SunPower Corporation (SPWR) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to SunPower's Fourth Quarter 2019 Results Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to Vice President of Investor Relations, Bob Okunski.

Thank you, Andrew.

I'd like to welcome everyone to our Fourth Quarter 2019 Earnings Conference Call.

On the call today, we will start off with a review of operations and a strategy update from Tom Werner our CEO, followed by Manu Sial, our CFO, who will review our fourth quarter 2019 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 2018 10-K and quarterly reports on Form 10-Q.

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

To enhance this call, we have also posted a set of PowerPoint slides which we will reference during the call on the Events and Presentations page of our Investor Relations website.

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

With that, I would 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 overview of our fourth quarter and 2019 performance and update you on our strategic transformation.

Let's start with a recap of 2019 and an update on our proposed Maxeon transaction.

Please turn to Slide 3. We entered 2019 with the goal of fundamentally transforming our business, while improving financial performance and strengthening our balance sheet.

We successfully achieved these goals.

First, we announced the proposed spin-off of our Maxeon business to shareholders in a transaction that will provide significant capital for future growth.

We believe this will unlock meaningful shareholder value and allow Maxeon to continue to expand their share of the rapidly growing global DG business.

Our decision to exit the power plant development business and focus on the DG market is bearing fruit, as we recorded record global DG shipments in 2019.

We also simplified our financial model and executed plans to monetize noncore assets, thereby delevering our balance sheet and improving liquidity.

Additionally, during 2019 we executed on several critical new product development initiatives, including our new Maxeon 5 technology, further improvements to our Helix commercial offering, the initial launch of our Equinox residential storage system and the ramp of our P-19 technology in Oregon.

Our success in streamlining OpEx helped improve profitability and our focus on working capital management significantly enhanced our liquidity.

We progressively improved our financial performance throughout the year and ended the year with over $420 million in cash, including our recent capital raised as well as returning more than $30 million in convertible debt this quarter.

Our strategic focus on DG markets drove year-over-year DG shipment growth of 75% and subsequent share growth in many key markets.

I'd now like to provide a quick status update on the proposed spin out of Maxeon Solar.

Please turn to Slide 4. First, we continue to see further progress in relation to our initial 20-F filing last quarter.

Also regulatory approvals for the transaction are in process, including antitrust review and SEC registration, all of which remain on track for a Q2 '20 close.

Additionally, we are close to finalizing the details relating to our Singapore headquarters and expect to ramp hiring in the second quarter to support operations as a stand-alone company.

Jeff Waters is also making progress in putting together the Maxeon executive management team and recently announced the hiring of Joanne Solomon as Maxeon's CFO.

In summary, we're currently on track to complete the Maxeon spin out transaction in the second quarter.

Now let me cover our segment performance.

First, SPES.

Please turn to Slide 5. SPES delivered sequential revenue and megawatt growth across both business units.

In our channels business, strong demand drove 15% sequential revenue growth with record installation volume.

Residential megawatt volume increased 20% quarter-over-quarter with strong demand for our industry-leading A-Series panels, the mix of cash loan and lease across our residential business was in line with forecast.

We continued to build on our industry leadership position in new homes with approximately 125 new home communities going live in the second half of 2019 alone.

Our backlog is now over 45,000 homes, and we expect our new homes volume to grow over 50% this year.

Finally, we continue to beta-test our Equinox Storage solution and are seeing strong pull from our dealer network for this product.

You see in (technical difficulty) we maintained our #1 share position.

Our origination team is executing well as we booked 25 megawatts of new projects during the quarter.

However, our project developed -- deployment execution has been disappointing.

As a result, we are undertaking several initiatives in our commercial direct business that we believe will drive stronger financial performance.

Finally, our Helix Storage solution continues to gain traction with the pipeline now exceeding 175 megawatts and average attach rates of 35%.

We were also recently awarded our largest C&I storage project to date, a 20-megawatt power battery system for the Chevron Lost Hills project -- solar project.

I'd now like to discuss SunPower Technologies fourth quarter performance.

Please turn to Slide 6. SPT delivered very strong execution in Q4, beating financial targets across the board, including volume, revenue, margin, EBITDA and cash flow.

DG shipment growth, in particular, was extremely strong, up over 90% year-on-year and well-balanced geographically.

Operationally, our fab and Modco teams delivered significant cost and working capital improvements while ramping our Maxeon 5 technology to full output.

SPT's Q4 results capped a very strong 2019 with overall shipment growth of 80%, continued penetration of key DG markets, full commercialization of Maxeon 5 technology and a return to solid financial performance.

Please turn to Slide 7. Last November, we announced our strategic decision to create 2 market-leading, independent, pure-play companies, New SunPower and Maxeon Solar Technologies.

I'd like to highlight the strategic advantages of each company and why both are well positioned for future growth.

First, New SunPower.

Please turn to Slide 8. As a focused, pure-play DG energy Company, SunPower will be positioned to capitalize on the fast-growing market for solar plus storage, leveraging an extremely powerful solar platform we have been developing for many years.

With the largest installed base in the U.S. residential and commercial market, more than 500 channel partners and a leadership position in new homes and commercial direct, New SunPower will be the largest North American downstream PG solar pure play.

This transaction will allow SunPower to accelerate investment into critical initiatives to expand profitability, including expanded storage and services offerings in both the residential and commercial markets as well as digital products to lower customer acquisition costs and improve customer satisfaction.

We have also already taken a number of steps to rationalize operating expenses shifting to a leveraged EPC model in our C&I direct business and utilizing our deep experience in project finance to lower capital costs.

Finally, we remain committed to improving liquidity, deleveraging our balance sheet.

We expect that New SunPower to be cash flow positive in the second half of 2020 and are driving toward being recourse debt-free within 3 years.

Now let me highlight some of our initiatives within the individual SPES business units.

Please turn to Slide 9. In channels, our strategy is to drive margin expansion across our residential and commercial dealer network, including 4 key initiatives.

First, we will focus on further increasing our channel footprint through the addition of new dealers, growing our share of account as well as entering new states, given our successful system cost reduction initiatives.

Second, we plan to leverage our leading position in new homes through the extension of current partnerships, especially in California, where we expect strong demand growth due to the new homes mandate.

For example, we recently signed an exclusive 2-year agreement with Toll Brothers to be their solar provider for all their communities in California.

Third, we will increasingly attach Helix and Equinox Storage to our commercial and residential solar systems, which enhances revenue and margins.

Finally, we expect a further reduction in cost of capital for our leases through our SunStrong partnership.

Moving on to Commercial Direct on Slide 10.

We have a significant opportunity in the commercial direct market as many corporations are expanding their green energy procurement activities.

For instance, Microsoft is setting aside $1 billion to deploy renewables to reduce their carbon footprint.

We are well positioned to capitalize on this trend by virtue of our #1 position in this market.

We continue to see strong demand in our commercial business, 2019 awards of more than $500 million, 26 megawatts of bookings in Q4 and continued booking strength into the first quarter of this year.

However, as I mentioned earlier, we continue to face challenges on the project execution side of commercial direct, which is directly impacting our EBITDA results.

These challenges are primarily related to project delays.

As a result, we've implemented a number of changes, including moving more projects to external EPC partners, further reducing fixed costs, reorganizing leadership and focusing our bookings on margin rather than volume.

As a result of these initiatives, we expect to return to profitability in the second half of this year.

Please turn to Slide 11, where I'll review why the Maxeon Solar team is excited about their future prospects as a stand-alone company.

First, Maxeon Solar will operate the leading global dealer channel, focusing on residential and light commercial applications.

I'll provide some further details on this key advantage shortly, but the team's DG sales growth in Q4 and full year 2019 clearly demonstrates the power of this go-to-market model.

Going forward, we expect that Maxeon Solar's global channel footprint will continue to drive growth in the DG segment and enable expansion of our product offering to adjacent technology in specific markets.

Technology leadership will -- allows Maxeon Solar to claim the high ground with respect to product positioning and, in turn, support premium ASPs.

We intend to maintain this high ground via unparalleled IP portfolio and deep innovation pipeline.

Finally, we are focused on scaling our industry-leading technology with the increase in capital efficiency, including repurposing existing fabs with more productive new technology and using manufacturing partnerships, such as our P-Series, HSPV, the joint ventures.

I'll now expand briefly on each of these key success drivers.

Please turn to Slide 12, which shows Maxeon's global DG market footprint.

Maxeon Solar currently generates over 70% of its revenue outside the U.S. and operates what we believe to be the solar industry's largest global dealer network with direct sales to over 1,000 installers in 9 countries, not including the U.S. and further coverage through distribution in key emergency -- emerging and adjacent markets.

Maxeon Solar has a leading global DG go-to-market channel.

We have been developing our European dealer channel since 2008 and have a mature network in place to capitalize on increasingly strong policy support and resultant market growth.

In the Americas, Maxeon Solar has a very strong go-to-market partner in the form of SPES, serving the U.S. and Canada.

And Maxeon is actively building out a dealer network in Mexico to address what we feel is an exciting DG market opportunity there.

In APAC, we have a solid channel footprint in Australia and Japan, both of which are well-established gigawatt scale DG markets driven by favorable customer economics.

We are highly focused on further expansion of our global DG channel with particular near-term emphasis in Latin America and APAC.

Please turn to Slide 13.

As previously mentioned -- as I mentioned previously, technology leadership is a key factor in our ability to differentiate Maxeon solar products, maintain channel stickiness and achieve premium ASPs.

This slide shows how the competitive landscape has evolved recently with respect to solar panel efficiency.

Since 2018, the transition to mono-PERC technology by many of the commodity suppliers have led to an increase in average solar panel efficiency on the order of around 1 percentage point to slightly more than 19%.

During the same period, we began converting our legacy Maxeon 2 lines to our hardware efficiency Maxeon 5 process and are currently laying the groundwork to commercialize our next-generation of Maxeon technology with yet higher levels of performance.

Our IBC technology strategy is to maintain a relative performance lead of around 20% versus commodity products.

This performance gap creates significant market differentiation and enables premium pricing.

Now let me cover our capacity expansion plans.

Please turn to Slide 14.

2019 shipments totaled 2.5 gigawatts, split evenly between IBC and P-Series.

This slide shows how we plan to almost double capacity by the end of 2021.

First, we are debottlenecking Fab 4 to allow for expansion of Maxeon 3 to over 500 megawatts of capacity.

Secondly, we are converting our legacy Maxeon 2 lines and Fab 3 to Maxeon 5. Funding from TZS is part of the Maxeon Solar spin-off transaction will allow conversion of further lines, and we expect to have 4 Maxeon 5 line players in place by the end of 2021 with a capacity of around 1 gigawatt.

In combination of these initiatives in Fab 3 and 4 will roughly triple capacity to produce our highest margin products and drive product growth -- profit growth.

Concurrently, our HSPV JV is slated to expand P-Series capacity by 3 gigawatts, increasing total capacity to around 5 gigawatts.

Our P-Series supply allocation from the JV will therefore increase to over 3 gigawatts.

The capacity expansion shown on this slide will be achieved with a total CapEx expenditure that is a small fraction of the investment in our legacy Fabs.

We have dramatically improved our historical capital productivity via combination of process innovation, reuse of existing fabs and use of a fab-lite via manufacturing partnership model for our P-Series technology.

Finally, with respect to -- with respect to the new coronavirus, we currently expect minimal impact in Q1 and are actively working jointly with our JV partner HSPV to mitigate the disruption.

We will continue to closely monitor the situation with respect to our supply chain and JV operations, provide an update on possible longer-term impact for the year on our next earnings call or sooner.

On Slide 15, we look a summary of the key long-term initiatives that we feel will position each company for long-term future success.

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

Manu?

Thanks, Tom.

I'd like to start out by spending a few minutes discussing our perspectives in 2019.

Please turn to Slide 16.

2019 was a pivotal year for the company as we successfully executed a number of strategic initiatives, improved our profitability and set the stage for future growth.

We improved our EBITDA by approximately 70% versus 2018 after adjusting for NCI related to the accounting of a residential lease portfolio and Section 201 tariffs.

Additionally, we improved operating cash performance, reduced overhead and continued to delever the balance sheet.

We also achieved our 2 core goals; improve our financial transparency for investors and transition to a much simpler cash based model.

As a result of our efforts, we have 2 strong solar businesses positioned for success.

In SPES, our industry-leading origination engines in residential and C&I remain strong and both entered the year with great pipeline positions.

Additionally, we are seeing solid demand from our financing partners for this pipeline, which should translate into decreasing cost of capital.

SPT also exceeded plan posting a record shipment for the year.

This is primarily due to our ability to rapidly expand our international DG footprint and the ramp of our Maxeon 5 and P-Series products throughout the year.

I'd now like to discuss the financial results for the quarter.

Please turn to Slide 17.

Overall, our non-GAAP revenue was above prior year and prior quarter as a result of strong execution in SPT and our residential business.

In SPES, revenue grew more than 15% sequentially with particular strength in our residential channel, including record bookings.

For SPT, we shipped approximately 800 megawatts, another record and above our outlook.

Consolidated non-GAAP gross margin was 21%.

In SPES, gross margin was up sequentially, driven by an improved performance in residential.

However, as Tom mentioned, while the origination engine in our commercial direct business remain strong, project deployment execution was below expectations.

We have implemented a number of initiatives and now expect our commercial direct business to return to profitability in the second half of 2020.

In SPT, gross margin was higher than forecast on increased volumes, strong DG demand and the benefit from the previously disclosed sale of legacy utility scale project.

Non-GAAP OpEx was $70 million for the quarter, up from $68 million in the third quarter due to investment in R&D for Maxeon 5 and Maxeon 6 development, along with investments for our storage offering.

For the year, we achieved a target of less than $270 million in OpEx and expect additional reductions in 2020 post split.

CapEx for the quarter was $12 million, consistent with our Maxeon 5 ramp at Fab 3 with our second line now in production.

As a reminder, post-split we expect that New SunPower will have minimal CapEx needs and Maxeon Solar CapEx will be more than covered by available liquidity and enhanced capital efficiency.

Adjusted EBITDA was $72 million and up approximately $30 million sequentially.

We saw significant EBITDA improvement in the fourth quarter, benefiting from a strong backlog, increased volumes of NGT and a margin benefit attributable to sale of certain legacy power plant projects.

Post-split, we remain confident that both companies will reach the 2021 target model.

I would now like to discuss the financial highlights of the quarter on Slide 18.

We posted solid financial performance for the quarter with significant volume and EBITDA growth versus prior quarter and prior year.

Additionally, our consolidated 2019 EBITDA number does not include the impact of roughly $15 million margin associated with the safe harbor of panel inventory that will be released in 2020 and 2021 as it install in our residential and commercial projects.

In SPES, our residential business posted record revenue and megawatt for the quarter.

The Q4 2019 performance of the business gives us confidence in achieving the exit 2020 EBITDA run rate of approximately $95 million for the New SunPower that we had articulated in our November transaction presentation.

For the quarter, our C&I direct business was a drag on our EBITDA as it missed its forecast by more than $10 million.

For SPT we continue to ramp both our Maxeon 5 and P-Series technologies with strong shipments of both products for the quarter.

Post-spin, Maxeon will be continuing the conversion of Maxeon 2 technology to Maxeon 5 which improves the EBITDA run rate for the business going into 2021.

Finally, we further strengthened our balance sheet during the quarter.

We were pleased to report that we ended the year with $250 million in cash, excluding our capital raise and exceeding our earlier end of year forecast of more than $200 million.

Given our Q4 capital raise and our improving cash performance, we are confident of addressing our 2021 converts, having already retired more than $30 million of these bonds last month.

I would now like to provide an update on our cash forecast for the balance of the year.

Please turn to Slide 19.

On the left-hand side chart, we detail our major cash flow moves for the fourth quarter of 2019.

For the fourth quarter, we met our goals of being cash flow positive at the BU level and to end the year with more than $200 million of cash balance.

Finally, we remain confident that both New SunPower and Maxeon will be well capitalized post the proposed spin.

For new SunPower, we are targeting net recourse debt of less than 4x EBITDA exiting 2020 and plan to be recourse debt-free within approximately 3 years of the planned spend, based on the strength of improving operating performance, cash from SunPower's 2019 balance sheet, cash proceeds to SunPower from Maxeon transaction, the potential monetization of Enphase shares and remaining noncore asset sales.

Finally, as we have discussed, we expect the Maxeon Solar will exit the spin with a very strong balance sheet.

Before turning the call over to Tom for details of our 2020 guidance, I would like to highlight our EBITDA growth through the years as well as how we expect to see greater linearity in our business in 2020.

Please turn to Slide 20.

As you can see on the left-hand side of the page, we expect to post strong EBITDA growth in 2020 with EBITDA growth exceeding 50% when comparing to 2019, and this follows approximately 70% growth in 2019.

The chart on the right highlights our expected EBITDA performance for Q1 and Q4 as a percentage of our total year EBITDA midpoint guidance.

As you can see, we expect our linearity to improve significantly over prior year, given our existing backlog and strong DG market fundamentals, while further derisking the second half of the year.

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

Tom?

Thanks, Manu.

I would now like to cover our guidance for the first quarter and fiscal year 2020.

Please note, our guidance is for the company pre-split, though we have provided 2020 guidance on a post-split pro forma basis in a table in the appendix.

As a reminder, our first quarter guidance reflects the impact of seasonality in our business, as well as commercial direct project timing.

We will also continue to evaluate the potential impact of the coronavirus on our full year guidance.

Please turn to Slide 21.

The company's first quarter 2020 guidance is as follows: revenue of $435 million to $470 million on a GAAP and non-GAAP basis.

GAAP gross margins of 3% to 6% and net loss of $85 million to 75 -- to $70 million.

On a non-GAAP basis, the company expects gross margins of 9% to 12%, adjusted EBITDA of negative $15 million to breakeven and megawatt recognized in the range of 520 to 570.

On Slide 22, the company's fiscal year 2020 GAAP and non-GAAP guidance is as follows: revenue of $2.1 billion to $2.3 billion on a GAAP and on non-GAAP basis.

Gigawatts recognized is expected to be in the range of 2.5 to 2.75 gigawatts.

Non-GAAP operational expense -- expenses of less than $260 million and capital expenditures of approximately $100 million.

Finally, the midpoint of the company's fiscal year 2020 adjusted EBITDA is unchanged.

Though we have widened the range slightly, given the restructuring of our commercial direct business, which we see contributing approximately $5 million in EBITDA for 2020.

We now see 2020 adjusted EBITDA between $125 million and $175 million.

In Summary, Q4 was a solid quarter for the company as we executed on our strategic initiatives and position the company for a strong and profitable performance going into 2020.

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

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

Pardon me, our next question comes from the line of Michael Weinstein with Crédit Suisse.

Can you hear me?

Yes, sure is.

Can you maybe just expand a little bit about the -- what are the execution problems that you're having in commercial direct?

And what -- obviously, you expected to have them fixed by the end of the year.

I'm just curious what the delay in fixing them is and what they are.

I -- so I -- as I -- this is Tom.

As I said, my prepared remarks, the -- our origination part of the commercial business is doing great.

In fact, in fourth quarter, we had excellent bookings and awards, awards where we've been selected, and then ultimately, booked 26 megawatts of projects.

And on the other end of the spectrum or the value chain, we're adding storage to more and more systems.

So that's working great.

What's not working great is perfecting the projects and executing on them.

We had an unusual number of projects that were delayed by virtue of permits or interconnection issues.

And then any time there's a delay that means we have fixed costs that are under absorbed.

And we have to deploy and redeploy.

And so the primary issue has been project delays.

In some cases, there's delays the way we contracted resulted in some [LDs].

Now importantly, we've taken a lot of action in the last month that would improve the execution part of the value chain, lowering our fixed costs so that we have less under absorption issue, if there is a project delay.

Restructuring contracts that were less liable for LDs on things that we shouldn't be liable for and that we've had to clean up.

And then we've reorganized so that the probability of the delay is reduced because we've integrated the development team in with the execution team to reduce the likelihood of further delays.

We'll see the benefit of all those actions starting in Q2.

We expect to have the first half actually breakeven after a positive Q2 and certainly, the second in a breakeven condition.

Is that the primary driver of being cash flow positive in the second half of the year for the sole company here?

I think we could be cash flow positive with the commercial business at breakeven.

And then, of course, and then it only gets better from there.

The biggest driver with the commercial businesses is the momentum of the company would be is when you look at the channels business, the performance in channels business in Q4 was outstanding.

It comes in the new year, really strong.

We're expecting EBITDA growth in that business and more than doubling, this year compared to 2019.

The SPT business has been turned around compared to 2018.

So as we fix commercial and you think of the new split companies, the momentum we have with the fixed commercial, the other 2 are already there.

So commercial, once we get there.

So one, we didn't answer to, yes, it drives cash flow positive, but really drives the momentum of the EBITDA profitability and significant cash flow positive thereafter.

I think -- I just had one more question.

I think you said that the impact of the coronavirus is built into the guidance for this year.

And I'm just wondering what -- did you break that out during the call, I didn't -- don't recall?

Yes.

I'll just add color, right.

We just had a couple of sentences on it.

And of course, it's evolving real time.

There are some shortages within China.

The -- and of course, the China supply chain supplies all of solar.

And there are shortages as we have seen in our glass and modules predominantly, those are factories that aren't running at 100%.

Those factories are coming back online.

They have the secondary challenge that logistics within China have been -- are challenged because some of the logistic options have been reduced.

That, too, is evolving and it's our understanding the coronavirus, that things have perhaps or -- there are positive signs forming.

So if those positive signs continue and the trends of the factories coming online and logistics being improved, we expect to manage through this and hold guidance as we guided today.

(Operator Instructions) Our next question comes from the line of Brian Lee with Goldman Sachs.

Sorry about earlier.

Can you hear me?

Yes.

Great.

I guess, first off, just on the updated EBITDA guidance for 2020 here, obviously, it's a little bit wider, $5 million on the low end, $5 million on the higher end.

Commercial, at least when I listened to the call, it sounds like the narrative has gotten a lot worse.

So I might have missed this, but what was sort of embedded in your EBITDA for commercial prior and what's embedded there?

And if I take that into the context of the overall guidance for SPES not moving a ton.

Does that infer that you're a little bit more positive on the residential side and things have actually improved there to offset some of the drag happening in commercial?

Just maybe some of the moving parts there to help us parse to where you're [not] thinking the guidance here?

All right.

So thanks for the question, Brian.

And this is Tom.

I'll take this.

So for the year, yes, we're -- I -- we're expecting even better performance out of the channels business or planning on better performance out of the channels business.

It ended the year quite strong.

It's profitable in Q1, and it's growing, and it has a tailwind of Equinox Storage in the back half of year.

So we're very positive on the channels business.

The commercial business can be sized this way.

We expect EBITDA between somewhere between 0 and 10 or 15.

And given the performance in Q3 and Q4, Manu and I decided to put an extra 5 on either end, simply because of that, we fully expect to manage this business back to a breakeven condition going into the second half of the year, in which case, at that time, we'll adjust guidance appropriately.

But the answer to your question is yes, channels is doing great.

And by the way, so is SPT.

Okay, that's great.

I appreciate the color.

And then maybe if I could just squeeze 2 more here, and I'll pass it on.

On the spin-off transaction here?

I know you talked about being on track for Q2.

Can you provide a little bit of granularity as to sort of what milestones you have achieved since November when you first announced it?

And then kind of what's still on the schedule here before we get to the Q2 completion of the spin?

And then second one would be on more housekeeping.

The SPT gross margin if we exclude the legacy asset sales, do you have that number, I believe, you had talked last quarter about $20 million of revenue on the legacy asset sales, if we strip that out, what's the clean gross margin for the segment?

And is there any additional legacy asset sales expected in 2020, that will impact margins?

Okay.

On the cleanup things I'll have Manu cover that SPT gross margin and other asset sales.

I will take the opportunity to indicate, though, that if you take out assets sales, our EBITDA of our core business that is being split is well over doubling year-on-year and has great momentum.

And I broke it out in the previous answer, SPT and channels are doing very well, and commercials will be on an upward trend.

In regards to the split, I'll say a few things, and Jeff can add anything that I might have missed.

What we're trying -- the critical path is antitrust approvals, probably China will gate that.

We do already have a couple of antitrust approvals in favorably.

And so our partner in China, of course, is giving us indications of the time line, and that is what basically the expected date of that plus 4 weeks is what we're indicating to you.

The second thing is, we're raising debt to match the equity investment.

We want to have that debt materially raised prior to the split.

And that will take us up to a very similar time frame.

So those are the 2 things in the critical path.

In terms of some of what's gotten done on the transaction.

I'll let Jeff cover some of that.

Yes, in terms of background filings on 20-F were to plan and certainly set up there to split in the time line Tom described, we're also setting up the domicile in Singapore and getting all that set up hiring for the Board members, executive staff and all that's going to plan as well.

Okay.

Just on the gross margin normalization, normalizing for the sale of the development asset.

SPT's gross margin would be roughly 18%.

That's a few hundred basis points higher than prior quarter and happens to have the basis.

So the business is performing extremely well and -- coming into 2020 with (inaudible).

Our next question comes from the line of Philip Shen with Roth Capital Partners.

First one is on your SPES resi business, you guys did, I believe, 279 megawatts for full year '19.

Can you give us the specifics on how much you expect that segment to grow in 2020 if you strip out some CVAR megawatts there?

I'm guessing maybe a 17% to 20% year-over-year growth.

I know the market is doing well.

We're forecasting 25% year-over-year growth in 2020.

So I just want to see how that growth is doing for you guys?

Yes.

So I'll just say a quick comment and turn it to Norm Taffe, who runs that business, that, of course, we've got great momentum in that business.

And we're managing to profitable growth.

So we're careful not to grow just to grow.

And as we add Equinox, I think that's really important because we expect that to really enhance -- there can be as much as a 25% improvement per watt when it is attached.

Yes.

Thanks, Tom.

Thanks, Phil.

So yes, just to add some color to that.

I guess from a megawatt standpoint, you mentioned CVAR numbers you quoted, are independent CVAR.

CVARs, another incremental 120 megawatts growing quite a bit next year as well.

And growth-wise, our current forecast on the megawatts is at roughly what you said, 17% to 20%.

I will also like to point out that revenue is faster than megawatts quite significantly.

So our expectation is that will be ahead of our model, which is between 10% and 20%.

There's -- we expect to be able to see that on a revenue basis.

Great.

And I guess, what I was doing was taking the SPES channels' megawatts guidance of 430 to 480 and then subtracting out 100-plus megawatts there to get to the 17% to 20%.

But it sounds you're like you're affirming that 17% to 20% for the resi line item specifically.

As a follow-up there, can you speak to the attach rates for resi storage that we might see?

So let's say, resi megawatt ends up being closer to 320-ish megawatts in the year, what kind of attach rate for resi storage specifically, could we see in the year?

Yes.

No, happy to answer that.

This will be certainly the back-end loaded side.

I would say our confidence in attach rate is increasing because the demand in the pool is stronger than I think we had thought a quarter ago.

It's early for us to be able to tell you what it's specifically going to be.

But now we're thinking that in Q4, we could be north of 20% attached for new designs or even higher than that, which originally, we had a smaller plan on that just because we didn't know a new product ramp.

But it still speculating to some extent.

But every time we look at it, the more confident we'll be telling that the attach rate is going to be very high.

Great.

One of the things we're hearing in the channel is that one of the bottlenecks in storage right now might be electrician labor.

To what degree do you think that's -- you guys or your dealers are experiencing that?

And it seems like the demand is strong, but then it might be mitigated by that potential bottleneck?

Yes, I can comment on that.

It is something that is a concern out there.

I would say one thing that positions us very well is that we have an extremely loyal dealer network with that capacity being really exclusive to us for when they're designing in solar plus storage applications.

So while we still may be limited, frankly, by just the amount of that channel we have, the ability of us to have a loyal network, we think, gives us a great opportunity.

And at the rates that were since we're ramping, we don't expect that to material impact -- materially impact our growth.

Next year, that could be a bigger issue (inaudible) to do more thinking at the (inaudible), but we don't think that's going to affect our business.

Let me add to that.

Remember, it's Equinox story.

That's important because it's designed by us.

Designed 2 boxes, and that's less than almost any other offering, which makes it easier to install.

And one of the things we're perfecting, maybe overstated, but improving during the beta case is the time to install and creating standard methods for our dealers, and we're doing that on a go-forward basis with our dealers.

So it's helpful to know that shortage because we can design in improvements and we're in fact doing that.

And there are other points of differentiation with Equinox Storage that I think you're going to find very interesting going forward.

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

Let me ask kind of a macro one about the market.

This is our first conversation since Congress or the White House, perhaps blocked solar ITC extension last December, despite the industry's strong effort to get it extended.

What do you think went wrong with getting that done?

And could anything change in 2020?

I'll take that.

And I would say there is constructive -- Our understanding is there was constructive talks up until the end, although this happens.

It's been our experience with tax bills or observation with tax bills and things degraded and there was a separation towards the end.

Given that it's an election year, we're less optimistic this year, on a change.

That does not mean that us and CEA are not doing our best effort to have some moderation on the reduction, but we're less optimistic given that it's an election year.

Okay.

And one more on the policy front, there's obviously talk in Washington right now about potentially suspending or modifying the Section 201 tariff.

Your thoughts on that?

Sure.

The ITC -- U.S. ITC just had their hearing December 5, so it is not just a couple of months ago.

They issued a report, it's basically a synopsis of what happened at the hearing.

They'll issue their recommendation in early March.

And if I were to educate it, speculate, I would think that there will be unchanged tariffs -- 201 tariffs.

And I'm optimistic that the tariff rate quoted on solar cells would be addressed or potentially increased because one of the positives out of the 201 tariffs has been a dramatic increase in module production in America.

And of course, that can't happen, if you can't get solar cells.

So I would -- my educated guess is that I wouldn't expect to change for the next couple of years in 201 and hopefully, action on the [Tier 2] for solar cells.

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

A couple of quick ones I might have missed.

Did you disclose the safe harbor amount either in megawatts or dollars spent?

Yes.

So when we started, we talked about couple of hundred megawatts of safe harbor.

We are on track to that.

Most of it came in, in second half of 2019, there's a little bit of a trailing in first quarter, still covered under the 2019 safe harbor rules.

And we have a modest amount of safe harbor built in our 2020 forecast, that's something that we'll be evaluating over the next quarter or so, and that could have an impact.

And if it did, if anything, I would do, educated forecast, a favorable impact.

But either not significant or not something we're ready to commit to yet.

But nonetheless, we have a modest amount for safe harbor for 2021.

Got it.

And then 2 other quick ones.

The Equinox Storage, when does that come out of beta, Tom?

Or when do you expect to start selling it?

I'll let Norm take that.

Jeff, this is Norm.

Yes, so the product will come out of beta in Q2, we'll start selling more broadly late Q2.

So what we've done in the beta testing is writing the procedures to install and improving sort of standardizing the install.

Also, Norm and his team have made the decision to upgrade what we're going to raise in terms of the scalability of the offering.

And that's based on feedback we've got and we think that that it makes sense not to have a route right away just to come out with the latest route.

So it will be an up route or an updated version of what we had originally talked about.

They can back up more load within the home.

And the last one I had, Tom, was on the SPT side.

Can you just touch on what you're seeing in Europe in the 6 or 7 countries that you operate in, general trends by country would be helpful?

Sure.

I'm going to let Jeff Waters take that.

So by and large, for us in Europe over the course of 2019, we saw the rate growth in Europe, over 80% growth.

And it's not a country-by-country basis, we tend to see a pretty strong, pretty uniformly across probably double digit number of companies that we sell -- the countries that we sell into.

I don't know that I would call any items being specifically strong but they are, I would say, very receptive consumer, especially on the residential side are very receptive to our Maxeon family products.

So we're expecting for 2020 to see double-digit growth out of Europe.

And continue to build out the great dealer channel that we have there.

So Jeff, I'd say there are places in Europe where we're particularly strong.

We had historically -- historical strength in Benelux, as an example, like the Scandinavian countries are actually doing quite well.

And of course, Jeff and his team have built great channels in Japan and Australia, both of which are growing, are quite well for us as well.

So those would be a few I'd point to.

Okay.

We're going to take one more analyst and that person's questions, if there's plural.

Our last question comes from the line of Colin Rusch with Oppenheimer.

Can you talk a little bit about the pricing dynamics on the energy storage solutions?

How sensitive are customers at this point?

And how much pricing power do you feel like you have going through the balance of the year?

And then I've got a follow-up.

Okay.

I'll let Norm take that.

Yes, Tom, I think that it's still early, but from a market perspective, we see the pricing on the storage being at least margin equivalent, if not margin accretive.

I also like to emphasize that what it really does for us is significantly improve the revenue per customer.

So while it doesn't just help additive gross margin and lowers our cost of sales are getting more revenues with same customer.

And right now, I will tell you, a part of the reason for what Tom indicated that we are offering maybe more extendibility of the product is our indications are that the demand is for bigger batteries than what we originally expected.

And that also helps margins because you amortize the installation cost over more megawatt hours.

And so we're anticipating bigger storage installs than we were originally.

Great.

And then just on the product side, certainly, there's an awful lot going on with battery chemistry at this point.

You guys look at the applications and the potential for 1 cost reduction in 2 product cycles.

What are you expecting in terms of your ability to drive costs out of the supply chain as well as evolve with emerging chemistries that are coming to market?

That's a great question.

I think that it's -- I'd like to point out, strategically, we have focused on architecture, which is battery agnostic, meaning we can ride what will be a -- we believe, a major, essentially, call for nationwide or worldwide really drag down of pricing battery technology, obviously driven even more by the EV market than us.

So that has been key to our strategy.

So the cell technology can be replaced with other cells and our software control.

So I think right now, the costs we're seeing are as good as or better than what we had forecasted but we expect that over time, those will continue to come down, and we'll be able to take advantage of that.

Okay.

Thank you, Colin, and thank you all for calling in.

We really appreciate it.

We look forward to our Q2 call with you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.