Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Thomas Yeh - BofA Merrill Lynch, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Timothy M. Arcuri - Citigroup Inc, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Farhan Ahmad

Eric Gold

Hari Chandra Polavarapu

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Scott Reynolds

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

MEMC Electronic Materials (WFR) Q1 2012 Earnings Call May 9, 2012 5:30 PM ET

Operator

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

Christopher Chaney

Good afternoon, and thank you for joining MEMC's first quarter 2012 results conference call. I am Chris Chaney, Director of Investor Relations. With me today are Ahmad Chatila, President and Chief Executive Officer; and Mark Murphy, Chief Financial Officer.

After my remarks, Ahmad will provide an overview of the significant events and commentary on the company's first quarter performance, and Mark will then review the financial results. Mark's discussion will reference slides that have been made available in the Investor Relations section of our website at www.memc.com. Our results -- our discussion today will refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial 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 release and in 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

Thanks, Chris. Good afternoon, everyone. In my remarks today, I will discuss the performance of our 2 business units in the first quarter, provide an update on our restructuring and comment on our current positioning.

In our Semiconductor business, we believe the market bottomed in the first quarter and is now beginning to recover. We are seeing improved order volumes in the second quarter. We are fully committed to our Semiconductor business and will invest judiciously to further our market position. We are executing on our cost reduction plan and with improved efficiencies will lower our breakeven revenue level and increase profitability in the next up cycle. These actions will leave us well positioned to drive meaningful improvement in EBITDA and free cash flow generation as we move into the second half of 2012.

Our priorities in the Semiconductor business for 2012 remain unchanged. We plan to continue to lower costs through manufacturing efficiencies, labor productivity and SG&A reductions. Also, expand capacity largely through increased factory productivity as well as prudent capital expenditures and finally, maintain our market share while optimizing price.

In our Solar Energy business, the market, while still volatile, is showing signs of stabilization. Price reductions continue but the rate of decline has slowed. Even so, we expect the market environment to remain challenging throughout 2012. Our Solar Energy business continues to focus on executing our pipeline of projects while reducing costs, improving efficiency and minimizing capital expenditures. These efforts and the favorable positioning of this business around the world continue to help us strengthen our position as a leader in the worldwide solar energy.

We are able to leverage the value chain and take advantage of low industry pricing for poly, wafers and modules. We maintain a strong solar project pipeline at around 3 gigawatts, while interconnecting another close to 150 megawatts of projects in the first quarter.

Our track record enabled us to complete debt financing for a 60 megawatts facility in Bulgaria. We are on track to sell this facility and other European projects this year. Our Solar Energy profile remains diverse and that broad portfolio helps us to maintain scale and use resiliency -- resilience on any specific geography.

Our priorities in the Solar Energy business for 2012 are as follows: one, reduce OpEx by over 30% with the consolidation of 2 divisions and a focused development spend; two, minimize capital expenditure in the upstream material business; three, drive leading-edge cost structure throughout the value chain; and finally, ramps [indiscernible] and installation consistent with the balance sheet capacity.

Now I'm going to give you a quick update on the restructuring that we announced in December 2011. Our restructuring remains on track. We continue to implement best practices across sites as well as aggressive productivity initiatives. We have closed our Sherman, Texas wafering facility, moved additional equipment out of the St. Peters site, shuttered our Merano polysilicon facility; and ramped and improved performance in Ipoh, Malaysia, which is a site we moved assets to from higher cost locations. We have consolidated business units and have reduced headcount by more than 1,300. In Kuching, we continue to refine our technology while minimizing spend and the cost in our Meca [ph] JV continues to be world class. We move quickly and decisively on our restructuring and we continue to be focused on identifying additional opportunities for savings.

Lastly, we expect our liquidity to improve in 2012 with the sale of the European and other projects, recovery of the semiconductor market and our continued restructuring efforts. Mark will talk in more detail about our balance sheet and our focus on cash in 2012.

So in summary, the Semiconductor industry has bottomed and turned and so has our Semiconductor business. The solar energy industry is showing signs of stabilization, although 2012 will continue to be very challenging. And our Solar Energy business is correctly sized and positioned for execution in a difficult environment.

Our restructuring is on track. We expect 2012 to be a much improved year and we are cautiously optimistic about the future. With that, I turn the call to Mark Murphy for additional insights. Mark?

Mark J. Murphy

Thank you, Ahmad, and good afternoon, everyone. My comments today reflect information found in the press release and financial tables released shortly after market close. And we'll reference the first quarter 2012 earnings conference call presentation posted in the Investor Relations section of our website. Chris has already reviewed the Safe Harbor statement, so I will begin with a brief summary.

Based on our own market -- based on our own semiconductor order activity and industry reports, Semiconductor Materials market bottomed in 1Q and are showing signs of a cyclical recovery. The solar market remains challenging. Europe project activity has slowed and Solar Materials pricing remains severely depressed. Now this benefits are downstream solar business.

Our near-term efforts remain focused on cost reduction and cash flow. We are benefiting from restructuring efforts announced last year and these benefits should increase through the year. Our quarter-end liquidity is $637 million. While we are forecasting a net cash use in the second quarter, we expect our liquidity to increase through the second half of the year with the recovery of semi markets, cost savings from restructuring and broader productivity programs, lower working capital levels and reduced capital spending.

Turning to the slide deck. Please note the Safe Harbor statements on Slide 3. On Slide 4, please see the first quarter summary results. Concurrent with the initiation of our restructuring actions last December, we announced the consolidation of the Solar Materials and SunEdison segments into one Solar Energy segment, effective January 2012. Thus, the 2012 first quarter is the first period reported under the new segment structure.

First quarter non-GAAP revenue was $523.8 million. Semiconductor Materials represented about 40% of revenues while Solar Energy represented about 60%. Based on our own order activity and industry data, we believe Semiconductor Materials sales bottomed in the first quarter and are showing signs of an upturn.

Within our Solar Energy segment, solar project revenue represented about 70% of total Solar Energy revenue, while sales of solar wafers, polysilicon, silane and other related materials represented the balance. External solar wafer sales were down nearly 85% year-over-year due to both market conditions and our decision to deemphasize external wafer sales.

Taking advantage of short-term poly demand and to reduce inventory levels, we sold approximately 1,700 tons of poly inventories to third parties in the first quarter. This was an opportunistic sale and we do not expect to see this level of quarterly poly sales for the remainder of the year.

Going forward, we expect project revenue to constitute the vast majority of our Solar Energy revenue. Non-GAAP gross margin was $53 million or 10% of sales. Non-GAAP operating expenses were $104 million, in line with our guidance of less than $110 million and including consulting and other fees we expect to reduce through the year.

Non-GAAP operating losses were $52 million on low volumes less favorable mix and cost to support future business growth. After interest, taxes and other items, non-GAAP loss per share was $0.26. Excluding restructuring and related expenses in the quarter, loss per share was approximately $0.24.

Now please turn to Slide 5. First quarter 2012 variance. Non-GAAP revenue for the first quarter of 2012 fell 32% sequentially and 37% year-over-year. Semiconductor wafer revenue was down 5% sequentially and down 14% year-over-year, primarily driven by the cyclical semi downturn.

Solar project revenue was down 50% sequentially and down about 10% year-over-year between lower seasonal volumes and project timing. Solar wafer sales declined 80% sequentially, nearly 95% year-over-year due to depressed market conditions and our decision to deemphasize external wafer sales.

Gross profit margin in 2012 first quarter fell to 10% from an adjusted 11.6% in the 2011 fourth quarter and 18% last year. Both Semiconductor Materials and Solar Energy segments have experienced weaker sequential and year-over-year gross margins on pricing and mix effects.

Operating expenses of $104 million were slightly lower compared to the previous quarter and roughly 10% lower compared to last year. We expect OpEx to continue to decline through 2012 to well under $90 million per quarter as we drive our restructuring activities and simplify the business.

Adjusted operating loss increased from $17 million in the 2011 fourth quarter to a $52 million loss in the 2012 first quarter, primarily due to lower volumes and weaker mix. As a result of weaker semi pricing and lower Solar Energy project sales with less profitable mix, our first quarter non-GAAP loss per share was $0.26 versus an adjusted non-GAAP loss of $0.21 per share in the 2011 fourth quarter.

We are not satisfied with these results but we are encouraged by the progress of our restructuring activities and broader productivity efforts. We expect to see increasing benefits from these initiatives as the year progresses.

Please turn to Slide 6, first quarter review. Now I would like to take a brief moment to reflect on our results given the industry backdrop. Based on our order activity and market information, we believe the first quarter represented a cyclical trough for our Semi business.

Volumes are improving sequentially and we expect to see continued strengthening through the year. While pricing is firming, we expect only modest increases in price in the near term. In solar, the upstream continues to remain in gross oversupply, which we expect to keep polysilicon, solar wafer, cell and module prices depressed. While this negatively impacts material sales, which we deemphasize as part of the restructure, this is generally good for our downstream SunEdison business.

Financing remains a challenge in Europe. However, we believe the majority of our Europe projects held for sale will close midyear. In the quarter, we met or exceeded the key targets we outlined on our February call. We expected Semiconductor revenue to decline 10% to 15% in the quarter, but increased order activity mid-quarter and available capacity allowed us to turn these orders quickly, thus, our Semiconductor Materials revenue declined only 5%.

We expected approximately 50 megawatts of non-GAAP project sales and sold 49. Our solar project ASP of $4.37 was higher than we expected due in part to Canadian prices but unfortunately, gross margins were lower than expected on higher cost.

Operating expenses of $104 million were in line with our goal of less than $110 million. CapEx was $40 million, in line with our target of less than $50 million. While we continue to explore ways to minimize our CapEx, we remain committed to investment in our core Semiconductor business.

Non-GAAP net interest expense was $20 million, in line with our target of less than $25 million. We ended the quarter with $381 million of cash and $630 million -- $637 million of liquidity.

Our restructuring is on track. Our headcount is down over 1,300 personnel or near 20%. U.S. production for semi wafers has been stopped with the exception of SOI. We shuttered our poly plant in Merano, Italy. We slowed production plans at our Kuching and Portland facilities. Make-versus-buy decisions and modules and other project components will be driven by the best overall cash solution for the company.

We expect the benefits of lower module cost to begin accruing to the company in the second half. In the first quarter, we had a net cash outflow of approximately $12 million on restructuring as ongoing severance payments more than offset cash savings. In the second quarter, we expect to be cash neutral on restructuring. And as we exit 2012, we expect cash benefits to exceed $50 million per quarter.

Our cost reduction efforts are not finished. As we execute the restructure plan and the business stabilizes, we are evaluating additional ways to further lower the cost structure and generate improved cash flows. While our restructuring decisions have been difficult we believe our early and decisive actions were prudent and will help better position us for when markets recover.

Now I will review the first quarter results for each of our 2 operating segments. Please turn to Slide 7. Results show on our GAAP except Solar Energy results, which we show non-GAAP adjustments. Operating profit is shown as GAAP and adjusted non-GAAP reflects the exclusion of restructuring and related charges.

Semiconductor Materials revenue declined 5% sequentially and 14% year-over-year. The sequential decline was largely driven by lower average pricing in weaker 300-millimeter wafer volume, which was offset by high -- higher small diameter volume. The year-over-year decline was driven by a 5% volume decline and 9% lower average pricing.

The $13 million sequential adjusted operating profit decline was driven by weaker pricing and less favorable product mix. Year-over-year, operating profit was down $21 million driven by price erosion and to a lesser extent, volume and mix largely offset by productivity.

Please turn to Slide 8, first quarter 2012 Solar Energy. As mentioned, we consolidated our Solar Materials and SunEdison businesses into one Solar Energy business segment. Organizationally and operationally, the businesses have been merged to improve coordination and drive efficiencies. Because the adjustments defined by our non-GAAP metric pertain to the Solar Energy business, all financial figures on this page are non-GAAP.

Solar Energy revenue declined 43% sequentially driven primarily by lower solar wafer volume and lower solar project revenue, partially offset by opportunistic poly sales. Year-over-year, the 47% drop in Solar Energy revenue was due to an 82% decline in solar wafer volume, solar wafer prices that declined over 60% and lower solar project sales.

First quarter adjusted operating profit was down $20 million sequentially. Lower project volumes and current operating expenses resulted in the loss. Year-over-year, Solar Energy operating profits were down $83 million. The collapse of solar wafer prices results in a loss of $39 million. Higher OpEx and lower project sales were the remaining variance.

On Slide 9, I will review some key metrics on our pipeline. Our pipeline decreased slightly from fourth quarter 2011 to 2.9 gigawatts with interconnections and fallouts slightly exceeding additions. About 3/4 of our pipeline consists of a large number of commercial, industrial and small utility scale projects below 100 megawatts, helping us to manage risks across the portfolio.

Just over 60% of our pipeline lies in North America, a region we believe to be one of the largest and most stable for the foreseeable future. First quarter interconnections were 149 megawatts, up over six-fold from the 20 megawatts interconnected a year ago and down slightly from the 161 megawatts interconnected last quarter.

At the end of first quarter, we had 147 megawatts of projects under construction.

Please turn to Page 10, cash flow. Our unrestricted cash balance was $381 million at the end of the first quarter, down $205 million from year end. Cash use was driven primarily by working capital effects, including higher solar project inventory and increased vendor payments. We remain highly focused on managing cash flow and are taking prudent steps to help ensure adequate liquidity through the year.

As you will see in the 10-Q filing, we have completed amendments to both our nonrecourse construction facility and our corporate credit facility. For the second quarter, we expect continued cash use but at a much reduced rate than experienced in our first quarter as volumes increase and working capital is reduced.

We expect to generate cash in the second half of the year as the Semiconductor market recovers further, our restructuring activities and other productivity initiatives are more fully realized, working capital returns to normal levels and CapEx decreases.

Now turning to Slide 11, balance sheet and liquidity. As discussed previously, most of our debt is nonrecourse to MEMC and most of this is tied to sale-leaseback projects. Unlike the corresponding asset, this debt is non-amortizing and is extinguished upon the last lease payment, typically 20 years after the project is sold, at which time a GAAP gain will be realized. These projects have been sold but remain on our balance sheet due to the lease back. These projects generate energy revenue at or in excess of the debt service requirements during the lease-back period.

We remain focused on maintaining adequate liquidity. At quarter end, we had $637 million in liquidity, which is the sum of our cash and unused capacity in our corporate revolver. The table at the bottom of this page shows key ratios relating to our corporate credit facility. We were well within compliance on both metrics at quarter end.

Please turn to Slide 12 for our 2012 outlook. For 2012, we expect a challenging first half but recovery in the Semiconductor and continued stabilization in solar as we progress through the year. Accordingly, the following are our second quarter and full year 2012 targets: Semi revenue up by -- up sequentially 5% to 10% in second quarter and for 2012, down slightly year-over-year; Solar Energy systems sales volume from 130 to 170 megawatts with ASPs of approximately $3.50 in 2Q and 400 megawatts with ASPs over $3.50 for the full year; second quarter OpEx less than $110 million and less than $375 million for the full year; CapEx less than $50 million in second quarter and less than $175 million for the full year.

Our key priorities for this year remain unchanged from our last few calls and reflect the need to navigate depressed end markets, while building on the improvements and company transformation in 2011. We intend to: focus first and foremost on cash flow and maintaining adequate liquidity; execute our restructure plan and position the company for when markets recover; continue to gain Semiconductor share and expand margins during the recovery; and optimize the growth of our downstream solar business.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Krish Sankar from BofA Merrill Lynch.

Thomas Yeh - BofA Merrill Lynch, Research Division

This is Thomas Yeh calling in for Krish. First off, your revised semi full year outlook to down 2% to 5% from flat year-over-year, can you help us understand if the change is driven primarily by volume or is it pricing?

Mark J. Murphy

It's just a -- it's a little bit -- it's primarily -- well, it's a combination of the 2. We still see the market recovering through the year just dialing back a little bit on the volume. And then we see pricing definitely firming up and expect pricing to increase through the year. But we're -- again, we're taking a conservative approach on that.

Thomas Yeh - BofA Merrill Lynch, Research Division

That's helpful. And your financing revolver, it went down to $70 million during the first quarter. I wanted to get a better sense of the impact that might have around SunEdison projects and how that might affect your ability to finance further projects?

Mark J. Murphy

Well, the facility has since been amended and it is back up to $150 million. You'll see that in the 10-Q. And we're also working on additions to that facility. And at this time, at $150 million, we believe that's adequate to grow the business as we've laid out at 400-plus megawatts.

Thomas Yeh - BofA Merrill Lynch, Research Division

Okay. And then last one for me. You highlighted one of your top priorities as maintaining liquidity. Can you elaborate on some of the specific metrics you have built around that goal? What do you see as adequate liquidity? And does your revolver come into that conversation at all?

Mark J. Murphy

Well, the revolver is part of the equation and we have a constructive relationship with the bank group. You'll see in the 10-Q that we had the revolver amended to give us a little lower liquidity covenant in the third quarter and a little more leverage headroom in the second and third. So the banks are understanding that while we didn't need the original waiver in the first and second quarter, it doesn't appear on liquidity, we felt that it was prudent to get a modest waiver and that will allow us to -- the semi markets will recover. Our working capital levels return to lower -- normal levels. CapEx is lower in the back half of the year, and we enjoy the benefits of all the restructuring actions we've taken. We've always maintained that we believe around $500 million of cash is adequate -- it provides us a baseline for adequate liquidity. And we expect to be at the end of the year back up around $500 million of cash. And with the unused revolver capacity, we expect at the end of the year, we expect to have liquidity between $700 million and $800 million by the end of the year.

Operator

Our next question is from Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

Just a question on the solar pipeline by region. The emerging markets region grew substantially as a percentage of the pipeline. I was wondering if you could share what some of the economics are in the emerging markets. Are the project prices and profitability similar in the emerging markets? Or is this why the 2012 systems price guidance is slightly lower?

Mark J. Murphy

Yes, I mean the -- we're very carefully looking at various emerging markets. Some we've elected to proceed, others we have not. We've elected to proceed where we feel the economics are good. And in places where we are, the economics we feel are as good as DG in the U.S., for example, which is sort of our base load and sort of benchmark business.

Ahmad R. Chatila

Yes, and the emerging markets -- this is Ahmad, Steve. The module pricing has declined substantially and other costs. So the pricing, while it continues to be lower in the future but the costs are declining as well making some markets attractive.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And then my follow-up question is on the semiconductor wafer operating margin recovery. The implied semi wafer guidance for 2012 does assume the second half semiconductor wafer sales get back to about, it looks like $270 million a quarter. The last time we saw the semi wafer sales at that level, you had about a 7% operating margin last year. Is the operating margin power significantly higher than that given all the restructuring levels? And can you get back to your long-term target at that revenue level?

Ahmad R. Chatila

I'll make a few comments and Mark will help me. So first, actually, I want to share with you one key data point. In Q1, we had a positive EBITDA in the business in the -- between $10 million and $20 million. I forgot the exact number. And we expect that number to expand somewhat in the second quarter and then substantially in the second half of the year. We're cautiously optimistic about the business, Steve. And we don't know if $270 million is going to be the right number. We think the second half is going to be bigger than the first half but we're not sure exactly where it's going to lie. And it's going to be us and the investors looking at our semiconductor customers, the large ones, seeing how they are demanding product. So our view is the second half will be better than the first half. Customers are telling us that. But we're not sure exactly where the number is going to be at.

Mark J. Murphy

Yes, Stephen, I'd build on that, that with the completion of the Ipoh ramp and the closure of the U.S. facilities, a lot of restructuring work being done now under the 2011 restructuring plan and then just increased 300-millimeter mix. You had mentioned that sort of 7% operating margins. And we would expect in the back half of the year to sort of be in the 1.5 to 2x that on the operating margin level.

Operator

And our next question is from Tim Arcuri with the Citigroup.

Timothy M. Arcuri - Citigroup Inc, Research Division

A couple of things. First of all, Mark, if you look at your revenues, you mentioned that the Solar Materials was actually pretty breakeven in terms of operating margin. So all the operating losses in the Solar Energy business were in the SunEdison business. So can you give us an idea of what the OpEx was in SunEd? Is it sort of in the $30 million to $35 million range like it was in the full quarter? And then I have a second question.

Mark J. Murphy

Yes, I think we're viewing it as a segment now. And the -- all I can say is that the OpEx levels continue to go down in that segment, that's part of the reason we combined the businesses. So I guess 2 things, Tim. One is volumes were sequentially down quite a bit and we had a relatively low volume -- our lowest volume quarter that we've had in some time and the lowest volume quarter that we'll see for the year. So -- and we haven't yet fully realized the cost reductions that we expect to see at the back half of the year. So as volumes improve and the breakeven point of the business gets lower, we expect to generate cash out of that business in the second half. And the numbers, the numbers that you gave on OpEx will be those...

Ahmad R. Chatila

Maybe I'll give him something to model. That will make it easy for you. So, Tim, go back to 2011, look at those numbers for OpEx. I would say, Mark, half of them are Solar Energy and half is semi and corporate. That's how you think about it, Tim. And from that, you can look at corporate, what the losses are. So you can tell what the OpEx is, some way or another. And what we said before is we want the solar business to decline by 30%. That's what we said we're going to do. That's how we are playing it. And Mark is right, the Q1 was a low term-out revenue recognition quarter, only 49 megawatts. It's lower than the average for the year. The other thing I would add also is there is a delay in realizing lower cost because this is an infrastructure business. So you have to lock in certain characteristics of price on negotiations way before the project is sold. So today you see a module price that is super low, it doesn't mean that we got it at that time when we negotiated the deal. But hopefully, we'll start seeing some of those gains in the second half of the year like Mark said.

Timothy M. Arcuri - Citigroup Inc, Research Division

Great, Ahmad. Just a second question. You didn't have a lot of positive cash inflows from the SunEdison business during the back half of the year. I guess it's kind of like the kid riding a bike. You have to put a lot of cash in and you have to push the kid on the bike to get them riding the bike. But then once they start riding the bike, then they can sort of ride by themselves. So my question on SunEdison, whether -- during the back half of the year or even for the full year, SunEdison will be self-sustaining in terms of cash, i.e. it's not consuming more cash than it's throwing off?

Ahmad R. Chatila

Let me try to give you -- rather than talking about SunEdison, I'm going to tell you about the MEMC overall cash engine. I think higher installation numbers than 50, let's say 75 to 100 megawatts, plus the OpEx reduction we're doing, plus that factory shuttering, which is we did multiple of them. All that together allowed us to be a cash-generating engine. And that's what Mark and I and the executive staff have been working on. So we need the volumes on us to be a little bit higher. We need the OpEx for the overall company to be lower and we need to realize the gains on the factory closures. And that's how we're thinking about it, Tim. And you are right. I mean your thinking about the bike is right, but I look at it as the overall company.

Operator

And our next question is from the Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

Ahmad, can you maybe just talk a little bit about your credit status -- statistics. What's -- what are your -- with your liquidity at the covenant today and how do you plan to improve your cash position if you'd already entered that price?

Ahmad R. Chatila

Mark will answer that one. Thank you, Vishal, for the question.

Mark J. Murphy

Yes, Vishal, I mean on Page 11, you'll see the ratios. Those are our key covenant metrics. We're at 1.7 leverage in the first, well below the 2.5 covenant. And then we're at $637 million on liquidity, well above the $450 million we had in the first. So we expect through the year, we're forecasting to be in compliance with the covenants. As you'll see from the 10-Q that we did get an amendment to our revolver to lower the liquidity threshold or set the liquidity threshold in the third quarter to $400 million, again, as we did in the first and second here, as a precautionary measure, giving ourselves time for semi markets to recover, our productivity programs to take hold, projects to term out and inventory levels to decrease. And at the back half of the year, our CapEx decreases. So as Ahmad said, once the business design is reset completely, we believe we're in a cash-generating position in the back half of the year. And then we return to liquidity levels, which we have set as an internal objective, which was cash around $500 million and an unused revolver capacity of about $200 million to $250 million so total liquidity, north of $700 million.

Vishal Shah - Deutsche Bank AG, Research Division

Great. And then Ahmad, does it still make sense to keep the 2 businesses together? I know you have historically viewed the Semi and the Solar businesses, keeping them together as a strategic, a competitive advantage, but in light of what's happening in the industry, have your thoughts changed?

Ahmad R. Chatila

Thank you, Vishal. I think at this moment, the answer is yes. It makes sense to keep them together because of the way Pasadena works and other overhead in the company from sales and everything. I don't know if the answer is yes 3 years down the road. That's something we need to assess at that moment. But at this time, the answer is yes. Keep them together is the right answer.

Operator

And our next question is from Satya Kumar with Credit Suisse.

Farhan Ahmad

This is Farhan asking a question on behalf of Satya. I had a question regarding your projects that are on balance sheet. You have mentioned in the past that you have about 50 megawatts in [indiscernible] in Spain and now, you mentioned 60 megawatts in Bulgaria. Can you talk about like how much of those projects revenue recognitions is built into Q2 guidance?

Mark J. Murphy

Well, we have -- what I can say is that we have 112 megawatts of European projects at the moment. We did have about 117 but we sold 5 in the first. We will -- we expect all but about 20 megawatts to term out midyear. And there is one project, which we think will most certainly close in the third. But otherwise, we generally expect most of our projects to term out again midyear, of which a large portion of those is in the second quarter.

Farhan Ahmad

I had another question in regards to your gross margins. You mentioned that the cost on the projects came out higher than expected. Can you talk about like what were the contributing factors for that? And do you expect like going forward, that this could be an issue that you probably were expecting the cost to be lower than they are turning out to be?

Mark J. Murphy

Yes. I think we had on a couple of projects some interconnection costs were higher than expected and some Canadian projects just the civil activities were more expensive than we had anticipated. We've learned that lesson. We've modeled that properly going forward. So we -- it's examples like that.

Farhan Ahmad

And in regards to your semi business, can you talk about like what's leading for you to decrease the guidance for full year? I mean your Q2 guidance is strong and you're talking about recoveries. And what's your reason that you're lowering your full year guidance?

Ahmad R. Chatila

This is Ahmad. Thank you, Farhan. From my perspective, our Q1 and Q2 alliance with the year is still intact, if you add both of them together. I have not changed my mind. But second half, I don't know. I'm not seeing a blowout demand that -- like a surge or a snap -- a snap back of demand that sometimes you see in an up cycle. So we just want to be a little bit more conservative about the second half of the year. That's the thing that changed, Farhan. Thank you for your question.

Operator

And the next question is from Eric Gold with MacKay Shield.

Eric Gold

A few questions. In terms of bottoming out on cash, is it second quarter, is it third quarter? It's kind of the first. Second, on Slide 12, you referred to the decline to be lower in 2Q than 1Q in part due to vendor payments. How much do you really expect Q2 decline? And what are the vendor payments in terms of dollar amounts you need to make? Lastly, I'm a little surprised by the cash balance ending the quarter. On February 15, you held your fourth quarter conference call. And just quoting from the transcript, you said you're going to be within striking distance of the $500 million liquidity due to timing of European projects. $380 million in 45 days from the date of that conference call doesn't strike me as striking distance. So I'm kind of curious as to where you think you're going to end this year in cash and how confident are you. You exited at $585 million. You're thinking you're hopefully going to get back to $500 million by the end of the year. That seems like you're down therefore year-over-year. How much are you going to cross that finish line by and how confident are you?

Mark J. Murphy

Yes, I mean Eric, this is Mark. I think -- let me just try and cover the sort of various questions you asked. And if I haven't covered them, let me know. But we expect in the second quarter to be down closer to $300 million of cash. And we expect that to be the trough on cash during the year. We expect in the fourth -- or third quarter to be closer to $400 million of cash. And then in the fourth quarter, we expect to be over $500 million of cash. We believe we've been conservative in our forecasting, understanding that we are down at these levels, which we've -- as we've said are lower than we would like to be. However, the stresses of the marketplace, the timing on projects and factors like that were just at these levels that we do not believe -- we obviously understand need to be addressed. As far as the payables expected to be paid in the second quarter, we have a lot of term outs in the second and we have a lot of proceeds. And we expect to pay in the neighborhood of about $200 million on payables. And then, we have construction facilities that also need to be addressed with those term outs. So inventory will go down substantially. Proceeds will be received. Those proceeds will be used to pay down vendors and also nonrecourse facilities. Our working capital ratios at the end of the second quarter will be relatively healthy compared to where they've been historically. So -- and we're monitoring those levels to make sure that our liquidity is healthy and it's not driven by extending payables.

Eric Gold

How much of that $300 million of cash assumes you close on almost all of the European projects that you're looking to sell? I mean is it possible that's delayed? Are you highly confident of that number?

Mark J. Murphy

I mean we believe that the number will be down close to $300 million. And we've been -- we have weekly meetings on cash. We are very specific about all the opportunities to improve it. And I think make sure about the risk that we have. So we feel confident about our forecast.

Operator

And our next question is from Hari Chandra with the Auriga USA.

Hari Chandra Polavarapu

In your commentary, you said you are not satisfied with the first quarter results. And also you have lowered the Solar project ASP for the year and also in terms of the Semi revenue expectations are down now versus flat over the year. But at the same time you also said that you are cautiously optimistic. So how should we take that in terms of cautiously optimistic in terms of cost, cash flow, market share, ASP? What are the metrics that we need to measure you against?

Ahmad R. Chatila

All right. Thanks, Hari, this is Ahmad calling. One, the Semi business in first quarter is the bottom of the cycle. So we expect the Semi business to start becoming a cash-generating engine in the second half of the year. So that's one. And you can see it in all the news from all our customers that they felt that January was the bottom of their own order demand from their own customers. The second thing is, as we said, the installation level in the company is 400 megawatts for 2012 and we only hit 50 in Q1. So the rest of the quarter is hopefully will be a lot more than 50. So that's the second piece. Third, we are going very well on our restructuring efforts. We started very early as compared to many people. And we have gone deep and wide in the company. And because of that, our cost structure is improving. And four, a lot of the input cost for our projects is also improving. You can read in the news on a daily basis where the module pricing is emerging to be. And these are the 4 main reasons why we are cautiously optimistic, Hari. I actually do not look at the pricing for the projects as the main indicator the way you are looking at it. Don't look at it as price multiplied by the installation level, meaning if it dropped, that means our profit is going to decline. I don't look at it this way. So the input costs also are changing. The Semi is, I would call it, not a major change. It's just that second half, I'm not sure if it's going to snap back the way I wanted it to snap back. It's going to be much improved from the first half but I don't know how much it's going to be. I just know that my profit is going to improve and my cash flow is going to improve in that business. I hope that helps, Hari.

Hari Chandra Polavarapu

Yes, that does help. And on a different note, I just wanted a quick question on the non-recourse debt. Is there a way for you to offload that off the balance sheet because it definitely has a perception issue in terms of valuation. So is there anything that you can do or any thought process around that in that direction?

Ahmad R. Chatila

Yes, Hari. That's a good direction. We're looking at that. We don't have anything closed or close to being closed. But we have recognized the upticks on that is just something the investors are not putting their arms around. And because of that, we start thinking about it. I don't want to make any commitments today or anybody getting excited that something is going to change in the next few months or quarters. But definitely, it's something that we got a signal, that we have to look at seriously. And we are.

Operator

And our next question is from Sanjay Shrestha with Lazard Capital.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

I had 2 questions here. One is you talked about the margin impact from sort of an unfavorable mix effect within SunEdison. Was there any one-off like large project with impacted margins and something, which probably will not recur going forward?

Mark J. Murphy

There was a project in the quarter, Sanjay, that was an FRB project that was pretty far along when we bought the company. So the -- in purchase accounting, we have a lot of cost ascribed to that project, so pretty low margin. A couple of the Canadian projects were fairly large and again a lot of lessons learned in those projects and some low margins there. So that adversely affected the mix.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Got it. Second question is on -- I mean, when we look at your 400-megawatt sales volume for this year, can you give us sort of a geographical breakdown of that, and maybe you could talk about what kind of selling conditions are you seeing in some of your key international markets for these projects?

Mark J. Murphy

So in rough numbers, you've got about -- of the 400 megawatts, you've got roughly 60% is the U.S., stable market, predictable demand, deep financial markets, good visibility on pricing and we have excellent execution. So the largest part of our portfolio is sort of the lower risk part of the portfolio. We said we have roughly 120 megawatts of European projects in that 400. So a little over 25% -- 25%, 30% of projects in Europe. Those are, with the exception of Bulgaria, they're already interconnected and producing power or Bulgaria is now as well. So we're just -- it's a matter of just selling those projects. And we believe that will happen midyear. And so the remaining 20% or 15% is the emerging markets. And we're, as for the question earlier, we're working to opportunistically develop in those markets we feel are attractive and that we can deploy resources to and extract value, so.

Operator

And our next question is from Jesse Pichel with Jefferies.

Scott Reynolds

This is Scott Reynolds for Jesse. We're hearing that you guys are selling some of your projects or some of your pipeline. What kind of revenue should we expect through the year from some side of these sales?

Ahmad R. Chatila

Yes. We're not selling our pipeline at this time. We look at opportunities always in anything we do but we're not selling pipeline. And you shouldn't expect any revenue from those.

Scott Reynolds

Okay. And then on the projects in Europe, can you give a rough geographic breakdown within Europe, where the projects are? And also, what are some of the key things that need to happen for those projects to be sold?

Ahmad R. Chatila

Yes. So you know about Bulgaria. Most of them are in Italy. And today, we are just going through the diligence phase in detail. We have exclusivities with certain investors that we're going through. And as Mark said, by midyear, give and take a little bit, we'll be able to sell most of them.

Scott Reynolds

So what's the current issue now? Is it on pricing? Or is it financing?

Ahmad R. Chatila

No, there's no current issue now. The current -- the issue was in Q4 of '11 and that's where the issue was. We should have sold on that time. And the liquidity crisis in Europe blocked us. So now there is no issue.

Operator

And the next question is from Mehdi Hosseini with Susquehanna International.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Most of my questions have been answered. But just one follow-up. Going back to the nonrecourse. How should we think about the mismatch here, the mismatch between the origin of the leaseback and the PPAs you have in the pipeline?

Mark J. Murphy

Yes, I'm not sure, Mehdi, I understand the question. Can you repeat the question?

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Sure. As you try to better assess the restructuring nonrecourse loan, and to that end, is there any mismatch in the length of the sale-leaseback loans associated with a specific project and the PPAs of -- and the related PPAs?

Mark J. Murphy

Not that I'm aware of, Mehdi. So I'm not aware of any mismatch. And in fact, I'm not sure you would be able to structure the sale-leaseback without PPA that is supportive of that structure.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

So we shouldn't be concerned and that the duration of the sale-leaseback would be shorter than the PPA?

Ahmad R. Chatila

No, this is not our knowledge. You can't strike a deal like that, Mehdi. What's your next question?

Operator

Now I'll turn the conference back over to our host. Please go ahead.

Mark J. Murphy

Well, thanks, everyone, for attending our first quarter 2012 results conference call. Have a great afternoon. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MEMC Electronic Materials' CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts