SunPower Corporation (SPWR) 2018 Q2 法說會逐字稿

Good afternoon.

Welcome to SunPower Corporation's Second Quarter 2018 Earnings Call.

(Operator Instructions)

And I would now turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at SunPower Corporation.

Thank you, sir.

You may begin.

Thank you, Sandra.

I'd like to welcome everyone to our second quarter 2018 earnings conference call.

On the call today, we will start off with an operational and strategic review from Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our second quarter 2018 financial results before turning the call back to Tom for guidance.

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

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, our 2017 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 this call, on the Events & 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.

On this call, we will review our second quarter 2018 financial performance and provide an update on our strategic initiatives.

Additionally, we will highlight some key themes for the quarter, including strong Q2 execution, continued investment in our DG business, status of our NGT cell and panel technology and our decision to accelerate the implementation of a new corporate structure and segmentation presentation.

First, our Q2 2018 highlights.

Please turn to Slide 4. We executed well in Q2 with strong performance across the board as we exceeded our revenue, margin and EBITDA forecasts for the quarter.

In particular, I'd like to highlight the continued growth in our DG business, with global DG sales up 45% year-on-year.

In the U.S., our residential business beat plan, and we continue to grow this business.

We also saw a continued strength in our core international DG markets, including Europe, Japan and Australia.

Strong C&I bookings during the quarter included recent awards for more than 40 megawatts of enterprise contracts for 2 Fortune 50 customers.

Interest in our Helix storage solution remains strong with storage-attach rates of 35%.

In our upstream business, SunPower Solutions again performed well with record bookings in Q2.

We executed well on our fabs, meeting cost and yield targets for the quarter with full fab utilization.

NGT technology development is ahead of plan, and we hit our first silicon milestone on our full-scale manufacturing line in Fab 3. More on NGT later.

We continue to simplify our company and generate cash through the sale of noncore assets, including completing the sale of our ownership stake in 8point3 and announcing the sale of our microinverter business to Enphase.

We are making good progress on sale of our 400-megawatt lease portfolio and expect to monetize the first phase of this transaction by the end of the current quarter.

Finally, we have made the decision to transition to our new upstream and downstream segmentation by the first quarter of 2019.

As we mentioned last quarter, we are optimizing our corporate structure to further reduce costs, enable faster decision-making and provide the opportunity for more focused partnership opportunities in 2 very different businesses.

We believe that an upstream and downstream business unit model will allow us to capitalize on our core strengths in upstream technology and manufacturing as well as our complete product solutions and strong channels to market in DG.

I'd now like to briefly review why we believe our new corporate structure and increasing focus on the DG market will position us well for future success.

Please turn to Slide 5.

One of the competitive advantages of our diversified model is our ability to quickly respond to changes in global market conditions.

We are exercising this flexibility by implementing a new corporate structure focused primarily on the global DG business.

We are doing this for a number of reasons.

In the power plant market, we are seeing a reduction in demand caused by recent significant policy changes in China, which represented more than 50% of global solar power plant demand in 2017.

This reduction in demand has put significant pressure on standard-efficiency commodity panel pricing and is already impacting factory utilization rates and margin profiles for suppliers focused mainly on this segment.

The power plant market is increasingly mature and PPA pricing has decreased steadily, driven by increased project scale and aggressive competition between asset owners with very low cost of capital.

Given this market dynamic, we decided to exit power plant development, and we'll be addressing this market exclusively via an equipment supply model centered around P-Series product from our DGS joint venture.

For DG, on the other hand, we expect global market expansion of 40% over the next 5 years, with significant customer demand for high-efficiency, premium-priced panel technologies such as our IBC and P-Series products.

This market growth is being driven by improving customer economics as retail electric rates increase and the cost of battery storage continues to fall.

Given our established footprint in key global markets and an industry-leading high-efficiency product portfolio, we are very well positioned in the DG segment.

Slide 6 shows our U.S. and global DG deployment over the past 4 quarters compared to our downstream U.S. competitors.

We believe that our scale advantage will we increasingly drive margin improvement as we reduce supply chain costs and benefit by leveraging our larger operational platform.

Now let's talk for a moment about the status of our NGT technology development.

Please turn to Slide 7.

SunPower's IBC panels have been the technology of choice for residential and light commercial customers for over 15 years, with panel efficiencies up to 23% in the highest levels of reliability in the solar industry.

Our new NGT technology will offer customers similar performance to our X-Series products with significantly lower manufacturing costs.

When fully ramped, we expect that the cost per watt of NGT will be on par with mono-PERC technology but with superior levelized cost of energy due to higher performance and durability.

Higher NGT cell efficiency reduces the effective cost per watt of silicon wafers in module conversion.

This technology is a game changer for SunPower, offering high efficiency at low cost.

There are a number of factors that contribute to the manufacturing cost reduction.

First of all, NGT is based on a 6-inch M4 wafer platform compared with our 5-inch legacy wafers.

The result cells produce almost 70% more power per unit.

Our technology is to develop a simplified manufacturing flow that enables 25% cell efficiency with fewer steps and fewer production tools, thereby reducing capital expenditures.

We are already retrofitting Fab 3 with our NGT technology and are planning to transform all of our E-series production capacity to NGT over time.

Utilizing existing fabs rather than building new greenfield facilities greatly reduces capital expenditures and significantly improves flexibility.

We expect NGT to be margin accretive, given a very competitive cost structure and proven premium market value.

We remain on plan for volume production starting in Q4, with volumes of up to 100 megawatts in 2019.

We have spent a fair amount of time on our last 2 calls discussing our restructuring, new DG strategy and our technology road maps.

On Slide 8, we are providing an overview as to how these pieces fit together under our new segmentation.

I would like to focus on a few key takeaways.

First, on an operational level, our new segmentation will drive increased business unit focus on cost structure management and greater financial transparency.

We believe this view will highlight the inherent value in each of our segments and enable potential value chain partnerships to drive additional growth.

The new structure will also make it easier for investors to model and value our businesses as each BU will have separate P&L responsibility with its own respective financial disclosures.

Finally, the new BU structure will allow us to devolve corporate overhead into the BUs, which we believe will improve operating expense efficiency.

In fact, we recently completed our first lean corporate initiative in Q2 in anticipation of our change by Q1 2019.

Before turning the call over to Manu, I would like to briefly discuss what we see is our key initiatives to enhance shareholder value.

Please turn to Slide 9.

In upstream, scaling NGT technology will enable us to maintain our industry-leading efficiency advantage while materially lowering our costs by 2020.

Once scaled, this technology will drive superior margins.

It will be the cornerstone technology by which we expand our global DG business.

In downstream, we will remain focused on the long-term DG market growth opportunity.

We expect to continue expanding share in the U.S., both in residential and commercial.

With the addition of storage to our offerings, we see a clear path to expanding long-term margins in this market.

Moving to our new segmentation, we will further simplify and streamline our business and drive increased accountability, resulting in better expense control and faster decisions made closer to customer.

Finally, we remain committed to improving cash flow and EBITDA.

For example, we've already made significant progress on our plan to delever the balance sheet through asset sales and reducing operating costs.

This will improve our bottom line and provide the resources necessary to fund growth.

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

Manu?

Thanks, Tom.

Before I get started, I wanted to take a moment to say how excited I am about joining SunPower.

I appreciate the time and effort by the team given the transition and look forward to speaking with many of you in the future.

Now let me review the financials.

Please turn to Slide 10.

We were pleased with our results for the quarter as we exceeded our revenue, margin and adjusted EBITDA forecasts.

Our non-GAAP revenue was above guidance as we executed well in all segments.

Power plants was up sequentially, primarily due to project timing and the continued growth in our SunPower Solutions equipment business.

On the DG side, our commercial revenue was up more than 25% year-over-year and Q2 bookings were above planned.

We also saw strong sequential and year-over-year performance in our U.S. residential business as our North American team executed very well.

Overall, our consolidated non-GAAP gross margin was 11.7% ahead of plan as we benefited from the strength in our higher-margin residential business.

Commercial margins were in line sequentially and year-over-year.

We expect commercial margins to improve in the second half of this year.

In our power plant segment, margins were breakeven as we continue to transition out of development to panel supply agreements.

In residential, as I mentioned, we saw strong results in the U.S., with Europe and Japan again ahead of plan.

Overall margin was 22%, up both sequentially and year-over-year.

In North America, cash and loan sales were 61% of our shipments, while 39% were leased.

Overall, we deployed 96 megawatts of residential products globally, in line with our forecasts.

Non-GAAP OpEx was $77 million for the quarter and consistent with Q1.

CapEx for the quarter was $16 million, also in line with our forecasts.

Adjusted EBITDA was $59 million ahead of plan, with our outperformance primarily due to a strong DG business as well as higher-than-forecasted noncontrolling interest resulting from a residential lease portfolio.

Additionally, our Q2 Section 201 tariff impact was also lower than anticipated due to inventory bid, but expect that these costs to shift to the second half of the year as we deploy these megawatts.

Finally, we are pleased with our progress on our NGT road map and have made the decision to transition our existing IBC capacity to NGT.

As a result, we expect to upgrade the equipment associated with our manufacturing operations for the production of NGT over the next several years.

In connection with this evaluation and our proposed change to our segmentation structure, we recognized a noncash GAAP impairment charges of approximately $369 million in the second quarter related to the value of our legacy manufacturing assets.

I'd now like to discuss a few financial highlights for the quarter.

Please turn to Slide 11.

As Tom mentioned, we continued with our efforts to simplify our business and improve our liquidity as we completed the sale of 8point3 and announced the sale of our microinverter business to Enphase.

Additionally, we are in exclusive negotiations with a partner to acquire our North American pipeline development portfolio, which we expect to complete this quarter.

Our cost control initiatives are in plan, including the completion of the first phase of our lien corporate strategy, which complements our new segmentation approach.

By encouraging the BUs to take a P&L approach to their individual businesses, there is less of need for a large corporate footprint to support their efforts.

Going forward, we now see our annual corporate overhead expense run rate declining to less than $40 million.

We also expect to make further progress on delevering and simplifying our balance sheet in the second half of the year, including closing the first phase of our 400-megawatt lease portfolio sale this quarter.

This monetization will significantly improve the transparency of our P&L while adding to our liquidity.

We also recently closed a $75 million project construction revolver in the commercial space as we continue to leverage our finance expertise to provide efficient capital to the distributed generation business.

In closing, I want to reiterate that my top priority since I arrived here is to drive cash flow and believe that our initiatives will generate positive cash for the second half of this year.

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

Tom?

Thanks, Manu.

I would now like to discuss our guidance for the third quarter and fiscal year 2018.

As a reminder, our guidance assumes our estimated impact of the Section 201 tariffs for Q3 and 2018 as a whole.

We expect Q3 tariffs to be around $25 million.

Please turn to Slide 12.

Third quarter fiscal 2018 GAAP guidance is as follows: revenue of $425 million to $475 million, gross margin of minus 1% to positive 1% and a net loss of $215 million to $195 million.

Third quarter 2018 GAAP guidance also includes the impact of revenue and timing deferrals due to real estate accounting as well as the impact of charges related to the company's restructuring initiatives.

On a non-GAAP basis, the company expects revenue of $450 million to $500 million, gross margin of 6% to 8%, EBITDA of negative $10 million to positive $10 million and megawatts deployed in the range of 400 to 430 megawatts.

Third quarter guidance excludes the impact of the company's proposed acquisition of SolarWorld Americas as well as the potential financial impact of timing differences related to its previously announced proposed asset sales.

Additionally, third quarter adjusted EBITDA guidance assumes an approximately $10 million inventory charge related to the company's second quarter impairment of legacy manufacturing assets.

For 2018, please turn to Slide 13.

For fiscal year 2018, the company now expects adjusted EBITDA to be in the range of $95 million to $125 million.

The balance of the company's fiscal year 2018 non-GAAP guidance remains unchanged.

On a GAAP basis, given the company's second quarter asset impairment charge of $369 million, our net loss is expected to be in the range of $860 million to $830 million.

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

(Operator Instructions) And our first question comes from the line of Brian Lee with Goldman Sachs.

I guess, first off, just high-level.

Tom, I know you spent a lot of time in DC the past year.

So does this shift away from IBC basically mean you're walking away or giving up on pushing for an exemption on the Section 201?

Could you update us on that process?

No.

It does not mean that.

The -- actually, we're investing in NGT.

We're bringing out our next-generation technology, which is a larger format IBC product is substantially lower cost, and we're doing that in Malaysia.

We think our position on exclusion remains quite strong.

We are exactly what they ask for in their exclusion criteria.

We fit that exactly.

We have productive interchange with the interagency committee in (inaudible), although to a limited nature recently.

And we do know that they're actively working on the decision.

So we still expect exclusion, and we're still just investing in our IBC technology.

Okay.

I appreciate that update.

I guess staying on that line of questioning, on the IBC capacity, you have, correct me if I'm wrong, 1.2 gigawatts of capacity today, 800 megawatts being E-series and 400 megawatts X-Series.

Will all of that convert to NGT?

I know you mentioned E specifically, so curious what happens to the X. And then can you speak a little bit to what the CapEx budget needed for the transition will be?

And then lastly, as you make the transition, will you have some capacity that temporally has to come offline and so your effective capacity over the next couple of years until you fully transition is lower than the nameplate that you have today?

Okay.

Thanks, Brian, for the question.

I appreciate the level of detail.

So our plan right now is convert E-series, the 800 megawatts, to NGT and the extra wattage output, we'll make the capacity of the fab quite a bit harder -- higher, and that's somewhere between 50% and 70% higher.

I think we can transition lines without a big gap in capacity, that's your third question.

I don't think there's going to be much transition.

We've built one line so far.

It's actually half of a line pair.

That half-line pair, by the way, produced for silicone a few weeks ago and will be in volume production in Q4 and is producing 24-plus percent cell efficient.

So the technology works.

In terms of Fab 4, it's only 2 years old.

It's X-Series.

It's beating its nameplate capacity.

So that will be a call we'll make after E-series, and that's going to be a question of, can we get the equipment on minimal equipment conversion to convert that fab?

If I had to guess or if I had to project in the long run, the answer would be yes.

And then lastly, CapEx.

That is a feature of NGT technology that is among the reasons why we want to do this conversion aggressively because our CapEx is well under half of what it used to be on -- and we think it can be well below $0.30 per watt.

And as we implement more of that, I'll update you in time, but certainly, well below $0.30 a watt.

So just to keep track, 70% more power, 30% to 40% less costs and less than $0.30 per watt CapEx.

Okay.

Just to clarify, the $0.30 a watt CapEx would be -- we would want to calculate that off the higher wattage that NGT produces, and then that's for the brownfield you're doing?

Or would that be a greenfield number?

Yes.

It is -- with the higher wattage brownfield number, but the number will improve.

So by the time we need greenfield, my guess is it would be lower than that even for a greenfield.

Yes, it's important to note with NGT that the team is working on the current [RAV of the] technology plus 2 successor revisions of it, and -- mostly on [RAV 1] now.

So that's why that affects my projections.

Thanks, Brian.

And our next question comes from the line of Michael Weinstein with Crédit Suisse.

Are you waiting for any specific milestones before accelerating NGT CapEx at this point?

What challenges do you expect to see as you switch from the 5-inch to 6-inch?

So in the near term, we're still working up the yield curve.

We actually have a 9-panel where we measure mechanical yield, electrical yield, efficiency, lifetime of the silicone, et cetera.

You get the idea.

A couple of those are not at our projections, and we've -- as we perfect the technology, we have to hit certain statistical milestones.

We expect to hit the meaningful ones this year.

So technology is, I would say, largely unplanned or completely unplanned technically.

We're still working on our funding for how we'll ramp the technology.

And I'll just go ahead and talk about funding so you don't have to follow up and ask.

We are planning to fund this through customer advances or partnerships.

We're in discussions with both.

We do not plan on doing any capital markets raise to fund the transition to NGT.

The guidance I gave for next year's capacity is largely in place with the first half-line pair.

So funding it occurs would allow us to upside that number most likely.

Great.

And a separate question.

How do you think about the distributed generation sales versus leasing strategy now thinking about California and also the recent IRS Safe Harbor rule?

So we think that there's a long-term trend to owning systems.

That's always been the case for SunPower.

We've always had the you can choose what you want customers, so you can raise loan or buy with cash.

And there's always been a bias towards either a loan or cash with our technology.

And, of course, with the ITC going down, the economics will work better for loan.

And loan is doing great for us this year, so we're already seeing a bit of that trend.

Now I wouldn't necessarily call that because the ITC, I think we'll start seeing that more towards the end of next year.

While I'm talking about residential, I want to mention new homes as well.

The new homes market -- I could tell you, you might ask about that next.

New homes market is doing quite well in California.

It's actually transitioning to the 100% live ruling.

So on that business, we're #1 in that business.

We're doubling that business from '17 to '18.

So it's another positive trend.

So -- and to your first question, I see loan and I see that happening already, and then I wanted to add the comment on new homes.

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

You've alluded to the falloff in industry-wide module pricing about 12% in the last 2 months because of the Chinese actions.

Has your premium relative to the commodity Chinese modules changed at all during this 2-month period?

Thanks, Pavel.

So let's talk segments.

And in the power plant segment, we sell predominantly our P-Series product because now we're selling equipment.

And as our TZS joint venture ramps, costs are coming down, and we can maintain a premium.

I would say what we see is there's a modification in pricing.

There's a bit of a premium expansion, and then we react to it.

So we're seeing most of that decrease in power plants.

In the DG business, it's more insulated from that because there's more value in high efficiency.

So there's 2 things there.

One, its smaller sales channel is more important, service is more important.

Secondly, because we have the highest efficiency, the best technology, it's somewhat insulated.

But I would say the same thing to your question.

There will eventually be some price movement in the DG business, and we don't allow the premium to expand.

And definitely, we do respond to that.

Typically, we're responding.

So it's mostly power plant, though, in the near term.

Okay.

And a quick follow-up.

You've talked about simplifying the financial reporting for quite a while.

And in Q2, non-GAAP revenue versus GAAP revenue almost identical; Q3 guidance same, same.

Should we expect this to be the norm where the 2 sets of metrics essentially converge?

I'll comment, and if Manu wants to add, he can.

I think the answer is yes.

What we're doing to simplify the financials is exiting the power plant business, sold 8point3 and are selling residential leases, so residential leases will look like a cash sale.

And selling 8point3, of course, eliminates real estate accounting and the partial revenue rec and the whole [co] stuff.

So significant simplification through the lease -- residential lease sale and the sale of 8point3 and, of course, self-developed power plant project accounting.

So it's almost like we look more like recognizing revenue like when we went to IPO and appreciate you remember that since you've been with us a long time.

And you can just model per watt and margin per watt.

That's our goal, to get back to a P&L revenue per watt, margin per watt.

Manu, anything?

Yes, the only thing I'd add is that from a revenue perspective, yes, but from an EBITDA point of view, it will take us a couple of quarters as we exit the -- or we complete the sale of our lease portfolio.

And our next question comes from the line of Jeff Osborne with Cowen and Company.

Just 2 quick ones.

So I was wondering -- I might have missed it, but did you give the Section 201 impact for 2Q?

I know you gave that for the guidance.

I'm going to give you for first half and second half, and then my team here can work out the split in Q2.

First half was $17 million.

Second half was $51 million.

And I'll note that, that's more than we spent on R&D in the second half of the year.

So the impact of the tariffs is really, really significant.

And, of course, we hope that we'll hear a ruling soon that exempts us so we can take that $51 million and invest it in our R&D and American manufacturing.

What was the number for Q2?

Do you have it?

It was de minimis, Tom, because most of the...

And the cash number?

And the cash number was about $15 million.

Yes.

So most of it was Q2, about $15 million of the $17 million.

All right.

Now remember, and maybe we can clear this up on any follow-up calls, we are now putting it as part of the standard, so it's going in inventory.

So there's a difference between cash costs and P&L costs.

Got it.

And then if you can just give us an update on Oregon.

How much -- if the deal goes forward and closes what the CapEx would be?

Or is there any hiring activity ongoing now?

And just what sort of the logistical operation planning that's underway?

Sure.

So we did plan on closing SolarWorld already.

We obviously haven't.

We've had a few challenges.

We're working through those.

We do expect to close this quarter.

And we've noted on the previous calls that the size of the transaction is not material, therefore, not disclosed.

And I've said, I think previously, but I'll say it again, our plan is to convert to P-Series module manufacturing in the module part of the facility.

We're finishing the call of their -- of the cell that they make in their cell fab so we can take the cell from their cell fab and directly make it into P-Series.

There'll be $10 million or $15 million of capital equipment that moves into the facility.

Some of that already exists, though, so it's not all in incremental CapEx.

And our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch.

So just following up a little bit on sort of the cash flows here, just the moving pieces here.

Can you comment a little bit on power plant?

You talked about some portfolio sale back half here; obviously, microinverter business, lease sale on the resi side potential.

Can you talk about sort of the cash inflows here relative to the cash outflows of the business and just thinking about potentially reconciling that against the CapEx, especially on a go-forward basis of funding NGT?

And how you think about scaling that entity?

You talked about that 2020 cost structure.

Are we supposed to read into that in terms of any sort of accelerated time line to deploy that at this point, particularly given the microinverter sale in the quarter, et cetera?

But can you talk -- at a minimum, can you talk to some of the pluses and minuses here '18, maybe onwards as well?

Sure.

I'll take the question materially, and then Manu might add a little bit on top of it.

First, when we covered the divestitures, so we have lease, microinverter and power plant.

All 3, we expect to close in Q3.

And we have not guided a number for proceeds from those transactions.

I would say it could meaningfully be used to ramp NGT.

I'll let Manu comment, though, on how we think of the use of the funds in balancing out on what we're spending on.

In terms of NGT acceleration, the technology works.

So we are getting the yield up and getting to the output levels that we expect out of the first half line.

We expect that to happen in the next 3 or 4 months and be ramping in Q4.

So we're ready to ramp that technology, the next line, certainly, in the first quarter of next year.

And so, yes, there is a timing decision we're making.

That will be dated off of potential partnerships versus internally funding the next lines.

And so, yes, we are making some trade-off decisions in terms of use of CapEx.

Julien, I would also point, too, you're going to know the numbers on maybe all 3 of these transactions in the not-too-distant future.

I think we should make good progress on these in the next month or 2. Anything you want to add?

I think the only thing I'd add is as I think about the back half of the year, you've got 3 elements from a cash point of view.

We have improved operating performance of the businesses.

That will continue as we get into 2019.

So positive cash generation from a business perspective.

We'll have asset sales, and we'll use some of those proceeds in the back half of the year to invest back in the business, NGT included.

We have significant headroom from a timing perspective, CapEx between first half and second half.

Just to be clear, just to reconcile that real quickly.

You wouldn't issue external capital to finance NGT.

It sounds like you really want to be oriented towards organic elements here.

Exactly.

Yes, thanks, Julien.

That's exactly right.

And the next question comes from the line of Colin Rusch with Oppenheimer.

Guys, could you talk about the cadence of R&D spending with these initiatives and how we can think about that trend line to the balance of this year and into next year?

Sure.

We spend on NGT technology and our IBC technology, call it, $30 million plus or minus per year.

And we think that, that will materially stay the same each quarter.

There is some pre-op associated with ramping.

We typically take that in COGS, so we don't call that out necessarily separately.

So I think -- and this assumes, by the way, that we get excluded from the tariffs.

If we continue to pay tariffs, we're going to have to make changes in R&D.

But we likely to place where we did have to reduce.

But assuming we get excluded, expect that run rate.

I want to remind everybody we do plan an Analyst Day.

We're currently planning that for the first half of next year.

So we look forward to talking to you on our next earnings call.

Thank you so much for calling in.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.