MEMC Electronic Materials Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: SunEdison, Inc. (SUNEQ)

MEMC Electronic Materials (WFR) Q2 2012 Earnings Call August 8, 2012 8:00 AM ET

Executives

Chris Chaney - Director of Investor Relations

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

Brian Wuebbels - Chief Financial Officer

Analysts

Stephen Chin - UBS Investment Bank, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Satya Kumar - Crédit Suisse AG, Research Division

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

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

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Nimal Vallipuram - Gilford Securities Inc., Research Division

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

Operator

Ladies and gentlemen, we'd like to thank you for standing by, and welcome to the MEMC Second Quarter Earnings Teleconference Call. [Operator Instructions] As a reminder, today's conference call will be recorded. I would now like to turn the call over to your host and facilitator, as well as your Director of Investor Relations, Mr. Chris Chaney. Please go ahead, sir.

Chris Chaney

Thank you, Steve. Good morning, everyone, and thank you for joining MEMC Second Quarter 2012 Results Conference Call. As Steve mentioned, I am Chris Chaney, Director of Investor Relations. And with me today are Ahmad Chatila, President and Chief Executive Officer; and Brian Wuebbels, Chief Financial Officer. After my remarks, Ahmad will provide an overview of the significant events and commentary on the company's first quarter -- sorry, second quarter performance, and Brian will then review the financial results. Brian's discussion will reference slides 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 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 press release and the slides published today for a more complete description.

And now I will turn the call over to Ahmad.

Ahmad R. Chatila

Thanks, Chris. Good morning, everyone. In my remarks today, I will review the performance of our 2 businesses and the status of our restructuring in the second quarter and detail our priorities for the second half of the year. We released our second quarter results earlier this morning. And while we are encouraged by those results, there remains much work to be done in a persistently difficult business environment.

In our semiconductor business, we believe the market bottomed in the first quarter and began a recovery in the second. Our read of customers and the market indicates improved but limited demand growth in the second half.

Our cost-reduction plan have progressed as expected and improved efficiencies and careful capital spending will lower our breakeven revenue.

Solar Energy -- in our Solar Energy business, the markets remain very challenging. Housing price declines have moderated. And although lower material prices are good for the industry in the long term, they are difficult for many companies in the short term. We are happy to report the sale of all but 14 megawatts of the European projects we spoke with you about last quarter, as well as additions to our pipeline.

I'm encouraged and proud of the efforts and the accomplishments of our team in driving second quarter results in the Solar Energy business. However, the environment remains very difficult.

Our restructuring continues on track and would be largely complete in the third quarter. At the end of the second quarter, we have reduced cash operating expenses. Our solar wafer business is now cash breakeven, and we maintained our pipeline at 2.9 gigawatts while controlling development expenses.

Our priorities for the second half of the year are to improve liquidity while not limiting the long-term growth potential of the company and fully realize gains from OpEx reductions in our solar materials business restructuring.

In summary, we expect tepid semiconductor industry growth in the second half. Our semiconductor business is prepared for this environment, and we have factored this into our outlook. We expect the solar industry to remain very challenging through 2012 and into 2013. Our Solar Energy business is positioned to come through this, but we take nothing for granted. Lastly, our cash and liquidity positions are sufficient, and will remain so going forward. Brian?

Brian Wuebbels

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

The second quarter delivered improvement in both the semi and solar businesses, driven by higher volumes in both businesses. In semi, the market bottomed and is clearly behind us as volume recovered in Q2, but the strength of the rebound has softened heading into the second half of the year. Even so, restructuring efforts initiated late last year are expected to drive continued margin improvement.

In solar, the market remains challenging. Despite continued pressure on upstream pricing, the downstream solar project business has experienced relatively good demand.

In the second quarter, as Ahmad mentioned, we achieved our goal of selling the 98 megawatts of projects in Europe, representing 4 projects in Italy and 1 in Bulgaria. Our cash and liquidity were better than expected, but we continue to focus on reducing cost and driving higher operating leverage.

On Slide 4, please see the 2Q summary results. Second quarter non-GAAP revenue was $933 million. Semiconductor Materials represented about 25% of that revenue, while Solar Energy represented 75%.

Non-GAAP gross margin was $156 million or 17% of sales. Gross margins benefited from higher semiconductor plant utilization and higher solar project volumes.

Operating expenses were $106 million, in line with our guidance of less than $110 million, and included a $10 million FRB acquisition expense and other fees.

The non-GAAP operating income was $51 million, just over 5% of revenue. After interest, taxes and other items, non-GAAP earnings per share was $0.14. The non-GAAP tax adjustment of $37 million was primarily driven by the reversal of evaluation allowance associated with deferred tax assets on our sale-leaseback transactions in the U.S.

So now if we turn to Slide 5, we'll talk about our period comparisons. Non-GAAP revenue for the second quarter grew 78% sequentially and 20% year-over-year. Semiconductor Materials revenue was up 8% sequentially and non-GAAP solar revenue was up 128%. Year-over-year, Semiconductor Materials declined 16% and Solar Energy revenue grew 39%.

On the non-GAAP gross margin in 2012 grew to 17%, up from 10% the prior quarter, driven by higher operating leverage achieved with higher volumes in both segments.

Year-over-year gross margins declined due to a large benefit from an LTA customer contract resolution last year and price deterioration in both the semi and solar wafers. As we mentioned earlier, operating expenses came in at $106 million and were relatively flat compared to the previous quarter and 8% lower compared to last -- 18% lower compared to last year.

Note, however, that the OpEx included, as we mentioned, a $10 million expense associated with the FRB acquisition earn-out. We expect OpEx to continue to decline through 2012, as we drive our restructuring activities.

In the second quarter, we generated an operating income of $51 million compared to a $52 million loss last quarter and operating income of $67 million last year. Sequential and year-over-year comparisons were influenced by the same items I discussed previously and the gross margin.

Second quarter 2012 non-GAAP earnings per share were $0.14 compared to a loss of $0.26 last quarter, a $0.29 gain in last year's second quarter, which as we mentioned included the benefit of an LTA customer contract resolution.

The earnings per share we delivered this quarter reflected improved operating leverage in both of our businesses. While we achieved significant improvement thus far, we are still not satisfied, and we continue our efforts to drive greater operating leverage through cost reductions and productivity programs.

So now let's turn to Slide 6, the 2012 second quarter review. I'd like to take a moment to review a few of the metrics we committed to delivering last quarter. As we had said last quarter, we believe semiconductor wafer volumes had bottomed in Q1 and our semiconductor revenue would grow in the 5% to 10% range. Our actual results, we grew 8% quarter-to-quarter and generated a positive EBITDA, operating cash flow and free cash flow. Semi wafer ASPs, however, remained under pressure due to lower industry utilization.

In solar, upstream material prices remained under pressure, although the rate of decline seems to have moderated. We, however, view lower module pricing as an opportunity for our downstream Solar Energy business.

As we said in our last results conference call, there were a number of European projects that we expected to sell in the quarter. We sold all 98 megawatts of the projects targeted for Q2. And importantly, these projects were not sold in a fire-sale fashion, but actually generated healthy profit margin despite the adverse conditions. As we has said in our -- we came in on top of our guidance range at 169 megawatts, and the ASP met or -- $3.52 met our guidance of about $3.50.

The ASP difference between Q1 and Q2 was driven in large part by the mix of geography and project size. In Q2, the higher concentration of Europe projects accounted for majority of the ASP decline. However, as we had mentioned, the cost equally declined, and we generated healthy margins.

Note that our quarterly ASP fluctuations are not necessarily a good proxy of profit margin. For example, in 2Q, ASPs went down 20%, but our project gross margins went up over 600 basis points.

As for the other key targets such as operating expense, CapEx and interest, we met or exceeded these targets.

Finally, we ended the quarter with $449 million of cash. And our liquidity, which includes the unused portion of our corporate revolver, was $719 million.

Finally, in addition to that, we executed an amendment to remove the draw stop and regained access to our North America nonrecourse construction revolver, which now has a capacity of $110 million.

If we move on to Slide 7, we'll talk about the individual segments. We'll start with Semiconductor Materials. Semiconductor Materials revenue increased 8% sequentially, but declined 16% year-over-year. The sequential increase was driven by higher volumes across all diameters, offset partially by a slight ASP decline. The year-over-year decline was driven by a 6% volume decline and 10% lower average pricing.

On the right side of the page, you will see that semiconductor operating profit increased $8 million sequentially. This increase was mostly due to higher capacity utilization, but we also experienced lower pricing, as we had mentioned.

Operating profit declined $8 million year-over-year, driven by lower ASPs and plant utilizations, partially offset by lower OpEx from our restructuring savings and the earthquake charges that we took last year.

So now let's move on to the Solar Energy segment. Because the adjustment defined by our non-GAAP metric pertains to the Solar Energy business, all financial figures on this page are non-GAAP.

Solar Energy revenues more than doubled sequentially, primarily driven by higher solar project sales. As I mentioned earlier, ASP was lower due to the regional and project size mix.

Year-over-year, Solar Energy revenue was up $196 million, driven by 141 megawatts in higher-project sales, partially offset by $252 million less in solar material sales.

Also note that in last year's second quarter, it included $149 million of revenue from an LTA customer contract resolution, making the year-over-year comparisons more difficult. Excluding this, second quarter Solar Energy revenue would have nearly doubled versus last year.

Second quarter operating profit was $78 million, up $92 million sequentially, primarily driven by stronger project sales and offset by the lower ASPs that I described earlier.

Year-over-year Solar Energy operating profits were down $11 million. Solar material sales were lower sequentially, offset by higher project sales as we just discussed. And remember, this also included the LTA customer resolution -- customer contract resolution, which accounted for $74 million in 2011 Q2 operating income. Excluding the Solar Energy, operating profits were up $63 million year-over-year.

So now let's move on to the SunEdison pipeline on Slide 9. Our pipeline in the second quarter was flat sequentially at 2.9 gigawatts, despite 87 megawatts of interconnection during the quarter. As we had mentioned last quarter and very similar to this quarter, about 3/4 of our pipeline consists of a large number of small and medium-sized commercial, industrial and utility scale projects, providing diversification across these project types, which helps us to manage risks in our portfolio.

Nearly 2/3 of our pipeline is in North America, where we remain comfortable with the energy policies, and economic stability in the region is relatively better. However, we do continue to explore attractive opportunities globally.

In the second quarter, we sold 169 megawatts in projects in Eastern and Western Europe, Thailand and the U.S. We profitably sold all 98 megawatts in Europe that we committed to selling on our last conference call.

Interconnections in the quarter were 87 megawatts in 24 different projects, nearly triple the megawatts interconnected a year ago and down from 149 megawatts interconnected last quarter.

At the end of the second quarter, we also had 104 megawatts of projects under construction. Going forward, we plan to manage construction such that on average, we may have 100 to 200 megawatts under construction.

So now let's turn to Page 10, and we'll discuss some of our major projects that we completed and sold in the first half of 2012.

So on Slide 10, to give you more color of our recent project sales, we've provided a table, lists what we sold in the first half of the year on projects that were greater than 5 megawatts.

As you'll notice, this list represents a variety of regions, sizes, buyers and energy off-takers. In total, we have sold 218 megawatts of projects in the first half of the year, with the majority of them being direct sale and only 18 megawatts of these being of the sale-leaseback financial instrument.

Onto the next page. Page 11, our cash flows. Our unrestricted cash balance, as I mentioned earlier, at the end of the quarter was $449 million, up $68 million from $381 million at the end of the first quarter. The positive cash flow was primarily driven by operating income and improved working capital.

Operating cash flow was $100 million and free cash flow was $114 million. We paid down $135 million of payables, and we expect payables to be reduced further in Q3.

We remain highly focused on managing cash flow and are taking prudent steps to help ensure adequate liquidity throughout the year. During the second quarter, as I've mentioned previously, we amended and regained access to our North America nonrecourse facility. At the quarter end, the lone capacity of the facility was $110 million, of which $44 million was available for future draws in Q3 and Q4.

For the third quarter, we expect the cash balance to be similar to that of the 2012 first quarter, due to making a nonoperating payment for the FRB earn-out of $66 million and lower Q3 project sales. And by the end of the year, we expect our cash balance to be similar to that of the second quarter.

Now please turn to Page 12 and we'll discuss the balance sheet and liquidity. As we've discussed previously, the majority of our debt is nonrecourse to MEMC and is tied to the sale-leaseback projects in North America. 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 is realized. These projects have been sold and are generating energy revenue at or in excess of the debt service requirements.

At quarter end, we had $719 million in liquidity, which is the sum of our cash and unused capacity in our corporate revolver. As you can see from the table at the top of the page, our liquidity during the second quarter was over twice what we needed to clear our covenant, and we were well within our debt coverage.

As a precautionary measure, we amended our corporate revolver in the first quarter in the event that the sale of the European projects was pushed out and other parts of our business suffered unexpectedly. Although we did not need the amendment in the end, we believe that the proactive liquidity management remains the most prudent course for MEMC.

On the bottom of the page, you will find a principal repayment schedule for our recourse debt through year 2016, which is approximately $5 million per year, and you will see that our bond doesn't mature until 2019.

Now onto Page 13, and we'll discuss our third quarter outlook. In our Semiconductor Materials segment, we expect our revenue to be up 3% to 8% sequentially, driven by higher volumes and the stable ASPs. In our Solar Energy segment, we expect to sell 40 to 60 megawatts with an average price exceeding $3.50 a watt.

Operating expenses should be less than $100 million as benefits from our restructuring actions begin to materialize. We continue to conservatively manage our capital spending and expect CapEx in the quarter to be less than $30 million, with the majority of the spending being on our Semiconductor Materials segment. Our non-GAAP interest expense is expected to be less than $25 million.

For the third quarter, we expect our cash balance to be similar to that of the 2012 first quarter due to the nonoperating FRB earn-out payment and lower project sales.

With that, let's turn to Page 14, and we'll discuss our full year guidance. This slide shows our prior full year 2012 guidance, which was given during our last call, as well as our updated guidance. We continue to believe our Semiconductor Materials business will be down 2% to 5% compared to last year. However, visibility into the fourth quarter is significantly diminished as concerns of the global macroeconomic environment have increased.

We do expect to sell over 400 megawatts of solar projects this year at an average price north of $3.50 a watt. We expect our operating expenses, including the $10 million nonoperating FRB earn-out we expensed in the second quarter to be about $385 million.

We remain focused on minimizing cash outflows and have reduced our CapEx plan to less than $150 million for the year compared to our prior guidance of $175 million.

CapEx in the second half will be primarily focused on the Semiconductor Materials segment. And as I mentioned earlier, we expect our year-end cash flow to be similar to the second quarter cash flows.

Please turn to Slide 15, on this slide, what we've shown here is what our business breakeven scenario would look like post our restructuring.

As you know, over the past 6 months, we have restructured the company in an effort to improve our competitive position and our profitability. We have reduced our costs in a number of areas, and the business model has been fundamentally redesigned to break even at a quarterly revenue run rate of approximately $600 million.

The table on the page shows our assumptions for a possible breakeven scenario. Although Q2 was a very good quarter and well above this scenario, due to project timings and not yet achieving full benefits of our restructuring, our third quarter will not likely exceed this scenario. However, in the fourth quarter, we think that we can.

And finally, I would just like to wrap up with a few final comments. Our key priorities for this year remain unchanged from our last few calls and reflect a need to navigate depressed end markets, while building on the improvement and company transformation initiated in 2011.

We intend, number one, to focus first and foremost on cash flow and maintaining adequate liquidity; number two, to continue to execute our restructuring plan and position the company for when markets -- for when our end markets recover; number three, continue to gain semiconductor share and expand margins during the recovery; and finally, number four, to optimize the growth of our downstream solar business.

With that, we will now open the call for your questions.

Question-and-Answer Session

Operator

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

Stephen Chin - UBS Investment Bank, Research Division

I was just wondering if you could share how many megawatts of solar projects are currently for sale? If we look at Slide 9, we add up all the interconnects and subtract the megawatts of sales, we get about 190 megawatts. Is that the right way to think about how many solar projects are for sale now for MEMC to execute in the second half of the year?

Brian Wuebbels

Well, Stephen, I think probably -- this is Brian, by the way. The best way to think about it is in absolute, we have projects that are under construction. Some of those will complete construction in Q3 and some will complete in Q4. The projects that are, as we mentioned earlier, are ready for term-out. I think the number you're using is probably a little high. As we mentioned, we expect our term-outs in Q3 to be in the 40 to 60 megawatts range. So a lot of those projects are under construction and will likely term out in Q4.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And my second question is on the semiconductor division profitability. I think in prior quarters, Ahmad, you talked about reaching a 10% operating margin in this business. So post restructuring, what revenue run rate do you think you need to reach that level? And what do you think it takes to get there? Is it just market share gains in 300 millimeter?

Ahmad R. Chatila

Thank you, Steve. I think we need some help from just the market, a little bit of pricing stabilization. And we wanted to get there in the second half. So that's what we need, market stabilization. Market share, we don't need to grow that much to get there. We continue to work on our cost reductions, and these are well underway. Thank you, Steve.

Operator

Our next question will come from the line of Krish Sankar of Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

I have 2 of them, first one on semi. Ahmad, I see that you are maintaining your guidance for the semi revenue in spite of outlook for softening demand. I'm just kind of curious in your current full year outlook of down 2% to 5%, what is your implicit assumption for volumes in Q4 for the semi business?

Ahmad R. Chatila

Krish, you know the semi industry very well, and you've heard a lot of the news about the, what I call, momentum tolling in the semiconductor industry. We're going to grow, but the momentum is not as good as we would like it to be. I would say that I was more expecting to decline 2%, now I'm closer to the 5%, but I'm still within the range. And I'll give you more guidance next quarter. We're still going to grow, second half of the year.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. Okay, that's fair enough. And then a question for Brian. I understand the reason why the cash balance is coming down in Q3. But is it fair to assume at this point, that should be the low water mark, and given if you're trying to pursue any of the other new nonrecourse revolvers?

Brian Wuebbels

Yes. I mean, I think that's a fair assumption, Krish.

Operator

Our next question comes from the line of Edwin Mok of Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

First is on the Solar Materials side, and I notice that -- maybe if I just back out the numbers, it seems like solar wafer cells actually increased in volume and probably actual revenue number. What drove that increase?

Brian Wuebbels

So as we mentioned in previous quarter calls -- this is Brian, by the way. We mentioned in previous quarter calls that this was going to be an area of opportunity, and that we would not be putting emphasis on that Solar Materials business, and that continues to be the case. To the extent that we have opportunities to sell solar wafers, we will explore those, but it is not a significant area of interest for us as a company.

Edwin Mok - Needham & Company, LLC, Research Division

I see, great. That's helpful. And then, on the SunEdison pipeline, if I look at last quarter, I obviously, both construction and -- was down sequentially, right? So how do we -- how do you think about that, in terms of going forward, right? I think on the call, you mentioned that you expect construction to be 100 to 200 megawatts. So are we talking about second quarter kind of being a low point for construction and you expect bigger construction in the second half and 2013. Any color you can provide around that?

Brian Wuebbels

This is Brian again. I think the best way to think about it is if you go back and look at the chart, the back half of last year, if you take last year as an example, we did 50 megawatts of our 300 in the first 2 quarters. This year, we did 200, which means last year we did 250 of the 300 in the last 2 quarters. This year, we're saying that our guidance is 400 megawatts, and 200 of those are already complete. So I think what you're seeing in here is that a more normal level of construction starts and term-outs to try to drive the business a little more linear. It's always going to be lumpy. But I think what I mentioned was what we expect to happen, which is this is now going to be in a normal range of Q1 Q2 and going forward that we expect. Hopefully, that answers your question.

Operator

Our next question comes from the line of Satya Kumar of Crédit Suisse.

Satya Kumar - Crédit Suisse AG, Research Division

What's the cycle trend from groundbreaking to sale for a typical solar project right now?

Ahmad R. Chatila

It varies greatly. It varies from as low as 3 months to as high as 9 months. So it varies greatly.

Satya Kumar - Crédit Suisse AG, Research Division

Okay. So if I sort of assume let's says 6 months wait, so if your construction rate is 100 megawatts to 200 megawatts at any given point in time, perhaps you're shooting for having project sales would be 400 to 600 megawatts sort of ballpark in a little bit longer term.

Ahmad R. Chatila

I would -- look, you're in the ballpark, but I would -- I've not giving any guidance for next year. Like Brian said, we said we're going to do 400 megawatts this year. We're done with a little more than half maybe. We still have a little bit less than half to go this year. That's the only thing I would tell you.

Satya Kumar - Crédit Suisse AG, Research Division

Yes. The reason I asked, Ahmad, is obviously the results in Q2 are very encouraging in the solar project business with what you've done there with profitability and getting out of the European situation as much. But the backlog is 2.9 gigawatts. And the rate at which you've been doing the megawatts is -- if it's going to take you maybe 5 years to consume that. So I was just trying to think through what the longevity of this backlog. And just longer term, what are the things that you need to do whether it's access to capital or shortening that cycle time that you can start using up the backlog before it sort of expires or something.

Ahmad R. Chatila

All right. Look, great comprehensive question. Let me try to give you some color of how we think about the business. I don't want to be too excited about Q2. It's a great result. I'm happy with the team. We show that we have a great brand name. I mean, to be able to sell projects under severe situations in Europe of liquidity and make significant profits on them shows that we have developed sort of a powerhouse of a brand name in the industry and downstream. But we have to be also very careful. #1 priority for the company is to improve liquidity and ensure that our cash flows are in good shape. And that's what Brian has showed you today is we are -- we develop scenarios of in case the revenue is low how to break even in cash. So that's how we're thinking about the business. But there's no question, the upside is there. And we just need to ensure that the short term is taken care of well, but the upside is there. The pipeline is there. We continue to get significant progress in our downstream organization. You can see in the numbers today. We have not stopped working on downstream. We are not on our heels by any means. But my focus right now are the next 2 quarters, that's where I am. But I'm here because I think the upside is nice for the company, and that's why a lot of executives are around. So for us, the pipeline is pretty healthy, and will continue to be. And I expect it to grow over the long horizon. But again I repeat, situations are very difficult in the industry, pricing on materials is very low, and our focus is cash, cash, cash.

Operator

Our next question will come from the line of Mr. Brian Lee of Goldman Sachs.

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

Not to beat a dead horse, but I had a follow-up with respect to the construction velocity, which seems to have slowed here versus what you're seeing last year. I guess on that front, are there any constraints that drove part of that trend, whether it be financing or working capital needs? Just trying to make sure that we kind of covered all the bases there.

Brian Wuebbels

Brian, this is Brian Wuebbels. Thanks for the question. Look, at the beginning of the year, we had mentioned that we were focusing -- and we did this in the last call, that we are focused on liquidity management and making sure that we are managing the working capital properly. So was there some impacts to the project starts early this year? The answer is absolutely. And so -- but I believe those decisions were prudent at the time, and I believe they still are prudent. And what you'll see is that the normalized rate as one of the previous questions had mentioned, puts us in an annual run rate that is within our guidance and within what we can expect to deliver this year. So my view is still is, is that of any given time, we'll have 100 to 200 megawatts of projects under construction. Significantly large changes, like we experienced last year, is not something that we believe is in the best interest of the company. That a more normalized rate on a growing basis is how we should look at construction starts. So hopefully that helps answer your question.

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

Great. Yes, and I appreciate the color. I guess related to that, if I look at the strategy in emerging end markets, where it seems like there's meaningful volume opportunities here over the next couple of years, some of which you guys are involved in, would that preclude you from maybe leveraging the upside and potential volume there, just given kind of the comment you just made around rightsizing around 100 to 200? Because it seems like some of those may come in quite a bit higher. Or is the strategy in those markets different where you'll be going through a partnership, and so you might be able to leverage that to access the volumes?

Brian Wuebbels

Brian, thank you very much for the question. I think you hit the nail on the head. I think we do not see that construction range is an inhibitor for us to take advantage of the emerging markets, as well as our North America backlog. And clearly, we are always seeking partners. I think the right approach in an industry like this where you have a lot of change going on is to find the strong companies that are willing and interested in making the industry as a whole successful. And so yes, in areas that are merging, we do look for those types of partnership. So we also look at opportunities to do our own self-development. So I really don't see the construction discussion that we talked about as a constraint to us having a global business and a global platform.

Operator

Our next question will come from the line of Jesse Pichel of Jefferies.

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

Some investors are trying to value the 2.9 gigawatt pipeline. Could you help us with that, think about how much of the 1.9 gigawatts in North America is under PPA contract? And in Europe, maybe how much of those projects did you have a buyer? If you could help us think about that.

Brian Wuebbels

Well, as we previously have not disclosed, how much of this is in PPA or how much of it is under contract or under buying. I really can't disclose anything additional than what we have on this page. But I think the best way to think about this is that as you move through the time, we're going to be looking at different regions as time progresses. So look, Europe right now is 11% of our pipeline. Everybody knows what's going on in Europe. So we are focusing in North America and in some of the emerging markets. Our view is having a very diverse pipeline in different parts of the world, as well as in different project sites allows us to move around as we see the opportunities present themselves. So I didn't -- I know I didn't answer your exact question, but it's not a number that we disclose as far as what is actually under PPA contract. Potentially, that could be something in the future that we may look to disclose. But right now, I don't think we're in a position to talk about that at any more detail.

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

I'm sorry, I thought you disclosed that in the past. Could you talk about -- a little bit about polysilicon? Are you still selling polysilicon? And how do the poly operations affect the solar and the semi business at this point?

Ahmad R. Chatila

Jesse, can you repeat your question one more time?

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

I'm just wondering how Pasadena operations are impacting the financial results at this point.

Ahmad R. Chatila

Got it. Thank you, Jesse. It supports both businesses. As you know, we use granular poly for our semiconductor. They take a significant amount of that factory and the rest goes to solar. And I would just say that we continue to work on our cost in our Solar Materials business to improve it. I'll leave it at that.

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

Okay. Maybe one housekeeping, could you talk about the tax benefit in the quarter? It was a rather large number affecting the non-GAAP. And just could you repeat what you said on what that was?

Brian Wuebbels

Yes. It's related to the reversal of a valuation allowance associated with deferred tax assets on our sale-leaseback transaction. So what it is, is because our sale-leaseback transactions have deferred revenues attached to them, they then have deferred tax attached to them on a GAAP basis. Well, we take a valuation allowance against that in our GAAP financials. In our non-GAAP, we back that all out. Like, we don't show the revenues over time in our non-GAAP. For the sale leasebacks, we show upfront. You'd have to back out that tax valuation as well.

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

So that should continue the tax valuation?

Brian Wuebbels

Yes.

Operator

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

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

First, Ahmad, a question for you. So how are you thinking about this, again, pipeline in terms of sort of balancing the cash inflow versus cash outflow? Because it's obviously a very big profit generator for you guys. And are you potentially considering extending relationship like First Reserve or talking to any strategic partner, so that you're not limited in terms of how much of this pipeline can you construct in a given year?

Ahmad R. Chatila

So thank you, Sanjay. All of the above. All of the above. We continue to develop relationships with many parties across the value chain, so we can take advantage of our strong position in the pipeline. We'll be partnering with people in constructing projects, building funds, all of the above.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay, that's fair. And one follow-up question on that, right, last quarter, I think you guys talked about -- again, profit on the SunEdison was already pretty good. But you guys were impacted by some of the long-term module contract, which was higher than where the marginal spot prices were. So do we see that benefit as we go into Q3 and Q4 that some of these long-term contracts is no longer in place and you will actually get the true benefit of where the spot price in the module is? Are we at that point? Or do you still have some legacy long term...

Ahmad R. Chatila

Well, let me, maybe I'll say it in another way. There's always a time lag between when we contract a module, which is not a long-range contract by any means, Sanjay. And the time we get the module delivered, we put them on our projects, and then we sell the project. So there's a -- I wish -- I want to say it's not a significant time lag, but it is. It's actually sometimes many quarters, sometimes it's 2, sometimes it's 3. Having said that, we are enjoying lower module pricing, and you are going to see that over the next few years, I think. I don't think the module pricing is going to go up any time soon. And there's a trade war, by the way.

Satya Kumar - Crédit Suisse AG, Research Division

Okay, fair enough. And one final point of clarification, Brian. So when you guys talk about your non-GAAP EPS, right, that completely exclude this sort of the tax benefit you talked about. That's really an implication of the GAAP number for the non-GAAP number, correct?

Brian Wuebbels

What it's doing is it's normalizing the revenue recognition for non-GAAP with the tax treatment for non-GAAP. So since we don't -- since we have projects like sale leasebacks, which have revenue recognition over time due to real estate accounting in our GAAP, we show that recognized day 1. By just trying to match up my tax for those projects and my revenue recognition in our non-GAAP adjustments.

Operator

Our next question will come from the line of Vishal Shah of Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

Ahmad, I just wanted to follow up on SunEdison. You got 2.9 gigawatts of pipeline. You're doing 400 megawatts this year. As you're sort of looking to 2013, I'm assuming you've already started planning for 2013. How should we think about the construction and revenue recognition on that -- on the projects in 2013? And some of your -- other project developers that put some of these pipelines up for sale, are you considering taking a similar approach or just increasing just because I think a lot of these projects may have some sort of time duration? So are you looking to monetize a pipeline in other ways besides constructing and selling them after construction?

Ahmad R. Chatila

Well, Vishal, we have not given guidance for 2013. And I mean, we have a significant pipeline. I'm proud of it. It's pretty, pretty strong. We have not sold any pipeline in Q2. I would say that we're not -- I'm not in the mode of selling, but I want to partner with people. I want to monetize the pipeline in a way that I can grow the business without having to stress the balance sheet, and I'll just say that. But the pipeline is really at a bright spot in our business, very bright spot. And at a time when it's incredibly difficult for being an upstream player, whoever you are, whether you have the lowest costs in the world or the medium costs in the world, you're in trouble at -- these days. The pipeline is a significant bright spot for us.

Vishal Shah - Deutsche Bank AG, Research Division

Okay, great. And then in the semiconductor segment, you said 10% operating profit exiting this year. So should we assume a linear progression in the back half in terms of overall profitability. Is that...

Ahmad R. Chatila

Yes.

Operator

Our next question will come from the line of Nimal Vallipuram of Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

My question is that, Ahmad, I think it has been asked already, but I just want to get some more color on the pipeline. If possible, to the extent you can, if you can discuss the aging of the pipeline. And you also once before discussed how much in your projects have you seen in the 3 months before you decided to add or not add anymore to the pipeline? So if you can discuss the profile of the pipeline, it could give us some idea.

Ahmad R. Chatila

So let me share with you what I can share with you today. I can't answer every question, but I'll share with you some. One, we have not lost any pipeline because of timing, and I do not expect in the short term to lose any of that, either, okay? I can't tell you a year from now or 2 years from now. The other thing I would say is our activity continues to be strong downstream. But we're very selective. Look, there's significant amount of pipeline out there. When we drew our pipeline in North America in 2011, we looked at 22.5 gigawatts worth of pipeline. And what people talk about sometimes, they talk about a pipeline, and it's shovel-ready, what we found out to be not the case at all. So we're very selective, and we want to have something that we can build. There's a yield, of course. We always said that. There's a yield to this activity. Sometimes environmental studies don't work out, things change, but our pipeline is very solid. And I do not expect our momentum to stop. It's slowed a little bit like Brian said in the beginning of the year on purpose, so that we can reshuffle and improve our liquidity situation. But it's not going to stop. Actually, it is our growth engine in the long run, and we'll continue to see some good progress there in the foreseeable future.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Is it possible to give us some color as to qualitatively, is there enough of lead to the pipeline internally? Or does that really depend on how the market dictates, depending on different parameters?

Ahmad R. Chatila

Yes, there are limits. Look, I mean, at the end, pipeline is like a garden. You have to maintain it. You have to pick out the weeds, plant flowers. So there's spending you have to do. And if you have -- we can -- look, I mean, we have an engine. We can grow the pipeline significantly, if we want to. It just doesn't make sense. You have to maintain it. You just have to spend money. It's like spending CapEx on a semiconductor factory, and we don't want to do this. We want to be very selective, and we want to diversify our portfolio. We get a lot of huge projects. I'm actually not too excited about those. They are not in the zone of risks that I would like to take. It's almost like playing Russian roulette. I don't want that. So we try to diversify the portfolio globally, good stuff with people who know -- we know they will pay, as well as in markets where we think investors are willing to put their money. Today, for example, Southern Europe is not a good place to be in, period. We suffered through that. But in other places in the world, the market is pretty healthy. We're lucky. We have a lot of pipeline in North America, we're lucky. And it's diversified. There's no 500 megawatts project we have to sell, and we have a pretty diversified portfolio. So there's an upper limit. It is something you have to maintain, you have to spend money on. And I'm not willing, for example, to have 10 gigawatts, although I'm not saying that we can get there, but it is not unforeseeable -- unforeseen that we can grow and grow it. It can grow significantly, if we want to.

Operator

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

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Ahmad, switching gears to semi and looking into the future. How much of your R&D is currently for developing 450-millimeter wafer? And when do you think we're going to see an inflection for that particular transition?

Ahmad R. Chatila

That's a $64,000 question, they call it, right? I didn't grow up in this country, so I don't know the exact term. Is it $63,000 or $64,000?

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

It's up there. It's very up there.

Ahmad R. Chatila

Yes. So well, look, right now, there is definitely increased momentum on the 450 transition. It is still far out there. We are very careful in our assessment if we want to do it or not. We have few people working on it. But we have not spent significant amount of money on it yet. We don't know the answer at this time if we want to be in it or not. My main focus is to ensure that the semi division becomes very valuable for the company by improving its cash flow, reducing its costs and maintaining our position or increasing our share. So 450 for me is not something that I'm going to make a decision on in the next 3 to 6 months.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Sure, that's fair. And then the reason I asked this question is over the past 2 months, we have seen a total of maybe $5 billion -- an aggregate $5 billion of investment by Intel and TSM into developing the lithography. And at some point, they're going to turn around and say, "Well, we need the raw wafer to develop the equipment ecosystem." And this is where -- this is why I'm asking you. And obviously, this is beyond the next quarter or next year.

Ahmad R. Chatila

No. You're correct. And at some point, of course, they're going to come in at it. I've actually been out of it a little bit the semiconductor -- through semiconductor industry. I should be there. But what I'm hearing is the following. The critical path for the industry is tougher. And the targets are like 2016 or '17 or something. This is -- I'm talking about public information, okay? It's not confidential, no customer information. And a lot of the resources were tied up in EUV lithography for 300 millimeter, and this was not working out very well. And I think probably that's one of the reasons why a lot of interest in lithography at the time. Once progress is made somewhat, then that would be the conduit to having more demand for us, and that will get us to think more deeply about it. I would say it's a little bit far out right now. I think as investors, Mehdi, we should focus on making our current business run well. That's what we should focus on.

Operator

And our last question in queue comes from the line of Jagadish Iyer of Piper Jaffray.

Vasanth N. Mohan - Piper Jaffray Companies, Research Division

This is Vasanth Mohan for Jagadish. I have a question going back to your pipeline. I'm sorry to bring this one, but this one will be slightly different. Based on the cycle of projects in your pipeline, I assume you must have a wide range of ASPs. How do they vary based on size? For example, what is the ASPs of your less than 1 to 10 megawatt projects compared to the much larger projects?

Ahmad R. Chatila

Thank you. Well look, I mean, clearly having smaller sizes all the way to residential, going down all the way to super large projects, the ASP will decline, not linearly but close to. The other factor you have to look at is regional. And finally and the most important is the tariff regime in any given place and the PPA that you signed. So I would say that the #1 thing that we need to look at is what is the contract that you have, either with a out-taker like a PPA with a company, like a utility or some customer or a feed in tariff. These are the 2 things you should look at and the insulation in that region. After that, the size becomes an issue because it's a risk profile for people. The larger the size that this profile is not there. Actually from our experience, we like usually medium-sized projects. Banks like them. If the project is too large, then it's too high. If the project is too small, the SG&A cost on the project is too high per megawatt. So we like medium-sized projects because they're in the sweet spot for our investors. I hope this helps.

Vishal Shah - Deutsche Bank AG, Research Division

Yes. And just a quick follow-up, so you do know the ASPs going into the project? They don't change over the course of actually building -- develop the project? Do you know ahead of time what you're going to realize as ASP?

Ahmad R. Chatila

Brian, why don't you give him the number?

Brian Wuebbels

Yes. I think -- again it depends on, as Ahmad mentioned, the PPA rate. That PPA -- if you have a PPA signed, then absolutely you know the pricing. And if you know what the tariff regime is. And so -- but once 1 of those 2 are signed, then the price is very sticky.

Ahmad R. Chatila

The way we differentiate ourselves, by the way, in this kind of game is having its own brand name for 2 different parties. So what I told you is the typical answer for anybody on earth, right? But now I'm telling you what SunEdison is. It's all about branding and strength and ensuring that the investors make money and track records, fixing problems when they happen. And that you cannot get just by having signed a contract. Having a good reputation helps a lot. And that's what you see in Europe. Our reputation really helps us a lot.

Operator

We have a follow-up question from the line of Nimal Vallipuram of Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Just one question. Can you discuss at least qualitatively regarding the significant restructuring action took about 6 months ago, where we are in terms of those milestones? Have they been more or less achieved? Or do we still have to go a few more quarters before you hit those milestones?

Brian Wuebbels

This is Brian Wuebbels. So a majority of our -- if you split apart the restructuring that we've talked about in the previous quarters, so largest part of our restructuring was noncash, and that those actions took place immediately. The second largest piece was the 1,300 to 1,400 employee reductions. Most all of those are completed. And as we've said previously in the call, you will -- because of the ongoing severance payments in the beginning of the year after the announcement, towards the back half of the year, you will start seeing those savings. So in Q3 and definitely in Q4, you'll see that run rate of savings showing up in our P&L. One, you see it in our OpEx projections, but 2, you'll see it in our gross margin as well. And then the last piece that was left was the one contract, which had to do with our facility in Italy, and those negotiations and discussions are ongoing. So I would say overall, the program is progressing as we had expected, and we're going to continue to execute on that as we close out the year.

Operator

Gentlemen of the panel, there are no further questions on queue at this time.

Chris Chaney

Thank you, everyone, for joining our call and for your interest, and we hope you have a good day. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I would like to thank you for your participation. Thank you for using AT&T. Have a wonderful day. You may now disconnect.

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