SunPower Corporation (SPWR) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's fourth-quarter 2012 results conference call.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

I would like to turn the call over to Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation.

Sir, you may begin.

Thank you, Lisa.

I would like to welcome everyone to our fourth-quarter 2012 earnings conference call.

On the call today, we will start off with an operating review from Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our fourth-quarter 2012 financial results.

Tom will then discuss our guidance for the first quarter and provide some color on our outlook for 2013 before opening up the call to questions.

As a reminder, a replay of this call will be available later today on the investor 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 our 2011 10-K, our quarterly reports on Form 10-Q, as well as today's press release.

Please see those documents for additional information regarding those factors that may impact these forward-looking statements.

To enhance this call, we have also posted a set of Power Point slides, which we will reference during this call on the events and presentations page of our investor relations website.

In the same location, we have posted a supplemental data sheet detailing some of our historical metrics.

On slide 2 of our Power Point presentation, you will find our Safe Harbor Statement.

Our prepared remarks will run approximately 25 minutes and then we will have a brief question and answer session.

With that, I would like to turn the call over to Tom Werner, CEO of SunPower, who will begin on slide 3. Tom?

Thanks, Bob, and thank you for joining us today.

On today's call, we will update you on our Q4 operational highlights and strategic position, review our fourth-quarter financials, and provide our outlook for the balance of the year.

Please turn to slide 4. Overall, we delivered solid financial performance in Q4, despite challenging industry conditions.

Our North American Power Plant business continued to be a key source of strength, contributing significant revenue and impressive margins.

The highlight of the quarter was the sale of our AVSP projects to MidAmerican.

The 250-megawatt CVSR project for NRG remains on track and we expect to complete this project on schedule by the end of this year.

To date, we have installed more than 185 megawatts at this site.

We also executed a PPA with PG&E for the 100-megawatt Henrietta Solar Project in California.

With our 100-megawatt Quinto Project due to be complete in 2014, and Henrietta scheduled for 2016, we have further extended our revenue and margin visibility.

In the North American Residential market, we once again saw strong demand for our leasing products.

Q4 lease demand outstripped our financing capacity for the year, as we fully consumed our cash grant lease program months ahead of our plan.

We subsequently accelerated our efforts for securing lease financing and recently closed $100 million in financing from US Bank.

With greater than 14,000 leases signed to date, and additional financings in the pipeline, we are well positioned for growth in this business.

In Japan, we continue to expand our footprint in Residential, with record shipments in the quarter.

We also beat our panel cost-per-watt targets for the quarter and full year.

As we have said in the past, we see substantial further panel cost reduction ahead, as we continue to implement our manufacturing process step reduction program.

These achievements resulted in a strong financial performance, with solid non-GAAP profit, EPS, and free cash generation.

As we enter 2013, and look towards the future, we believe that SunPower's technology and products represent an increasingly important source of competitive differentiation compared with non-vertically integrated competitors.

Please turn to slide 5. The fact is that SunPower products exhibit significant performance and long-term durability advantages compared with conventional solar products.

By directly managing the development, manufacturing, and downstream deployment of these products, we maximize the value of our technology investment and provide our customers with better, more reliable energy solutions.

Our panels have set the high efficiency bar for the industry for almost a decade and we are now in full production of our Maxeon Gen 3 technology that raises that bar even higher.

The key technology attribute is a solid copper foundation on the back of our cells that enhances electrical conductivity and dramatically improves resistance to cracking and corrosion.

More on that later.

We continue to execute on our accelerated panel cost reduction roadmap.

Blended cost per watt declined by more than 25% in 2012, with costs in our largest format panels coming in at less than $1 per watt in Q4.

We are also scaling our C7 technology with 7 megawatts currently in construction in the US, and our joint venture in China scheduled to begin ramping later this year.

SunPower technology also delivers superior field performance.

Our customers see between 7% and 10% higher energy delivery per rated watt, compared with conventional solar systems.

Our new Gen 3 technology works even better, yielding further incremental energy benefit.

This additional energy production represents a major cost advantage for our customers over the lifetime of their systems.

SunPower panels also retain more of their initial out-of-the-box power than any other PV panel by a wide margin.

Superior reliability starts with the fundamentally different cell architecture I mentioned above.

We interconnect these cells with a unique strain relief, in-plane design, and encapsulate them in a better, more weather-resistent package.

The end result is a PV panel that delivers more energy over its operational lifetime, solely as the result of minimal output degradation.

We see very low panel failure rates on the order of 27 panels returned per 1 million panels shipped.

As a result of this exceptional reliability and output stability, we can offer the industry's only 25-year product warranty and performance guarantee.

I will spend the balance of my time discussing our downstream strategy.

Our goal is to provide additional color to help you better understand the individual value of both of our Power Plant and Rooftop segments, we will provide a more in-depth discussion on both segments during an analyst day we are planning for May.

Let's start with Solar Power Plants.

Please turn to slide 6. SunPower's been a leader in the megawatt scale Solar Power Plant space for 15 years.

As of the end of 2012, our worldwide operating Power Plant fleet comprised greater than 150 ground mount systems with an aggregate capacity of more than 700 megawatts.

Our four announced California projects CVSR, AVSP, Quinto, and Henrietta more than double the scale of our installed Power Plant fleet, drive the deployment of over 1 gigawatt of SunPower panels over the next four years, and generate over $3.5 billion in revenue, and approximately $1 billion of gross margin during this period.

The driving force behind our Power Plant business is a highly compelling offer, combining competitive LCOE and lower investor risk.

By controlling the entire value chain from solar cell manufacturing through system installation and commissioning, we can predictably drive down levelized cost of energy.

SunPower's extensive experience in the backing of Total reduces investor risk, and thereby effectively lowering the project IRR hurdle rate.

As the cost of solar power reaches parity with high cost fossil fuel resources, we foresee that our Power Plant business will become increasingly international in scope, and we plan to utilize a mix of go-to-market business models based on the characteristics of each market as shown on slide 7. In North America, we have established a very strong development platform.

We will continue to develop our multi-gigawatt domestic project pipeline, including more than 400 megawatts and RFO bids in North America that we expect to submit over the next six months.

We have largely moved away from project development in Europe, but continue to pursue selected projects in France, and to work with development partners on a turn key EPC basis for future projects in Southern Europe.

In the emerging Middle East, Africa, and Latin America markets, we are working on a number of projects in close coordination with Total, who can leverage their deep experience and local presence in these regions, and who can offer multifuel energy solutions, combining solar and fossil fuel components.

We have also started construction of two projects totaling 33 megawatts in South Africa as a result of our acquisition of Tenesol from Total.

In Asia-Pacific, we are pursuing a number of paths to market, including our recently announced Chinese JV to develop a C7 supply chain and drive local gigawatt scale deployment.

We are also very active in Japan, India, and Australia, where we will be working to offer clean solar power directly to retail customers.

Now, let's focus briefly on the Residential and Commercial market segments.

Please turn to slide 8. SunPower has been a global leader in the Residential and Commercial Rooftop business for the past decade.

Currently, we have 2,000 dealer partners in nine countries, with an install base of over 100,000 customers worldwide.

Our indirect sales model allows us to expand or change our market footprint with minimal fixed cost impact.

As many of you know, the development of vendor-arranged end user financing options such as leasing is driving the transition from hardware sales to an energy services model.

This process is furthest along in North America, but we expect similar trends to play out internationally.

We are an industry leader in North America with over 14,000 leases in place across nine states.

And we are actively developing innovative end user financing offers in selected international markets, which we expect to roll out later this year.

Also, our relationship with Total facilitates access to a lower cost of capital, as well as an opportunity to leverage their strong brand in select markets.

Please turn to slide 9, which lays out our go-to-market approach in different regions.

As we mentioned earlier, we have been the market leader in North America for many years, working with 500 authorized dealers in 45 states, we have deployed more than 450 megawatts of residential systems to 60,000 plus customers to date.

With the development and ramp of our leasing products, we are now addressing a significantly expanding market, expected to exceed 5 gigawatts by 2017.

With $465 million in contracted lease payments and the addition of lease capacity financing such as the US Bank announcement last week, we are well positioned to drive long-term growth in this segment.

In the North American Commercial segment, we take a slightly different path to market by utilizing a direct sales and turn key EPC model.

SunPower has developed a broad roster of enterprise accounts and repeat customers, including Johnson & Johnson, Macy's, Campbell's Soup, Toyota, and many other Fortune 500 companies.

We expect revenue of more than $250 million during 2013 in this segment.

Europe remains a challenging market with significant near-term policy volatility.

However, there are a number of key markets in Europe where Residential and Commercial customers can enjoy the benefits of solar power at or near economic parity with retail power rates and where public sentiment favors a sustained transition to renewable energy sources.

We made the strategic decision last year to restructure our operations in Europe with two goals.

The first goal was to regain profitability in the second half of 2013.

The second goal is to develop new financing offers and build on our substantial dealer platform to position us for market leadership as selected European markets transition from the feed-in-tariff market to a more sustainable, long-term policy structure.

I am pleased to say that we are on track to achieve both of these goals.

In Asia-Pacific, we are focused primarily on two Residential and Commercial markets in the near term, Japan and Australia.

In Japan, we continue to see strong demand for our panels, with roof space at a premium, our high efficiency technology is perfect for this market, and shipments to Japan now constitute more than 10% of our business.

In addition to our long-term partnership with Toshiba, we are expanding our channels to market in Japan as evidenced by our recent agreement with Sharp, as well as expanding our direct sales efforts in the Commercial and Power Plant sectors.

With that, I would like to turn the call over to Chuck for a more detailed review of our financial performance.

Thanks, Tom.

Good afternoon, and please turn to slide 10.

Today, I will discuss our operational performance for the quarter and provide some additional color and information on our leasing business.

We finished 2012 with strong results.

For the year, we grew megawatt volume by 13% with revenue up 2% compared to 2011.

Non-GAAP gross margins increased 20%.

Non-GAAP net income increased 37% year over year, while operating expenses declined.

Fourth quarter was solid for both earning and cash flow growth, due to the acceleration of our cost reduction programs, a focus on capital and liquidity, and execution of our downstream strategy in Residential and Utility scale projects.

Our non-GAAP revenue for Q4 was $785 million, compared to $607 million in Q3.

Our North American and Japanese markets again showed strong growth while Europe was in line with Q3.

We are happy to report that we closed AVSP with MidAmerican in Q4, along with several other multi-megawatt projects.

Our revenue was at the lower end of our guidance range, as we recognized approximately 50% of the development revenue for AVSP in Q4.

We do expect to recognize the balance of the development revenue in the first quarter.

Non-GAAP revenue in the fourth quarter includes approximately $189 million from AVSP and $266 million from the continued construction of CVSR.

As we've stated in the past, GAAP revenue recognition is based on real estate accounting requirements, whereas non-GAAP revenue follows the IFRS convention for multiple element arrangements and percent complete, which we believe better represents the timing and flow of the projects and economics.

For the fourth quarter, non-GAAP revenue exceeded GAAP revenue by approximately $100 million.

Residential ASPs were down less than 10% and premium standard efficiency were in line with prior quarters, as customers continue to value our highly differentiated products.

Per our plan, we reduced cell production in Q4 to 153 megawatts, down approximately 32% versus Q3, as we focused on reducing inventory levels.

Megawatts recognized for the quarter totaled 225, up 15 megawatts versus Q3, due to record shipments into Japan and a continued buildout of CVSR.

Our non-GAAP global gross margin for the quarter was 18.7%, up 460 basis points versus Q3 and above our initial plan.

Our strong gross margin performance for the quarter was attributable to our cost reduction plans, development margin on AVSP, continued execution of CVSR, and strong growth in the Japanese market.

As Tom mentioned, we are executing well on our cost reduction initiatives.

In fact, for the year, we saw our cost-per-watt fall faster than our ASPs.

This was an important driver in our overall margin improvement.

We still see significant opportunity to reduce both panel and BOS costs into 2013 and beyond.

Now let me spend some time on our regional performance.

In Q4, non-GAAP North America revenue rose 36% sequentially to $626 million, accounting for 80% of total revenue with a non-GAAP gross margin of 28%.

We expect to start the initial construction of AVSP this quarter, ramping to meaningful EPC revenue and margin in Q3 of this year.

As Tom mentioned, Residential lease demand continues to be strong and we closed the fourth quarter as the Residential lease leader for 2012.

In EMEA, non-GAAP revenue was $89 million, in line with Q3.

Megawatts recognized rose approximately 25% sequentially while margins declined significantly, due to the liquidation of inventory from the legacy Tenesol business.

In addition, our margins in EMEA reflect underutilization charges and inventory write-offs.

As we discussed last quarter, we remain committed to the EU market, as we have a number of competitive advantages such as our high efficiency technology, multiple build-to-order module manufacturing locations, and our partnership with Total.

We are seeing improvement and measured success related to our recently implemented restructuring programs and expect to return to positive margins and profitability in EMEA in the second half of this year.

In A-Pac, revenue was $69 million, up 19% sequentially as we gained traction through our partnership with Toshiba.

For 2013, we expect further growth in Japan, as we expand our Toshiba relationship and leverage our recently signed supply agreement with Sharp.

Non-GAAP gross margin for the quarter in A-Pac was 22%.

Non-GAAP operating expenses for the fourth quarter was $88 million.

Operating expenses declined year over year, even with the Tenesol acquisition due to our cost reduction activities.

In fact, we expect to reduce OpEx by an additional 10% in 2013 compared to 2012.

We ended the quarter with a non-GAAP profit before tax of $43 million and recorded a non-GAAP tax expense of $22 million.

Our tax expense for the quarter was greater than expected due to an incremental tax provision for our European business.

Overall, non-GAAP earnings per share for the quarter of $0.18 was in line with our plan.

On a GAAP basis, loss per share was $1.22 and below our forecast, due to an increase in restructuring charges, as well as the settlement of our class action lawsuit, both of which we previously announced.

We fully expect to see a significant reduction in GAAP restructuring charges for 2013 and do not anticipate any new restructuring plans globally.

The remaining GAAP P&L restructuring charges will be less than $20 million over the next year or so.

Our non-GAAP weighted average diluted shares outstanding for the quarter were 119 million.

Please turn to slide 11.

As we enter 2012, we committed ourselves to prudently managing our balance sheet and working capital needs.

I'm pleased to say that we succeeded on both accounts as we exited Q4.

We added $85 million in cash to our balance sheet and extended our revolver maturity to Q1 2014.

Our strong execution also enabled us to generate $141 million in cash from operations and record $73 million in free cash flow, which includes Residential lease financings.

Additionally, in order to continue to grow our Residential lease business, we recently announced our first ITC financing transaction with US Bank.

This $100 million facility will enable us to add 2,000 to 3,000 Residential lease customers to our growing portfolio.

We prudently managed our working capital during the fourth quarter as inventory declined by $115 million, down 35% for the year.

Cash management metrics significantly improved in Q4, with our cash conversion cycle at a very low point of 29 days.

Cash and working capital are one of our top priorities and we expect to generate between $100 million and $200 million of free cash in 2013, after the approximately $80 million we will invest in CapEx, primarily R&D and operations.

I would now like to provide a brief update on our Residential leasing business.

Please turn to slide 12.

Q4 was a very strong quarter for Residential lease.

With the recently announced $100 million ITC financing partnership with US Bank, our signed lease capacity now totals more than $500 million.

We believe that our US Bank announcement is the industry's first Residential solar ITC flip partnership deal and it is a direct reflection of our bankability.

We continue to have in-depth discussions with a number of other financial parties related to our lease programs and expect to announce additional ITC partnerships throughout 2013.

We are also evaluating other financing structures to build and enhance our shareholder value.

I want to say a few words on how the partnership flip accounting will look in our financials over the coming years.

As background, the typical lease structure of cash grant leases such as inverted leases, embed the tax benefit in revenue, or as a reduction in COGS.

With an ITC financing and a partnership flip, the tax benefit will show up on a new line in our financials called net income or loss attributable to noncontrolling interests, or NCI.

This is very similar to the current reporting minority earnings, or equity earnings or subsidiaries.

What does this mean to our financials?

First, most leases will be classified as operating leases and recognized over 20 years.

Second, most of the lease P&L benefit will show up under NCI at the time of system installation.

We structured our partnerships to minimize volatility and do not expect material losses in NCI.

Third, we'll receive all the cash from the partnership up front.

Fourth, we will report NCI in both GAAP and non-GAAP results.

Finally, gross margin is not the relevant metric for leases, as most of the profits show up under NCI.

In addition, I want to point out that our margins include all the dealer and channel costs, unlike others, where they are presented as SG&A costs.

Please turn to slide 13.

At the end of 2012, we surpassed 14,000 lease customers with our contracted payments exceeding $465 million.

For the year, we booked more than 90 megawatts of leases compared to 22 megawatts in 2011, while installing approximately 75.

We plan to discuss our leasing business in more detail in the Q1 earnings call and at our analyst day in May.

In closing, we ended the year with a strong financial performance as a result of the continued execution of our cost road map and long-term downstream strategy.

We also strengthened our balance sheet, improved our liquidity position, and prudently managed our working capital needs.

Looking to 2013, we expect to increase profitability and drive free cash flow for the year as we leverage our global model.

With that, I'll turn the call back to Tom.

Thanks, Chuck.

I would now like to turn to our guidance for the first quarter, as well as provide some high level color on where we see 2013.

Please turn to slide 14.

For Q1 2013, we expect to recognize revenue on approximately 150 to 170 megawatts.

We see non-GAAP Q1 revenues in the range of $475 million to $550 million, with non-GAAP gross margins projected to be in the range of 18% to 22%.

On a GAAP basis, we expect revenue of $450 million to $525 million and a gross margin of 3% to 7%.

Non-GAAP earnings per share projected to be in the range of $0.05 to $0.20 with GAAP loss per share of $0.85 to $0.60.

Capital expenditures in the first quarter are expected to be in the range of $30 million to $40 million.

For the fiscal year 2013, we expect both GAAP and non-GAAP total revenue to be in line with 2012, with an increase in volume recognized as we ramp capacity to meet the needs of AVSP in the second half of the year.

Performance for the year will be weighted more to the second half, as we expect to start initial construction of AVSP this quarter and ramp to meaningful EPC revenue and margin in Q3 of this year.

Additionally, we expect that our restructuring in Europe will lead to profitability in this region in the second half.

Gross margins will remain strong, and operating expenses are expected to decline 10%.

As a result, we see a significant increase in 2013 non-GAAP earnings per share when compared to 2012.

Looking forward, we see substantial unlocked shareholder value in both our Power Plant and Rooftop segments.

With more than 1 gigawatt in contract or under PPA at identified pricing, our Power Plant business now provides us significant revenue, margin, and cash flow visibility over multiple years.

In Rooftop we see strong Residential lease growth in North America, further market share gains in Japan, and the flexibility to offer global innovative financing programs.

We firmly believe we have the best combination of go-to-market strategies, industry technology, and bankable experience to be the leader in this segment.

Our goal is that post our analyst day in May, you will have a much better understanding of the strength and long-term shareholder value inherent in both businesses.

We'll now open the call to questions.

In addition to Chuck, we also have Howard Wenger, Regions President, and Bob Okunski, our Senior Director of Investor Relations.

Operator, first question, please?

(Operator Instructions)

Sanjay Shrestha.

Lazard Capital Markets.

Two quick questions I had.

One, just a clarification.

So how much, again, just want to make sure I got the number right, how much is left to be recognized as revenue on CVSR, and how much of AVSP do you guys expect to recognize as revenue, even though it's going to be the second half in 2013, megawatt wise?

Okay.

Sanjay, both your questions are on, one's on CVSR revenue, and AVSP revenue for the rest of this year.

Correct.

So, Chuck, do you want to take those?

I will.

Sanjay, we have just started on AVSP in Q4.

So the substantial majority of AVSP is left, and the previous announced range was $2 billion to $2.5 billion in both project size.

As far as CVSR goes, there we have approximately -- let me get you a better range.

We are about 70% through the project in terms of total recognition.

Okay, okay.

That's great.

And one follow-up I have guys.

So when I take everything into consideration that you guys said, look at Q1 and then think about Europe getting breakeven in the second half of the year, AVSP ramping up, your costs coming down.

I mean, is it fair to think about second half actually being given more profitable than the comment on Q1 here, suggesting that we're actually looking at a pretty wildly profitable year compared to 2012 in '13?

Yes, you had me until you said wildly.

This is Tom.

Significantly.

The one nuance, or the one detail is I think of Q2 as a transition quarter, and, yes, Q2 and Q3 has a really, really strong reason to believe they will be very strong quarters and strong quarters even relative to Q1, with Q2 being a transition quarter.

So that's how I would characterize it, Sanjay.

Okay, great.

Can I actually squeeze in one more then, guys?

Sure.

Okay, great.

So you guys briefly mentioned that you are exploring other financing options apart from some of the sale leaseback and Residential business transformation that's happening there, right?

Are you guys of hinting towards -- lot of talk about the restructure, the MLP structure, the (inaudible) -- what are you guys kind of talking about when you say other financing option to further enhance the growth and the capital formation and things like that?

Sure.

So what we're referring to is, as you know, we entered lease about 18 months ago and rapidly became a top lease player, and we're going to be aggressive and we're going to expand in North America.

By virtue of our model where we don't own the Residential channel, we partner with independent dealers worldwide, we're able to offer similar structures in other regions of the world.

And so what we're referring to is work that's being done in Australia and parts of Europe to offer similar solutions that we'll be able to talk substantially more about during the second half of this year.

So that's specifically what we're talking about.

Now, with regard to MLPs and REITs, it's our view that that's a logical transition in the market.

We're the first to get a deal done on a tax-equity basis and a flip partnership structure, a partnership flip structure with US Bank.

And as we execute more and more capacity, we think the transition MLP, MLP and REITs is a logical outcome of lease becoming a really big part of solar in general.

We fully expect to capitalize on that because we think our position is unique to actually capitalize on those structures.

Now, the timing of that is not clear to us.

Okay.

That's fair enough.

Thank you so much, guys.

Shar Pourreza.

It's Shar Pourreza, Citigroup Global Markets.

Let me ask you, good traction on the cost-per-watt front, is there a target of where you think you'll levelize at in 2013, '14, or is there somewhere we could think about costs bottoming out?

I think the answer to your question is no.

At least not in that timeframe.

What we believe is unique about our cost reduction projects -- or approach is that our cost reductions are driven as much by innovation as they are from supply chain efficiencies.

And of course we believe that the innovation, things like step reduction, increased efficiency, improved yields by changing design architecture, redesign in systems to match specific applications, complete systems design, things like that, we think to have a more sustainable competitive differentiation, and we have a very robust pipeline of such projects.

So I would say we're quite confident certainly in the next couple of years and probably beyond that that we can drive costs out of our product.

We've said, and that's both module and system.

Over the last several years, we've pointed out that our module technology is a relatively new technology and therefore we believe has more room to have innovative solutions applied to it, and in fact we're seeing that.

All right.

Got it.

Shifting over to Japan real quick, would the -- especially in line with the Sharp partnership, is there -- what's your current market share position down there, assuming that your megawatts increase?

Is there a potential, what market share do you think you can get down there, especially with the Sharp JV, and is there an opportunity to shift a little bit downstream and actually do the installation and project development work?

This is Howard Wenger.

I'm going to take this question.

We're really pleased with our position in Japan.

It's one of the fastest growing markets in the world.

They place a premium on quality and efficiency, and so our technology obviously lines up well there.

It took us many years to establish the Toshiba relationship and we value it highly.

We have a very strong partnership with them.

We believe their market share that we have together with Toshiba and Japan is approximately 8% to 10% of the market.

As you know, it's one of the fastest growing markets in the world.

So we anticipate our volumes to continue to increase.

With the addition of Sharp as a partner, obviously we're going to increase volume and share.

And so we do think there's more headroom there in Japan, to answer your question.

And we may be in the future going further downstream there.

But that's quite a ways off.

We believe our approach in partnering with very well established Japanese companies is the way to go.

Got it.

And just one last question.

In the Middle East, could we get a bit of a sense on what regions you're particularly focused on?

And what part of the stage that you're at?

Are we close to getting to making an announcement somewhere in a region?

Can we get a little more clarity on the Middle East?

Sure.

I'll comment and then, Howard, you can add on as well.

So our approach in Middle East and Africa is to work collaboratively with Total.

They have had a 75-year history in many of those countries and their footprint is in 130 countries, and so in many countries, we're leading with Total and we're the solar energy provider, the technology provider, and that gives us a great advantage.

The list of countries is common to many solar players.

So of course Saudi Arabia is on that list because their stated desire to have a scale PV program, and because the economics work so well.

But with Total, we don't have to target just obvious countries like Saudi Arabia because they are such a large footprint.

So we expect that throughout the continent we're going to be able to over the relative near term start to announce some project wins that are pretty broad based.

That's on top of what we're doing in South Africa and we have some projects, some small scale projects we're building in the region, and I would like to point out we're just completing a C7, small scale C7 project in Saudi to prove that technology in that region of the world, and we're confident that that's going to be a winner for that region.

Appreciate the extra color.

Thanks.

Vishal Shah.

Deutsche Bank.

Tom, wanted to just get some clarification on your comments about 2013 revenues.

How should we think about the split between Power Plant and the leasing business this year?

And then you had 90 megawatts of leases last year.

Can you just maybe provide some color on how the bookings momentum was through the year and how you are looking at the year as you look into 2013, 2014?

Yes.

So I'll answer the question with the exception of the split of revenue, and Chuck, I'll give you that easy question.

So revenue '13 versus '11 is in line, meaning we're forecasting very similar revenue levels.

We'll ship more panels this year, but revenue levels will be similar.

Part of that is the way we recognize revenue on leases, and I'll let Chuck comment on that split in the way we recognize revenue.

Now, in terms of lease demand, we have a very clear value proposition in lease.

And that is for the same or very similar cost-per-kilowatt hour, you can get the world's best solar technology.

Because of that, demand outstrips the rate at which we can bring on lease capacity currently, the financing capacity.

That was particularly acute in the last four or five months of 2012.

Increasingly, though, we believe we can fill that pipeline of lease financing capacity faster this year, so we will grow in lease rather significantly in 2013 over 2012, and momentum in North American lease is very, very strong.

Chuck, do you want to comment on split between Power Plant and lease 2013?

I will.

Our historical guidance has been regional.

So our general splits are Americas will be approximately 60% of the total volume and Americas is going to be three-quarters Power Plant.

The balance of A-Pac and EMEA is primarily Residential and light Commercial and we disclosed previously it's about 50-plus megawatts internationally that we expect to close this year.

That's great.

That's very helpful.

Just one other question, on the discussion on REITs, what is your take on the likelihood of something getting done, especially given that it's a [private ruling], and can you maybe talk about how that impacts your leading business and some of the other businesses that you're looking at, whether that improves your profitability or allows you to, like you said, get more financing for your leasing?

Could you just maybe talk a little bit about that?

Thank you.

Sure.

I think you'll see REITs more common on Commercial projects and larger scale projects because of the tax structures.

As it relates to Residential, likely we'll see asset-backed securitization and transactions precede REITs, but we think that it's a real advantage for SunPower because of our bankability and that we'll be in the forefront of these emerging new structures.

And it gives you the ability to increase capacity because, of course, you can so to speak, recycle cash through your lease offering, if you have capitalized on those structures.

Appreciate that.

Thank you.

Satya Kumar.

It's Credit Suisse.

You mentioned Tom that your demand exceeds the supply of capacity you have for the leasing business.

I was wondering if that's allowing you any flexibility in terms of being a bit more aggressive on the pricing front.

Just broadly if you could talk a bit about the pricing trends in the leasing business.

Sure.

So pricing on leasing business for us, or I mean for leasing in general, is competing on cost-per-kilowatt hour.

Of course you're comparing that conventional energy.

And the solar industry and SunPower is at a point where we can offer competitive cents-per-kilowatt hour.

And it's particularly strong for SunPower because it embeds the advantages of our product that I talked about in my prepared remarks.

Those are built in.

And so we no longer have to keep explaining efficiency-adjusted costs.

It's built into the lease.

Now, as you have limited capacity, you can price your energy higher and what that does is it forces you to a different customer set.

It forces you to higher energy users typically.

And so it causes you to move to different customer segments.

So there's some ability to do that.

Our goal, and our plan, though, is to have a broad-based program where we're attacking the market in increasing share, but sure, in the near term, when the lease financing capacity isn't significant enough, yes, you can affect pricing, you can do that by which segment you sell to.

Okay.

And then on the -- just if I look out sort of longer term, how would the mix of volumes evolve for SunPower?

I guess this year, you'll be consuming some of your backlog for AVSP.

Do you expect that you would be able to finish that backlog of your last year pipeline, or do you expect that as time goes on, the mix for you guys would shift to more Rooftop-oriented (inaudible) --

Yes.

The answer to your question is great news, is we have three, four years of booked pipeline in our projects business that allows us to have at least a one-third and closer to 50% of our business in a very predictable, stable manner so that Power Plant volume is going to be at least half for the next several years.

But because we can expand our lease offering in America and then take that experience to other parts of the world, lease will rapidly grow for us.

And as we've mentioned in this call and previous calls, we've got a joint venture in China as well where we think we can have some volume increase in Power Plant projects there.

The good news, that's driven by C7, so it allows us to grow without adding fab capacity.

As a rule of thumb, I think the Power Plant business in the near term being more than 50%, perhaps 60% or 70% of volume, but that's shifting to more like 50/50 because of the strength of our lease product, not only in America, but around the world.

Thank you.

Chris Kovacs.

Baird.

I actually have two.

The first is, as you guys look to push new financing models in Europe, for example, with leasing as one, do you think you can get the same type of margins you get in your leasing business here, given some of the pressures there?

Is there a target margin you have on the leasing side?

Yes, it is, I'll comment really quickly.

As Chuck said, the lease accounting can be different, I'll say.

And hopefully it was helpful to hear Chuck's comments on the geography of where the margin shows up on American lease.

The structure in Europe is likely to be different.

However, the regions that we're targeting, we think that the net income generated by the structures will be similar or better, and what's really interesting in those parts of the world is it's very close, or if not already there competing incentive list.

So these offerings will be competing straight-up against conventional energy.

And we think delivering net income similar, at least similar to what we can do in North America.

Great.

And then a quick follow-up--

I just would add on to what Tom said, which is that we are not counting on a lot of revenue and margin from our lease operations outside of the United States in 2013, although we do plan on having some.

That said, it is we believe significantly better than our current business in that region, in that channel, so we do expect significant margin improvement as we export it.

Okay, and then can you just elaborate a little bit on the Chinese JV.

Maybe talk about how big you think that could really be in maybe 2014, 2015 in terms of megawatts and what your individual partners really bring to the table?

Yes, so we have three partners.

There is, of course, SunPower and then a partner that is a supplier to SunPower currently and they have a solar division.

The acronym is TZ.

And the solar, division, of course, is TZS.

Very large company that makes high purity silicon.

They make wafers for semiconductors and they make wafers for us as well.

They have proven to be a great supplier and a great partner.

In addition and importantly, the third partner is the Inner Mongolia Power Company and they are a world leader in integrating renewables onto their grid.

They have done close to 10 gigawatts of wind, which proves the scale that they can operate at.

But that has obvious advantages in terms of access to transmission and potential sites.

And then the fourth partner is a city called Hohhot, and that's a Mongolian city, and they are important because of, we will be building facilities to manufacture the product and also that they will be offering -- we will be citing a lot of our first Power Plant projects in their city.

In terms of scale, you all can cite the statistics on China.

Growth of energy consumption is rather breathtaking and the preference for renewable energy is transitioning very rapidly.

So the total available market, as you know, multiple gigawatts where we could get done with this joint venture starts this year modestly with tens of megawatts and going into the next few years where we get to hundreds of megawatts, and of course it's very hard to predict; it's going to be execution-dependent, and as we execute, it's at least that with a significant upside.

Okay.

Thank you very much.

Rob Stone.

It's Cowen & Company.

Tom, a little bit of color on the cost road map, if you can.

What was it that allowed you to exceed your goals for 2012?

How are you thinking about progress this year?

So the big drivers in 2012 was a metric that you'll remember well, Rob.

We were using a lot less polysilicon per watt.

We've had some great success in our manufacturing engineering group on that front, which is a combination of thinner wafers, higher efficiency, and better yields.

So we've been able to innovate quite successfully.

We're starting to ramp our Gen 3 technology and that is a more cost effective technology, so that's a driver as well.

Fab 3, our joint venture with AUO is performing excellently, and they have driven a number of our operating metrics really favorably.

So that has had a big impact.

We've also been able to innovate in our module designs.

We've designed some new custom materials in our module that allow us to get more energy output that are unique to SunPower and we've done, been able to do that while reducing the costs.

So those are the primary drivers.

We have benefited as well, however, from more cost effective supply chain.

That being big drivers, of course glass, aluminum, silicon, where we have long-term partners and they see -- they appreciate when they see something like AVSP book, because they know they have got a really stable partner to work with.

And so working together, we've been able to ring out cost of our supply chain.

So those would be the primary things I would point to, Rob.

As I look to 2013, we're equally aggressive this year.

We have -- we're expanding our Gen 3 technology.

We have some step reduction programs that we'll continue to fan out through our fabs.

And it's one of the things I forgot to mention in our Fab 2. We completed the first significant step reduction program across all of our lines.

So as we look to 2013, it's further improvement on a lot of the things I talked about, including step reduction.

So as I said earlier, I think our innovation pipeline could get cost out.

It's as strong as it's ever been as we look to '13 and '14.

Follow-up, if I may.

You mentioned supply chain.

Given how tough industry conditions have been over the last year, do you have any concerns or big picture thoughts about how we should think about the supply chain this year helped the vendors and so forth?

Broadly speaking, the big guys are, the big suppliers are stable.

They are navigating through the market.

They have had to make some rather dramatic changes in terms of capacity expansion and thinning sites, just like SunPower has.

As you know, there's at least one important inverter manufacturer that's no longer with us, and so we've really spent a lot of time as a Company making sure we future-proofed our supply base, and we are working with -- on some of the significant commodities, the who's who, and we have been for several years.

So our confidence that we're insulated from significant, or disruption in the supply chain is high.

Will there be disruption in the supply chain?

Yes, absolutely.

The challenges of the market over the last few years have clearly moved throughout the upstream part of the value chain.

Great.

Thank you.

Thanks, Rob.

Thank you all for joining us today.

We really appreciate it.

We look forward to our Q1 call and then we'll follow that up with an analyst meeting in May.

Thank you.

Thank you.

That does conclude today's conference.

Thank you for your participation.

And you may disconnect at this time.