SunPower Corporation (SPWR) 2020 Q2 法說會逐字稿

Good afternoon. Welcome to SunPower Corporation's Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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, Shannon. I would like to welcome everyone to our Second Quarter 2020 Earnings Conference Call. On the call today, we'll start out with a strategic overview from Tom Werner, CEO of SunPower, who will also provide an update on our SPES business, followed by Jeff Waters, CEO of SPT and Maxeon, who will discuss our international business. Manu Sial, our CFO, will then review our second quarter 2020 financial results before turning the call back over to Tom for our 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 2019 10-K and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during the call on the Events and Presentations page of our Investor Relations website. Please note, we have provided a number of additional data slides in the appendix of our presentation deck. In the same location, we have also posted a supplemental data sheet detailing some of our other historical metrics.

Finally, I would like to highlight that SunPower will be hosting our 2020 Capital Markets Day on September 10, and we will provide details on timing as we get closer to 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 overview of our second quarter performance and a brief update on our strong competitive position in the second half of the year and beyond.

Let's start with a recap of our second quarter performance. Please turn to Slide 3. We executed well in the second quarter despite the COVID disruption as we exceeded our guidance in all of our key financial metrics while generating $30 million in cash. Our U.S. channels business contributed to outperform -- continued to outperform with strong demand in our residential retrofit and new homes businesses. Our C&I business also exceeded plan, posting positive EBITDA for the quarter. While SPT's Q2 performance was impacted by factory shutdowns, we exceeded our shipment guidance and saw improving demand trends. I'm very proud of our employees' diligent execution during the quarter, making sure our employees and customers stayed safe while transitioning effectively to a new way of doing business. We continued to invest in our industry-leading solutions, and we're pleased to launch a number of new products in the second quarter that will drive growth and margin expansion.

Finally, we also have recently closed all financing requirements for our Maxeon transaction, including a $200 million green bond offering and $125 million in working capital and term loan facilities. As a result, Maxeon's 20-F is now effective and reflects a record date of August 17, with the expected distribution of Maxeon shares on August 26.

Now I'd like to spend a few minutes highlighting our strong performance in SPES, which will be known as SunPower post spin. Please turn to Slide 4. Our channels business delivered a very strong quarter, primarily driven by residential retrofit as we benefited from our successful transition to an online sales model. We saw both demand and installation activity increase beginning in the second half of April, with these trends continuing through the end of the quarter. We grew first half revenue and doubled gross margin year-over-year, benefiting from cost-reduction initiatives, successful transition to online sales and a lower cost of capital for lease and loan. As a result, our channels business posted adjusted EBITDA of $7 million, while generating $32 million in cash.

New homes also performed well, adding to our backlog of more than 180 megawatts or 45,000 homes, and maintained our industry leadership with more than 50% market share. Our new OneRoof product, which I will highlight later, provides additional differentiation and customer value in this market. We are pleased to announce our partnership with Bank of the West, which is focused on providing financing solutions to our fast-growing commercial dealer business. We are confident we have sufficient tax equity, project finance capability to meet our residential and commercial financing needs for the next year. SunPower has always been an innovation leader in solar, and we continue to invest aggressively to evolve our business model into storage and services. In the second quarter, we launched 2 new important products, our Equinox residential storage solution called SunVault and our OneRoof product for the new homes market. We believe that both of these solutions will be cornerstones of our future growth.

Please turn to Slide 5. SunVault is the next major addition to our Equinox energy platform, giving homeowners more freedom from utility outages and expensive peak electric rates. With SunVault, homeowners have access to greater backup capacity during blackouts and reduce daily peak electricity consumption. It is the only solution that is a fully integrated residential system designed, engineered and warranted by a single company. SunVault is a clean 2-box solution with double the discharge cycles of our competition, a scalable, modular footprint and superior warranty. With over 100,000 operating hours in the field and dozens installed in July, we are very confident in SunVault's performance capabilities. We have already started to ramp installations in California, and demand is very high and attach rates are above our 2020 target of 20%. We expect SunVault to have a positive impact on our residential business as we roll out this solution nationwide through our dealer network.

Now let me turn to our OneRoof product for the new homes market. We have a strong #1 position in the solar new homes market, with more than 50,000 installations over the past 15 years, backlog of 45,000 homes and more than 50% market share. This product developed in collaboration with KB Homes, offers customers an efficient, durable and cost-efficient roofing product, which is ideal for new homes, especially in California as homebuilders work to meet the new solar mandate. OneRoof features interlocking roof trays with integrated clips, enable panels to be installed directly on the roof deck, creating a watertight solar roof, with the ability to install faster, and easier than traditional (inaudible) solution, it reduces cost for the builders. Feedback so far has been very positive. And we have already booked 19 communities across 6 builders in the first 2 weeks following the product launch.

Please turn to Slide 6, where I'll provide an update on our Commercial Direct business. We restructured our Commercial Direct business in the second half of last year, and we are pleased with our results to date. In Q2, we achieved a number of important milestones. Performance was ahead of plan and posted positive EBITDA for the quarter, primarily driven by improved project execution and platform cost reductions. Our origination volume has risen significantly over the past year with more than 100 megawatts awarded year-to-date and our opportunity pipeline has increased by more than $1 billion over the last 6 quarters. We added to our backlog and now have approximately 100% of our forecasted 2020 business under contract. We are on track to achieve our target model of greater than 15% gross margin, exiting 2020 and remain confident in achieving sustained profitability and positive cash flow by the end of the year. Demand for our Helix storage product remains high, with attach rates approaching 50% for the second half of 2020. In addition, we secured greater than 50% market share in the recent California storage incentive program.

In closing, with the spin-off of Maxeon later this month, I want to briefly highlight why we feel both companies will be well positioned after the transaction.

Please turn to Slide 7. The rationale for this transaction is straightforward. The significant TZS investment in Maxeon, combined with the recent close of debt and bank financing, provides Maxeon with sufficient capital to rapidly expand its international manufacturing and downstream footprint. Additionally, this transaction successfully repositioned SunPower as a leading pure-play DG company in North America, who can now leverage their asset-light model to significantly improve the return on invested capital, starting in the second half of this year.

With that, I would like to turn the call over to Jeff Waters, CEO of SPT and future CEO of Maxeon. Jeff?

Thanks, Tom. Let me start with a quick review of SunPower Technologies second quarter performance. Please turn to Slide 8. I would first like to thank the SPT team for their efforts in navigating what was an unprecedented operating environment during the quarter. As the COVID pandemic swept across the globe, our employees were forced to react in real-time to disruptions on both the supply and demand side of the business. I'm very proud of the team's adaptability and perseverance and of the fact that they delivered financial results ahead of expectations. We were able to exceed the midpoint of EBITDA guidance and to be breakeven on cash while paying for CapEx and legacy liabilities.

On the supply side of the business, by far, the largest factor in the quarter was the shutdown and eventual reopening of all 7 of our global factories. Such events are highly complex projects involving thousands of people. But our manufacturing teams rose to the challenge in delivering on volume, cost and cash flow metrics and did so with no safety incidents.

On the demand side of the equation, our sales teams were able to capitalize on faster-than-expected recovery in several of our core DG segments and delivered volume and revenue ahead of plan. Of note, we achieved record Q2 volume shipments in both our European and Australian DG businesses despite of COVID. This is a testament to solid underlying demand and share growth in these markets. as well as to the resilience and strength of our global sales and installation partner channel.

We were able to partially mitigate the EBITDA impact of our factory closures through careful cost management and higher ASPs. And we delivered EBITDA ahead of midpoint of guidance as a result. I want to remind our investors of our recent announcement relating to our partnership with Enphase on AC modules. We're very excited to be launching these new products over the coming months as a concrete first step in Maxeon's strategy to deliver value beyond the panel to our global DG customer base.

Please turn to Slide 9, where I will give a short update on progress in the large-scale or power plant side of the business. As we explained during the Maxeon Capital Markets event, our HSPV joint venture is in the process of ramping 2 new 3-gigawatt factories to produce the latest generation of our shingled cell panels. These factories are highly automated and designed around the latest large area G12 wafer format to produce a range of products with power ratings of up to 625 watts. I'm very pleased to report that the first of these factories, which we call SmartFabs, is already in operation. The photo on the right of this slide shows one of the first 500-watt bi-facial panels being robotically packaged for shipment. The first manufacturing line is already exceeding yield and power output distribution objectives, and HSPV expects to ramp the balance of the production lines in the Yixing SmartFab over the next few months. As a reminder, we can purchase 2/3 of HSPV's output and more if needed, selling this output into large-scale solar projects as well as through our DG channels. Consistent with the progress of our new JV manufacturing facility, we recently officially launched our new line of P5 bi-facial panels, and we are already seeing significant customer interest in these new products.

With that, I would like to turn the call over to Manu Sial, CFO of SunPower.

Thanks, Jeff. I'd now like to discuss the financial results for the quarter. Please turn to Slide 10. We are pleased with our financial performance for the second quarter as we exceeded our revenue, margin and EBITDA guidance and generated cash in the COVID environment.

Moving on to the specifics of the quarter. Non-GAAP revenue exceeded guidance as we saw a solid recovery in both our segments. In SPES, outperformance was driven primarily by our channels business, where we added 8,000 residential customers for the quarter. Our C&I direct business executed well on its project commitments and exceeded the midpoint of our megawatts recognized guidance. For SPT, the second quarter shipments totaled 440 megawatts and were above our guidance as a result of quicker-than-anticipated improvement in our U.S. and European DG business. Consolidated non-GAAP gross margin was 10%. In SPES, gross margin almost doubled year-over-year driven by improvements in residential loan and lease economics. Overall, focus on cost by the channels team and sustainable improvements in project execution in our C&I direct business, which posted a profitable quarter.

In SPT, gross margin was in line with our forecasts. Non-GAAP OpEx was $58 million for the quarter, down 15% sequentially as we benefited from our cost-reduction initiatives. We expect a double-digit decrease in 2020 OpEx versus 2019, and we will continue to benefit in 2021 from our investments in digital, business simplification and move to Asia from Maxeon.

CapEx for the quarter was $5 million, in line with first quarter and consistent with our Maxeon 5 ramp at Fab 3. Adjusted EBITDA was negative $9 million and ahead of guidance.

I would now like to discuss some additional financial highlights for the quarter. In our channels business, we are seeing improving booking trends in residential rental set and increases in new home installs that rose in second quarter versus prior year. Additionally, we expect that channel's gross margin to approach 20% as we exit 2020. In our C&I direct business, we are confident of generating sustainable positive EBITDA in the second half of 2020 and beyond with continued improvements in project margins. Our bookings remained strong with the balance of our 2020 forecast currently in backlog. For SPT, we exited the quarter with all of our factories fully online that enabled us to exceed our shipment guidance and capitalize on recovery in the global DG market.

Looking forward, Maxeon remains focused on expanding their DG footprint post-spin as evidenced by announcement of the partnership with Enphase.

In relation to the balance sheet, we generated approximately $30 million in cash in second quarter, driven by strong channels performance. In SPT, cash was breakeven. We have approximately $500 million in identified liquidity for SunPower over the next 12 months post-spin and are confident in our ability to fully address SunPower's 2021 convert. Maxeon post-spin will have a well-capitalized balance sheet, with $298 million in equity investment from TZS and $325 million from the recently completed financing.

Finally, we continue to build annuity streams in our downstream business that create future value beyond day 1 customer contact. At the end of second quarter, we had approximately $400 million of future service revenue attributable to SunPower and approximately $358 million in net retained value in SunStrong. For third quarter, we expect net retained value in SunStrong to be up to $365 million.

In summary, we believe SunPower and Maxeon are well positioned given the capital-efficient business models, new products and a strong balance sheet.

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

Thanks, Manu. Moving on to guidance. Please turn to Slide 11. Company's third quarter 2020 guidance is as follows: revenue of $360 million to $400 million on a GAAP and non-GAAP basis; GAAP gross margin, 0% to 5%; and net loss of $110 million to $95 million. Company's third quarter 2020 gross margin and adjusted EBITDA guidance on a combined basis now includes an approximate $40 million impact as a result of its out-of-market poly contract in the SPT segment for the third quarter. As a result, on a non-GAAP basis, the company expects third quarter gross margin of 0% to 6%, and adjusted EBITDA in the range of negative $35 million to negative $20 million, with SPT in the range of negative $38 million to negative $28 million, and SPES in the range of positive $8 million to $14 million. Upon completion of the Maxeon spin-off expected August 26, the out-of-market poly obligation will be retained by Maxeon into 2022. Megawatts recognized will be in the range of 500 million to 560 million, and we also expect positive cash generation for SunPower in the third quarter. For the fourth quarter and after, the company's expected spin-off of Maxeon Solar Technologies, both companies expect a continued improvement in global solar demand environment and our financial performance through the end of the year.

Finally, I would like to highlight that SunPower will be hosting our 2020 Capital Markets Day on September 10, and we will provide details on timing as we get closer to the event.

In summary, Q2 was a solid quarter for the company as we executed on our strategic initiatives, positioning the company for a successful spin-off of Maxeon and laid the foundation for improving profitability.

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

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

Just to start off, can you confirm that the inclusion of the $40 million impact from the legacy polysilicon liability, does that -- that makes this guidance not comparable to prior guidance, correct? I have to -- would have to go back and just (inaudible)

That's correct.

Okay. I'm assuming you're doing that because of -- to make Maxeon a little more visible or transparent that...

Okay. I -- Manu, you want to explain real quick?

Yes, I can take that. So Michael, as we were finalizing the 20-F for Maxeon, we determined that or retain the presentation to not exclude the losses under the long-term contract for Hemlock in the margin and the EBITDA presentation for Maxeon. So what you see for SunPower in third quarter, is consistent with what we presented in Maxeon's 20-F. Going forward, the contract ends -- which ends in 2022, will go with Maxeon. And Sunpower's results will not be impacted by the contract post-spin. And then as you disaggregate the third quarter guidance compared to the second quarter actual, there's over $20 million of volume and operational improvements building quarter-to-quarter from second quarter actually to the midpoint of our guidance.

Got you. How much visibility do you have in the fourth quarter for SPES? Why not give a full fiscal year 2020 guidance at this point? And also, what kind of cash sources from asset sales might occur at SPES in the second half of this year?

Michael, this is Tom. As we -- I think our visibility into the fourth quarter is good. It's great in the commercial business. The channels business is a shorter cycle business, but the trends are quite strong. And so we have great confidence or strong confidence going into the back half of the year, including Q4. We're doing an Analyst Day on September 10. And so we're saving it for that, would be what I'd say. We'll have a lot more to say about it then. What was the second part of your question, Michael?

Are there any cash sources from like the asset sales or anything like that expected in the second half?

Yes. Manu, can you take that?

Yes, there's about $40 million to $50 million of cash from asset sales over the next 12 months.

Our next question comes from Brian Lee with Goldman Sachs.

Maybe just following up on the prior one. On the polysilicon out-of-market cost. Manu, Tom, is there a technical reason that you're no longer excluding it from non-GAAP? Or I guess, adding it back to non-GAAP the way you have done historically? I know it's consistent with the way you're reporting it in the 20-F for Maxeon. But is this an SEC requirement? Or is there some strategic reason you're doing it this way versus historically having put it back into the adjusted EBITDA metrics? And then on the $40 million itself, I think you've had $10 million or so in Q1 and Q2. So why the step-up in Q3 to $40 million? And is that the quarterly run rate going forward until exploration in 2022?

Okay. So let me take the three questions. Just -- so on the first one, why included in third quarter? Really, the -- based on the discussions that we had in and around the review of the 20-F, with the staff. We wanted to be consistent for SunPower vis-à-vis what was reported in 20-F. So that was the discussion around that topic with the SEC. So that was one. Second, the $40 million of out-of-market poly in context with second quarter versus third quarter. I think the volumes are going to be lumpy. But as we think in terms of 2Q versus 3Q, 2Q was a lower production quarter for Maxeon given the factory shutdowns. All the factories are back online now. So the $40 million is reflective of what we've historically been in 2019 and parts of 2018. I think the way to think about the liability going forward is there's about $150 million of liability post-spin that goes through 2022.

Okay. That's super helpful. And then I guess on the gross margin guidance here for the 0% to 6% non-GAAP consolidated, the target for Q3. How should we be thinking about SPES gross margin versus SPT gross margin assumptions embedded in that?

Okay. So Manu, why don't you say a few words and we might hand it over to Norm?

Great. So just from an SPES perspective, the channels gross margins are approaching closer to 20%. The Commercial Direct margins are in the mid-teens. You're seeing some of that play out in second quarter. More details are in the metric sheet that Bob posted. And then I think we'll have Norm provide a little bit of color there.

Yes. No, happy to. Yes, margins for channels, we're actually quite proud of the results we had in a pandemic quarter where we doubled our margins in Q2. We certainly have a lot more momentum to grow those in the back half of this year, both because our volume is increasing and also because some of the financial products, like the significant announcement we made with TCU last quarter don't really hit the bottom line until Q3 and Q4. So very confident that the underlying gross margins of channels are going to continue to grow the back half of this year.

Okay. And maybe last one, if I could squeeze it in. Just -- I know you said Manu volumes in SPT are going to be lumpy. You had a better-than-expected quarter on shipments in Q2 here in the midst of the pandemic and with production being impacted through the quarter. Heading into Q3, it sounds like production is fully back online and barring any unforeseen circumstances, I suppose, your base casing that production will stay online through the quarter. But the volume guidance looks relatively flattish, even though it sounds like production could be better. Were you shipping out of inventory in Q2? Or can you kind of walk us through the dynamic of the flattish volume outlook for SPT specifically?

Yes. So I think, Jeff, why don't you cover the volume dynamics from an SPT perspective for Q2. Just from a Q2 versus Q3 point of view. In Q2, our shipments were 10% above our guidance. And then there is an increase in shipments for SPT between Q2 and Q3, and Jeff will add more color to it.

Yes. So with the factories shut down for more than a month in Q2, we were able to wind down inventory. So a lot of the shipments that you saw coming in Q2 did come from inventory. You then see a little bit of that bubble then transfer into Q3 as it's going through the manufacturing line. So that's why you see our Q3 volumes will be lower than what we would expect to see in Q4. But by the time we got to Q4, we'll be fully up and running. And every expectation out of the factories is that even with the pandemic still out in the various markets, we're operating now very safely and the local governments see that. So we don't expect any disruption on the supply chain or on the factory side.

Our next question comes from Philip Shen with ROTH Capital Partners.

As we understand it, I think Maxeon will be able to ship and sell P-series into North America without going through New SunPower. So I was wondering if you could walk through how that dynamic will play out and what the economics might be. Will New SunPower, for example, be able to pursue P-Series sales in the U.S. as well?

So it will be segment driven. And Jeff, you can add on to this. It will be segment driven. So P-series in the DG channel was all done by SunPower. And P-series into the power plant channel can be done by Maxeon. Jeff, do you want to add anything?

Yes. And I think you covered it, Tom. So the power plant piece is an area where we'll be looking also at shipping P-series, but that will be something coming in from outside of the United States.

Right. So just to be clear, the power plant P-Series will be revenue booked by Maxeon and then -- so New SunPower would not have a claim on that. Is that correct? Or help me understand if that's not correct.

That's correct. That's correct.

Okay. Great. Also, with COVID, we've seen pricing come down a fair amount for modules in the past few weeks, pricing through the supply chain has recovered. Based on the Maxeon Analyst Day, we estimate that 2019 pricing ASPs for modules was roughly $0.35 per watt for P-series, and I think $0.65 per watt for IBC. How has -- so that's the past. What do you expect? And how do you expect pricing to trend for the back half of this year and the first half, maybe Q1 of '21? Are these ASPs sustainable in the U.S. and internationally? And I know you guys get a premium price, but can you talk through also how pricing has changed during COVID?

Sure. I'll take most of that and I'll ask Norm to comment on pricing during COVID. So the good news is, first of all, as mentioned in our press release last night and in our prepared remarks that the split of the company is on track for August 26. And so the relevance of that, Phil, is that after the 26, the agreement as written will kick in and that has pricing that is market-based. And so I would say that both Jeff and I are quite comfortable with that. I'm quite comfortable with the 35 years' experience with Maxeon preceding us that Maxeon will do a great job with IBC and cost management of IBC. And I think he's quite comfortable. We'll do a great job with delivering that to the market in a way that is favorable to both companies. And we have done that for almost 15 years in the DG segment. So our confidence in the cost structure and pricing for the North American market is quite high in the nature of the agreement post-split. In terms of pricing that we see in a COVID environment, maybe Norm, you could comment on that.

Sure. Yes. I mean I think from what we've seen so far, is -- overall, our ASPs are staying quite stable. It's evidenced in part on the improving gross margins that we have in the business. I would echo what Tom said, we very much appreciate the ability to have a highly differentiated panel, and it's a big part of our story. And it's a lot of things that allows us to keep higher prices out there. But we also have a mechanism to make sure things are very competitive from a cost standpoint. So from a pricing perspective, we see things quite stable and I think that will continue to be the case as shipments grow at the latter half of this year.

Great. One last one. In terms of the AC Maxeon panel and going out to international markets. Can you give us a sense for what kind of volume we might be able to see in maybe the back half this year or for 2021, what do you see ahead for that product line?

Yes. We'll have Jeff take that. Of course, that relationship started with SunPower, and it's a very strong partnership, one that obviously Maxeon is leveraging and their relationship going forward. Jeff, can you take that?

Yes. So obviously, we're excited about the AC module addition. And it is going to be launching in Europe here immediately. So expect to see some relatively small volumes over the course of the second half here as it ramps up. But we're expecting it to be a good sales growth driver for us going in through 2021. And it really fits in nicely with the channels that we have, especially the large dealer channel that we have throughout Europe. And we expect to see AC modules going into additional markets, maybe in Japan and Australia here in the future. But I would say volumes for 2021, probably no specifics right now.

So next question comes from Ben Kallo with Baird.

Congratulations on the split. Tom, what do you think the direction -- or does it change after the split owning your assets or how you position SunPower with dealers on the commercial side and then also on residential side? Do you anticipate changing the model at all after you get through this? And then my second question is, Tom, you mentioned you've been at it for, I think, you said 20 years or 30. And what do you think your time line is as you go forward? You've been through this restructuring for the past couple of years and a lot. And so what do you think your time line is for being in SunPower? And what should we expect for a transition as leadership when you're ready?

Ben, thanks for the questions. And let me first take the direction changes. So as our slide indicates, due to the 1.5 years or 2 years that we put into creating these 2 separate companies is bearing fruit. We're raising $625 million for Maxeon. That's sort of an unprecedented level for that part of our business to deploy more capital efficiently than we ever had previously. When we look at the New SunPower or the remaining SunPower, we like to call New SunPower. We have a profitable cash-generating business. So Manu summarized that as very high return on invested capital business. And therefore, we expect our model to stay the same in terms of monetizing leases. And having a pure cash-based, easy-to-understand P&L. I will point out that our ability to pay off the 2 converts has gone up dramatically with recent events, which include better performance of cash in Q2, our ownership in Enphase in the likely closure of the spin, which brings cash into SunPower. So with an improved balance sheet, then we start to have an option to look at alternatives. So time will tell. We need to process these improvements into our balance sheet, and time will tell. I've worked closely with the Board as has the whole team that's on the call on this transaction. As you point out, it's been well over 1.5 years. And we've been just working super hard on that, and I have a great relationship with the Board and the team. So my intention is to continue to lead SunPower. And certainly, someday post-spin, we'll have a conversation with the Board. But for now, get the spin done, improve the balance sheet dramatically, and then have investors see what the spin was all about. And as we deliver what we promised on in each of these 2 businesses. So time will tell, Ben.

Our next question comes from Colin Rusch with Oppenheimer.

Can you talk a bit about your expected sales cycle post-spin? And what you can do to improve that along with your velocity of capital? It seems to me that you're moving to the new business model and maybe some things that you can do to generate some higher returns and that comes along a little bit quicker.

So I'll say a few words, and then I'll turn it to Manu. I think this is a exciting part about really both businesses. The Maxeon side, of course, will be in a strong net cash position, and they have way higher capital efficiency compared to historical, over twice for IBC and even way more than that for the P-Series product. So that's for Maxeon. So the New SunPower sales cycles in the residential business are actually quite rapid there within quarter. It's important to note that we're agnostic between cash loan and lease. And in fact, less than 40% of our business is leased. And we're kind of swimming with the current because loan and cash are actually over 70% of the market and growing rapidly. In those parts, the business, of course, the cash cycle is instant. And so the New SunPower by virtue of having great products that we design -- we create design in market through our 15-year channels, will exploit our strength in cash and loan, and that will improve the cash cycle that you alluded to. In terms of lease, Norm could -- Norm or Manu could say a few words about that. And then Manu, if you could say a few words about commercial and sales cycle and cash management?

Yes. So I think just from an overall cash perspective, here is how to think about it. We had a great second quarter from a cash point of view. As we sit at the end of second quarter, we have access or identified over $500 million of liquidity. Tom identified a few of those pieces earlier. From a model perspective, it's a capital-light model, said differently, does not really require any CapEx. And then from a working capital perspective, both residential and commercial have forward flow arrangements that make the working capital cycle quite efficient. You put it all together, it's a pretty high return on invested capital business. From a commercial -- specifically addressing commercial, we financed most of our projects in commercial through a combination of construction financing as well as some milestone payments that we get as we progress. So commercial projects take 3 to 6 months. But from a working capital perspective, very, very efficient.

And then just another one on the tax rate for storage and your expectations around that, both in California and outside of California, can you just give us an update on where you're at with that at this point? And any real serious demand that you're seeing outside of California?

Hey, I'll take this one. This is Norm. Yes, so storage, just to recount something that was said earlier, we did begin selling storage in June through our direct sales network. Now our focus has been in California as we introduce it, and then we are training our installers. So most of the demand in sight we have today is specifically California, but we will release later this quarter to the broader areas, particularly Hawaii and then other parts of the U.S. So we'll get a better feel for outside California attach. But so far, frankly, the reaction has been outstanding, the products installing quickly looks great. It's integrated completely with our -- both our warranty, but also our software tools. So the feedback has been terrific. I can tell you that our attach rates, the initial tactics we're seeing in California, around 30%. And I think that as we roll us out more of our dealer network this quarter, we're going to see those numbers in California. We expect them to stay in that kind of area. And then as we roll it out later to those other states, we'll get a better feel for the interest beyond California.

Our next question comes from Julien Dumoulin-Smith with Bank America.

Question around COVID impacts here for third quarter. For the last quarter, you guys described about a $60 million COVID impact at the outset here. If you were to put that in kind of comparable terms, how do you think about the normalized COVID type run rate here for 3Q, if that would be a good way to think about it as you roll into a '21 outlook? And then separately and related, how are you thinking about that road map and the execution targets towards that liquidity runway that you described last quarter? And I know you provided some comments earlier, but just how are you faring against that waterfall charge towards the $500 million of total liquidity sources over the next 12 months?

Yes. So let me cover the liquidity piece first. The chart we showed last quarter in terms of the liquidity runway, we are doing better than that on all literally all our bars. So we talked about approximately $500 million of liquidity last quarter. Our second quarter performance was better than what we had guided to in our last quarter earnings call and then some of the pieces of the bars are better than where we had pegged them last time. So overall, our liquidity is greater than $500 million, I would say, doing better. So that's from a liquidity perspective. I think just from a COVID point of view, here is how I would think about the COVID piece, right? So our second quarter performance compared to what we had talked about in our last earnings call was better, clearly. And on 2 accounts. One, some of the cost initiatives we did better than what we had initially planned. And secondly, we saw a quicker-than-anticipated recovery in global DG markets, both U.S. and Europe to call out in particular, right? You will see that trend continue in third quarter and get better in fourth quarter, at least that's how I think about it. As I mentioned earlier in the call, if you disaggregate our second -- third quarter guidance and compare it to second quarter, you're seeing a $20 million plus improvement, both on volume and operational performance in 3Q versus second quarter. So that should give you some sense of how to think about the business going from second quarter to third quarter and then tailwinds carrying into fourth quarter.

Can you guys comment super quickly, what about the trajectory of volumes here, right? I mean we've heard from some of your peers, got some very sharp inflections in recent weeks and months, online platforms, et cetera, how would you characterize that volumetric trajectory as of today, not just for 3Q with SPS, but more -- again, trying to get a sense for '21.

So I think we'll have Norm cover the SPS portion.

Thanks, Manu. Thanks, Julien. Yes, let me give you some color a little bit about what we're seeing on the demand trends. To your comment, we're seeing a similar trend of quite an impressive bounce back. If I gave you some numbers, the -- in our recognized megawatts in the coming quarter, we're outlooking more than 20%. But if you look at deployed, we're actually expecting that to grow more than 30%. And in rival, frankly, 2019 Q3 numbers, so kind of fully bounced back versus not just pre-COVID, but Q3. And if you look beyond that, the growth rate should lead to an even faster Q4. One thing, it's interesting on the front end of the funnel, we track very much we supply appointments, and we sell those to our dealer channels, one of the big values we had to our dealers. In July, we crossed 1,000 appointments sold in a single week for the first time ever. And then for the next 4 weeks, we beat 1,000 every time. So we never have seen those milestones before. So the last month on the front of the funnel is setting all-time records for us. So super excited about the opportunity going forward. We definitely see a bounce back, which is at levels we have never seen in channels before.

And Julien, just let me -- Julien, if I could comment on the commercial business. First of all, it was profitable in Q2. And I noticed there weren't any questions on that. So I'm really happy with profitability in the commercial business. That business also has the back half of the year, 100% booked or very close to it. And we haven't had that in years either. So our demand profile for the commercial business is set for the second half of the year. And we're heading into 2021 with strength in that business as well. Thanks for your questions, Julien.

Our next question comes from Pavel Molchanov with Raymond James.

Hopefully, this issue will be behind us by the time we get to the Capital Market Day. But what's your expectation realistically for what the solar industry can get from the stimulus conversations in Congress?

And Pavel, I think you're going to be our last questioner, and we'll certainly take the follow-up questions that you have. So the ITC, of course, is relevant in the CARES Act. The Democrats are doing a great job. And many of -- most of them are very supportive, and there's certainly Republican support as well. I would say realistically, I wouldn't be optimistic of an ITC extension as part of the CARES Act. Maybe there's an ITC payment that makes it so that it's not a credit, that may be realistic. And of course, that could happen for certain market segments. So all of that is in play. As we look longer term, I think there's growing support for ITC, but that's more likely a '22 than a '21 change and that's certainly how we're preparing.

And in that context, how much pull-in of demand should we expect just directionally for the second half of '21, if the law does not change in the next 12 months?

So I'll say a few words and Norm, you could add color if you'd like. I think we're going to see the normal. There's a 4% step down incentive. And what we're seeing though is the tailwinds for DG implementation, solar DG implementation in the United States are quite significant. People are working from home. Retail electricity demand is up dramatically, whereas it's down in other market segments. People want to have control of their electricity, storage attach rates are up. So the tailwinds I think will sort of mute a trend or override a trend of ITC incentive, but it will have some impact. Norm, do you want to add anything?

Well, just a clarification. I don't know if the question was referring to this year or the following year, I thought I heard at the end of '21. I think if there is no change to the current ITC model, the end of '21, there will be a more substantial potential for pull-in because of the dropping more significant. So if that's the case, I don't think we specifically modeled, but there certainly could be even more significant. We certainly expect 2021 to be a big year regardless. And then we'll have to see how the ITC policy plays out to how significantly.

All right. Thank you, Pavel, and thank you everyone else who attended the call. We look forward to speaking to all of you on September 10 at the SunPower Analyst Day and, of course, in our next quarterly conference call. Thanks so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.