Good afternoon. Welcome to SunPower Corporation's Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at SunPower Corporation. Thank you, sir. You may begin.

Thank you, Daniel. I would like to welcome everyone to our fourth quarter 2018 earnings conference call. On the call today, we will start off with an operational and strategic review by Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our fourth quarter 2018 financial results before turning the call back to Tom for guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, our 2017 10-K and our Quarterly Reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides which we will reference during the call on the Events & Presentations page of our Investor Relations website. Finally, I would like to remind everyone that we announced last quarter; we will report our Q4 and 2018 financial results under our new segmentation structure. Our earnings press release and supplemental slides reflect this change. We have also posted materials in our IR website and in the appendix of today's slide, detailing the last two years of historical results under the new segmentation for comparison purposes. Please see our 10-K for additional details on the impact of our structure as well. And in the same location, we have posted a supplemental data sheet detailing some of our other historical metrics. Finally, I'm pleased to announce that we have scheduled our 2019 Capital Markets Day for March 27 at the Western Grand Central Hotel in New York City. The event will start at 9 AM Eastern Time and webcast through our Investor Relations website. We will also post our presentation materials on the site prior to the start of the event. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower. Tom?

Thanks, Bob, and thank you for joining us. On this call, we will provide an update on our strategic transformation, review our fourth quarter 2018 financial performance, and explain how our new segmentation will highlight the inherent value in each of our businesses. First, an update on our transformation and long-term strategy. Please turn to Slide 3. Over the past two years, our focus has been on simplifying our business model and reducing leverage in order to improve financial transparency, enables sustainable profitability. During this period, we exited the Power Plant development business, monetized a number of non-core assets, restructured our organization, strengthened our balance sheet and lowered our annual operational expenses by more than $100 million. I'm happy to say that this strategic transformation is now materially complete and that SunPower is now a simpler, leaner and stronger company. In 2019, our focus is shifted to delivering the results of our transformation, namely a return to sustainable profitability. There are three key elements to reach this objective. First, we will continue to expand our leading position in higher margin, higher-growth global DG markets. SunPower's products deliver exceptional value for DG customers in our brand and channels to market enable premium pricing versus competing products. Second, we will leverage our industry-leading technology position on two fronts. First, through the ramp of our lower cost high-performance NGT technology, secondly, by enhancing our storage and services offerings in the North American DG market. We've also reduced the capital intensity of our upstream business, meaningfully through our DZS P-Series JV, as well as our CapEx efficient NGT technology. We believe that these key initiatives will allow our business units to achieve operating cash flow breakeven for the second half of this year and position us for sustainable future profits. Looking forward, we will…

Thanks, Tom. Now, let me review the financials. Please turn to Slide 12. Before we get started, I wanted to remind everyone that we are now reporting our results under a new segmentation that improves transparency and enables stronger long-term financial performance. To help you better understand our new model, we have posted – our website, recasting two years of historical under our new segmentation and providing additional detail. We've also added this information in the appendix of our earnings deck and will provide further details in our 10-K. Moving on the quarter, we were pleased with our results as we met our key financial commitments, including our adjusted EBITDA forecast. Overall, our non-GAAP revenue was in line with our commitment, due to strong execution. In SPES, demand remained strong throughout the quarter with U.S. residential ahead of plan, which offset certain project timing delays in our U.S. commercial business. For SPT, we shipped 318 megawatts during the quarter with continued solid performance in our EU and Australia DG business, while achieving our power plant supply volumes. Our consolidated non-GAAP gross margin was 6.9% in line with our forecast. In SPES, resi gross margin declined moderately due to the impact of our resi lease portfolio, while commercial margins were lower versus last quarter due to certain legacy projects as well as mix. We expect commercial margins to improve in 2019, given our strong backlog and improved cost structure. In SPT, gross margin was 6.3%, in line with our commitments as we benefited from strong sales in our higher margin international DG business. Non-GAAP OpEx was $66 million for the quarter, below our guidance for the quarter and the year. We expect to continue to benefit from our expense control initiatives and improved operational processes in 2019. CapEx for the quarter…

Thanks, Manu. For 2019, we expect financial performance to improve on a quarterly basis throughout the fiscal year. Performance weighted towards the second half of the year, driven by big record commercial bookings in the fourth quarter of 2018, SPT backlog as well as normal seasonality in the residential business. Company also expects fiscal year 2019 adjusted EBITDA to increase approximately 60% on a normalized basis. This includes adjusting for NCI due to our residential lease portfolio sale as well as the effect of Section 201 tariffs paid during the year, both of which will not occur in fiscal year 2019. I would now like to discuss our guidance for the first quarter in fiscal year 2019. Please turn to Slide 16. First quarter fiscal 2019 GAAP guidance is as follows; revenue of $290 million to $330 million, gross margin of negative 3% to 0% and a net loss of $70 million to $50 million. On a non-GAAP basis, the Company expects revenue of $350 million to $390 million, gross margin of 3% to 5%, adjusted EBITDA minus $40 million to minus $20 million and megawatts deployed in the range of 360 megawatts to 400 megawatts. For 2019, please turn to slide 17. For fiscal year 2019, the Company expects revenue of $1.8 billion to $1.9 billion on a GAAP basis and revenue of $1.9 million to $2 billion on a non-GAAP basis, OpEx of less than $280 million, adjusted EBITDA of $80 million to $110 million, megawatts deployed in the range of 1.9 to 2.1 gigawatts. On Slide 18, we are providing to bridge to our adjusted EBITDA forecast compared to our 2018 results. To get normalized 2019 comparative number, you need to adjust 2018 for two factors; NCI and Section 201 tariffs. NCI is no longer applicable due to the sale of our residential lease portfolio last year; we will not be paying 201 tariffs in 2019, as our technology is exempted. As a result, we see normalized EBITDA growth of more than 50% year-over-year, as we begin to benefit from our new model structure. This increase in EBITDA will be primarily driven by improvements in our gross margin per line. Finally, as Bob mentioned, we'll host our 2019 Capital Markets Day on March 27th in New York City. We are looking forward to updating you on our long-term strategy, including a detailed overview of our new segments and update on our long-term financial model as well as provide additional details on our 2019 guidance. With that, I would like to turn the call over for questions.

Thank you. [Operator Instructions] Our first question comes from Michael Weinstein with Credit Suisse. Your line is now open.

Hi, this is Maheep Mandloi on behalf of Michael Weinstein. Thanks for taking the questions. Just with regards to the target gross margin structure for the different businesses, and Manu thanks for that Slide 15. Just wanted to understand, when do you expect to achieve those targets, is it like 2019 or 2020 number? And if you can explain a bit more – what's the delta between that target and the 3% to 5% gross margins in Q1 that would be helpful?

So I'll let Manu – this is Tom. I'll let Manu take the when do we hit the target, and I'll talk about the difference between last quarter or this quarter's guide and that number. So Manu?

Yes, just from a timing perspective, we get to these target margins back half of 2019, early 2020. So that's from a timeframe perspective.

And the drivers of gross margin expansion are different for each of the two parts of our business in DG. In residential, we expect our lease economics to improve throughout the year, both execution and the financing vehicle that we used. We expect to have positive benefit from our new homes segment, where we have a commanding lead, 17 of the 20 top home builders are SunPower customers and we expect to exploit that throughout the rest of this year. We expect to benefit from NGT in this channel and then there's a channel that has lower customer acquisition costs, where we self install, might be in third-party sales where we benefit as well. These things all lead to margin accretion in residential. In commercial, it's primarily driven by better execution of our core solar installations. We do have a couple projects that report back several years ago that are flowing through our P&L in Q1. The longer project takes generally the less good the margin is, so we'll be getting those behind us. We had a strong finish to last year in bookings in commercial. So we benefited from that in the back half of this year. And then we have more storage adding onto our net 9 megawatt hours and then we have a services business, that's been primarily service to reduce customers' utility bill and I can speak more about that later, but those are the drivers for margin acceleration.

Got that. Thank you. And the other question which I had was just on the mix of loans versus leases for the residential business in the quarter and probably going forward, what do you expect over there? And a follow-up on that, just looking at the safe harbor of panels, would you be able to buy safe harbored panels for the cash loan business? Or would that be just limited to the leasing business? And thanks for taking the questions.

All right. Sure. I'll give a high level and then I'll let Manu give any specifics, I don't have exactly right. Our lease volume typically varies between 40% and 60% of our business. I think it's closer to 40% currently. I would expect that to increase this year because it will be better economics with safe harbor unleased going into next year. And now I'll pivot to safe harbor strategy. So we obviously will have one or we have one. We benefit by being vertically integrated and that we believe we can safe harbor more strategically products that we think are best suited for multiple years after this year. The answer to your question is, we have 40% to 60% of our residential business in commercial business can be safe harbored that we think we have a very strong safe harbor program going into – or going out of this year. We cannot safe harbor cash or loan at least not as currently constructed. We're doing more work there, but current plan is we cannot. So it will be our commercial business and our lease business where residential, which again I expect to expand.

Yes. Just on the first quarter mix between lease and loan and cash of our North America residential, about a little over a third is leases.

Got it. Thanks for taking the questions.

Thanks, Maheep.

Thank you. And our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey guys. Thanks for taking the questions. Maybe first one for Tom, I think you mentioned during the prepared remarks that $3 billion pipeline. Just wanted to clarify on that, was that just related to commercial or was that total DG? And then maybe if you could just elaborate. That's a big number. How do you define and quantify that just kind of wanted to get a sense of what that's comprised of?

So that's a commercial number, and like most companies, we use a CRM system, we're giving an unweighted number and these are various stages where we have positive engagement. And that includes both our direct and our [CCAR] business and also importantly, Brian that would include storage.

Okay. Appreciate that. That's helpful. And then I guess second question just on the CapEx. I know you guys are moving into more of a CapEx light position relative to historical. But can you give us a bit more granularity around for this year, the guidance growth, how much of this CapEx is growth versus maintenance related? And then how do you think about or how should we be thinking about the level of CapEx involved from going from 250 megawatt of NGT to the full conversion to 1.3 and sort of what's the timeframe for that to occur?

So I'll start and then Manu can give specifics on. So NGT can expand from the initial 252 megawatt once we convert all into ratio will be 1.8 gigawatts that will happen over several years. It's important to note that the CapEx intensity of NGT is way lower than our traditional IBC products, way below half of what it has been previously. So Manu can give you some kind of guidance now on our CapEx. What I would say on CapEx is, its all NGT is minimal non-NGT CapEx that we'll plan this year. So it's where we will implement that all of our CapEx. The last thing I would say is the timing will be driven by the fundraising that we're doing. I would say that's going really well, and we would expect something in the next couple of quarters to talk about how much that is and then how that influences the timing, so maybe you can calibrate the CapEx.

Yes. Brian this is for 2019 CapEx, for the $75 million we've talked about, most if it is NGT, there's a little bit of CapEx associated with digital and then the maintenance CapEx is roughly at similar levels from 2018 to 2019.

Okay, thank you. That's helpful. And maybe just last one from me and I'll pass it on. Manu, I was under the impression that the GAAP to non-GAAP adjustments were going away this year, but they still seem to look pretty meaningful in the 1Q outlook. So if you could just update us here on how we should think about the reporting structure with the new segmentation and particularly on the GAAP to non-GAAP adjustments? Thank you.

Yes. What you're seeing come through in the first quarter guidance is as we are going into the new, call it fund structure for our residential lease business that's got a much simpler P&L treatment, and you get to that in the back half of the year, we're still kind of running through the funds that existed in 2018 and that's what you're seeing come through the guidance. What we have done from a guidance perspective, we have done our a non-GAAP basis, on a more simpler P&L structure that is much more transparent and cleaner, but you have the first half of those adjustments that will come through, but it gets cleaner in the second half.

Okay. Thanks a lot, guys.

Thanks Brian.

Thank you. And our next question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open. Julien, please check your mute button.

Hey. Can you hear me? Good afternoon.

Yes. Hey Julien.

Hey, Julien.

Hey. Sorry about that. So just to follow-up on the last set of questions here. Just can you elaborate a little bit more on the fundraising opportunities for beyond the 250 megawatts, just want to understand, what should we say instruments you're contemplating? And then separately, the timeline, i.e. if you get the right fundraising solution shall we say, is there potential for the NGT deployment to be accelerated, just if you can elaborate on that?

Yes, we can. So the funding is non-equity non-capital market funding. So it's strategic partner funding, that's something we've done before a couple times, actually, I've been here since almost inception. Our second line was funded by customers and then we funded the expansion in Malaysia, actually with the partnership you may recall. So we're looking for strategic partners or we're in dialogue with strategic partners that we would expect to able to announce something within a few quarters, say two or three to have funding in what we're planning for by the end of the year or at least partially funded by the end of the year. If it's sooner, we would expect to accelerate NGT faster, and it will depend on the strategic source of capital. But yes, there is an opportunity for NGT to move faster. We certainly are capable of ramping faster or bringing on equipment faster.

Got it. But to clarify, would that be in the – would that effectively give some kind of equity ownership into the NGT expansion? Just as you think about it. I know that early days, lots of combinations here, but just to be clear on that. And then a separate second question, margins on P-Series, just expectations now as you kind of really start to scale this, any shift versus what you've kind of previously talked about?

Sure, actually, I'll take both, and then Manu can comment. In terms of the type of fundraising, it could be a straightforward as investment to get preferential access to the product, as an example or it could be some form of an instrument in the technology itself. Those are still be being determined, so I don't want to comment on something that's very much a work in progress. It’s up to the individual investor. But again there's precedence of doing both of those things that I just mentioned. I can come back Julien, if you want to talk about it further. In terms of P-Series, I'll just comment broadly and hand it to over to Manu. Our P-Series expansion is going excellent way. We are ramping P-Series in Hillsboro and we will supply North American commercial with that product. We've started to ship out of Hillsboro, Oregon and that's going really well. Of course, the majority of the volume is coming out of our DZS joint venture, that's almost 2 gigawatts now, and it could expand to another gigawatt yet this year. We are exploiting what we believe to be in a technology lead in the shingling technology. So great optimistic in our margins in P-Series here because of the scale that we have in the technology is proving to be a winner. I would also say that we price differently this year and we're focused on not only the power plant market, but we've reconfigured the P-Series product also sell specifically into DG channels and we think we'll see benefit from that as well.

Just on the P-Series margins Julien, we've talked about the margins being high single-digits. So you see slight improvement just on volume leverage. But that product is highly capital efficient and a highly OpEx efficient product for us.

Excellent. Thank you all very much.

Thanks, Julien.

Thank you. And our next question comes from Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question. The deleveraging between Q3 and Q4 is obviously very impactful. At this point is your balance sheet essentially where you want it to be on a sustained basis? Or do you envision further debt reduction that you still want to have for comfort?

So thank you for the question. So just from a balance sheet perspective, if I just deconstruct our debt, primarily our debt is the convert and they can't view in 2021 and 2023 respectively. Beyond that, there is very little debt. Just from our balance sheet model perspective, we like the model we have, which is much more of a working capital and an asset-light model, given the nature of our businesses that is quick turn and high margin Distributed Generation businesses. So I think we like the model. I think we like the position that our balance sheet is at, our working capital was down 20% from third quarter to fourth quarter. And that's just a proof point from an efficiency of the model that we have right now.

Okay, that's helpful. And the second one, you guys may or may not be able to answer but, in the context of relentless M&A in the industry with so many of the other module companies having been acquired, and in particular, taken private by their management teams thinking about some of the Chinese players. Is there any conversation at the Board level with Total about perhaps taking the business into full ownership at the Total level?

So our comments on, first, I'll say about Total. We are in year eight of our relationship with Total. There is a high level of interaction. They're supportive of our strategy. And our strategy is to manage the Company as two business units in upstream and in downstream and the benefits associated with that, which we believe will be a more nimble entities they can manage to market changes faster. Also importantly, can make capital allocation decisions and importantly perhaps have investments that would be optimized for either of those two businesses. So that's the path we're heading on. We've moved almost all of our corporate OpEx into the divisions, there is 2% of sales still at corporate by the middle of the year. We expect that to be less than half of that. So we will have two entities that can operate largely independently and that offers options for those two businesses. And we think our crews benefits during the year. So that's what I could say about that question.

All right, thank you very much.

Thanks, Pavel.

Thank you. And our next question comes from Jeff Osborne with Cowen and Company. Your line is now open.

Hi, good afternoon, guys. Just two quick ones from me, I might have missed it. But did you give expected interest expense for the year, just with the delivering? How do we think about that?

Just from a interest expense perspective, that interest expense will be cut to half from 2018 levels as you think about 2019.

Okay. And then maybe for Tom, just as you think about the megawatts being deployed for DG and as the storage attach rates goes. Is there any broad strokes you can give us in terms of sort of revenue impact for home in terms of – if you had an X-Series and you are getting $100 per home, what that goes to, is storage going up just in round numbers? And then more importantly as storage and services take place, which is part of your 2020 plan for both residential and commercial, what happens to gross margin? There is a lot of third-party content with that. So is it safe assumption that maybe there is some pressure on gross margin, but EBIT margins are higher, any thoughts on that question would be helpful.

All right, sure. So on resi in the attach, it's storage. I think what you're asking is that the – how much more revenue per watt would we get with storage?

Exactly, 3X multiplier or any comments would be helpful.

No, you should think of that more and up to 25% range. Now that's in the near-term, and that's without thinking of what services we might be able to attach that and that is the way you should think of it, so think of up to 25%.

Any comments on the margin differential?

So thank you, Jeff. On margins – the margins are actually accretive, and I want to remind you that we released a product, we have – Helix is our solution for commercial, which is our IBC modules plus a complete mounting system, the inverter and all those that are racking. So that the team has designed Helix storage, where we buy the actual battery itself, but we do the integration and most importantly, we write the software that does the demand charge optimization. And in the future, we'll do rate arbitrage as well and that is – the margins on that are materially accretive to solar only. And that's a meaningful part of how our commercial business will expand their margins. Services will be even better margins. And for us, commercial is first in line, and it's already installed 9 megawatt hours and is already selling the demand charge services. We've also done some grid service as well, but that's just – it's in the early stages. So I think storage – it's a meaningful higher gross margin services, even more or so both accretive commercial first, residential second.

Perfect. That's very helpful. Thank you.

Okay. I think we'll go to our last question.

Thank you. And our final question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much for squeezing me in. I maybe missed it along the way here. Can you talk about the silicon above market expectations for 2019, where that's going to pencil out in terms of total dollar value?

Sure, I'll say a comment and then Manu will take it. The good news on the silicon out of market is – in a few years now they're having that behind us. We had two contracts, one is behind us and the other one is working on just two or three years and it's behind us in terms of impact on 2019.

So, yes, the impact on 2019 will be slightly higher than 2018, but in the – at the similar levels.

Okay. And so from a free cash flow perspective, are you guys ready to provide some guidance on that. Just if I do the math, it looks like you're – it can be burning somewhere around $70 million.

Yeah. That's sounds about right.

Okay, great. Thanks a lot guys.

Well, thank you for calling in, and we look forward to Analyst Day in March 27, you'll get quite a bit more on all the topics we covered here. So we'll see you in New York on March 27. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.