Good afternoon. Welcome to the SunPower Corporations Second Quarter 2019 Earnings Conference 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] 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, Brenda. I would like to welcome everyone to our second quarter 2019 earnings conference call. On the call today, we will start off with an operational and strategic review from Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our second quarter 2019 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. On 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 2018 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. In the same location we have also posted a supplemental data sheet detailing some of our other historical metrics. Please note, that we have update our metric sheet to be more inline with our new corporate structure, as well as to provide additional transparency for each business unit. 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 overview of our second quarter 2019 performance and provide an update on our strategic initiatives that we feel will drive improved profitability and shareholder value in the second half of the year. I'd now like to review our Q2 performance. Please turn to Slide 3. The results of our strategic transformation are bearing fruit as we met or exceeded our key financial targets for the quarter, including our adjusted EBITDA forecast. Volume, revenue and margin all came in ahead of plan, driven by strong demand across our global DG business, with particular traction in the U.S., Europe and Japan. Our SPT business delivered record quarterly shipments as we continued to expand our international footprint. Given our strong first half performance and our significant visibility into the second half, we are raising our adjusted EBITDA guidance for the year. Now let me discuss our segment performance in greater detail. First, an overview of SunPower Energy services, our North American DG business. Please turn to Slide 4. SPES executed well in the quarter as both our residential and commercial businesses showed strong year-on-year megawatt growth and sequential financial improvement, benefiting from solid demand in a stable pricing environment. In residential, demand for our recently launched A-Series panels remains very strong, and we are ramping production to meet this need. We continue to build on our industry leadership position in new homes, where our backlog is now over 38,000 homes. The mix of cash, loan and lease remains balanced, in line with forecast, with particularly strong demand for our loan products. In relation to lease, we were pleased to close our new innovative financing vehicle to not only fund our needs into 2020, but also drive significantly better…

Thanks, Tom. Now let me review the financials. Please turn to Slide 11. We were pleased with our results as we met our key financial commitments, including our adjusted EBITDA forecast. Overall our non-GAAP revenue was above our commitment as we benefited from strong international DG demand as well as our strong overall execution. In SPES, revenue was up sequentially as both our residential and commercial businesses saw improved demand throughout the quarter. For SPT, we shipped 637 megawatts above our forecast, driven primarily by international DG business. Our consolidated non-GAAP gross margin was 11%, ahead of our forecast. In SPES, gross margin was up sequentially, driven by and improved mix in our commercial business, while residential margin was impacted by 1x noncash charges. For the quarter, pricing in both residential and commercial remain stable. We expect both resi and commercial margins to improve in the second half of the year, given our strong backlog and improving cost structure. In SPT, gross margin was better than forecast on increased volumes and strong demand in our higher margin DG business. I also want to highlight that SPT Q2 margin and EBITDA results include the impact of continued ramp costs of our Oregon manufacturing operation. The expected costs we'll be applying the second half of the year. Non-GAAP OpEx was $61 million for the quarter, down 10% sequentially as we benefited from our cost reduction initiatives and productivity gains from our digital investments. We're increasingly confident that 2019 OpEx will be less than $270 million. CapEx for the quarter was $12 million, consistent with our NGT ramp at Fab 3, and the continued install of our second line in Malaysia. Adjusted EBITDA was $8 million. We see 2019 adjusted EBITDA improving on a quarterly basis as we benefit from our (inaudible) initiative,…

Thanks, Manu. For 2019, we expect financial performance to improve on a quarterly basis throughout the balance of the year. I would now like to discuss our guidance for the third quarter and fiscal year 2019. Please turn to Slide 15. The company's third quarter 2019 guidance is as follows. On a GAAP basis, revenue of $430 million to $470 million, gross margin of 8% to 12% and net loss of $55 million to $35 million. On a non-GAAP basis, the company expects revenue of $450 million to $490 million, gross margin of 14% to 17%, adjusted EBITDA of $30 million to $50 million and megawatts deployed in the range of 550 to 600 megawatts. On Slide 16, the company's fiscal year 2019 GAAP and non-GAAP guidance is as follows. Revenue of $1.8 billion to $2 billion on a GAAP basis, and $1.9 billion to $2.1 billion on a non-GAAP basis. Gigawatts deployed is expected to be in a range of 2.05 gigawatts to 2.25, excluding approximately 200 megawatts for the company's safe harbor program, non-GAAP operational expenses of less than $270 million and capital expenditures of approximately $65 million. Finally, the company is raising its fiscal year 2019 adjusted EBITDA to be in the range of $100 million to $120 million. In summary, Q2 was a solid quarter for the company as we executed on our strategic initiatives and positioned the company for a strong and profitable second half performance. With that, I would like to turn the call over for questions.

[Operator Instructions] Our first question comes from the line of Brian Lee of Goldman Sachs. Your line is open.

Hey, guys. Thanks for taking the questions. I had two, maybe first on the gross margins. Pretty encouraging to see you beat guidance for the second straight quarter here. So kudos to you. But I was a bit surprised to see the components. Resi seemed weaker, commercial better and then SPT was higher. So can you walk through some of that, the moving pieces across the 3 buckets, and then how we should think about each component into 3Q? And then generally speaking, it seems like you're tracking ahead of plan in commercial and SPT, but there's more upside potential in resi. Any thoughts around the longer term targets you set out at the Analysts Day, if those are still relevant or if maybe you're starting to see potential upside in some of those buckets?

Thanks for your question, Brian. And this is Tom. I'll start, and then Manu can take if from there. You're right, gross margins were good in Q2, trending the way we want. And I appreciate the question about the models that we showed at Analyst Day, because I think that's highly relevant. Commercial is pretty close to model. Volumes in the second half of the year will be substantially higher. So it's really good news for the commercial business, because as margins have now come in closer to model, we capitalize on that with volume. SPT is benefiting from focusing on the DG business and, of course, the A-Series product. And so we expect both of those things to continue to bear fruit going forward. So the SPT trend, I think is something we're confident in going forward. I'll let Manu explain resi. Residential does have some accounting in it that he can explain. What I would say about residential is we're quite confident about the trend towards model and we need to just explain Q2. But in terms of the overall trend, we're still quite confident that we get to model. I'll end just with my last comments about getting to model. And I believe you can still find those Analyst Day slides on our website if you want to look at the model for others. Is, yes, I wouldn't say we're prepared to raise model on any of the businesses. But I would say that the guidance that we gave, our confidence is higher and maybe we get there a little sooner in some of the businesses than we were suggesting when we had Analyst Day. In terms of residential, Manu?

Thanks, Tom. So like Tom said, our residential margins are improving throughout the year. Here's the way to think about second quarter. Second quarter had a 1x noncash charge that was effectively a forgiveness of some charge-backs to dealers from prior years. And non-realizing for that, that would have put us at a higher gross margin compared to prior quarter. So the trends are positive with a little bit reclass [ph] as well between OpEx and gross margin that would have enhanced the gross margin for second quarter. So as Tom said, the trends in residential are positive quarter-on-quarter and expect to continue through the year.

Okay. Fair enough. That's helpful. And then the second question, then I'll pass it on, on revenues, you've been pretty consistent here in kind of the $400 million to $500 million range throughout the year, also what you're inferring here for 3Q as well. So the first real step-up seems to be in Q4, based on the full year outlook you're providing in the 3Q guidance. But correct me if I'm wrong. If I look at a megawatt guidance, it seems like Q4 will actually be about 500 megawatts, which is actually not higher; if anything, it seems a little bit lower than the recent run rate. So can you kind of parse that out for us, the better Q4 revenue run rate on what seems to not be necessarily higher volumes? Is this all mix-related? And if that's the case, can you give us some sense as we head into 2020, around the two drivers of top line growth, potential top line growth, I guess organically on mix and then inorganically on incremental capacity and volume additions? Thanks, guys.

Great. There were lots of questions rolled into one, so I'll address piece-by-piece. From a revenue perspective, SPES is a higher mix. Both residential and commercial over at [ph] SunPower revenue in the back half of the year or megawatts in the back half of the year. That drives the higher revenue. Both businesses are doing extremely well with higher bookings, and residential and commercial bookings also very good, stronger backlog coming in the back half of the year, which gives us increasing confidence in the back half revenue number. Those revenue numbers in SPES we'll expect to grow in line with the model that we laid out at the Analyst Day for both residential and commercial businesses. So that was from a revenue perspective. From a megawatt perspective, one of the things you have to factor in is that the back half of the year, megawatts includes about 200 megawatts for safe harbor. That is not part of our megawatt guidance, our megawatt deployed guidance. So you have to add 200 megawatts to that, 1/4 of that in third quarter and 3/4 of that in fourth quarter.

And then, Brian, in terms of 2020 and beyond, how do you think of revenue growth? So there's the baseline megawatts deployed and we guided our growth on our Analysts Day. And we do have the catalyst of the safe harbor, plus we will have an ITC catalyst again next year in America. And rest of world markets are really strong, places like Europe, of course, Korea, Latin America, other parts of Southeast Asia that are doing quite well. We think that goes into next year as well. I think it's super important to know as well that we expect revenue per watt to increase meaningfully over the next few years as we increasingly attach storage and services to a lesser extent. And that's the case for residential and commercial. In SPT, a big driver will be more A-Series focus on DG. And of course we're not done. A-Series, as we ramp A-Series, our SPT team is working on a successor product as well; assume in the out years that'll help revenue as well. So that's how I would think of longer term revenue growth.

Okay. Thanks, guys. Appreciate the color.

Thanks, Brian.

Thanks, Brian.

Thank you. And our next question comes from the line of Michael Weinstein of Credit Suisse. Your line is open.

Hi. This is Maheep Mandloi on behalf of Michael Weinstein. Could you just touch up on NGT manufacturing roadmap and where we are on adding the third line and beyond the first two lines? And then I will follow.

Sure. So we think of NGT really comes in line pairs. So we've implemented a line pair, so you could call it two lines. But it's a line pair. The equipment for that second half or that second line is being installed and will be operational soon. And so we expect to be pretty close to the nameplate run rate of 250 megawatts in Q4. In terms of the next line, depending on how you count, we would expect to make the commitment for that line during the fourth quarter, probably towards the end of the fourth quarter. That commitment right now would be planned to happen after we signed a funding agreement. And so that's the plan that we have in front of us now. And of course, then we ramp subsequently and more aggressively next year post-funding, converting more lines to Maxeon 5.

Got it. And then, typically like could you just touch on the bifacial exemption which was recently granted by the government? And how do you see that technology specifically for your JV in China and for NGT as well? Thanks.

Yes. So bifacial is not new to us. We shipped bifacial product in 2009 to the Desoto project with NextEra Energy. So we know bifacial extremely well. The P-Series product actually has a better bifacial ratio or coefficient than does our IBC product. So the P-Series product in China is particularly well-suited for bifacial. We don't actually ship out of that joint venture into America. So the motivation from the 201 exclusion is not there for us, because, of course, we have an IBC technology exclusion. So if we do bifacial, it would be P-Series most likely, but it would be for rest of world markets. There are things evolving with 201 and tariffs in the AD CVD that may change that, but that would be the current position. And it's important to note bifacial really only makes sense in power plant. In the DG applications, you don't have adequate space between the module and the reflective surface for the math to work. It doesn't mean we won't see bifacial modules in DG; it just doesn't make sense economically.

That's helpful. And just one last question, and then I'll get back in the queue. Just could you just talk about the improving residential lease economics? And I know Manu there briefly touched upon it. But if you have anything more on that to share, will you? Thanks.

Yes. So we've done -- I'm going to let Norm Taffe answer that question here in a second. I'm just going to say a few words. Norm runs the residential business; I think many of you know that. We've done 3 prior funds with BAML. Well, of course, you improve each fund as you work with them. And we've raised a lot of lease funds. And so Norm and his team and Manu's team work closely with BAML to improve the actual implementation of the [forced lease] fund. Do you want to say a few words now?

Yes. Thanks, Tom. Yes. The only thing I'd add there was we are very good partners with BAML, allowed us to really achieve our key objective, both in terms of lowering our cost of capital and allowing us to actually take more money back to ourselves on those leases. Also, it supported our SunStrong partnership very well in that this lease fund actually allows us to deconsolidate real-time leases. So we get the cash upfront and then we participate with our partner, SunStrong, in the longer term economics of the lease at the same time. That's quite innovative and unique and very supportive with our whole trends for be more transparent about our economics and focus on getting cash up front.

Thank you. And our next question comes from the line of Julien Dumoulin-Smith of Bank of America. Your line is open.

Good afternoon. Congratulations. Maybe just a quick housekeeping item before I move on. [Technical Difficulty] embedded in your guidance here in the back half of the year and where that's to be accounted for? And then I got a follow-up real quickly.

Julien, we lost your connection there briefly. You said something about something being embedded in the back half guidance. Can you . . .

Sorry. Apologies about that. The Enphase shares, just where is that reflected in your guidance? And what are you assuming there for the balance of '19 here?

So from a Enphase perspective, we are assuming that we'll own about 85% of the Enphase stock.

So we've got nothing in our P&L nor our cash forecast from this day forward on Enphase for 2019. We'll be an 85% owner at the end of the year.

Got it. Okay. Excellent. And then if I can just turn back to the sustainability of the cash improvement that you're talking about. I suppose, can you give at least a little bit of a flavor as to some of the items in the back half of the year and how you think about that moving forward? I mean, there's a lot of more specific questions, I suppose you could ask. But perhaps at a high level and at risk of being overly specific, that's probably the best way to frame the question at large here.

So Julien, you want a summary of how do we think of cash in the back half of the year and what the drivers are for cash?

Yes. But with an eye towards how do you think about the sustainability of the business unit cash as well as corporate and CapEx going into '20, right? So the viewpoint being, what changes?

So as you think about the back half of the cash, elements of cash, so 3 big pieces. The business units are generating cash in the back half of the year on the backs of strong EBITDA performance and a better working capital model. That should continue in 2020 and beyond. The legacy liabilities is the second piece. That should start reducing as you think about going from 2019 to 2020 and beyond. And then the CapEx will be primarily invested in high ROI investments, most of it going to NGT.

I think, too, Julien, I would just jump on, the upstream part of our business had a pretty significant transformation. That was a significant part of our cash burn in previous years and it's gotten quite a bit better that their business is benefiting from A-Series from the new DG product, from strong markets performing well, by the way, gaining share in those strong markets. So there's been quite a turnaround in SPT that we would expect to continue as we invest in our NGT product.

The preferred bidder structure, just what's the expectation there on how that would contribute here, as best you at least initially understand it today?

When you say preferred there, are you referring to NGT funding?

Yes. Sorry. And what would that structure look like under the preferred bidder, if not specific to who it is, et cetera.

Yes. Yes. Well, of course, until we're final, definitives, I can't convey exactly what that would look like. What I would say to you broadly is it's significant funding. We're [broadening] an agreement as to what that would look like. It is structured in a way that can be exclusively invested in the upstream business. And (inaudible) to mention, I think I'm comfortable with conveying here is timing, which I would measure in low number of months.

And our next question comes from the line of Colin Rusch of Oppenheimer. Your line is open.

So as you look at the energy storage and the services opportunity there, can you talk a little bit about the supply chain's preparedness to help support you guys in terms of that growth? And then how do you think about some of these services in terms of the pricing dynamics? Certainly, what we've seen in terms of fast responding energy storage? And the Mid-Atlantic has been a lesson in terms of not getting too far ahead of ourselves. So just want to get some perspective on that from you guys.

Okay. So Colin, can you repeat the first part of the question? The second part . . .

The second part is on energy storage pricing in the open market bidding. And the first part is about supply chain's preparedness to support your growth there.

Thank you. Okay. So I'll say a few words, and Nam Nguyen, who runs the commercial business, may add a few comments. So in terms of supply chain, the good news is, we've been in the storage market now in production for over a year, year and a half. In the commercial business, we've diversified sources. It would be fair to say that supply and demand isn't always in alignment. And generally speaking, demand is greater than supply. There's also been suppliers that are modulating how aggressive they are in terms of their supply. We've been able to diversify supply in commercial, and we're fine. The work that we've done there is benefiting how we approached Equinox storage for residential. And sourcing for battery, we think is going to be fine for us when we release that product in the back half of this year. Then I'll comment on services. For us, when you monetize the services, for sure the customer, the old management is much more revenue generation than grid services than the market pricing for capacity or fast response, as you indicated. So our focus is on demand charge elimination which has way more significant economics. In terms of grid services, though, mentioned in our prepared comments, we're a year into it. We won a New England ISO capacity bid a year ago. It was not that large, but it gave us experience. We're bidding more significantly as I speak or approximately in this time frame. So that doesn't really materially -- I'm going to give you a broad answer. Doesn't really start to materially affect our P&L as we model it. It takes a couple years before you're going to see that really move the needle in our P&L, 2 or 3 years. Do you want to add anything, Nam?

Yes. Just to add another comment, Tom, to your comment around the supply situation. While there is constraint on the battery supply side, we actually feel pretty comfortable with our position. We have a number of strong suppliers. And I think it speaks to the strength of our pipeline as well as our deployment numbers and our partners being able to count on us for that pipeline and deployment. The certainty of deployment is very, very critical. On the storage services side, to date, we've mostly deployed applications around demand charge savings as well as energy [arbitrage]. And the key markets that we've seen those types of economics to work for us are California as well as a few of the east coast markets, including New York, Massachusetts and New Jersey. So those are the big markets right now for C&I storage.

Great. That's helpful. And then just following up on Julien's question around the Enphase position. So today it's exiting the market at about $182 million of value. Can you just walk us through the logic of hanging on to that position when we're having so many discussions around cash about the operating business?

Well, there's actually a form filed that shows prior to today we have sold 1 million shares out of 7.5 million. So that's 13%, and, thus, the answer to the previous question of 85%. And there's contractual reasons in terms of the way we originally got that investment, that affect on how we would monetize that position. Also, frankly, we have a really good partnership with Enphase, and it's quite effective. And I think holding the 85% gives you some impression of what we think of the partnership. So it's a combination of the contract and the partnership.

And our next question comes from the line of Pavel Molchanov of Raymond James.

In the cash flow statement for the June quarter, there was a $9 million payment to SolarWorld. Is that the entirety of what you paid to acquire the Oregon facility?

The answer's no. We had an upfront payment back in the fall, and then this is part of that. I think that upfront payment, I don't remember exactly, but it was mid-20.

That's right, Tom.

Okay. Can I also ask about the prospect of ITC extension? Some bills introduced in both the House and Senate for a 5-year extension. Obviously, the pre-buying in advance of 2020 would suggest the industry doesn't really believe it. I'm curious if you're expecting this thing to get settled before, let's say the 2020 election.

So our opinion is based on, in my case, several rounds with ITC, and the last one, of course, was the, I believe it was 5-year extension. And that was very late in the process and it was a late part of the agreement that was reached on the Tax Extenders Bill, as I remember it. And I would estimate that that would be what would happen here as well. So in my opinion, given that experience, November or December would be when we would know. That does affect how much we safe harbor, because, of course, the more we safe harbor, if it were extended in December, we'll have that extra material with no economic gain at that point. So we are preplanning for that. I think that's one of the benefits, of course, of being vertically integrated, is we can adjust rapidly. So on those two bills, we're not optimistic. We wouldn't think that it's going to happen -- I think this is just early signs in positioning for the potential for that. And I believe the whole reason for this is that most people voting believe in climate change, and this is a bipartisan way that's worked in the past to extend renewables. So it went from 0% at the beginning of the year to maybe 30% now, and we'll see as the year develops. That's how we think of it.

Okay. Appreciate it.

Great. Thanks, Pavel. That's all the questions we're going to take today. We really appreciate everybody's time, and we look forward to our next earnings call with you.

ladies and gentlemen, thank you for your participation in today's conference. this does conclude the program. you may now disconnect. everyone have a great day.+