So I'm just -- my question is, how is your costs going to do in -- does it matches up so that you can keep a flat gross margin, or the cost is going to decline faster or it's going to decline slower?

Mark J. Murphy

Yes, I think I mentioned earlier that we expect right now for prices to decline as fast or -- our cost to decline as fast or faster than price, so we expect there to be some margin expansion.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

And second question on the semi side, in your assumption of flat revenues, what's the average year of -- year-over-year ASP decline are you modeling?

Mark J. Murphy

We didn't give any guidance on prices in semi.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

But can you give us some idea of it? Is it single-digit or double-digit? I mean, you said Q1, the pricing decline was pretty significant. So year-over-year, I'm just wondering.

Mark J. Murphy

We've said that -- I mean, you know that the general market backdrop is soft in the sort of first quarter, a little stronger in the second and then a healthier market in the back half of the year. So I'd say the nadir of pricing will be about now, and then we should see prices get -- firming up through the year and maybe a little bit of price appreciation in the back half -- second half of the year.

Ahmad R. Chatila

What I said also earlier is we're attempting, actually, to hopefully raise price or being more firm in the second half of the year. But we'll see the environment. We'll wait for the environment, how it is. Clearly, in the first half, the price is lower than 2011.

Operator

Then we'll go next to Jagadish Iyer.

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

This is Vasanth Mohan on behalf of Jagadish. And I want to go back to the pipeline of projects, just one question. You have a healthy backlog, but you're limited to 400 to 500 megawatts. So as a result, have you turned down projects, or do you turn down because you cannot execute?

Ahmad R. Chatila

Well maybe, I go back because a lot of you have asked this, and let us give you our view one more time. First of all, we've been growing very fast downstream. We went from 40 megawatts to 167 to now 311, and we're telling you we're going to do 400 in '12. Of course, a lot of your expectations are probably to be a bigger number like if you have 3 gigawatts worth of pipeline, why don't you do more? And the answer is, as Mark said, we're going through a major restructuring, we're reducing OpEx in the Solar Energy business, like I told you, by 30%. So when I combine Solar Materials and SunEdison, we're going to slash OpEx by 30%. We -- and since the European projects, we're still trying to work on them to sell them now, and we have good progress. I mean, we told you in Q4, we're not going to compromise on price, remember that discussion. So since we have all of these things happening together, we are taking a breather a little bit, just a little bit. We have all the pipeline that we need at this moment. Actually, if, we can do many things with it. So, so far, 400 is what we're comfortable in executing on in 2012. Okay, it's a choice we're taking. It's not from a weakness, it's just that this is the way we think we can execute very well on the business.

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

Just a quick follow up so you do not turn down, or you don't pass up on projects because of that?

Ahmad R. Chatila

We pass all the time on projects. Actually, let me tell you, last year, we grew 1,600 megawatts. We looked at 22.5 gigawatts worth of projects. So we look at projects all the time. I mean, let me tell you, there's more projects than anybody needs. The main thing is to get ones that are really healthy from a gross margin perspective, that you spend the OpEx on, and they give you a good return. And that's where the scale comes in.

Operator

And our final question will come from Mehdi Hosseini.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Two follow-up questions. There was a report in Korean Times that Samsung is considering shutting down their solar, the entire solar operation. And my question to you is, would that have an impact on your JV with Samsung for the polysilicon plant? And I have a follow-up.

Ahmad R. Chatila

The answer is no. Mehdi, remember, Samsung has 200,000 employees, with around 50 companies, potentially, half of them are public companies. They have the same first name, but maybe what you're hearing about is Samsung SDI, it's a rumor, I really don't know them, but our Samsung Fine Chemical Company, which are our partner, are fully engaged on building the JV with us.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Okay. And then earlier on, you mentioned that the BOS cost was flat in '11, but expected to be down 20%-plus in '12. Can you help us understand what gives you confidence that suddenly BOS costs could decline so much?

Ahmad R. Chatila

Yes, no problem. Look, the mix changed. What happened is we built a 72-megawatt project in 2010 that's really had very low cost, and Europe actually, while it's Europe, it has -- and you think the costs are higher, Europe has a very well-developed construction balance system industry. And for us, our costs are pretty good there. We actually saw declines in '11 on inverters and trackers and many other equipment, significant declines. But the mix changed, so that's why on a blended average, looks like flat year-on-year. In 2012, we continue to see the trend that market softness for all components sold, whether wafers, modules, inverters, trackers, allows us to have lower cost year-on-year, and potentially faster drop in cost structure versus ASP in our downstream business, Mehdi.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

And just for clarification, the 45-megawatt project in India, that's not included in the 400-megawatt guidance, is it?

Mark J. Murphy

No, it is not.

Operator

Gentlemen, please go ahead with your closing remarks.

Mark J. Murphy

We like to say thank you to everyone who joined us tonight for the call and have a great evening. Goodbye.

Operator

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

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