SunPower Corporation (SPWR) 2018 Q4 法說會逐字稿

Good afternoon.

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

(Operator Instructions) As a reminder, this conference call may be recorded.

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

Thank you.

Sir, you may begin.

Thank you, Daniel.

I would like to welcome everyone to our fourth quarter 2018 earnings conference call.

On the call today, we will start off with an operational and a strategic review from Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our fourth 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 the call, on the Events & Presentations page of our Investor Relations website.

Finally, I'd like to remind everyone that we announced last quarter we would report our Q4 and 2018 financial results under our new segmentation structure.

Our earnings press release and supplemental slides reflect this change.

We have also posted materials on our IR website and in the appendix of today's slides detailing the last 2 years of historical results under the new segmentation for comparison purposes.

Please see our 10-K for additional details on the impact of our new structure as well, and in the same location, we have posted a set of supplemental data sheets detailing some of our other historical metrics.

Finally, I'm pleased to announce that we've scheduled our 2019 Capital Markets Day for March 27 at The Westin Grand Central Hotel in New York City.

The event will start at 9:00 a.m.

Eastern Time and will be webcast through our Investor Relations website.

We will also post our presentation materials on the site prior to the start of the event.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower.

Tom?

Thanks, Bob, and thank you for joining us.

On this call, we will provide an update on our strategic transformation, review our fourth quarter 2018 financial performance and explain how our new segmentation will highlight the inherent value in each of our businesses.

First, an update on our transformation and long-term strategy.

Please turn to Slide 3. Over the past few years, our focus has been on simplifying our business model and reducing leverage in order to improve financial transparency, enable sustainable profitability.

During this period, we exited the power plant development business, monetized a number of non-core assets, restructured our organization, strengthened our balance sheet and lowered our annual operational expenses by more than $100 million.

I am happy to say that this strategic transformation is now materially complete and that SunPower is now a simpler, leaner and stronger company.

In 2019, our focus has shifted to delivering the results of our transformation, namely a return to sustainable profitability.

There are 3 key elements to reach this objective.

First, we will continue to expand our leading position in higher-margin, higher-growth global DG markets.

SunPower's products deliver exceptional value for DG customers, and our brand and channels to market enable premium pricing versus competing products.

Second, we will leverage our industry-leading technology position on 2 fronts: first, through the ramp of our lower-cost, high-performance NGT technology; secondly, by enhancing our storage and services offerings in the North American DG market.

We've also reduced the capital intensity of our upstream business meaningfully through our DZS P-Series JV as well as our CapEx-efficient NGT technology.

We believe that these key initiatives will allow our business units to achieve operating cash flow breakeven in the second half of this year and position us for sustainable future profits.

Looking forward, we will continue to focus on key DG markets where we expect to see further share gains.

Ramp of our lower-cost NGT technology at Fab 3 will drive top line growth and improve gross margins.

And we expect to see meaningful profit contribution from storage and service offerings in the U.S. starting in 2020 via a combination of new customer deployments and upsell of our 2.5-gigawatt installed DG customer base.

Our plan is to work towards a business model that delivers greater than 10% operating income.

I'd now like to discuss our Q4 performance in greater detail.

Please turn to Slide 4. We executed well in Q4, meeting our EBITDA forecast and materially completing our strategic transformation.

Our global DG business remained strong, with particular traction in the United States, Europe and Australia during the quarter.

We also continued to see growing interest in our storage and services offering, which we expect will become an important profit driver for SunPower Energy Services as we leverage our existing 1.3-gigawatt commercial installed base with respect to retrofit opportunities.

Our capacity expansion initiatives remain on track, with equipment on order for our second NGT line at Fab 3 and our DZS P-Series JV now operating at 2 gigawatts of capacity.

We also further delevered our balance sheet in Q4, completing the sale of our residential lease portfolio and materially reducing our letter of credit facility.

We achieved record Q4 bookings, and as a result, our revenue visibility heading into 2019 is very strong.

More on this later.

Now let me discuss our segment performance in greater detail.

First, an overview of SPES, our North American DG business.

Please turn to Slide 5. SPES executed well in the quarter.

Residential demand remained solid with 15% year-on-year volume growth.

Our mix of cash and lease was in line with forecast, with strong demand for our loan product, which grew 4x compared to Q4 2017.

We added approximately 40,000 customers in 2018, bringing our U.S. residential installed base to approximately 240,000 homes.

In commercial and industrial, we maintained our significant market share lead, deploying approximately 50 megawatts in Q4.

We ended 2018 with record bookings, with 80% of our 2019 forecast already in backlog, including recent project awards from Walmart and Cabot.

With a pipeline of $3 billion and the largest installed base of C&I and solar in the industry, we are well positioned for growth in 2019 and beyond.

On the lower right of this slide, we have highlighted several key themes for our North American DG business in 2019.

First, our large and growing DG customer base comprising over 2.8 gigawatts of installations across close to 240,000 homes and 5,000 C&I sites.

We believe that this installed DG fleet provides us with the unique opportunity to provide retrofit battery storage and upsell associated energy services as storage technology decreases in price.

We expect to see an acceleration of our retrofit business towards the second half of 2019.

Second, we are well positioned to benefit from a number of policy tailwinds, including our exemption from Section 201 import tariffs as well as the recent California mandate for 100% attach rate of solar on new homes where we have, by far, the leading market share.

Third, we also expect our new lower-cost NGT technology to drive margin expansion with over 100 megawatts of NGT deployment planned in SPES during 2019.

Finally, we are making significant progress on our program to address the ITC safe harbor opportunity post 2019 and will provide additional details at our Analyst Day next month.

Now let's focus on some key trends in each part of SPES.

Please turn to Slide 6. As you can see on the left-hand side of the page, SunPower is well positioned within the rapidly growing U.S. residential market and holds a commanding lead in new home segment.

On the right side, we also expect the U.S. residential market to show continued growth.

We expect to leverage our differentiated products, including NGT, our established channels to market, an increasingly digitized online customer experience to outgrow the overall market.

Slide 7 shows a similar view of our C&I business, where SunPower is the #1 player within a rapidly growing market.

The middle chart shows our customer mix for 2018 and illustrates the importance of repeat customers to our overall C&I business.

Our long-term relationship with such customers provides a significant opportunity for us to sell storage and services through existing fleet.

The right-hand chart illustrates a rapidly growing trend of solar-plus-storage deployment in the U.S. C&I market.

We are well positioned to capitalize on this trend by virtue of our industry-leading solar-plus-storage solutions, large installed customer base and long-term relationships with many of the top corporate solar buyers.

Looking forward, we expect to retain our C&I leadership position in 2019 given our strong backlog and multisite project momentum with repeat customers.

Storage and services will be a key growth driver, both for new systems, where we have a storage project pipeline of over 100 megawatts, but also increasingly for retrofit of our existing 1.3 gigawatts installed C&I fleet.

Let's move on to SunPower Technologies.

Please turn to Slide 8. First, I would like to formally welcome Jeff Waters to our management team as CEO of SPT.

Jeff brings a wealth of technology, operational and business expertise to our team, and I look forward to working together with Jeff in his new role.

Our manufacturing team executed well again in Q4, meeting cost and yield targets for the quarter with full fab utilization.

NGT deployment is on plan, with average solar cell production efficiency of 25% and our second line on order.

We shipped our first NGT panels to customer sites in Q4 and plan to ramp our first NGT line to full output in Q1.

Ramp of our P-Series technology is also going well, with our DZS joint venture at 2 gigawatts of capacity and our factory in Oregon recently shipping their first P-Series panels.

The chart in the middle of the Page 8 shows the next evolution of our product shipments in 2016.

P-Series shipments, shown in gray on this chart, have grown rapidly, and we expect P-Series to comprise up to half of our volume in 2019.

The conversion of E-Series capacity to NGT at our Fab 3 will allow us to increase total IBC volume in 2019 as well.

Our SPT international sales channels executed well, with DG sales volume, ASPs and margins coming in on plan, driven by particularly strong demand in Europe and Australia.

DG volume accounted for close to 60% of our shipments for the quarter.

Q4 was a very strong bookings quarter for power plant demand, and we entered 2019 with approximately 750 megawatts of our international power plant orders in backlog.

Our SPT sales team continues to expand our geographic footprint with sales into 115 countries today.

Slide 9 provides some detail on the expected growth of international DG solar and our strong position in this market.

The chart on the left of this slide shows our current 5-year DG market growth forecast.

We expect steady growth in all subsegments over this period, driven by increasingly compelling customer economics due to decreases in the cost of solar power and battery storage.

The chart on the right shows our megawatt growth since 2016 in what we refer to as our core international DG countries, namely Europe, Japan and Australia.

Over this time, we have increased our volume into our core DG markets at a CAGR of more than 60%.

We've had particular success in Europe, tripling our DG volume since 2015 versus industry growth of 10% and doubling our market share in key countries.

Keys to our success in these DG markets are superior product performance, brand reputation and a highly structured sales channel, all factors that we expect to continue to differentiate SunPower versus our competitors.

Going forward, we will have the additional benefit of lower-priced P-Series panels from our DZS joint venture to enhance our overall product portfolio.

Moving on to Slide 10.

I would like to spend a few minutes reviewing the progress of our IBC technology, which we will sell under the Maxeon brand.

We have been the leader in solar cell and panel efficiency for the past 15 years, starting with our Maxeon Gen 1 technology in 2004.

Gen 1 solar cells were the first commercially available solar cells with efficiency above 20%.

Over the subsequent 15 years, our R&D teams developed and commercialized new architectures and processes and enabled us to increase average cell efficiency to 25%.

Our NGT or Maxeon Gen 5 technology continues the SunPower legacy of pushing the frontiers of practical cell -- solar cell performance and, perhaps more significantly, enables this level of industry-leading performance at dramatically lower cost.

As I mentioned earlier in my comments, we are currently constructing our second Maxeon Gen 5 line, which, when completed later this year, will expand our NGT capacity to over 250 megawatts.

We are in active discussions with a number of parties regarding funding to complete the full conversion of Fab 3a and expand Maxeon Gen 5 capacity to approximately 1.8 gigawatts.

In conclusion, I would like to provide a brief summary of our business seen from the perspective of our new segmentation.

Please turn to Slide 11.

For SPT, we're focused on driving top line growth and margin expansion through the ramp of NGT and leveraging our highly capital-efficient P-Series technology platform.

Given our strong DG distribution channels and established market presence, we are confident in SPT's ability to drive material margin improvement as we scale volume.

For North American residential, we are a market leader with close to 240,000 customers in an installed base in excess of 1.5 gigawatts.

Our mobile channels to market and broad array of financing options offer a strong and flexible go to

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capture additional growth as the market expands.

Recent deconsolidation of our residential lease portfolio and joint venture formation enhance our leasing economics and dramatically improves the transparency of this business for our investors and shareholders.

Also, our leading share in the new homes market gives us a strong position to capitalize on structural growth opportunities in this sector.

Finally, the rollout of NGT in our U.S. residential business will significantly enhance our relative differentiation to competition.

For North American commercial, our focus is on driving continued share growth enabled by our direct and independent dealer channels, leveraging our leading 1.3-gigawatt customer base to install battery storage and sell associated energy services in continuing to reduce installed system price and improve business efficiency.

In conclusion, we have completed the transformation of our company to become leaner and more transparent.

With a dramatically delevered balance sheet, we have a very significant opportunity ahead of us created by the combination of our new lower-cost solar panel technologies and our existing strong global DG market footprint.

Heading into 2019, SunPower is completely focused on executing on this opportunity to deliver improved shareholder value.

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

Manu?

Thanks, Tom.

Now let me review the financials.

Please turn to Slide 12.

Before we get started, I want to remind everyone that we are now reporting our results under a new segmentation that improves transparency and enables stronger long-term financial performance.

To help you better understand our new model, we have posted

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to our website, recasting 2 years of historical under our new segmentation and providing additional detail.

We've also added this information in the appendix of our earnings deck, and we'll provide further details in our 10-K.

Moving on to the quarter.

We were pleased with our results as we met our key financial commitments, including our adjusted EBITDA forecast.

Overall, our non-GAAP revenue was in line with our commitments due to strong execution.

In SPES, demand remained strong throughout the quarter, with U.S. residential ahead of plan, which offset certain project timing delays in our U.S. commercial business.

For SPT, we shipped 380 megawatts during the quarter, with continued solid performance in our EU and Australia DG business, while achieving our power plant supply volumes.

Our consolidated non-GAAP gross margin was 6.9%, in line with our forecast.

In SPES, resi gross margin declined moderately due to the impact of our resi lease portfolio, while commercial margins were lower versus last quarter due to certain legacy projects as well as mix.

We expect commercial margins to improve in 2019 given our strong backlog and improved cost structure.

In SPT, gross margin was 6.3%, in line with our commitments as we benefited from strong sales in our high-margin international DG business.

Non-GAAP OpEx was $66 million for the quarter, below our guidance for the quarter and the year.

We expect to continue to benefit from our expense control initiative and improved operational processes in 2019.

CapEx for the quarter was $7 million as we managed our supply chain related to our NGT ramp at Fab 3. Adjusted EBITDA was $14 million, in line with our forecast, with our performance primarily driven by strength in the DG business.

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

Please turn to Slide 13.

As previously mentioned, we met our key financial commitments for the quarter, including our adjusted EBITDA, cash and megawatt volumes.

We also completed our transformation initiatives, simplified our business model and delevered our balance sheet.

Our transformation has resulted in a much more efficient balance sheet and working capital model.

We are already seeing benefits from this as we've increased our cash balance and improved working capital as inventory declined to 20% versus Q3.

Another benefit from this transition is that now we have a much more capital-light model for both segments and will see a material amount of SPT volumes this year coming from our DZS joint venture.

Our focus remains on expanding gross margin per watt as well as continuing to prudently manage our cash and expenses.

With a more streamlined operational structure, we have significantly reduced our liquidity needs for 2019 by bringing out the resources to continue to invest in our industry-leading technology and growth initiatives.

As we looked into 2019, we will use the first half of the year to build out on DG infrastructure, including our growing storage and service offerings in the U.S., and expand our international DG footprint to SPT.

We also expect continued cost improvement throughout the year.

Given the improvement of SPES residential business and strong C&I backlog, we expect a much stronger second half of the year while being well positioned to further improve our financial performance in 2020.

I want to take a few minutes to summarize the results of our transformation.

Please turn to Slide 14.

First, we have materially lowered our breakeven point through our streamlined operational structure, and we reduced our OpEx by more than 25% over the last 3 years.

Our existing OpEx structure supports our high-margin global DG business.

With the ramp of our lower-cost NGT technology and ability to leverage our asset-light DZS joint venture for P-Series, we have significantly improved our capital efficiency by more than doubling our capacity over the last 3 years.

Finally, we have successfully delevered our balance sheet and reduced our net debt by more than 60% over the last 15 months.

Additionally, we expect a material reduction in interest expense given our delevered balance sheet.

In summary, our transformation has resulted in a simpler, leaner and stronger company.

I'd like to spend the balance of my time explaining our new segmentation.

Please turn to Slide 15 for an overview of our new structure.

The first column formally lays out the new segmentation.

Please note that corporate line is used to account for costs not directly related to either of the businesses.

The financial composition column details what parts of our current businesses are in each segment.

For SPES, this includes our North American residential cash, loan and lease business as well as our North American commercial rooftop, carport and ground mount businesses.

SPT consists of our manufacturing assets as well as our global panel business outside of North America.

As a reminder, we have shifted away from the power plant development businesses in 2018, which is included in our SPT historical.

One thing I would like to highlight is that we have formalized our transfer pricing agreement between SPT and SPES, and SPES procures all of their volume from SPT.

As a result, you will see a line item called intersegment revenue eliminations in our financial statement, which is an offsetting item to ensure that megawatts produced by SPT and sold to SPES are not counted by both segments.

We see considerable tailwinds in the business and remain confident in our ability to accelerate our growth catalysts under the new segmentation.

Tom has already touched on many of these in his remarks.

The final column provides some details on modeling our new segment going forward, primarily over the next 18 months.

For SPES residential, we expect 2019 megawatt growth of 15%, in line with the previous forecast.

2019 to 2020 gross margins will revert to a historical norm of approximately 20%, and we see continued improvement in our OpEx costs as we scale our business.

For SPES commercial, we expect to grow faster than the market with megawatt growth of more than 50% and gross margin reaching mid-teens in 2020.

Given the larger project sizes and the anticipated increase in storage and service deployments, we feel we are well positioned to meet our cost targets in this segment as well.

In SPT, we will continue to leverage our asset-light strategy through our DZS joint venture to rapidly expand total capacity to up to 2.5 gigawatts this year while continuing to ramp our NGT nameplate to approximately 250 megawatts.

As previously mentioned, CapEx per watt will continue to decline.

On gross margin, our goal is approximately 15% in 2020, with OpEx in the high single digits.

For corporate, operating expense are now at less than 2% of revenue, and we expect further declines going forward.

We firmly believe this new structure will drive improved long-term financial performance of each of our segments.

It also highlights the inherent value (inaudible) pieces, and we will provide additional detail at our Capital Markets Day in March.

In summary, the strategic transformation that we embarked on is now materially complete.

With a simpler, leaner and cash-focused model, we are well positioned to improve our financial performance in 2019.

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

Tom?

Thanks, Manu.

For 2019, we expect financial performance to improve on a quarterly basis throughout the fiscal year, with performance weighted towards the second half of the year, driven by record commercial bookings in the fourth quarter of 2018, SPT backlog as well as normal seasonality in the residential business.

The company also expects fiscal year 2019 adjusted EBITDA to increase approximately 60% on a normalized basis.

This includes adjusting for NCI due to our residential lease portfolio sale as well as the effect of Section 201 tariffs paid during the year, both of which will not occur in fiscal year 2019.

I would now like to discuss our guidance for the first quarter and fiscal year 2019.

Please turn to Slide 16.

First quarter fiscal 2019 GAAP guidance is as follows: revenue of $290 million to $330 million, gross margin of negative 3% to 0% and a net loss of $70 million to $50 million.

On a non-GAAP basis, the company expects revenue of $350 million to $390 million, gross margin of 3% to 5%, adjusted EBITDA of minus $40 million to minus $20 million and megawatts deployed in the range of 360 to 400 megawatts.

For 2019, please turn to Slide 17.

For fiscal year 2019, the company expects revenue of $1.8 billion to $1.9 billion on a GAAP basis and revenue of $1.9 billion to $2 billion on a non-GAAP basis, OpEx of less than $280 million, adjusted EBITDA of $80 million to $110 million, megawatts deployed in the range of 1.9 to 2.1 gigawatts.

On Slide 18, we are providing a bridge to our adjusted EBITDA forecast compared to our 2018 results.

To get a normalized 2019 comparative number, you need to adjust 2018 for 2 factors: NCI and Section 201 tariffs.

NCI is no longer applicable due to the sale of our residential lease portfolio last year.

We will not be paying 201 tariffs in 2019 as our technology is exempt.

As a result, we see normalized EBITDA growth of more than 50% year-over-year as we begin to benefit from our new model structure.

This increase in EBITDA will be primarily driven by improvements in our gross margin per watt.

Finally, as Bob mentioned, we will host our 2019 Capital Markets Day on March 27 in New York City.

We are looking forward to updating you on our long-term strategy, including a detailed overview of our new segments and update on our long-term financial model as well as provide additional details on our 2019 guidance.

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

(Operator Instructions) Our first question comes from Michael Weinstein with Crédit Suisse.

This is Maheep Mandloi on behalf of Michael Weinstein.

Just with regards to the target gross margin structure for the different businesses -- and Manu, thanks for that Slide 15.

Just want to understand when do you expect to achieve those targets, is like a 2019 or 2020 number?

And if you can explain a bit more what's the delta between that target and the 3% to 5% gross margins in Q1 [target].

I'll let Manu -- this time, I'll let Manu take the -- when do we hit the target and I'll talk about the difference being at -- why is quarter -- this quarter's guide and that number.

So Manu?

Yes, just from a timing perspective, we get to these target margins back half of '19, early 2020.

So that's from a time frame perspective.

And the drivers of gross margin expansion are different for each of the 2 parts of our business in DG.

In residential, we expect our lease economics to improve throughout the year, both execution and the financing vehicle that we used.

We expect the positive benefit from our new home segment, where we have a commanding lead '17 into '20 top homebuilders or SunPower customers, and we expect to exploit that throughout the rest of this year.

We expect to benefit from NGT in this channel, and then there's a channel that has lower customer acquisition costs where we self-install, that being third-party sales where we benefit as well.

These things all lead to margin accretion in residential.

In commercial, it's primarily driven by better execution of our core solar installations.

We do have a couple of projects that were brought back several years ago that are flowing through our P&L in Q1.

The longer a project takes, generally, the less good the margin is, so we'll be getting those behind us.

We had a strong finish to -- last year in bookings in commercial.

So we benefited from that in the back half of this year.

And then we have more storage adding on to our 9-megawatt hours.

And then we have a services business that's been primarily services to reduce customer's utility bill.

And I can speak more about that later, but those are the drivers for margin acceleration.

And the other question I had was just on the mix of loans versus leases for the residential business in the quarter and probably going forward.

What do you expect over there?

And a follow-up on that.

Just looking at the safe harbor of panels.

Would you be able to buy safe harbored panels for the cash loan business?

Or would that be just so much to the leasing business?

Sure.

I'll give a high level, and I'll let Manu give any specifics I don't have exactly right.

Our lease volume typically varies between 40% and 60% of our business, and it gets closer to 40% currently.

I would expect that to increase this year because there will be better economics with safe harbor on lease going into next year.

And now I'll pivot to safe harbor strategy.

So we obviously will have one or we have one.

We benefit by being further co-integrated, and that we believe we can safe harbor more strategically products that we think are best suited for multiple years after this year.

The answer to your question is we have 40% to 60% of our residential business and commercial business can be safe harbored that we think we have a very strong safe harbor program going into -- or going out of this year.

We cannot safe harbor cash or loan, at least not as currently constructed.

We're doing more work there but our current plan is we cannot.

So it'll be our commercial business and our lease business for residential, which, again, I expect to expand.

Just on the first quarter mix between lease and loan and cash for North America residential, about -- a little over 1/3 is leases.

And our next question comes from Brian Lee with Goldman Sachs.

Maybe first one for Tom.

I think you mentioned during the prepared remarks that $3 billion pipeline.

Just wanted to clarify on that.

Was that just related to commercial?

Or was that total DG?

And then maybe if you could just elaborate.

That's a big number.

How do you define and quantify that?

Just kind of wanted to get a sense of what that's comprised of.

So that's a commercial number.

And like most companies, we use a CRM system.

We're giving an unweighted number, and those are at various stages where we have positive engagement still.

And that includes both our direct and our CVAR business.

And also importantly, Brian, that would include storage.

Okay.

Appreciate that.

That's helpful.

And then, I guess, second question just on the CapEx here.

I know you guys are moving into more of a CapEx-light position relative to historical.

But can you give us a bit more granularity around, for this year, the guidance growth?

How much of this CapEx is growth versus maintenance related?

And then how do you think about -- or how should we be thinking about the level of CapEx involved from going from 250 megawatts of NGT to the full conversion to 1.3?

Sort of what's the time frame for that to occur?

So I'll start and then Manu can give specifics.

So NGT can expand from the initial 250 to -- once we convert all [on the ratio of being] 1.8 gigawatts.

That will happen over several years.

It's important to note that the CapEx intensity of NGT is way lower than our traditional IBC products, way below half of what it has been previously.

So Manu can give you some kind of guidance on CapEx.

What I would say on CapEx is it's all NGT, minimal non-NGT CapEx that we'll plan this year.

So it's where we will implement that -- all of our CapEx -- the last thing I would say is the timing will be driven by the fundraising that we're doing.

I would say that's going really well, and we would expect something in the next couple of quarters to talk about how much that is and then how that influences the timing.

So maybe you can calibrate the CapEx.

Yes.

Just, Brian, just for 2019 CapEx for the $75 million we've talked about, most of it is NGT.

There's a little bit of CapEx associated with digital, and then the maintenance CapEx is roughly at similar levels from '18 to '19.

Maybe just last one for me, and I'll pass it on.

Manu, I was under the impression that the GAAP to non-GAAP adjustments were going away this year, but they still seem to look pretty meaningful in the 1Q outlook, so if you could just update us here on how we should think about the reporting structure with the new segmentation and particularly on the GAAP to non-GAAP adjustments.

Yes.

What you're seeing come through in the first quarter guidance is as we are going into the new, call it, fund structure for our lease -- residential lease business, that's got a much simpler P&L treatment.

And you get to that in the back half of the year.

We're still kind of running through the funds that existed in 2018, and that's what you're seeing come through the guidance.

What we have done from a guidance perspective, we have done our non-GAAP basis on a more simpler P&L structure that is much more transparent and cleaner.

But you have the first half of those adjustments that will come through, and -- but it gets cleaner in the second half.

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

Can you hear me?

Yes, hey, Julien.

Sorry about that.

So just to follow up on the last set of question here, can you elaborate a little bit more on the fundraising opportunities from beyond the 250 megawatts?

Just want to understand what, should we say, instruments you're contemplating.

And then separately the time line, i.e.

if you get the right fundraising solution, shall we say, is there a potential for the NGT deployments to be accelerated?

Just if you can elaborate on that.

Yes, I can.

So the funding is nonequity, noncapital market funding.

So it's strategic partner funding.

It's something we've done before a couple times.

Actually, I've been here, since almost inception, our second line was funded by customers and then we funded the expansion in Malaysia actually with partnership, you may recall.

So we're looking for strategic partners or we're in dialogue with strategic partners that we would expect to be able to announce something within a few quarters, say, 2 or 3 to have funding in what we're planning for by the end of the year or at least partially funded by the end of the year.

If it's sooner, we would expect to accelerate NGT faster.

It depends on this strategic source of capital.

But yes, there's an opportunity for NGT to move faster.

We certainly are capable of ramping faster or bringing on equipment faster.

Got it.

But to clarify, would that be in the -- would that effectively give some kind of equity ownership into the NGT expansion just as you think about it?

I know, early days, lots of combinations here but just to be clear on that.

And then a separate second question.

Margins on P-Series, just expectations now as you kind of really start to scale this?

And any shift versus what you've kind of previously talked about?

Sure.

So I'll take both, and then Manu can comment.

In terms of the type of fundraising, it could be as straightforward as investment to get preferential access to the product as an example or it could be some form of an instrument in the technology itself.

Those are still being determined, so I don't want to comment on something that's very much a work in progress.

It's up to the individual investor.

But again, there's precedence of doing both of those things that I just mentioned.

I can come back, Julien, if you want to talk about it further.

In terms of P-Series, I'll just comment broadly and hand it over to Manu.

P-Series expansion is going excellently.

We are ramping P-Series in Hillsboro, and we will supply North American commercial with that product.

We've started to ship out of Hillsboro, Oregon, and that's going really well.

Of course, the majority of the volume is coming out of our DZS joint venture.

That's almost 2 gigawatts now and it could expand to another gigawatt yet this year.

We're exploiting what we believe to be a technology lead in this [channeling] technology.

So I'm quite optimistic in our margins in P-Series this year because of the scale that we have and the technology's proving to be a winner.

I would also say that we've priced differently this year, and we're focused on not only the power plant market but we've reconfigured the P-Series product to also sell specifically into DG channels.

And we think we'll see benefit from that as well.

Just on the P-Series margins, Julien, we've talked about the margins being high single digits.

So you see slight improvement just on volume leverage, but that product is highly capital efficient and highly OpEx efficient product for us.

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

The deleveraging between Q3 and Q4 is obviously very impactful.

At this point, is your balance sheet essentially where you want it to be on a sustained basis?

Or do you envision further debt reduction that you still want to have for comfort?

So thank you for the question.

Just from a balance sheet perspective if I just deconstruct our debt, primarily, our debt is the convert and they come due in 2021 and 2022, respectively.

Beyond that, there is very little debt.

Just from our balance sheet model perspective, we like the model we have, which is much more for working capital in an asset-light model.

Given the nature of our businesses, that has quick turn and high-margin distributed generation businesses.

So I think we like the model.

I think we like the position that our balance sheet's at.

Our working capital was down 20% from third quarter to fourth quarter, and that's just a proof point from an efficiency of the model that we have right now.

Okay, that's helpful.

And the second one, you guys may or may not be able to answer.

But in the context of relentless M&A in the industry with so many of the other module companies having been acquired and, in particular, taken private by their management teams, thinking about some of the Chinese players, is there any conversation at the board level with Total about perhaps taking the business into full ownership at the Total level?

So I'll comment on -- first, I'll say about Total, we are in year 8 of our relationship with Total.

There is a high level of interaction and they're supportive of our strategy.

And our strategy is to manage the company as 2 business units, an upstream and a downstream.

And the benefits associated with that, which we [hope] will be more nimble entities that can manage to market changes faster, also, importantly, can make capital allocation decisions, and importantly, perhaps have investments that would be optimized for either of those 2 businesses.

So that's the path we're heading on.

We've moved almost all of our corporate OpEx into the divisions.

There's 2% of sales still with corporate.

By the middle of the year, we expect that to be less than half of that.

So we will have 2 entities that can operate largely independently and that offers options for those 2 businesses and we think accrues benefits during the year.

So that's what I could say about that question.

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

Just 2 quick ones for me.

I might have missed it.

But did you give expected interest expense for the year just with the delevering?

How do we think about that?

Just from a interest expense perspective, that interest expense will be cut to half from 2018 levels as we think about 2019.

Okay.

And then maybe for Tom, just as you think about the megawatts being deployed for DG and as the storage attach rates go, is there any broad strokes you can give us in terms of sort of revenue impact for home in terms of if you had an X-Series and you're getting $100 per home, what that goes to as storage going up just in round numbers?

And then more importantly, as storage and services take place, which is part of your 2020 plan for both residential and commercial, what happens to gross margin?

There's a lot of third-party content with that.

So is it a safe assumption that maybe there's some pressure on gross margin but EBIT margins are higher?

Any thoughts on that question would be helpful.

Sure.

So on resi and the attach at storage, I think what you're asking is that the -- how much more revenue per watt would we get with storage?

Exactly.

Is that a 3x multiplier?

Or any comments would be helpful.

No, no, you should think of that more in the up to 25% range.

Now that's in the near term, and that's without thinking of what services we might be able to attach to that, but -- and that is the way you should think of it.

So think of up to 25%.

Any comments on the margin differential?

Yes.

So thank you, Jeff.

On margins, the margins are actually accretive, and I want to remind you that we released the -- a product.

We have Helix as our solution for commercial, which is our IBC modules plus a complete mounting system, the inverter and all those [for racking].

So that's the team has designed Helix storage where we buy the actual battery itself, but we do the integration and, most importantly, we write the software that does the demand charge optimization.

And in the future, we'll do rate arbitrage as well.

And that is -- the margins on that are materially accretive to solar only.

And that's a meaningful part of how our commercial business will expand our margins.

Services will be even better margins.

And for us, commercial was first in line and is already -- has already installed 9-megawatt hours and is already selling the demand charge services.

We've also done some grid services as well, but that's just in the early stages.

So think storage, it's a meaningful higher gross margin services even more so, both accretive, commercial first, residential second.

And our final question comes from Colin Rusch with Oppenheimer.

Guys, I maybe missed it along the way here.

Can you talk about the silicon above market expectations for 2019, where that's going to pencil out in terms of the total dollar amount?

Sure, I'll take -- comment and Manu will take it.

The good news now that silicon out of market is -- we're in a few years now to having that behind us.

We had 2 contracts.

One is behind us, and the other 1 is working on just the 2 or 3 years, and it's behind us.

In terms of the impact on 2019?

Yes, so the impact on 2019 will be slightly higher than 2018 but in the -- at the similar levels.

Okay.

And so from a free cash flow perspective, are you guys ready to provide some guidance on that?

Just if I do the math, it looks like you're going to be burning somewhere around $70 million then.

Yes, that sounds about right.

All right.

Thank you for calling in.

We look forward to Analyst Day on March 27 to do quite a bit more on all the topics we covered here, so we'll see you in New York on March 27.

Thank you.

Thank you.

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

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.