SunPower Corporation (SPWR) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation fourth-quarter 2016 results conference call.

Today's call is being recorded.

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

I would like to turn the call over to Mr. Bob Okunski, Vice President, SunPower Corporation.

Thank you, sir.

You may begin.

Thank you, Ashley.

I'd like to welcome everyone to our fourth-quarter 2016 earnings conference call.

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

Tom will then discuss our updated outlook for Q1 and FY17.

As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, our 2015 10-K, and our Quarterly Reports on Form 10-Q.

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

To enhance this call, we have also posted a set of PowerPoint slides, which we'll 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 Warner, CEO of SunPower, who will begin on slide 3. Tom?

Thanks, Bob, and thank you for joining us.

Today I will provide an overview of our Q4 performance, and our view of the current state of the solar market.

I will then discuss our segment performance in greater detail, and highlight our market position for 2017, before turning the call over to Chuck.

As you know, given continuing market headwinds, we began a number of restructuring initiatives last quarter to position the Company for long-term success.

While Chuck and I will provide more details in relation to our progress later in our remarks, I can report that we achieved our restructuring targets for the quarter, and our 2017 initiatives are on track.

Overall, while industry conditions remain challenging during the quarter, we posted solid results, as we met or exceeded our revenue and cost targets.

Excluding the charge for sale of excess polysilicon, we materially exceeded our gross margin and adjusted EBITDA guidance.

We executed on our power plant project milestones, and gained share in distributed generation in the US, where demand for our complete solution continues to grow.

Operationally, we reduced capacity, hit our cost targets, and continued the successful ramp of our P-Series product.

We exceeded our cash flow goals, as we monetized a number of projects.

Now let me touch on what we are seeing in the market.

Please turn to slide 4.

We believe that long-term growth prospects in the solar power industry are compelling, with solar power 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 profitably capitalize on this market opportunity.

However, in the near term, we believe that the solar power market is in significant transition, and industry conditions remain challenging.

We have successfully managed through industry transitions in the past, and expect to emerge from the current cycle in a much stronger competitive position.

Energy policy is a key driver for the solar industry, and there is significant speculation related to potential changes in the US policy by the new administration.

While we have no special insight into the current administration's ultimate policy position on renewables, we have based our 2017, 2018 business plan on the following assumption.

First, we expect no change to the current investment tax credit policy structure.

Second, we are not forecasting any implementation of the Clean Power Plan, though we believe that many utilities will continue to convert to low carbon generation regardless of the future status of the Clean Power Plan.

Third, we do expect some type of corporate tax reform over the next 12 to 18 months.

Given a number of different tax policies being discussed, it would be premature for us to speculate on the specifics.

However, we believe that our diversified market and application portfolio helps mitigate policy risk.

Finally, we believe that the solar industry's track record of technical innovation and cost reduction will drive long-term demand dynamics, regardless of near-term US policy outcomes.

Solar remains a significant driver of employment in the US.

With close to 260,000 people employed within the industry in 2016, solar now employs twice as many people as in the US coal industry.

Moving on to upstream.

After a very strong global solar deployment in 2016, we are seeing a relaxation of growth in 2017, and an associated mismatch between supply and demand.

The solar industry has been through similar cycles in the past, and we expect that future demand volume growth will once again, serve to rebalance this equation.

We are already seeing some indications of price stabilization in certain markets and geographies.

While this is encouraging, we expect that the panel price environment will remain extremely competitive through 2017.

Residential demand remains solid in all of our key markets, although overall market growth has slowed in California.

SunPower's products and channel expertise are strong advantages in this segment, and we're well-positioned to maintain our growth share.

The commercial market is also subject to policy dynamics, and the recent transition, the time-of-use rates under the NEM 2.0 policy framework in California has increased customer uncertainty.

However, we are encouraged to see an increasing commitment by schools and public agencies in California to invest in renewable energy, supported by state policy which allocates over $40 billion in local bond funds towards modernization and new construction including renewable energy infrastructure.

We are progressively gaining share in California, and in the broader US market.

Finally, the power plant business remains challenging with PPA pricing under considerable near-term pressure.

Now I would like to review our segment performance in greater detail, starting with residential.

Please turn to slide 5.

We executed well in our residential business, as we saw sequential increases in revenue, megawatts deployed, and megawatts recognized for the quarter.

Pricing is stable, and demand for our industry-leading X-Series panel remains strong.

We continued our share gains in Q4 in the US, and exceeded plan in Europe and Japan.

Demand for our Equinox Complete Solution continues to expand, accounting for 67% of new orders in Q4.

Looking forward, we expect to shift towards our Equinox and the X-Series Complete Solution to continue.

As we have said before, we believe that our ability to offer multiple financing options based on customer preference is a competitive advantage.

Last year, we saw a shift to cash and loan transactions versus lease.

In early stages of this year, we are seeing a minor shift back to lease, which could be the result of the increased uncertainty around tax policy.

We feel that our ability to adjust our financing offers based on customer preference and evolving policy is a significant advantage.

Finally, we continue to focus on our storage and Smart Energy initiatives as long-term growth drivers.

Moving on to commercial, please turn to slide 6. The fundamentals for our commercial business remains solid, and we are the number one market share player in the US.

Specifically, we are seeing particular strength in our public sector and light commercial channels, consistent with the continued ramp of our Helix complete solutions.

US deployments for the quarter were ahead of plan, and customer demand for Helix continues to increase, as Helix accounted for more than 90% of our Q4 orders.

As a result of Helix's success, more than 90% of our 2017 direct commercial forecast is already booked.

We are seeing increasing interest in the deployment of Solar plus Storage system, and our pipeline now exceeds $25 million of storage solutions.

Looking forward, we expect further market expansion over the next three years, driven primarily by the declining cost of solar power.

We plan to increase our focus on the public sector, where we feel our ability to offer integrated rooftop, carport, ground mount system solutions is particularly well aligned with customer expectations.

Recent 2017 Helix wins include nine megawatts for Toyota USA, as well as 28 megawatts for Vandenberg Air Force Base in California.

As I mentioned at the outset of our call, our realignment and restructuring plan remains on track, including initiatives in our power plant segment.

Please turn to slide 7. We had a solid quarter in power plants, meeting our key project milestones.

For the quarter, we sold approximately 400 megawatts in projects, including selling majority stakes in our Stanford, Turlock Irrigation and Boulder Solar I projects.

In Latin America, we continue to build out more than 850 megawatts of high-quality PPA projects.

There are a number of risks in the region, including policy and foreign exchange.

We're focused on mitigating these risks, while bringing most of these projects to completion over the next 18 months.

Finally, we continue to invest in our solar solutions group, where we sell complete equipment packages to the global power plant market.

Our solar solutions initiative leverages our latest P-Series and Oasis 3.0 technology, to offer improved system performance at competitive prices.

By bringing SunPower's extensive power plant experience to bear, and a productized equipment solution, we can decrease our customer's installation time and cost, while maintaining world-class plant availability and reliability.

Looking forward, we will focus our power plant project development efforts on selected core markets, while serving the broader global market through our solar solutions group.

In 2017, we expect conditions to remain challenging, though steadily improving throughout the year, before an expected recovery in 2018.

For 2017, we expect our development business to be 100% contracted in the near future.

We also expect solid growth in our solar solutions group.

For the year, our goal is to minimize risk, given the volatile market conditions, expand the footprint of solar solutions, and focus our efforts on building high-quality pipeline in our core development markets.

We also executed on our manufacturing and technology initiatives during the quarter.

Please turn to slide 8. We substantially completed our efforts related to our capacity reduction with the closure of Fab 2 in the Philippines, as we continue the transition to our higher value X-Series technology.

Also production at our other facilities was on plan, as we met our yield, output and cost targets for the quarter.

Our Operations Team continues to set the standard for solar technology.

In Fab 4, our team recently achieved average production solar cell efficiency of 25%.

SunPower's proprietary back contact cell technology offers our customers unique performance and reliability advantages, and our Technology Teams continue to innovate and raise the bar.

In relation to P-Series, we now have 200 megawatts of capacity installed in Mexico, and expect another 200 megawatts to be installed during the first quarter.

The technology is exceeding our yield expectations, and achieving our cost targets.

Finally, we completed the integration of Fab 3, and plan to upgrade the solar cell process technology at this facility this year.

Looking forward, we will continue to focus on panel and BOS cost reduction programs.

Our transition to our industry-leading X-Series technology is continuing, and we expect at least 350 megawatts of capacity by the end of 2017.

We also plan on expanding our relationships in China to leverage the low-cost China supply chain for our P-Series technology.

Before turning the call over to Chuck, I would like to reiterate that our core strategy is unchanged.

Please turn to slide 9. First of all, we remain committed to our long-term strategy of deploying differentiated technology, across a diversified portfolio of markets, channels, and applications.

This strategy has served us well through previous market disruptions, by hedging our exposure to policy dislocations in any single market or application segment.

Second, we will drive innovation in technology differentiation.

This includes investment in our proprietary cell and panel technology, further development of our complete solution product suite, and targeted investment in smart energy and storage products.

Third, as we mentioned on our Q3 earnings call, we will focus on cash flow and balance sheet delevering in 2017.

With the closing of Fab 2 in the Philippines, we have further aligned our capacity to match expected future product demand.

Additionally, we will significantly reduce our OpEx spend, and implement other restructuring programs designed to prudently manage our cash position.

We expect that restructuring efforts will be complete by mid year, and that we should see the benefits of these actions towards the back half of the 2017.

We continue to work closely with Total on international market expansion in R&D collaboration, in the areas of residential Smart Energy, and storage.

Deployment related to our 200 megawatt supply agreement to solarize existing Total service stations and other facilities remains on track, and we continue to discuss opportunities to expand our global power plant partnership, to include potential Total project ownership opportunities in such markets as Japan, South Africa and France.

Finally, we will continue to support the growth of 8point3, as both the buyer of our high-quality project, as well as strategic investment asset.

In conclusion, despite the near-term industry challenges, we see tremendous opportunity for solar power around the globe.

We are proactively adjusting our business, in order to capitalize on this opportunity, and we expect to exit this current market dislocation positioned toward sustainable profits and industry leadership.

With that, I would like to turn over the call to Chuck to review our financials.

Chuck?

Thanks, Tom, and good afternoon.

I will first review our fourth-quarter results, and then provide an update on our restructuring initiatives, before providing additional color on our balance sheet.

I will then turn the call back over to Tom for our guidance.

Please turn to slide 10.

We executed well on our strategic initiatives during the quarter, as we successfully rationalized our capacity, met our project milestones, and recorded a strong cash flow quarter.

Before moving on to the P&L, I would like to point out, that we took a number of charges during the quarter that influenced our financials.

These include approximately $175 million in GAAP restructuring charges, as well as a $61 million charge to sell excess poly, which affected both our GAAP and non-GAAP results.

As a reminder, when we guided our Q4 2016 results, we specifically excluded the impact of these charges.

When we compare the results without the charge, we exceeded our guidance for the quarter.

Moving on to the P&L, our non-GAAP revenue was in line with our guidance, as we executed well in all segments, with particular strength in power plant, as power plant revenues rose more than 50% sequentially.

Per plan, we met our project milestones for the quarter, including selling all or a majority stake in our Stanford, TID and Boulder Solar I projects.

In our commercial segment, non-GAAP revenue also rose more than 50% sequentially, due to project completions, while residential rose slightly in line with guidance.

Our non-GAAP gross margin for the quarter was negative 2%, driven by several low-margin utility projects, as well as the poly charge.

Please note, this charge accounted for approximately 6 gross margin percentage points overall, and was allocated to COGS across all three segments by megawatts recognized.

As expected, power plant margins declined sequentially, and we expect them to remain challenged in Q1, due to timing of revenue recognition and lower absorption of overhead costs.

On the positive side, the projects we sold in Q4 generated $50 million of net cash, after paying down approximately $500 million of project debt.

Non-GAAP commercial and residential margins for the quarter were in line with plan, after taking into account the poly charge.

Europe and Japan were ahead of plan.

In North America, cash and loan sales were 71% of shipments, while 29% were leased.

As we've said in the past, while cash or loan sales have higher up-front cash flow profile, leases generate higher EBITDA due to NCI.

Overall, we deployed 94 megawatts of residential products globally, up 13% sequentially, and in line with our guidance.

Leased bookings were 14 megawatts in Q4, with cumulative lease bookings of more than 340 megawatts in our HoldCo.

Net contracted payments are approximately $1.3 billion, excluding the residual value.

In addition, NCI for the quarter was $19 million.

We remain confident that we will have sufficient tax equity capacity to meet our 2017 demand.

Non-GAAP OpEx was $83 million, down approximately 16% versus Q3, and slightly ahead of our restructuring targets.

Our P-Series product is ramping on plan.

CapEx for the quarter was $38 million, lower than plan, due to the push-outs of purchases.

In addition, we expect to reduce CapEx at least 30% in 2017, compared to 2016.

We exited the quarter with more than $425 million in cash, which was better than plan, as we monetized a number of projects during the quarter.

We expect cash to decline in Q1 and Q2, and non-recourse debt to increase as we build out projects on our balance sheet.

We then expect to monetize those projects in the second half of 2017, increasing our cash balance, and paying off project debt.

I'd now like to provide an update on our restructuring programs.

Please turn to slide 11.

First, per plan, we complete of the closure of Fab 2 during the quarter.

Second, you'll recall that we mentioned in both the Q3 earnings call and the update 2017 guidance call that we may take a charge for excess polysilicon, but we excluded it from our guidance.

In the fourth quarter, we did sell excess poly, and recorded a $61 million GAAP and non-GAAP charge.

As you know we have long-term polysilicon contracts that are in quantities that exceed near-term consumption.

While not currently planned in 2017, we may potentially sell additional excess poly this year.

We also continue to execute on our cost reduction initiatives during the quarter.

We remain committed to reducing our full-year OpEx to less than $350 million for 2017.

We prudently managed our inventory during the quarter, as inventory declined by 10%.

Finally, we had a very strong cash generation quarter, while paying off project debt.

I'd now like to provide an update on the assets we have, in relation to our HoldCo strategy.

Please turn to slide 12.

Total megawatts recognized in our HoldCo reflects the sales in Q4, and now totals 1.5 gigawatts.

Our power plant sales were partially offset by increases in both residential and commercial.

Residential operating megawatts rose sequentially, and reflects our lease asset increase.

In commercial, we saw a slight increase in total megawatts, as our bookings more than offset sales of one of our commercial portfolios to 8point3.

In power plant, our overall megawatt declined, due to sale of our Stanford, TID and Boulder Solar projects.

Before turning the call over to Tom for guidance, I'd like to spend a few minutes updating you on some important cash flow and balance sheet highlights for the quarter.

Please turn to slide 13.

As we mentioned last quarter, we've taken a number of proactive steps to successfully manage through this industry dislocation.

We're a very prudently-run Company focused on cash flow in the near term, while restructuring the Company for long-term profitability.

While this will likely have a short-term impact on EBITDA, we believe it will create more shareholder value over the long term.

We are also focused on working capital, not only the project-related spend, but also inventory and cash conversion, improving our cash conversion cycle to seven days.

We feel it's important to remind our investors that as a development Company, we consolidate a significant amount of project non-recourse debt on our balance sheet.

We carry this debt on our books, until a product is complete.

In Q4, we delevered the balance sheet, and paid down our power plant project debt by approximately $500 million.

Additionally, I'd like to mention that we currently do not have access to our $300 million revolver, nor do we expect to have access to it this year.

However, our 2017 forecast reflect this, and we still expect to exit the year with over $300 million in cash.

Finally I'd like to point out that our current 37% ownership stake in 8point3 is currently worth approximately $400 million.

However, our book value does not reflect this, and it's carried in our balance sheet at negative $60 million.

This is due to real estate accounting standards.

In addition to the equity value of 8point3, we are now receiving distributions on our shares, and expect to receive 2017 distributions from the Partnership totaling approximately $30 million.

In summary, Q4 was a solid quarter, as we executed on the restructuring plan, drove significant cash flow, and further positioned the Company for long-term success beyond the current transition period.

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

Tom?

Thanks, Chuck.

I would now like to discuss our guidance for the first quarter, as well as reaffirm our FY17 outlook that we gave in December.

Please turn to slide 14.

The Company's first quarter FY17 GAAP guidance is as follows.

Revenue of $315 million to $365 million, gross margin of negative 2% to 0%, and a net loss of $175 million to $150 million.

First-quarter 2017 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 $370 million to $420 million, gross margin of 0% to 2%, EBITDA of negative $45 million to negative $20 million, and megawatts deployed in the range of 150 to180 megawatts.

For 2017, the only changes from our previously disclosed guidance in December are that we expect adjusted EBITDA to be positive for the year, though EBITDA growth will be weighted to the second half of the year.

Additionally, we expect a slight increase in CapEx for 2017, as well as lower restructuring charges for the year, versus our previous guidance.

This change is due purely to timing.

The balance of our guidance remains unchanged, as can be seen on slide 15.

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

Thank you.

(Operator Instructions)

Our first question is from Tyler Frank, you may state your company name.

Hi.

Robert Baird.

Thanks for taking the questions, guys.

Can you talk a little bit about what has changed since you last gave guidance, and why you're confident now that you can guide to positive EBITDA for 2017?

And then, looking at your Q1 guidance and the commentary so far, it looks as though it may be second-half weighted.

Can you discuss how good your visibility is for the second half of this year?

Sure.

This is Tom.

The changes since the last call on -- would be on the impact of the new administration and the White House.

And that would be speculation on tax reform, and also the exchange rate between different currencies, and lastly interest rates.

That is added on top of the continuing trend of the large American and Chinese markets continue to grow, but not as fast as projected.

And supply has continued to come on, as if those market continued to grow as fast as expected.

So we have a continuing oversupply, and [pricing in] modules has continued come down, albeit at a declining rate.

So there's a number of changes that are mostly unfavorable.

Having said that, what gives us confidence in our guidance is the following.

First, our commercial business is predominantly a direct sale business, and 90% of that business is in the backlog.

The remaining 10% is under contract, and will soon be in the backlog.

Our power plant business, we have more modest -- that we've scaled that business to be more modest in 2017.

So we have [less] of that business, and soon that business will be 100% booked for the projects that we self develop.

So we have clear visibility to what we're going to build in the back half of the year.

And then, I would add to that, that we've had two significant restructurings.

We've also worked aggressively to lower costs of both our panel module and BOS, and we will see the benefits of that start, even as soon as next quarter, but materially by mid year.

So really, really strong visibility, much better than the last year, in terms of backlog.

And then secondly, we've restructured the Company, and got costs out, that put us in a better position on the things that we control.

Great.

Thank you.

Then just a follow-up.

Have you seen the uncertainty around -- either that the tax situation or potential changes to the subsidies?

How is that impacted each one of the three markets, being residential, commercial, and utilities go?

So let me first talk about residential.

There's a combination of factors there.

I'll talk about residential America.

California is the dominant market, and we've had epic rain in California, and much needed, but epic rain.

And then, tax speculation has caused some customers to pause.

And so, I would say that the Q1 growth rate is not what we expected, although we're doing fine.

The commercial business has seen, perhaps early signs of changes in buyer behavior.

But our projects end up preferentially, and so, I think we're fine there as well.

On light commercial business, that's more of a short cycle sales business.

And there's been a policy announcement by the California Public Utility Commission that grandfathers projects through the end of January.

So that date has already past.

So there's uncertainty on rates for light commercial customers for the balance of this year.

It is possible that that decision will be modified, and we're working constructively, or certainly advocating for that.

In the power plant business, we have reduced our exposure to power plant business.

So we're less susceptible to the macro environment that is a part of your question.

And I would say though, that the Mexican projects are more challenging, because of the exchange rate with the peso.

And there is a sense of economic uncertainty in Mexico that may impact the value of the project.

That is offset by cost reductions that we can do, and in fact that which we produce in Mexico is lower cost now, so we can't offset that.

There may be an impact on the few projects that we need to sell this year, although that would be not significant at this point.

So that would be a broad overview.

Great.

Thank you.

Our next question is from Brian Lee, kindly state your company name?

Hi, guys.

Thanks for taking my question.

It's Goldman Sachs.

Chuck, if I can dig into the cash balance target of $300 million a little bit, you mentioned the positive operating cash flow target for this year, do you think you can be free cash flow positive as well?

And then with respect to debt, I know you're talking about delevering.

Can you give us some sense of how much you're implying, in terms of delevering in that cash balance forecast?

And then, what pieces of debt you'd particularly be targeting?

If I do the back of the envelope math, it seems like it'd be less than $100 million, but would be curious to hear your take?

Thanks.

Certainly, Brian.

Thank you for the question.

So the cash balance, end of the year of $300 million is after paying our pretty significant CapEx, primarily from building out Fab 4. And so, I think we will be operating cash flow positive.

However, as you know, the statement of cash flows has a lot of moving parts with sale leasebacks and residential financings.

So if I -- the way we'd look at it, is we sort of look at all non-recourse debt flowing as operating cash flows.

And when you take it all into account, we think we will drive positive operating cash flow.

On the statement of cash flows, it will be more significant because the debt part of non-recourse debt is in financing.

And so, the delevering that we mentioned, we really had a strong Q4 delevering, and paying down $500 million of project level debt.

We'll increase that a little bit in Q1 and Q2, and then pay that down significantly in Q3 and 4. As far as the exact number, we're not guiding to that level of specificity, but I would expect it to be more than $100 million that you mentioned.

Okay.

Great.

Thanks.

That's helpful.

And just a second question for me, and I'll pass it on, is when I look at the non-GAAP gross margins by segment, if I just specifically focus on the residential, and I try to back out the $60 million-plus that you allocated across the three segments from the poly charge, I'm getting to a number where you were, well less than 10% non-GAAP gross margin in the residential segment.

Which I guess, the question would be, is that in line with the targets you had coming into the quarter?

And secondarily, it just seems like pricing there, has been relatively more sticky than in some of your other categories, so would be a little bit surprised that the margins came down as much as they did, versus where they were trending in 2016.

Maybe if you could talk to the drivers behind that?

Thank you.

Yes.

Certainly, and thank you for that question as well, Brian.

There's one more part to the margin impact, and that is we had capacity charges due to lines that were not running in Q4, it was about $25 million.

And so, when we look at the overall margin profile, on a pro forma basis for residential, it was close to 20%, which is in line with our expectations, and where that's been historically.

And we'd expect it to maintain that level, and possibly increase over time.

Of course, that's dependent on FX for our European businesses, and business in Japan.

But largely, we expect the residential margins to stay fairly strong, in a 20% range, and you've the same impact on commercial and power plant.

So if you exclude the impact of poly, as well as capacity charges, it was a decent margin quarter.

And we'd expect that trend to strengthen into next year.

Q1 as we mentioned is going to be a little more challenging, but we see the margin profile improving throughout the year.

And the capacity charges, those are related to Fab 2, and so those are behind you, is that fair?

Yes.

That's correct.

Okay.

Thanks, guys.

Next question is from Krish Sankar, please state your company name.

Hey, guys.

This is Chirag Odhav on for Krish at Bank of America.

Could you give some insight on how much cost of goods sold are, for like domestically versus internationally?

In Q4, it was about 90% of our revenue, and correspondingly COGS was in North America.

If you're talking about the allocation of COGS, we don't really break out poly coming from the US or glass or whatnot.

But if the question is specifically on the revenue and COGS breakout, it was roughly 90% in the US in Q4, and less than that throughout the year, as we had more international earlier in 2016.

And do you see that increasing throughout 2017, or do you think the 90/10 -- the10% spread would be pretty consistent throughout the year?

It will be more international in 2017, because we have some really great projects in Chile and Mexico that will monetize.

So you'll see that number probably significantly lower than 90% throughout 2017.

All right.

Thanks.

Our next question is from Vishal Shah, kindly state your company name.

Deutsche Bank.

Thank you.

So Tom, thanks for the update on the 8point3 valuation.

I'm just trying to understand what the strategy is longer term, given that your power plant business focus is decreasing, and then, the model has become more complex.

Would you -- do you have any thoughts on just spinning that off separately, and then just completely disengaging from 8point3?

Sure.

I'll say a few words, and then Chuck, the CEO of 8point3, and may want to say a few words as well.

First, we believe that 8point3 is undervalued.

And it's the reasons that we've said repeatedly, it's solar only, therefore we think is derisked.

It has two great developers dropping projects, has long-term PPAs on -- so the quality of the PPAs are outstanding.

It is important to note that what has been dropped down already, will allow 8point3 to grow its dividend through this year.

And that there's 1 gigawatt in the ROFO portfolio beyond that, so there's quite a pipeline of projects.

Specifically, SunPower's support of 8point3 includes not only power plant projects, but importantly, commercial and residential.

So we have a diversified set of segments that we've developed, that can be dropped down into 8point3.

So we think patience is a virtue here.

Having said that, we will look at our ownership position in 8point3, and of course, continue to check that, that fits our long-term model, and that makes the most sense.

And I can tell you right now, the answer is yes.

Chuck, you want to add anything?

Yes, I would just add, that we have 1.6 gigawatts of assets in our HoldCo, 443 megawatts are currently in operations, generating great cash flow for SunPower.

And over time, we'll continue to develop and grow projects, both our commercial as well as utility scale.

And certainly, in the US, utility scale is more challenged today, but in the future that's going to be a very, very strong business.

So over time, we think it fits with our core strategy.

That's great.

Thank you.

And just, can you clarify the comments you made, about what's changed since the last call, and especially as it relates to the new administration?

It sounds like you're not really making major changes to your assumptions about the ITC, so what else has changed?

Well, specifically on what has changed is foreign exchange rates, which means that the projects in Mexico that we have, have that headwind.

That's obviously a tailwind, in what we make in Mexico.

That same FX challenge is true also, for example, in Japan, and to some degree in Europe as well.

And secondly, on tax reform looks, is speculated to be more likely in America, than less likely.

We're not in a position, of course, to project where that would land.

However, our counter-parties will certainly want to talk to us about where it's likely to land, and then build that into whatever structure that they buy projects, so it's topical at minimum.

So those two things, for sure, are things that we're dealing with the new administration.

With the ITC, you have the tax credit itself, as you're well aware.

And that's already planned to phase down, and so that's the nature of our comment.

Don't forget the bonus depreciation, and on bonus depreciation, depending on how you read the tea leaves, that could be impacted or not.

So that was all contemplated in our planned remarks.

Okay.

Great.

Thank you.

Next question is from Colin Rusch, state your company name, please?

Yes, hi.

This is Kristen Owen on for Colin from Oppenheimer.

Just wanted to ask a little bit about some of your premium markets like Japan?

Are you seeing any competition for the high-efficiency modules there, or are you seeing any new products that are competing with the X-Series?

I would say a couple of things here.

We are hearing announcements about higher efficiency.

We have not seen products that come close to, certainly not close to our X-Series, although we are seeing products that are coming closer to E-series.

There is, in the mainstream market, there is a clear trend towards, moving from a basic front contact design to into a PERC.

And over the next year or two or three, we'll see a transition.

A couple of things I'd say beyond that.

One, you heard the performance of our Fab 4, it's rather phenomenal.

When we IPOd the Company, which I was a part of, we said the 25% was beyond the theoretical limit.

And that is the median efficiency that we achieved last week in Fab 4, so we're improving our efficiency.

Secondly, we have P-Series as a product.

That product is performing great.

We've already produced this year, in the first seven weeks of the year, as much as we produced cumulatively prior to that, which of course, you'd expect.

It's an expanding product line.

That product line capitalizes on the increased efficiency of the mainstream solar cells, at pricing consistent with the new market.

So we think that we've balanced capacity of E and X, consistent with the markets that they best fit, and that P-Series is a complementary product that will work great in the other markets.

Great.

Thank you for that color.

And then, I wanted to see if I can get a little bit more on the point that you made about your pipeline of storage solutions.

I think you mentioned $25 million there.

Can you just give us a little bit more color on what you're seeing across your geographies, for any accelerating interest in energy storage plus solar?

Yes.

First of all, there are incentives in place in a number of markets, and clearly, California is one of those markets.

Second of all, the cost of storage has come down.

And then third, what we see is there's just an undeniable trend towards storage as being an enabler of solar, because solar penetration rates in a number of markets, California inclusive, have inverted the so-called Duck curve, or the peak is coincident with when solar produces, and therefore we've reduced the peak rather substantially.

And therefore, the value of solar energy at other times of the day is increasing, while the cost of storage is going down.

So the most notable markets, of course, are California, Hawaii, Germany, which has incentives as well.

New York with [REV] proceedings, I think will encourage the use of storage.

But because of the importance of solar energy outside of the traditional peak, and the cost of storage coming down, we think it's inevitable that storage will be part of a growing number of markets.

Great.

Thank you so much.

Our next question is from Julien Dumoulin-Smith, your line is open.

State your company, please?

Thank you, gentlemen.

UBS.

I just wanted to follow-up a little bit on Brian's earlier question, if I may.

I just wanted to understand a little bit around liquidity at the end of the year.

Obviously, you have a cash position you've disclosed.

What about revolver balance, and availability, as well as just can you discuss a little bit, to the extent you know today, assets that you'll have on the balance sheet as of year-end 2017, and/or working capital in those projects that are underway?

Just maybe expound on the full details of the liquidity position?

Sure, Julien.

So we expect to be north of $300 million at the end of the year, and of course, that's our estimate today.

Counting in there, is Total is doing a pre-pay of $90 million as a direct sign of support for the Company.

And so, we feel that's a real strength of the Company.

In addition, if you look at today, the current balance sheet, you've got north of $1 billion of equity.

And if you look at the assets that we have in there, there's not like a lot of goodwill or intangibles.

So it's a pretty solid asset balance.

That does not count, the $400 million of equity value of 8point3.

So we kind of look at it, as if there's a $1.5 billion roughly equity value in our balance sheet.

And this year, we're really focused on working capital, and driving cash conversion of the balance sheet.

We drove over $400 million of operating cash flow in Q4, and then those numbers will move around a little bit this year.

As I mentioned in a earlier comment, that we are building some projects, specifically in Chile and Mexico, that we expect that to sell throughout the year.

And we would expect, at the end of the year, to have less project assets, and have paid down more of our project debt, which we think improves the profile, and lowers the capital tied up in the balance sheet.

And then, that trend will continue, we believe into 2018, as we then accelerate and improve profitability.

So we're not providing a very detailed working capital numbers, but I would just point you to, that our inventory balance is north of $400 million, or around $400 million.

We expect that come down dramatically over the year.

Receivables will go up and down, obviously, we had a really strong fourth quarter.

And so, we're focused on working capital, as a really key part of our core near-term strategy, and driving strong return on invested capital.

And that will happen obviously, through the transition period, Julien.

Can you elaborate just quickly on the revolver, just the status there?

And also (multiple speakers).

(Multiple speakers) revolver currently available, it was expected in our plan.

So we have not drawn on the revolver, and it is currently not available.

And given our restructuring plans, we do not anticipate it being available throughout 2017.

We have not commented beyond that period.

At some point, we would expect it to be available again, but we are not planning on using it.

It's based on a metric, to be clear?

Yes, based on our EBITDA metrics, 4.5 times.

And the balance sheet of $1 billion, that was based on current balance sheet, or is that projected year-end 2017?

The current balance sheet has north of $1 billion of equity, and that does not count roughly $400 million of 8point3 equity.

In fact, I mentioned in the prepared remarks, that it's actually carried a negative $60 million, because of these real estate accounting rules.

So if you added that $460 million to our north of $1 billion of equity, you'd get this kind of pro forma $1.5 billion.

But would that change materially through the course of the year, just as you think about the $300 million in cash, are you monetizing a lot of assets to get that there?

Yes, I don't think the net equity value is going to change a lot, it's the composition.

We expect to pull cash out of working capital.

We're obviously investing north of $100 million in CapEx.

We're investing $100 million, a little bit less than that in R&D that's flowing through OpEx.

So we're making significant investments in the future of the Company.

Excellent.

Thank you.

Next question is from Pavel Molchanov, state your company, please?

Raymond James.

Last week, India's Power Minister reported that they have reached nine gigawatts of installed solar capacity, and their target for this year is somewhere between six and eight, which is going to make them the third biggest solar market in the world.

Can you talk about your leverage to the Indian value chain, and are there any partnerships, or alliances that we can look forward to in that market?

Yes.

We alluded or commented in the prepared remarks about our solar solution group, and that group has been fully staffed over the last year.

And it sells complete solutions, which includes our Oasis product with -- predominantly in those markets, P-Series.

And we are working with a large number of blue-chip partners in India.

And we would be either co-developing, or selling those complete solutions to those large blue-chip developers, many of which you know, Pavel.

So I would say, that we had a presence in India a few years ago, we exited India, and we're back now, but it is early innings.

And because of P-series, and because of the nature of P-Series, that a large part of it is sourced in China and parts of Asia.

We have flexibility, and we have solutions that fit that market really well.

So we're optimistic that through solar solutions group, we'll have a meaningful Indian business over the next few years.

Okay.

If I can follow up on your earlier comment about PPA pricing staying pressured.

Last August, you said that there was a lot of irrational PPA pricing in the market place.

Is that still how you would characterize the current state of affairs?

I would say a few things here.

One, largely yes.

I think that we do a lot of analysis, and we think that there are some companies selling modules at below cash cost, so that's not rational, nor will it last.

We think that there's been some bids in parts of the world that are unlikely to be built, and that maybe because they bet, that currency or a country risk would be different, than it's actually materialized.

So I do think that there'll be a little bit of a shake out.

Having said that, as a general trend, solar will be, has been in developed world, the largest new energy generation resource, and almost everyone is projecting that it will continue to be in most markets.

So that will mean in our view, intense competition for the foreseeable future in mainstream power plants.

There's still the ability to differentiate in power plants.

Location matters, local knowledge matters, in terms of the costs to perfecting the site.

You can get a premium, depending on your transmission position.

So selectively, you can get better PPAs, and we believe in the Americas.

But if you said broadly worldwide, I think our view is changing to intensely competitive, certainly for the foreseeable future, and our plan is via Oasis and P-Series in other parts of the world, it will compete, in that intensely competitive market, however, selectively or as a solutions provider.

So kind of a mixed answer.

Some irrationality that will shake itself out.

However, the intensity of the competition will continue.

Appreciate it.

This will be our last question, please?

Next question will be from Paul Coster.

State in your company, please?

JPMorgan.

Thanks for taking my question.

You talked to the recovery in 2018.

Is there anything specific behind that?

Is it, for instance, is a function of where the price points for the modules will be at that time, or your expectations around capacity leaving the market, et cetera?

And I've got a quick follow-up.

Okay.

So there are two aspects of this, that which we control, and that which we don't.

The macro environment, we don't control.

So we are not counting on pricing or supply and demand to rebalance, although as we said in our prepared remarks, we would project that to happen over the next few quarters.

And we have a really good idea of what cash costs are, and there is just a limit, to how long the industry can sell at cash costs or below.

So it's logical, although we're not betting on it, more importantly, there are things that are under our control.

That is we've restructured the Company.

Those benefits will accrue in the succeeding quarters, because we're still in the middle of restructuring.

So we've pulled the costs out, and lowered our breakeven point.

We've lowered the cost of our modules, and balanced the system, because it was required to compete, and so we've accelerated cost reduction.

And in meaningful parts of our business, we're in a much better bookings position.

So we have a predictable pipeline of projects we're going to build because they are booked, than we were last year.

So we have a more predictable set of economics for the balance of the year.

So mostly, our comments are based on that which we control.

And I would say, we're quite confident that our results will improve throughout the rest of this year.

Okay.

Got it.

And then, I'm unfamiliar with this situation, but what happens to your earlier mid-stage pipeline, in the context of a protracted downturn in the industry?

So we have assets throughout the world, although predominantly in the Americas.

And if there was a protracted downturn, we could hibernate and capitalize on those assets later.

Or we could monetize those assets, and we will of course, evaluate that, depending on how things progress, in terms of how we see the market developing.

But it is absolutely an asset to have land positions where we do.

And so, those are options that are good to have.

And as we improve our Oasis product line with P-Series, we're optimistic that we'll actually build them out, and capitalize on those assets.

And then, eventually some of those will be dropped into 8point3.

So there is no material expense attached to maintaining those assets (multiple speakers) in the meantime?

There is (inaudible) associated with continuing to perfect those.

So when I say, hibernate, you would not, for example, continue to spend money on transmission and [queue] positions, or on permits to build.

And so, it's depending on the probability that you'd expect to get a PPA, that you can make money on, you would continue to spend money.

Otherwise, you could hibernate and not to continue to spend money.

So it's short of -- it can vary depending on the asset.

Thank you.

Okay.

Well, thank you very much everyone for calling in.

We look forward to having our next call with you in a few months.

This concludes today's conference.

Thank you for joining.

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