Good afternoon. Welcome to the SunPower Corporation's Third Quarter 2019 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] 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, Kevin. I'd like to welcome everyone to our third 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 third 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. 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 2018 10-K and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect our 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 website. In the same location, we have also posted a supplemental data sheet detailing some of our other historical metrics. 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 third quarter 2019 performance and an update on our strategic initiatives that are driving improved profitability and shareholder value. Please turn to slide three. SunPower executed well in Q3, meeting or exceeding our financial targets for the quarter, including our adjusted EBITDA forecast. Volume, revenue and margin all came in on plan, driven by strong demand across our global DG business. In SPES, we are positioned well for the fourth quarter with record booking levels in both our residential and new homes businesses. Our SPT business also delivered record quarterly shipments in Q3, with particular strength in DG markets including Europe, Korea, Australia and Southeast Asia. Volume growth was enabled by capacity expansion initiatives across all fabs, including our P-Series JV. Finally, we strengthened our balance sheet, generated cash at the business unit level and closed our safe harbor financing agreement with Hannon Armstrong. Now, let me cover our segment performance in greater detail. First SPES. Please turn to slide four. Overall, both our residential and commercial businesses showed sequential revenue and megawatt growth with significant interest in our recently launched residential Equinox Storage solution. In residential, demand for our A-Series panels is strong and we are ramping production to meet this need. We continue to build under industry-leading position in new homes where our backlog is now over 40,000 homes, with record bookings and shipments during the quarter. To give you a feeling for the current scale of this business, we saw 80 new home communities go live with SunPower solar in Q3. The mix of cash, loan and lease across our residential business remains balanced, in line with forecast, with particularly strong demand for our loan products. In digital, we…

Thanks, Tom. Now, let me review the financials. Please turn to slide 11. We were pleased with our results as we met or exceeded our key financial commitments including our adjusted EBITDA forecast. Overall, our non-GAAP revenue was above our commitment as a result of strong execution and continued DG demand. In SPES, revenue grew approximately 15% sequentially, with particular strength in our residential channel, including record bookings. For SPT, we shipped 677 MW, another record and above our outlook, driven primarily by the international DG business. Our consolidated non-GAAP gross margin was 16%, in line with our outlook. In SPES, gross margin was up sequentially, driven by an improved performance in both our residential and commercial channels. However, as Tom mentioned, while the origination engine in our commercial direct business remains strong and our backlog continues to grow, project deployment execution was below expectations. We're implementing a number of initiatives in the fourth quarter to improve the overall execution in the commercial direct part of the SPES business. We expect overall SPES margin to improve in the fourth quarter and beyond, with strength in our residential business, given our strong backlog, improving cost structure including synergies achieved by combining our residential and commercial channel businesses and enhanced focus of the commercial team on the direct business. In SPT, gross margin was higher than forecast on increased volumes, strong DG demand as well as the benefit from our leaseback transaction related to our Oregon manufacturing facility. Both segments are making progress on getting to their target models. Non-GAAP OpEx was $68 million for the quarter, up from $61 million in the second quarter. Excluding a one-time $8 million OpEx benefit in Q2 that we mentioned last quarter, OpEx was slightly below Q2 on a comparable basis. We remain confident that…

Thanks, Manu. I would now like to discuss our guidance for the fourth quarter and fiscal year 2019. Please turn to slide 14. The company's fourth quarter guidance is as follows. On a GAAP basis, revenue of $520 million to $720 million, gross margin of 11% to 12% and a net loss of $28 million to $8 million. On a non-GAAP basis, the company expects revenue of $520 million to $720 million, gross margin of 16% to 19%, adjusted EBITDA of $74 million to $94 million, and megawatts deployed in the range of 445 MW to 645 MW. On slide 15, the company's fiscal year 2019 GAAP and non-GAAP guidance is as follows. Revenue of $1.8 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 the range of 2.1 GW to 2.3 GW excluding approximately 200 MW for the company's safe harbor program. Non-GAAP operational expenses of less than $270 million and capital expenditures of approximately $65 million. As a reminder, fourth quarter and 2019 guidance includes approximately $20 million in gross margin attributable to certain legacy power plant projects in the current quarter. Finally, the company's fiscal year 2019 adjusted EBITDA is unchanged and expected to be in the range of $100 million to $120 million. In summary, Q3 was a solid quarter for the company as we executed on our strategic initiatives and positioned the company for strong and profitable performance going into the end of year. With that, I would like to turn the call over for questions.

[Operator Instructions]. Our first question comes from Brian Lee with Goldman Sachs.

Hey, guys. Thanks for taking questions. Maybe first off, just Manu on the guidance, that's a pretty wide range here, low to high-end, for all the metrics. Can you walk us through some of the puts and takes of what's embedded in the range here, i.e. what gets you to the high-end and what would fall out to put you at the low end? It looks like the megawatts deployed ranges is widest on SPT. So, maybe if you could just walk us through some of the moving parts here.

Right. Thanks, Brian. So, if you think about the overall megawatt guidance, we increased our megawatt guidance slightly versus last time. SPT business, specifically our international BG, remains very strong. And then, there's a little bit of project deployment timing with our commercial business. So, as you think about the two bookends of the range, there's a little bit of lumpiness in SPT associated with project shipments that go into the big power plant, utility scale businesses out of our JV too. So, that explains the wide range in SPT.

Brian, this is Tom. There is no magic chair. Basically, what we did is we confirmed guidance from last quarter for the year. We moved megawatts a little bit up, but otherwise it's just confirmation of previous guidance. Where I would lead you to is we expect to be median, playing in the middle of that guidance.

Okay, fair enough. And then, maybe just two from me and I'll pass it on. If you guys had told us at the beginning of the year that SPT gross margins would be mid-teens and highest across the business units, I think most of us would have been surprised. So, can you give us some sense of why SPT has been able to get here so quickly and how sustainable this level is into 2020? You're already at kind of that target range in the third quarter of 2019. And then, conversely, I guess, on resi and commercial, what's the trajectory here to get to 20% and mid-teens respectively, which I believe were the targets heading into next year before?

Okay, Brian. Thanks. And then, I'm going to hand it off to Jeff and then Norm and then maybe Nam, the folks who run the business units. SPT is having a very good year. And actually, it is at our guidance model in Q3, the one that we gave on at the analyst day. Jeff can talk about the factors that are driving that. What I would lead you to is, think of that plus or minus a couple points going forward. We think of being at that or better on a reliable basis towards the back half of next year, going into 2021. So, there will be some quarters where we might be close, but not quite, to that level. So, you're right. And I'll let Jeff give you some color as to what the drivers are to get to model earlier than most would have projected. I'd like you to start thinking about our SPES business as a channels business, which is residential and – residential value-added reseller channel and commercial value-added reseller channel and new homes. All three are in extremely good position and are trending very favorably. Demand is excellent. And Norm can talk about that more. And think of getting to model there, though, I think similarly reliably towards the back half of next year and into 2021. Our commercial is more of a work in progress. The origination engine is working. We're getting lots of awards. Our execution is uneven as we entered new states. So, that's probably a little bit longer to get to model, probably 2021 is what I would relate you to. So, Jeff, if you just briefly say a few words and then Norm and maybe Nam.

Yeah. The underlying story on the good gross margin performance, again, it goes to the products and the technology and also the global DG market. As Tom highlighted, we've seen great growth in EMEA, we've seen great growth in Asia-Pac and even markets like Latin America. And whether it be the IBCs or the Maxeon series technology that we've had or the P-Series technology, because of the differentiation it has on the customer base, it allows us to drive price improvement which leads to good margins. We would expect, as we head into 2020, that we'll be roughly in that area. I think the target model we put is 15% in the Capital Markets Day. That is a little further out, but I would say, between now and then, we'll be roughly around that area.

This is Norm, Brian. As far as margins go on the channels business, we did grow margins quite well in Q3. So, we added almost 5% of gross margin. And I can tell you that, in Q4, that growth will continue. In effect, in 4Q, we're already getting fairly close to our model. That's our current plan. Now, that is the Q4 and that's ramping very large. I think, as Tom said, to overall hit model consistently towards the second half of next year is likely. Now, our margin improvement is really been driven by a couple of things. one, we're getting more A-Series mix. More A-series we ship, the higher our margins go. And the other one is new homes continue to be a bigger and bigger piece of our business. And as that backlog grows, our gross margins get healthier and healthier.

This is Nam here. With commercial direct, to follow what Tom said, origination is looking great. Our Helix storage is getting a lot of adoption. We're going to focus on the execution side. I would say, year-over-year, we are seeing gross margin improvement. In terms of getting to our targets, as Tom mentioned, 2021 is the right timeline for us. And again, over the next quarter, it's the focus on execution.

Great. Appreciate the color. Maybe just one housekeeping one, if I could squeeze it in. Manu, on the $20 million in gross margin for legacy projects expected in the fourth quarter, can you elaborate on what that's related to and if there's any recurring contribution beyond 4Q? And was this part of EBITDA guidance originally for 2019 or is it a new item? Thanks, guys.

So, two questions. The gross margin related to the first quarter legacy project is primarily related to our remaining development project in Mexico, with a little bit of tail next year, but small. And then, it grows part of our original guidance.

Okay. Thank you, guys.

Thanks, Brian.

Our next question comes from Michael Weinstein with Credit Suisse.

Hi, guys. Can you talk a little bit about the EBITDA targets? 5% for EBITDA for commercial direct. What's the timing of that? Are you actually expecting it to come in in 2021 at that point or is it going to be at the ramp up period through that period?

So, I'll take that, Michael. So, the actual target that we gave at the analyst da was 7% to 10%. And we think we can exit next year close to that rate. Our goal on each of these targets is to be sustainably at those rates, meaning that each quarter is at or above that rate. So, the answer is specific for C&I at 7% to 10% exit rate next year sustainably in 2021. And it's adjustments we're making to our cost structure and the way we deploy projects that will result in the improvements.

And on the 40,000 home backlog, how much of that is in California in 2020?

I'll go ahead and let Norm take that.

Yeah. Hi, Michael. As far as the new homes backlog, it's almost 100% California. Over 95% of that is driven by our super strong position in California.

Got it. One last question. Just on the safe harbor plan for next year, should we expect that in the first quarter or more like a Q1 type item.

So, let me answer and then I'll jump back in if I didn't answer the question sufficiently. We have been putting inventory in our safe harbor program, as Manu mentioned, financed by an agreement with Hannon Armstrong. We'll still be adding to that inventory throughout this quarter, maybe a little bit in Q1. That will be good for 2020. We would expect similar for 2021 at the end of 2020.

All right, great. Thank you.

Alrighty.

Our next question comes from Colin Rusch with Oppenheimer.

Thanks so much, guys. Can you give us some perspective on the current capacity you have for energy storage and the cadence for growth in that capacity?

Yeah. I'll say a few words and then Norm for residential and Nam for commercial. I would say we're modestly supply constrained in commercial now, but mostly we're able to supply. We've been able to add other suppliers. And then, on residential, the product has alpha-ed in their last quarter. It's beta this quarter. We'll take initial orders towards the end of this quarter with volume ramp at the end of Q1. Norm can give you a sense, though, for what we're planning for in terms of attach rates and the ability to supply.

Yeah. Hi, Colin. So, relative to storage, obviously, we're, probably not surprisingly, seeing extraordinary demand. We think it's going to be a huge part of our business going through the back half of next year, but we're brand new and we're just starting to take orders. I would say that our expectations have been kind of revising upwards to where we're now expecting 20-plus-percent attach rates overall and more than that in California. And so, that will be something that affects most of the second half of next year because we aren't going to start full shipments until February and March.

I was going to say, on the commercial storage side, we have about 30 MW, as Tom mentioned, already in award. We have another 10 MW, but in the process of being constructed. And we're managing a couple of very strategic partnerships and do think we can manage the supply chain. But the backlog is strong.

And then, just thinking about middle of next year on the module business in the US and seeing competitors like LG and Panasonic bring increasingly compelling products to market, what are you seeing at this point in terms of pricing dynamics, ability to book out business that far and if you could put that in context of your thoughts around this JV for new capacity?

Yeah. I'll say a few things; and, Jeff, if you want to add on, you can. What we see in America is that we still have a highly differentiated lead. Some of the products you mentioned aren't available in America at scale. So, our A-Series is clearly the highest efficiency and highest power ratings. Our X-Series is as well. I guess, that would be matched by the next four. And our booking ability, as witnessed by the residential channel selling incredibly well this quarter, is unchanged. We have improvements of our own planned for the year. So, I'd say we remain largely – have the same view on demand for next year as we've had previously.

Yeah. This is Jeff Waters. Just speaking globally of, I would say, a similar picture, especially when you look at NGT or the A-Series product branding where we're introducing that overseas and at the cost structure of that product, especially as we build out more capacity, it will allow us to compete and compete very profitably even as competition comes, as we always expect it will.

Great. Thanks so much, guys.

[Operator Instructions]. Our next question comes from Julien Dumoulin-Smith with Bank of America.

Hey. Good afternoon, guys. Thanks for the time. Perhaps, you can summarize a little bit of what we're hearing out there or rather – some of the last questions rather. Can you comment a little bit about the drivers of the non-GAAP EBITDA year-over-year [indiscernible], especially after some of the trends that we've seen sort of year-to-date and then third quarter? Can you comment on maybe piecing them out, if you will, in terms of margin improvement versus A-Series, versus the Helix solution, et cetera?

Sure. I'll take a pass and then Manu can add from that. So, in the SPT business, what we've seen is a better job of managing the less profitable SKUs and reorienting that business. We actually modified the form factor of some of our longer, older technologies to be suitable for the DG market. So, our switch to DG has paid off well. Or our focus on DG in SPT has paid off well. And as you mentioned, A-Series, we highlighted the joint venture because, last year, that was lower, no margin. This year, it's maybe quite good margin. So, that's another factor that's caused SPT to perform better. In the channels business, we have better economics on lease, by virtue of a new lease signed. And then, we have better performance in our business because of A-Series. It's a big driver. Demand is quite strong. And in that channel, the CVAR channel is similar to that. And then, in commercial, Helix storage has actually been a winner for us, offsetting some of the implementation challenges that we've had. Equinox will be similarly so in 2020. So, we've been able to sort of cap the leakages and then harvest some of the R&D investments we made in products and solutions the last few years.

[indiscernible].

No, no. Go ahead, go ahead.

So, I was going to just jump, if you don't mind, to the balance sheet side of the equation. Can you comment a little bit on where you stand with respect to revolver capacities or other liquidity sources just as we think about cumulative availability?

Yeah. So, I'm going to have Manu take that and I might add on a few comments after he's done.

So, from a revolver perspective, we're going to right-size our revolver to about $55 million just because with the cash generation in the business unit, both in terms of 3Q and expected fourth quarter performance, plus improvement in the model at SPES with a working capital like model and working capital improvements in SPT. We believe we need a lower revolver, driven also by the fact that they are effectively out of the utility scale business from a power plant perspective. So, I from a cash point of view, what I'll say on a balance sheet perspective, I think our balance sheet got stronger in 3Q. With cash generation, we expect the business units to continue to generate cash in fourth quarter and we'll further pay down our legacy liabilities.

Yeah. Julien, as you look forward, of course, we have a convertible that goes current at the middle of next year. And as we've said on previous calls, the combination of the BU cash generation, improvements in working capital management, particularly in leased, and our ownership in Enphase, we have, we call, the operational ways of paying off that convert. I do want to note as well that we did file a shelf registration a few weeks ago, maybe a month ago. And the point of doing that, of course, like all companies, is to have flexibility. If conditions were favorable, we would potentially look to raise capital in capital markets, even potentially in the near term.

And that's debt and equity?

I'm, Julien. Can you ask again?

Sorry. That would include debt and/or equity.

Yeah. We're evaluating. If we were to do something, of course, we'll consider both.

Excellent. Thank you, guys, very much.

All right. Thanks, Julien. I think we'll take one more question. One more question please.

Our last question comes from David Katter with Baird.

Hi, guys. Thank you for taking the question. Just want to quickly touch on the SPT partnership. Is there any update there and how are discussions progressing?

Yeah. Thanks, David. I think [indiscernible]. So, we've made great progress towards finalizing potential investment. That investment, of course, is to accelerate the conversion of match three to match five, which is a great return on investment. We're in a position to announce that this quarter. We are making good progress. We've narrowed it down to one party. Of course, we maintain options. It is possible, depending on how those discussions go, that we could have an agreement to announce in the very near term. So, things are progressing quite constructively with one party, is what I would say. So, thank you very much for – unless you have a follow-up, David.

I'm all set. Thank you, guys.

Okay, thanks.

All right. Appreciate the questions very much. Appreciate your time. I think we'll have some things to talk about soon. So, we look forward to talking to you again soon and, certainly, at our next earnings call.

Ladies and gentlemen, that concludes today's presentation. You may disconnect and have a wonderful day.