SunEdison, Inc. (SUNE)

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SunEdison (SUNE)

Q3 2013 Earnings Call

November 06, 2013 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 and Executive Vice President

Analysts

Andrew Hughes - BofA Merrill Lynch, Research Division

Shahriar Pourreza - Citigroup Inc, Research Division

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

Jerimiah Booream-Phelps - Deutsche Bank AG, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Y. Edwin Mok - Needham & Company, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to SunEdison Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Mr. Chris Chaney, Director of Investor Relations. Please go ahead, sir.

Chris Chaney

Good morning, and thank you for joining SunEdison's Third Quarter 2013 Results Conference Call. 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 third 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.sunedison.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 published earlier this morning.

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 press release and the slides published today for a more complete description.

And now I'd like to turn the call over to Ahmad.

Ahmad R. Chatila

Thanks, Chris. Good morning, everyone. I'll make a few brief remarks and then turn it over to Brian to review the quarter in more detail.

Overall, we did what we said we're going to do. Our results were in line with and in some cases, at the high end of our guidance. Our Semiconductor business, with the strong leadership team, continues to execute well in spite of continued weak environment, focusing on what they can control, like improving customer service and quality, driving lean efforts and improving efficiency and overall, making the most of an extended downturn.

The business maintained share during the quarter and generated cash. Overall, the Semiconductor business is very well positioned for the eventual upturn in the market.

During the quarter, we announced our intent to conduct a partial IPO of our Semiconductor business, which we expect should occur by early next year subject to market conditions. As we head toward the planned IPO of our Semiconductor business, I'm going to focus my remarks mainly on our Solar business. I wanted to take this opportunity to provide investors with a better understanding of how we think about solar business and leave you with some insights on the potential for value creation.

In Solar Energy, our mission is to be the most respected and profitable platform in the industry and hence, the most valuable. To be the most valuable, our megawatt growth rate has to be healthy, the value per watt extracted from our installation must be high and the balance sheet must be strong. So starting with our growth rates. We have grown our annual megawatts completions from less than 40 in 2009 to more than 900 megawatts, at the midpoint of our 2014 guidance. That is about 90% compound growth rate over a 5-year period. And while I have seen significant growth and our megawatts developed, we have been replacing them in our pipeline at least as quickly, and our diversified pipeline now stands at 3.1 gigawatts, up from 2.9 last quarter. We are a leading brand in a fragmented market in a high-growth industry. So we are optimistic about the long-range growth of our megawatts.

Now turning to the extraction of value per watt. At the significantly higher quarterly megawatts run rate that we are projecting, we believe we can now begin to build and extract more project value for shareholders. As an emerging company, at lower run rates, there was a greater need to sell all projects outright to maintain a business flow, primarily for cash management, as well as for accounting purposes and GAAP earnings. At a run rate such as 200 to 250 megawatts per quarter that we have projected for 2014, we have new opportunities to optimize the value per watt we create. Our business today generates around $1.97 for every watt of solar we install. This is discounted cash flow value of a project over its life. At the midpoint of our guidance of 2013 for 523 megawatts that means we have created over a $1 billion of value in our downstream business in 2013. Brian will provide more details and walk you through a sample model in the few minutes.

Today, this value per watt is shared by downstream value chain. About 2/3 goes to solar project buyers and 1/3 to our company in the form of gross margin on project sales. Project buyers today are able to earn the large share of project value for the 3 main reasons: first, the rate of return that a single investor requires is higher than using a public vehicle. This implies high discount rates for solar projects despite the demonstrated low-risk profile of solar installation. Second, they only pay for the first 20 years of project life, despite the fact that project will produce power for at least 30 years, so there's no appreciation for the residual value. We call this remaining portion the tail of a project. Third, there's friction loss due to negotiations, including disagreement on panel degradation rates and project output.

Read the rest of this transcript for free on seekingalpha.com