SunPower Corporation (SPWR) 2016 Q2 法說會逐字稿

Good afternoon and welcome to SunPower Corporation's second-quarter 2016 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, SunPower Corporation.

Thank you.

Sir, you may begin.

I would like to welcome everyone to our second quarter 2016 earnings conference call.

On the call today we will start off with an operational review from Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our second-quarter 2016 financial results.

Tom will then discuss our updated outlook for Q3 and 2016.

As 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 2015 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 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 as well.

With that, I'd 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.

In my remarks today I will review SunPower's solid second-quarter results and comment on recent changes in the solar power plant business environment.

I will explain the expected impact of these changes on our near-term financial projections and detail some proactive steps we are taking to position SunPower for long-term success.

We executed well in the second quarter across all geographies and segments.

In power plants we achieved a number of significant development milestones, including the sale of a controlling stake in our Henrietta project to Southern Company with expected revenue recognition in Q3 as well as expansion of our international footprint with new projects in Chile and France.

Our DG business performed well for the quarter as we benefited from strong customer demand for our SunPower Equinox and Helix complete solutions and dropped down our Macy's commercial project to 8POINT3.

On the operations side we delivered strong yields in panel output from our fabs, announced a world record 24.1% efficient panel and successfully started up our first high-volume Performance Series production lines in Mexico.

Now let's review Q2 results by segment.

Please turn to slide 4. Our residential business performed well driven by strong demand for our unique high-quality solutions.

We benefited from the continuing trend of customer demand towards cash and loan sales where system quality, durability and long-term performance are top of mind.

Overall megawatt deployment was up 25% year on year and we achieved record levels of customer satisfaction.

In addition to our solid performance in the US, our European residential business was above forecast for the quarter.

Demand for our recently released Equinox complete solution was stronger than anticipated, accounting for over 50% of all new orders by the end of the quarter.

Customer preference for our latest generation 21% and 22% efficient X-series panels remained strong, and I will mention later our plans to increase our production capacity for this technology.

Looking forward, we expect to see Equinox continue to increase as a percentage of our residential sales with the associated volume ramp of our unique high reliability microinverters.

We will continue to bias the allocation of our X-Series panels to the US residential channel and are working diligently to increase our manufacturing capacity for these products.

We also expect to see a continued shift towards cash and loan customer ownership models.

This plays to the advantages of our technology, but as a reminder, reduction in relative lease volume impacts EBITDA since lease offers the most efficient monetization of tax attributes.

We will continue to invest in our digital strategy to drive deeper relationships with customers and promote our brand, and we will continue to drive the incorporation of storage into our residential solutions as evidenced by our recent announcement of a virtual power plant partnership with ConEd.

Moving on to commercial, please turn to slide 5. Our performance in the second quarter was above planned, driven by timely project execution and increased demand for our Helix complete solutions.

Bookings for the quarter were solid, including an 8-megawatt project for Toyota in Texas, 11 megawatts for the County of Santa Clara, 10 megawatts for the US Army and a 4-megawatt system for Cal State Fullerton.

Going forward, we expect continued growth in the commercial segment due to ITC policy support and we believe that we can continue to gain share with Helix.

Our commercial pipeline now exceeds $1.3 billion, not counting the growing turns business through our dealer network.

In summary, our DG business executed well in Q2 and we are well-positioned for continued growth and share gains.

Moving onto our upstream business, please turn to slide 6. Our manufacturing teams executed well, hitting their output yield and cost targets.

We once again demonstrated our solar panel technology leadership, announcing a world record 24.1% efficiency panel up from our previously announced record of 22.8% just six months ago.

Such innovations by our R&D teams translate into continued improvement of our X-Series product lines and lay the groundwork for production of our low-cost next gen IVC technology in Fab 5.

As planned, we started the high volume ramp our P-Series panel production at our Mexicali Modco facility during the quarter.

P-Series is a critical component of our near-term growth strategy, offering a low-cost panel solution while retaining the hallmark turn tower attributes of higher efficiency and superior durability.

Production is currently ahead of plan, on efficiency and quality.

The recent decrease in the price of front contact solar cells has significantly improved our outlook for 2017's P-Series cost.

SunPower technology advantage is not just about solar cells.

As I mentioned previously, our Equinox solution has rapidly become the system of choice in our residential business.

The core enabling component of the Equinox solution is our proprietary microinverter now approaching 500,000 units deployed with exceptional field reliability.

Going forward, and in conjunction with our continued focus on panel and deep road maps, we plan to implement two key initiatives to realign our upstream operations.

First, we will be expanding capacity of our highest efficiency X-Series panels while ramping our new P-Series technology in Mexico.

Because we utilize third-party solar cells in our P-Series panels, we expect to significantly benefit from pricing pressure within the commodity solar panel market.

Second, we plan to streamline and focus our IBC panel assembly operations.

We will increase Modco capacity in Mexico, closer to our core markets in the US and Latin America, which we believe will streamline our supply chain and lower cost.

I would now like to cover our power plant business.

Please turn to slide 7 In Q2 we achieved a number of important milestones.

First of all, we partially monetized our 102-megawatt Henrietta project by selling a controlling stake of the project to Southern Company.

Our plan is to drop down the remaining minority stake, 8POINT3, before the end of the year.

We also expanded our Latin American footprint by announcing two more Chilean projects with signed PPAs totaling 250 megawatts.

Including our recent award in Mexico, our Latin American PPA portfolio now exceeds 800 megawatts with project completion scheduled between 2017 and 2019.

We believe that our contracted pipeline and planned cost reduction from our Oasis product roadmap provides significant profit visibility for our Latin American business.

In the public sector, we broke ground on a 9.5-megawatt project for the California Department of Water Resources.

We were also awarded 39 megawatts for projects on several French islands.

These systems include the use of battery storage to optimize late afternoon energy delivery during periods of highest value.

Looking forward, we see near-term challenges caused by shifts in demand signings, an increase in investor IRR hurdle rates, as well as an increasingly competitive global PPA price environment.

As a result, we are realigning our development business to focus on core markets.

Let's look at some of the factors affecting our power plant business in detail.

Please turn to slide 8 which shows a current forecast from GTM research for the US market.

There is no question that the extension of the ITC at the end of last year was a very positive long-term development for the US solar industry.

As a result of the ITC extension and the consequent customer economic benefits with retail great preparity in a number of states, we now expect sustained strong industry growth in DG.

In the power plant segment, concern around an ITC cliff drove a concerted burst of large-scale project construction in the first half of 2016 tied to specific contractual milestones.

However, extension of the ITC largely removed the urgency for project construction in the second half of the year, temporarily shrinking the buyer universe and decreasing both demand and pricing for projects completed in the second half of 2016 and 2017.

Beyond 2016, we expect that the pace of US power plant project deployments will be reduced for the next two years.

Customers are now in some cases waiting to see how PPA pricing develops before committing to further procurement.

We remain bullish on the longer-term prospects for US power plant deployment, particularly considering the additional impetus that we expect to result from eventual implementation of the clean power plant, and we are continuing to invest judiciously in US power plant project development geared towards longer-term completion.

Another key factor affecting our power plant business is investor IRR expectations, which have increased due to several factors including the SunEdison bankruptcy, general dislocation in the yieldco space and the associated reduction in competition within the financing sector.

Finally, increased competition from new entrants such as global IPPs has put additional pressure on PPA pricing, particularly in the international arena.

So, how do we do our business as a whole?

Please turn to slide 9. Overall we believe that solar power will remain one of the largest and most exciting growth industries for many decades to come.

As the industry reduces cost and innovates on new services and business models, solar power is widely expected to become the largest contributor to incremental electricity generation globally.

We believe that our strategy focused on developing differentiated technology and deploying it across a diversified portfolio of markets, channels and applications will allow SunPower to be a leading participant in the long-term growth of the solar power industry.

Our DG business is strong, driven by increasing customer demand for our unique, high-value complete solutions.

We're taking share in the US and seeing stable, profitable growth in Europe and Japan.

We continue to beat our own performance records with our core IBC panel technology and are aggressively ramping our new low-cost P-Series technology while innovating in batteries, microinverters and software, core elements of our complete, smart-energy solutions.

In our power plant business we are experiencing headwinds as the result of changes to the market environment that will negatively affect our near-term financial performance.

We currently expect that these factors will impact our full-year 2016 EBITDA on the order of approximately $175 million.

We are therefore changing our 2016 guidance from between $450 million and $500 million to be between $275 million and $325 million.

Chuck will break this down in detail.

As the result of our revised near-term power plant outlook, we are making a number of changes to streamline and refocus our business.

Please turn to slide 10.

First, we are reducing the scope of our international sales development activities, and we will now focus on a limited number of core markets including the US, Latin America and France, regions where we believe we have a solid downstream presence and strong market momentum.

In other regions we will bias our focus to equipment sales, specifically around our new P-Series product in Oasis complete solution platform which we believe competes very favorably with alternative technologies.

Refocusing our power plant downstream scope will allow us to significantly reduce OpEx and preserve CapEx in anticipation of an expected improvement in power plant business fundamentals in 2018 and beyond.

We will also delay the completion of certain projects until 2017 or 2018 to capture planned cost reduction delivery by our new P-series product, the next-generation Oasis development road map, particularly with respect to lower third power solar cell input pricing.

Additionally, we have modified our sales cycle in order to avoid compressed schedules forced buying the ITC extension.

Improve the Company's near-term cash position while maximizing valuation with a greater universe of potential buyers and financing alternatives.

8point3 remains a strategic pillar for us and we have a strong pipeline of power plant and commercial projects to support post ROFO growth.

Finally we will work closely with Total to access international markets, particularly in regions such as Africa and the Middle East where Total has a very deep market presence.

Total has been clear about their increased ambition in renewables and we look forward to supporting the expansion of their activities in the sector through the supply of our next-generation low-cost Oasis solutions incorporating P-Series panels.

In addition to making changes in our power plant business, we also plan to realign certain aspects of our upstream operations.

We plan to further increase production of our X-Series product line because, in our residential business, we are seeing strong demand for our new Equinox complete solution, particularly the versions using our X21 and X22 panels.

X-Series panels are the highest-efficiency product available on the market today and also incorporate a number of superior features such as favorable high-temperature performance, very low long-term degradation rates and excellent aesthetics.

Concurrently, demand for our E-Series panels, which are predominantly used in our power plant business, has been affected by the ITC demand timing issues discussed previously.

We therefore plan to utilize equipment from some of our older solar cell lines in Fab 2 to debottleneck later generation solar cell technology and expand our X-Series manufacturing capacity.

We expect that this work will be completed during the coming six quarters and will result in up to 100 megawatts of additional high-value X-Series panel capacity by the end of 2017.

To accomplish this, we will take several manufacturing lines offline which will reduce 2016 output volume by approximately 150 megawatts.

Beyond 2016, we expect that our capacity ramp for 2017 to 2020 as disclosed at our Analyst Day last November will remain largely unchanged.

We're also taking this opportunity to consolidate our module assembly capacity in Mexico close to our largest markets in the US and Latin America.

We will close our Philippine Modco and transfer much of the manufacturing equipment to our two highly automated Mexican module assembly facilities.

The net result of this upstream realignment will be increased manufacturing capacity for our highest-value products, a lower cost structure and panel assembly closer to our core markets with reduced work in progress.

I'd now like to discuss the expected realignment actions and cost.

Please turn to slide 11.

We expect a near-term workforce reduction in our Philippine operations of approximately 1,000 employees.

This reduction will be partially offset by increased hiring in Mexico as we ramp capacity there.

We will also eliminate approximately 200 positions in our downstream and corporate functions.

We expect to record a restructuring charge of $30 million to $45 million.

We also expect a substantial portion of the charges to be taken in Q3, with more than 50% of the total charges to be in cash.

These are difficult decisions driven by changing market conditions.

As CEO of SunPower, I'm ultimately responsible for the Company's performance and have therefore decided that, in addition to the above actions, I will reduce my cash salary and bonus to $1 for the balance of the year.

I am confident that our performance will improve and that shareholders, including me, will be rewarded.

Please turn to slide 12.

In conclusion, we see tremendous long-term opportunity for solar power and are realigning our power plant and upstream business to adapt to the changing business environment.

We will prioritize self-development in the limited number of power plant markets we are best-positioned, adjust the timing of projects to capture expected cost improvements and modify our project sales process to derisk margins.

We will increasingly leverage our low-cost P-Series Oasis solution to sell equipment and drive growth beyond our core power plant markets.

In DG, demand for our complete solutions is strong and we will increase investment in the segment.

Upstream, we will increase supply of our X-Series products and improve supply-chain effectiveness by relocating panel assembly closer to our core markets.

Finally, we will reduce OpEx in order to fund strategic investments.

With that, I'd like to turn over the call to Chuck to review the financials.

Chuck?

Thanks Tom, and good afternoon.

I will first review our second-quarter results, then provide additional color on the impact and actions we're taking in our power plant segment and upstream operations before turning the call back to Tom for our updated 2016 guidance.

Please turn to slide 13.

Q2 was a solid quarter for the Company as we met or exceeded our forecast, executed on our project development schedule and added to our backlog.

We generated approximately $30 million in EBITDA for the quarter, while increasing our megawatt deployments by more than 20% sequentially.

In addition, we successfully monetized a large commercial project from holdco while building additional projects for the second half of the year.

Specifically on the P&L, our non-GAAP revenue came in ahead of plan as we had better-than-forecasted performance in both our residential and commercial segments.

The improvement in DG was offset by lower sequential revenue in power plants as we recognized revenue from our Hooper project in Q1.

As you recall, power plant revenue is very dependent on project-sale timing.

In our commercial segment, non-GAAP revenue more than doubled as we benefited from strong execution, as well as the early completion of certain projects.

As Tom mentioned, we continue to see strong customer interest in our Helix product.

Commercial backlog the second half of the year is very strong, and we should see significant top-line increases as Q3 megawatts recognized is forecasted to increase more than 50% sequentially.

Our global residential business also performed well, as megawatts recognized increased more than 20% year over year.

Our US residential business was again the leader in this segment, as we met or exceeded our forecast.

Our non-GAAP gross margin for the quarter was 13.1% and in-line with our plan.

Power plant margins were impacted by the timing of project sales, as well as $15 million in charges related to impairments of two utility projects resulting in slightly negative margins for the quarter.

We expect power plant margins to improve significantly in the second half with the sale of Henrietta and other holdco projects.

Commercial margins were in-line with our forecast, though down sequentially due to mix changes.

Our residential business was solid as we saw continued strength in North America installations and bookings in Q2.

Non-GAAP residential margin for the quarter was 22.6% with strength in North America as Europe and Japan were stable.

North American cash and loan sales rose to 68% of our shipments while 32% were leased.

We feel our balanced portfolio between cash and lease offer us a significant competitive advantage in the industry and reflects our strategy of offering customers a number of different financing options to own our industry-leading solar solutions.

Overall, we deployed 78 megawatts of residential products globally in-line with our forecast.

Leased bookings were 17 megawatts in Q2 with cumulative leased bookings of more than 300 megawatts in our holdco; net contracted payments are approximately $1.2 billion, excluding the residual value.

In addition, NCI for the quarter was $22 million and in-line with our forecast.

We are working on our next residential tax equity fund and are confident that we will have sufficient capacity to meet our 2016 demand.

Second quarter non-GAAP OpEx was $104 million, down approximately 7% versus Q1 2016.

We expect OpEx to be approximately $100 million per quarter for the balance of 2016.

Our factories ran at full utilization with strong yields and a record panel production as we built inventory for second-half project completions.

CapEx for the quarter was $46 million, primarily for the completion of Fab 4 which produces our latest technology cells to make X-Series panels.

We exited the quarter with more than $590 million in cash as we monetized developed projects.

We expect cash to decrease in Q3, along with AP as the final amounts are paid for Fab 4 and we complete construction of our projects for sale in Q4.

We then expect our cash balance to increase in Q4 while we sell projects, pay down project debt and delever the balance sheet.

Inventories rose sequentially in the quarter, partially the result of our long-term polysilicon contracts.

We are currently working with our suppliers to reduce the amount of polysilicon we hold in inventory.

Our balance sheet remains strong.

Moving to our holdco strategy, please turn to slide 14.

This chart summarizes our holdco asset portfolio for the second quarter.

Assets under contract now total more than 1.9 gigawatts and reflect the addition of our recent 500-megawatt PPA award in Mexico, as well as our announced projects in Chile.

This project provides significant revenue visibility through 2019.

I will now address some near-term challenges following up on Tom's earlier comments.

Please turn to slide 15.

First, the ITC extension and inclusion of bonus depreciation.

The extension of the ITC in late 2015 significantly altered the completion timing and PPA-pricing dynamics for certain second-half 2016 projects, delaying project completion schedules and reducing expected PPA pricing.

Additionally, the inclusion of the bonus depreciation has reduced some of key customers' abilities to buy more projects as they have fully utilized their near-term tax equity capacity.

This has also affected both project timing and pricing.

Specifically, we had one project with a PPA offtake within late-stage negotiation and the customer exited after the ITC extension.

We then expected to sign a PPA for this project in the first half of 2016 for 2016 delivery.

We still expect to sign a PPA for this project in 2016, but now expect 2017 delivery.

Together we expect these factors related to ITC and bonus depreciation extension will impact our second-half 2016 EBITDA by between $70 million to $90 million.

Second, the near-term cost of capital.

While the overall near-term interest-rate environment has been fairly stable, we have seen an uptick in buyer IRR expectations in the last three months versus our previous assumptions.

We think this is temporary and largely a fallout of the SunEdison bankruptcy.

Additionally, while we are encouraged with the recent performance of 8point3, the short-term disruption in the yieldco environment has also impacted our EBITDA assumptions related to 8point3.

As we've discussed in the past, we have deferred profits from projects we have sold to 8point3 and expect to recognize these deferred profits as 8point3 issues equity to buy projects.

Given the yieldco disruption, we have proactively adjusted the timing of a number of projects in the 8point3 ROFO list.

While this provides significant benefits to 8point3, it also delays the expected recognition of deferred profits for SunPower.

Altogether we expect the impact to EBITDA, including 8point3 profit deferral, to be between $35 million and $45 million.

Third, the competitive environment.

As Tom detailed, we are seeing increased global competition in the power plant space as new entrants are bidding aggressive PPA prices.

This more competitive PPA-price environment impacted the final negotiated PPAs on certain projects we booked during the first half of 2016, and we believe that this will impact second-half 2016 EBITDA by between $20 million to $30 million.

The balance of the reduction is due to various other factors.

As Tom mentioned, we are taking a number of proactive steps to mitigate the challenges in our power plant business.

First, we will reduce OpEx by focusing development resources in a limited number of core markets in pursuing an OpEx-light equipment sales model in other regions.

We expect to reduce annual operating expenses by 10%.

As Tom mentioned, we have modified our power-plant sales process to expand the universe of buyers.

In addition, we plan to partner with buyers for our projects earlier in the sales and financing cycle.

We expect this new process will increase competition and strengthen our relationship with the ultimate buyer.

We will leverage our international cooperation with Total, both as a potential buyer of projects and to expand our footprint for product sales.

We will continue to drive our Oasis and P-Series cost-reduction road maps to improve gross margins.

Additionally, we will move our Philippine module operation to Mexico which will reduce land and panel cost while improving working capital.

We believe these steps, together with the strength in our DG business, position the Company appropriately to address near-term challenges while maintaining the ability to execute our long-term strategic plan.

With that, I would like to turn the call back to Tom for our guidance.

Tom?

Thanks, Chuck.

I would now like to discuss some of the highlights of our guidance for the third quarter, update our FY16 forecast and provide some color on what we see for 2017.

Please turn to slide 16.

On a GAAP basis, the Company now expects 2016 revenue of $2.8 billion to $3 billion; gross margin of 9.5% to 11.5%; and a net loss of $175 million to $125 million.

FY16 GAAP guidance includes the impact of the Company's holdco asset strategy and revenue and timing deferrals due to real estate accounting.

The Company's expected 2016 non-GAAP financial guidance is as follows.

Revenue of $3 billion to $3.2 billion, gross margin of 10.5% to 12.5%; EBITDA of $275 million to $325 million.

Capital expenditures of $225 million to $245 million; and gigawatts deployed in the range of 1.45 to 1.65.

For 2017, we expect a GAAP net loss of $200 million to $100 million and EBITDA in the range of $300 million to $400 million.

The lower end of the range of 2017 EBITDA guidance is based on an assumption that EBITDA will be generated largely from our DG business with power plants operating at neutral EBITDA for the year.

Note that approximately 50% of our planned 1.1 gigawatt 2017 deployment volume in our power plant business is contracted.

We believe that with our realignment, we are well-positioned to capitalize on the long-term growth potential in the global power plant market.

The Company's third quarter FY16 GAAP guidance is as follows.

Revenue of $700 million to $800 million; gross margin of 14.5% to 16.5%; and a net loss of $5 million to a profit of $20 million.

Third quarter 2016 GAAP guidance includes the impact of the Company's holdco asset strategy and revenue and timing deferrals due to real estate accounting.

On a non-GAAP basis, the Company expects revenue of $750 million to $850 million; gross margin of 16.5% to 18.5%; EBITDA of $115 million to $140 million; and megawatts deployed in the range of $380 million to $420 million.

In summary, we expect the changes in the power plant business environment will significantly impact our second-half 2016 performance.

We are making adjustments within our power plant and downstream business units to adapt to these changing market conditions and are confident in our ability to achieve our 2017 guidance.

With that, I'd like to turn the call over for questions.

In addition to Chuck, we also have Howard Wenger, President of Business Units; and Bob Okunski, our Vice President of Investor Relations.

Questions please.

(Operator Instructions)

Ben Kallo.

Hi guys.

I read quick housekeeping, then I have about three questions.

First of all, the guidance for next year, the GAAP EBITDA could you just confirm that and let us know what the difference is.

Ben, it is our non-GAAP EBITDA, but I would expect to align with the new revenue recognition standards that have been pronounced for 2017 early adoption.

Okay number two, it seems like a whole lot of moving parts that just blindsided me, maybe not everyone, but definitely me.

When you guys have publicly spoken over the past near couple of weeks, we didn't hear any kind of hint of this probably for about stuff in the marketplace, but nothing of this kind of size realignment.

And so can you just tell us when this all came to light here?

Yes, this is Tom.

And I'll take that question.

So in our prepared remarks we talked about the factors that influenced the power plant business.

And let me give you a little bit more color on those factors.

So we all know that in December the ITC was extended.

I think what we talked about a little bit less was that bonus depreciation was part of that.

As Charles mentioned in his remarks that, on one of our projects the counterparty stopped negotiating with us to close a PPA when we were on a probable path to close a PPA with that customer.

As time went on, we had a replacement, a customer for that project, as we did on other projects, those other projects actually booked.

This project did not and we still expect it to book, but it will not be in our P&L until next year; so that project was directly impacted by the ITC/bonus depreciation extension.

As we got into the new year, on buyers that were buying their projects, on the impact of both the ITC and bonus depreciation became more apparent and materialized in what they were willing to pay for solar projects.

And as we got into April, the third week of April, Sun Edison went bankrupt, and that was another factor that influenced how buyers thought of their quote/unquote perceived risk of solar projects.

The combination of those things meant that when we were selling projects in the last few months, the buyer universe had materially digested these changes and their perceived risk and their price they were willing to pay for projects that we closed over the last few months, two projects in particular, were lower than what our plan was.

And those projects will be going through our P&L in the back half of the year.

And so it's the evolution, the combination of ITC bonus depreciation, Sun Edison bankruptcy and then the other factors we mentioned on the phone that materialized during the second quarter on a couple of our projects and pushed one project entirely out of the year and that's what happened.

So I guess my last question is as we look forward to the guidance next year, we have the backdrop of the louder and louder call of Chinese oversupply.

So as I look at your guidance stats, you're bringing on new capacity, I understand how the P-Series is, you can benefit from oversupply; but how do we take your guidance now that it's been lowered for next year and take that as the base case versus it can get worse as the market gets worse, it is deteriorating for you guys in just a matter of a couple weeks, maybe a couple of months, significantly.

Thanks.

So here's how we thought about 2017.

First, our DG business is doing quite well.

And in fact, our entire business met plan the first half of the year, but the DG business particularly did well and is poised to do well in the second half of this year.

And the reasons for that, that I will go through really quickly, are that it's a long-term business for us.

We actually originated the solar residential business in North America, or certainly a pioneer; we've been at that for quite a while.

We bought PowerLight who had been in the commercial solar business for 15 years, so it is our legacy business.

Second, our modules work great in that they are the world's best module for that business.

Third, we invested significantly in complete solutions.

The Helix solution for Commercial and Equinox for residential; those are just coming to market.

And everything we ship as we go into a 2017.

So the combination of great product and great complete solutions that we didn't have coming into this year, that we do have in 2017, give us confidence that 2017 will be a very strong year for DG.

On top of that, in the residential business we know that the market is moving towards cash and loan.

Cash and loan buyers want the best product.

They want the solution that will last the longest.

They want a future-proof solution and that is SunPower.

So that plays to our favor.

In the upstream, as you mentioned Ben, we are successfully ramping P-Series in Mexico.

We believe the value proposition of P-Series will stay in place.

All the data we have so far indicates that it is the correct move.

And that is, that it will be the same cost as China Tier 1, but higher efficiency and higher reliability.

And that's the value proposition we believe we can hold even with dropping China Tier 1 prices, because we capitalize on dropping China Tier 1 prices in our P-Series product by buying Chinese front-contact solar cells or solar cells made elsewhere.

But importantly, front-contact solar cells, those solar cells then are turned into our P-Series product.

In addition, on the upstream part of our business, we are converting more lines to X-Series which is the clear winner in the market today.

It is by far the highest efficiency, not only highest efficiency, but highest quality that means degradation, that means long life, and we will have a higher percentage of our output in 2017 of the X-Series.

In the power plant business, and I'm going to wrap up here quickly, we have E-Series and Oasis.

And our next-generation of Oasis, which we will introduce to the market and make the market aware in a few months.

And we will start shipping in the early part of 2017.

It's a material cost reduction and the combination of P-Series and next-generation Oasis is, even when we forward the forecast, we believe we will be favorably competitive.

And so then, you have all of that data in the backdrop of Analyst Day last year where expectations could have been derived from our Analyst Day so we wanted to add greater clarity to 2017 and I want to point out that we have taken a conservative position on our power plants (inaudible) our business in our guidance.

And that is that it's built in as EBITDA neutral.

So that's the basis of our 2017 guidance.

Tom, if I can just very quickly, one thing because people are going to walk away with two different headlines.

And my first question is how quickly did you guys know this, because people are going to walk away and say they knew this and everything was hunky-dory in the first couple months of the year and then all of the sudden about-face and now it's bad.

So I want to understand how quickly you knew this, so that people don't walk away and say Tom is a liar.

I don't think that's true.

And number two, how bad is the market right now because right now everyone is going to walk away and say, the market is as bad as we thought; all these stocks need to go down.

So anything you can help us address that with, would be very helpful right now.

I can assure you I'm not a liar.

And the market development in our case materialized in May and beyond.

And as I said, it was a project that slipped out of the year and two projects that we contracted for sale in the second quarter.

I would say that the impact of the factors that we listed in our prepared remarks will affect companies differently.

If you have a backlog of legacy PPAs, obviously that will affect you differently than if you are booking PPAs towards the end of last year and into this year.

Having said that, we know what we are going into or we know that the dynamics of the market today and we have projected those into 2017 and that is the foundation for what we are saying for our guidance for 2017.

I understand the concern, but the fact of the matter is these changes materialized for us over the last few months.

Brian Lee, please state your company name.

Hey, guys.

Goldman Sachs.

Thanks for taking the questions.

The first one I had, I am just curious if you can help reconcile, Tom, the comments around the YieldCo environment, needing for that to become a better environment, for that to be the type of monetization mechanism that you were previously planning it was going to be, when it worked effectively.

It seems like we've seen some equity capital raised here recently and then yield-oriented investments in general seemed to have rallied a bit this year.

Obviously started off in a tough spot in the very early part of the year, but it seems to have rallied quite a bit.

We're just trying to reconcile what you guys are looking for specifically in that environment versus some of the better data points that seem to be out there.

Sure, I will comment and give it to Chuck.

Let me just say that that was another factor, the first half trading of YieldCo is in the books and it is clear what they traded like and it was certainly below our plan.

That's one of the things we would have expected to rebound faster that didn't.

We believe that 8point3 is a differentiated YieldCo for the points that we've made previously, with two strong general partners, the best developers in the world, it is all solar, it's investment-grade offtake, it's long-term PPAs.

And, that in fact, is how 8point3 has performed; and it has started to return with the rest of the dividend-yielding space.

So those are the comments I'd make quickly.

I will turn it to Chuck and then I'll say a few more words after Chuck.

Thanks Brian.

We are pleased with the recent performance of 8point3.

We closed the next drop-down, our Macy's Maryland project, so we have seen continual drop-downs to 8point3.

And I think we are seeing, really, some strong signs in the overall YieldCo market in general.

We do plan to sell Henrietta to 8point3.

And so I think generally we are bullish.

The revised ROFO schedules that we've done for 8point3 I think are a real strength of 8point3 and will help 8point3.

It does have a small negative impact on our P&L this year; and that's a benefit that we should pick up in 2017 and beyond.

And I didn't finish the answer to Ben's question about the status of the power plant market.

I would say that the power plant market is unlikely to improve in America in the next few quarters.

It will in time.

The power plant market will be the biggest part of the solar market over the course of years.

The combination of all the factors that I communicated plus the amount of solar that has been installed in America, as we showed in the GTM chart in our prepared remarks, mean that certainly 2017 will be a difficult year in power plants; and again, we built that into our outlook for 2017.

Brian, if you want to ask another question, go ahead.

No, that's helpful color, and maybe a segue into my second question.

And then I will pass it on.

You guys mentioned the PPA-pricing environment, that being also challenging and you are making the comment now that the power plant market in the US is going to be basically not seeing a recovery here for the next couple of quarters and into next year.

So when we think about the amount of renewables, both wind and solar that have been put in place, quite a large volume over the past several years, how much of this is structural where PPA prices just aren't coming back because you have deflationary pressures across commodities, power pricing, even cost of capital; and then you also have the fact that more and more renewables to the grid are pushing that down even further, so it makes it that much tougher to chase that good parity curve, if you will.

You have renewable mandates, which will drive some amount of volume; but when you're looking at the economic merits alone, how much of this is just structural where that backdrop, it's a challenge to see how it really improves from a PPA-pricing standpoint.

As I think I will say several things.

One, we put the GTM chart in on slide 8 that we think reflects a consensus view or certainly our view; and the power plant business, in that chart has a couple years of contraction of actually being smaller and so that is point one.

Point two, the degree that this structural, I think it is more than less; I think we can look to the wind market where the wind market had similar things happen years ago.

The companies that succeeded in that market, reinvested in their products, moved to markets where they could make money and conserve cash.

And that's exactly the elements in the play book that we are implementing for our power plant business, because while it probably will structurally return to pricing levels that make more sense, we're certainly not counting on that happening materially in the long run; and we are preparing to have solutions, the P-Series and Oasis in the near term, continue to work on those products so that we can compete in that environment and make money.

In addition to that, as renewables are a higher percentage of the electricity mix, there will be value-add on top of the renewals that are markets that we will be part of as well.

The obvious thing would be the inclusion of storage with solar, which I think is an opportunity as we go to the out years.

So we are planning on it being more structural than not, although I think there is a degree that the market will return to more rational pricing after some period of time, probably greater than a year.

Thanks guys.

Thanks.

Krish Sankar, please provide your company name.

Yes, hi.

It's Bank of America, Merrill Lynch.

I've two quick questions, one Tom, not to beat up on the power plant business.

Some of these challenges of ITC extension and PPA pricing is not new news right.

So I'm just trying to figure out the guidance downward shift.

Is it primarily on the margin mainly due to a couple of SunPower specific projects is that the way to characterize it; or did PPA pricing actually get exacerbated on the downside in the last three months; and then I have a follow-up.

I think to be clear, we had a site, had a buyer, or a PPA offtake; that negotiation failed in December, directly correlated with the ITC.

We had another PPA offtake, that may ultimately be the one that we sign for the project.

And we still have confidence we will, but that has not gone as fast as we planned.

That was part of the re-guide and that became clear as we got into the second quarter.

We were contracting to sell two projects in the second quarter that had all of the factors that we mentioned in our narrative affect them.

So to the extent that it is SunPower specific, it is that we did not have enough legacy PPAs to cover the year, that we were perfecting new PPAs at the end of last year for this year.

Now, almost all of the things that I had mentioned are part of the market, so as we end the year and go into next year, they are not SunPower-specific.

And at least our view is this is the business reality and we are going to adjust our business strategy to deal with it.

Got it, that's very helpful and then a follow-up question on the EBITDA guidance.

If I look from this year into next year, it looks like there is going to be more DG in the mix and it looks like more and more homeowners prefer the cash sales to loan with this PPA, so leases.

I am wondering how would you grow EBITDA next year?

What is the key driver for the growth in EBITDA from 2016 to 2017 with that backdrop?

So the key drivers are the DG business and, within the DG business, we expect growth, one.

Two, we expect better margins as a result of Equinox and Helix being a significantly higher part of our mix.

Already Equinox is more than half of the residential business that we ship and Helix is almost 100% of the new business in commercial; and the benefits of those will be completely borne out in 2017.

Lastly, the investments we've made in our DG business where we've actually increased OpEx year on year, we expect to get the benefit of that OpEx expenditure, which is a combination of marketing and cost reduction in the soft cost; we expect to accrue some of that benefit in 2017 as well.

So there is real, tangible programs that are being shipped to markets now that we would expect to monetize in 2017.

And then on top of that, in the power plant business, we've made the changes and are not counting on a significant return to profitability of that business in 2017.

Thanks Tom.

Patrick Jobin, please state your company name.

It's Credit Suisse and it's Andrew on for Patrick.

Hi guys, thanks for the questions.

Just a few on 2017 guidance following on some of Krish's.

The EBITDA breakeven in the power plant business for 2017, is that a function of primarily delayed profit recognition for projects dropped to 8point3 or is there something else going on there?

I would say that that is a factor.

There are projects that we're dropping down and the real estate accounting associated with that.

And also is a transition to our P-Series product, which we are ramping, and as we get through the year, we expect the cost of P-Series to drop; or as we get into next year and through next year, the cost of P-Series products will reduce significantly.

We're also starting to ship our next-generation Oasis balance system in the first quarter, and that will have its full impact starting in Q2 and beyond.

So the timing of new products, the mix of the projects that we have and 8point3 are the reasons for our comments or our color on power plants.

And then you gave us a good sense of what drives the lower end of EBITDA 2017, EBITDA guidance having it come primarily from DG.

Just curious, at the high end of guidance, is that upside all from power plants or is that assuming above-expectation growth in the DG businesses?

It is mostly power plants.

The DG business obviously had some variables and the attach rate of Helix and Equinox can influence the DG business, but the bigger driver is the performance of power plants and, to some degree, the P-Series product because we capitalized on front-to-contact pricing.

And so with that in mind, for the back half of this year and then what is embedded in 2017 guidance, what does that require of 8point3 in terms of buying assets and potential capital raises and I will leave it there.

Thanks.

We haven't broken out the exact details for 8point3 in 2017, but it's not the cornerstone to our 2017 plan.

The cornerstone to our 2017 plan is execution on distributed generation and ramping P-Series.

So 8point3 should not have a material impact next year.

Vishal Shah, please state your company name.

Hi, it's Deutsche Bank.

Thanks.

Tom, I'm just trying to understand the 2016 EBITDA breakdown between DG and power plant.

I appreciate the color on 2017, but can you just talk about what the breakdown would be in 2016?

I can tell you that our projections for the year, I would say that the profile of 2017 is very similar to what is going to happen in 2016 in our projections.

But I will let Chuck give you a little more color.

So Vishal, we expect Q3 to be a very strong EBITDA quarter for the power plants when we monetize Henrietta.

And so we will have a fairly strong EBITDA year in power plants driven by Henrietta monetization in Q3 and it will be sort of neutral in Q4.

We expect very, very strong EBITDA to continue in the residential channel with volume growth and share gains; and then commercial, we expect a strong Q3 and Q4 in commercial as we continue to sell projects, but the biggest contributor is residential for the Company in 2016.

Okay so sorry, what you're trying to say is that in Q3 a lot of the EBITDA will come from power plant and for the full year would you that 70%, 75% of the EBITDA will be from the DG business, the majority from [levi]?

When we gave our Q3 guidance for EBITDA, that strong guidance for Q3 is primarily driven by Henrietta and then Q4 is a combination of volume increases and monetization of our holdco projects with a strong quarter in residential; and, as you'll know, Q4 is typically a strong quarter for our residential business.

I appreciate that.

And also, what percentage of your capacity in 2016 would be utilized for DG versus power plant business and how do you think about 2017?

I think you mentioned some numbers for 2017.

I just want to confirm those.

Yes, I will let Chuck look it up.

This is Tom.

I will give you a broad sense.

Next year, it would be roughly split equally.

And that's the same this year, so roughly 50% of our volume goes to DG and 50% to power plant.

Okay, so I'm just trying to reconcile your guidance for next year.

Sounds like a big increase in EBITDA from the DG business; is it all primarily coming from margin expansion and what kind of margins do you assume?

You already have pretty good margins in the resi business, 20%, 22%; so do you think you can get to [products and] margins in the resi business in 2017?

In certain markets we may.

Overall, from a margin profile standpoint, I would expect residential to be fairly consistent and increasing over time as attach rates go grow and as we sell complete solutions.

On commercial, we've talked a number of times; we expect margin expansion with our Helix product.

And on the power plant side, I think it's going to be variable depending on the market and the projects.

There is growth in the DG business as well so it's not all from margin expansion.

There is growth and, as I said earlier, the Helix and Equinox products shipping.

Okay and just one last question, what percentage of your 2017 outlook is currently contracted either in the power plant or DG business?

In our prepared remarks, we said approximately 50% of the power plant business is contracted.

The residential business is a shorter cycle business.

So it's not contracted for next year, but we have ten years of run rates to work from.

In the commercial business, we don't have that data, or at least I don't have the data handy.

But certainly there is material business contracted for next year.

Thank you.

Colin Rusch, please state your company name.

Oppenheimer & Company.

Historically, you guys have had a pretty lengthy wait for the high-power models.

Can you talk a little bit about what that looks like at this point?

You've talked about having contracts in place for large volumes through 12 to 18 months.

Where does that stand right now?

Our X-Series panel is what we are building in Fab 4. Fab 4 is almost completely ramped and so our X-Series production is increasing significantly.

We will have over 500 megawatts of X-Series next year.

And so, as the next few months go by, we will be able to ship X-Series with lead time similar to the rest of our products.

Okay.

I will take the rest offline.

And just with the introduction of your energy storage products, can you give us a sense of the ramp on that as well as who your cell supplier is going to be for those paths?

So I caught the second part; I may need you to repeat the first part.

But the second part of your question is the cell supplier will be both Chinese Mainland and non-Chinese for P-Series depending on the market that we ship to.

What was the first part of the question?

It was about revenue ramp, but then my follow-up question there is, are they cylindrical cells or prismatic?

And you can answer that and I will take the rest of it offline.

For P-Series these are one sun, front-contact cells.

Great, thanks a lot guys.

Okay we are going to take one more question and then we will close this earnings call.

Next question, please.

Sophie Carr, please state your company name.

Guggenheim Securities, thank you for taking my question.

Just want to make sure I understand this correctly.

It was just one project that was essentially slipped into 2017 because of the failed PPA negotiation or was there more than one?

There was a site that we were in significant PPA negotiations on in December prior to the ITC extension.

But that site, that negotiation broke down post ITC; and again, we have a replacement PPA negotiation that is likely to be completed, but not in time for monetization in our P&L this year.

Okay and you still plan to deliver Stanford?

Yes.

Our Stanford project is in the queue for our ROFO.

It's a really high-quality project.

50 megawatts and we do plan to monetize that in Q4.

Got it.

You mentioned a higher rise in project finance cost.

Do you factor higher cost in 2017 versus 2016 as we may be looking at higher rates?

We assume that the market continues.

I think there's an upside case where the market returns to where the levels have been; but for next year, in the power plant business, we assumed stable financing costs, from where we are today.

I'll say on the positive side, the DG side, we have not seen a reduction or an erosion in value.

That business is very, very strong.

We've got great financing partners that provide capital, tax equity, cash equity and that business is very robust and we have not seen a degradation in those rates.

Okay and lastly do you plan to participate in the Mexican tenders later this year, and additional ones?

Yes, absolutely.

Thank you.

All right.

Thank you for joining us on the call.

And we look forward to the next earnings call.

Thank you.

This concludes today's conference.

Thank you for joining.

You may now disconnect.