Good afternoon, and welcome to SunPower Corporation's Second Quarter 2015 Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. I would like to turn the call over to Mr. Bob Okunski, Senior Director of Investor Relations, SunPower Corporation. Thank you sir, you may begin.

Thank you, Shiela [ph]. I would like to welcome everyone to our second quarter 2015 earnings conference call. On the call today, we will start off with an operational review from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our second quarter 2015 financial results. Tom will then discuss our outlook for Q3 and 2015. 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 earnings press release, our 2014 10-K, and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call, on the Events & Presentations page of our Investor Relations website. In the same location, we have posted a supplementary data sheet detailing some of our historical metrics. Finally, we are currently targeting November Analyst Day in New York City. We are still in the planning stages at this point, but we will provide additional details related to the timing and the agenda of the event at a later day. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 4. Tom?

Thanks, Bob, and thank you for joining us today. I'll start by providing some brief comments on the quarter before discussing our performance in greater detail. Q2 was another solid quarter for SunPower. In addition to meeting our financial goals for the quarter, we achieved three key milestones that position us well for future growth. First, the launch of 8point3, our joint yield curve vehicle with first solar, which we believe will lower our cost of capital and provide a sustainable competitive advantage. Second, the acquisition of Infigen’s 1.5 gigawatt U.S. solar project development portfolio, which significantly enhances our power plant pipeline through 2020. Third, the introduction of three innovative utility channel partnerships for our residential business, including our announcements with Dominion and ConEdison Solutions. I will speak more about these milestones throughout my formal remarks. Moving on to the specifics for the quarter, the quarter was characterized by strong execution across all geographies and segments reflective of continued growth in global solar demand. We replaced and successfully launched 8point3 energy partners, Chuck will go into more detail on 8point3 in his comments later in this call. For power plants, in addition to our Infigen portfolio acquisition, we achieved important completion milestones in a number of large scale projects including Solar Star and Quinto, while initiating construction at both Henrietta and Hooper. We also continue to grow our international power plant business in key global markets. Our distributed generation business remains solid, driven by residential market demand in both the U.S. and Japan. Our DG bookings rose materially in both the residentially and commercial segments. We added to our growing North American commercial pipeline with our recent 22 megawatt announcement for the current county, school, district. Upstream we performed extremely well achieving record cell output in manufacturing yields. Average solar…

Thanks, Tom. Good afternoon, and please turn to slide 9. For today’s call, I will focus my remarks on our Q2 results and 8point3. Q2 was a very good quarter for the company generating $64 million in EBITDA while successfully managing our holdco asset strategy with the launch of 8point3. Our strong performance was driven by North American residential, the completion of Solar Star and the IPO of 8point3. In addition, our Q2 results reflect the impact of our holdco strategy which differs revenue and margin benefit to the future. Q2 bookings and pipeline build have been the strongest we’ve seen in years and positions us well for long term growth, specifically on the P&L. Non-GAAP revenue and margin were in line with our forecast. Power plant revenues declined sequentially as we continue to build projects under the balance sheet rather than sell them prior to construction. Our non-GAAP gross margin for the quarter was 17.6% and also in line with forecasts. Power plant margins were on plan led by our large U.S. projects while commercial margins were stable. We continue to expect our commercial margins to increase overtime to the high teens, low 20s as we launch new products later this year that offers significant cost reductions and decreased installation times compared to our current generation of commercial products. In residential, our business was solid as we saw record North American installations in Q2. Non-GAAP residential margin for the quarter was 23.3% driven by strong cash sales. North American cash and loan sales totaled 61% of our shipments while 39% were leased. Overall, we deployed 77 megawatts of residential products globally. Lease bookings were 22 megawatts in Q2 with cumulative lease bookings of 263 megawatts. Net contracted payments at the end of the quarter were $820 million excluding the…

I would now like to discuss some of the highlights of our guidance for the third quarter as well as 2015. As a reminder, per Chuck’s comments, we feel that given our current model, EBITDA will be more appropriate measure of our ongoing business that we will be providing annual non-GAAP EPS guidance for 2015 only. Please turn to slide 16. For Q3, non-GAAP guidance is as follows. We expect revenue of $400 million to $450 million, gross margin of 10% to 12%, EBITDA of zero to $15 million and megawatts deployed in the range of 300 megawatt to 330 megawatts. On a GAAP basis, the company expects revenue of $400 million to $450 million, gross margin of 11% to 13% and GAAP loss per share of $0.60 to $0.50 per share. Please note that our Q3 and 2015 GAAP guidance reflects the impact of our holdco strategy as well as the deferral of revenue and margin due to real estate accounting treatment. Capital expenditures in the third quarter are expected to be in the range of $100 million to $125 million and full year CapEx of between $250 million to $300 million as we continue to ramp construction of Fab 4. We expect meaningful volume from Fab 4 in Q1 2016. For 2015, our guidance is as follows; non-GAAP revenue of $2.4 billion to $2.6 billion, gross margin of 21% to 23%, earnings per share of $1.50 to $1.80, and megawatts deployed in the range of 1.25 to 1.3 gigawatts. On a GAAP basis, the company expects 2015 revenue of $1.5 billion to $1.7 billion, gross margin of 10% to 12% and a GAAP loss per share of $2.35 to $2.05 per share. We are also raising our 2015 non-GAAP EBITDA guidance first given at our Analyst Day last November to $425 million to $475 million and we expect 2016 EBITDA growth of approximately 20% from the midpoint of our 2015 guidance or approximately $540 million. With that, I would like to turn the call over for questions. In addition to Chuck, we also have Howard Wenger, President Business Units and Bob Okunski, our Senior Director of Investor Relations.

Thank you. [Operator Instructions] Our first question comes from Ben Kallo. Please announce your company name.

Hi, Robert W. Baird. Thanks for taking my question and congratulations on all the work guys. Looking ahead on the acquisition of the pipeline you announced yesterday, could you just talk us through post ITC world, it looks like you have some faith in the U.S. market and so just walk us through there. And then also maybe give us an update on Fab 4 and the cost structure there. It looks like holdco was a little higher on projection this quarter. Thanks guys.

Thanks, Ben. First on Infigen, we are really pleased with the acquisition because it’s scale, its 1.5 gigawatts and the pipeline is split into thirds where a third of it is fairly advanced, the third intermediate to advance and then third of it is early stage. So we will build those as you pointed out in your question, those are probably the next five years the majority of those. And in fact 55 megawatts of it includes PPA with SoCal Edison that is particularly well-suited to drop down in 8point3. Now, to your question, if you look to one of our projects that we announced recently, you saw a sub-$50 megawatt hour on project. And if you do the math on that and you project post-ITC, and you continue protecting our cost down and performance increases in our systems, that's where we get our confidence in a potential post-ITC world. So, we think that our solar energy is interesting to utilities already post-ITC, assuming there is a post-ITC and we'll see what that looks like. So that would be my comment on Infigen and the economics pre and post-ITC. Secondly on output, we in fact had really, really good output. We are getting more output, primarily a result of more output out of our two large fabs, one in the Philippines and one in Malaysia. Both outperformed in the quarter, both beat yield and both beat the utilization of the equipment so-called OEE or overall equipment effectiveness. So we got more output because the two fabs performed better. As I mentioned on the last earnings call, the technology for Fab 4 has already been run in large scale, and is performing at or above plan. And the Fab will be coming online later this year and we’ll have a material impact on 2016, which will be all X-Series, the latest generation of our technology.

Great. Thanks guys.

Thanks, Ben.

The next question comes from Brian Lee. Please announce your company name.

Hey guys, it's Goldman Sachs. Thanks for taking the questions. I had two, both on the outlook. Maybe first – and I apologize if you went over this – but if I look at the Analyst Day guidance from late last year, I know you guys had withdrawn that, given the holdco and the pending IPO of 8point3. But it looks like the deployed megawatts forecast for 2015 has actually come down here versus what you had talked about last November; although the out years are going up. I understand why the recognized megawatts would be going lower, but just wondering what might be driving the deployed megawatts guidance coming down here in the near term.

Sure. The quick answer to your question is that we're going to do somewhat less of our C7 product in China. While we have put in 100 megawatts so far this year and things are going well, and we're doing more than any solar Western company is in China; such a great market. Having said that, we are going to install a bit less C7 in China this year.

Okay. That’s helpful. Thank you. And then the follow up was just on the updated guidance around the EBITDA. So it implies you guys are maybe pulling forward your 2016 EBITDA outlook versus what you outlined at the end of last year. So, wondering what the drivers of the improved outlook are here, and if that implies anything is coming out of the 2017 view, or if it's all incremental. Thanks.

Brian, thank you for the question. It's Chuck, it’s all incremental. So we had a very strong year. 8point3 has certainly helped better than we expected, so it’s good news and we’ve increased 2016 outlook as well. So the overall view is its fundamental to the business.

Okay. Thanks guys.

The next question comes from Vishal Shah, please announce your company name.

Deutsche Bank. Just wanted to [technical difficulty]. Okay, yes. I just wanted to better understand the cost outlook at the system level between both the residential and the utility scale market. What do you think the cost reduction potential is? And when you are signing these deals [technical difficulty] pricing environment, what kind of cash-on-cash yield are you looking at for these markets right now? Thank you.

Okay. I’ll comment on the cost reduction potential, and maybe Howard, you can add to that. And cash-on-cash yield, Chuck, if you would take that. So, we introduced an Oasis product or solution for the power plant market two or three years ago. And we are now on the third generation of that and the concept has worked great, and that is to have preconfigured blocks that are - also take labor out of the field, particularly the expensive labor. And then reduce the amount of material content so these are engineered solutions for power plants that concept we can now are reporting those similar concepts over to both the commercial and residential segments. That’s part of the cost and there is also the soft costs that are a meaningful part of the cost in both of those markets, particularly residential and we are attacking that as well. And I'll say one more thing and turn it to Howard. And that I would say that those two markets, commercial and residential, have been a little bit untapped for us on the cost reduction side. So I think there is a lot more potential to take cost out. If you look at what we’ve been able to do in power plants, and the kind of PPFAs that we signing and making profitability, if you took that trend I think you started to look at commercial and residential. Could you expect us to replicate that? Howard, can you add anything?

What Tom stated was exactly right. We are focused on complete solutions in both residential and commercial DG, and just wanted to note that for commercial we are developing complete solutions for the roof and for carports and ground tracking systems. So the reduction is on the order of 5% to 15% per year depending on residential and which type of commercial solution we are talking about. And that's at the solution level, so we're very focused on standardizing all of our systems across the distributed generation taking cost out and improving quality.

And this Chuck. Your cash-on-cash yield question, Vishal. Obviously there is a lot of variables in North America things like tax equity, and then which channel we are selling through. What we’ve seen with the assets that we’ve developed and sold are selling to 8point3. The unlevered returns are quite significant mid-teens. We have not provided this level of detail or granularity, but if you look at other markets around the world, they could be higher in some locations and lower. But it’s hard to generalize though across the portfolio.

Thank you.

The next question comes from Patrick Jobin. Please announce your company name.

Hi, Credit Suisse. Thanks for taking the questions. A few here. First, just briefly on Q3 gross margin guidance, and I apologize if I missed it earlier in the prepared remarks. Why is guidance for a lower gross margin on a non-GAAP basis sequentially into Q3?

Q3 we don’t have the large project margins hitting in Q3. What we expect very strong residential margins. We see increase in commercial margins which you saw two quarters in a row of increasing commercial margins. And the power plant margins are a little bit lower than what we’ve seen in Q1 and Q2, and quite a bit lower than what we will see in Q4. So Q4 you will see very, very strong margins based on our Quinto project and commercial project, and we expect longer term commercial to be in the high teens to low 20. So I think Q3 is a bit of a transitional quarter from a margin standpoint between the Solar Star model and the holdco model now evolving into recognition with 8point3.

Got it. Thank you. And then just two higher-level questions. First, could you maybe talk about your market expectations for the residential segment? The DG space in 2017, just given the ITC rules as they stand today, with going to 0% ITC for a cash sale. And then the second question would be on the longer-term strategy for allocating assets to get monetized through 8point3 versus third-party sale of – how you dial that percentage, and if there's any difference in your realized profit, that'd be helpful. Thanks.

Okay. So, Howard, why don't you take the first question about 2017 in DG?

Sure. So first of all, we are really pleased with the performance of our residential team, kudos to them, they are increasing customer satisfaction while scaling the business. We doubled over year-on-year the residential business in the quarter and the outlook is really strong where we are looking to increase by on the order of 50% first half 2015 to second half 2015. And so the outlook for the residential business is really going into the back half of 2015 and into 2016. That will give us a great basis for attacking the business in 2017 as we mentioned before we are reducing cost, we are scaling the channel, we are deploying more lease, we doubled our lease volume year-on-year, 25% sequentially quarter-on-quarter and so what we see for 2017 is to be in position to continue to drive that business going forward. You mentioned the 30% tax rate gone away for cash customers for the customer that owns the system and that’s correct. And so we do see the economics for lease continue to be strong with the 10% ITC, which is a default decline for commercially owned systems or third party owned systems and with the makers depreciation. So, the economics with the cost reduction performance increase channel scaling customer acquisition costs being driven lower we should have a robust business going into 2017.

And then Patrick I will comment briefly and then turn it to Chuck on the allocation of direct sale, or outright sale versus 8point3 and I’d say, just broadly we are in a position for several where we in fact will have that option. We have an abundance of dropdown assets and of course with the momentum we have we think that will continue, but we will see. And just one quick point about that choice there are customers who have preferences for – what interest rate they used to discount the cash flows of a project and depending on what interest rate they use that may favor dropdown versus in outright sale, and then there is, sometimes there is tax reasons that Chuck could elaborate on. So, we’ve always been about customer choice and customer orientation in the residential channel offering cash lease loan for several years now. Similarly, this will add then to 8point3 will help us customize things for our customers.

Great thank you. So, Patrick I think the key way to think about this is we will build up our holdco strategy and have assets on the balance sheet that will sell that 8point3. When we would sell outside of 8point3, we primarily be because it is a geography that is not suitable for 8point3, think about that like non-OACD countries or areas where there is different risk profile or there could be things with the PPA or the contract that maybe don’t meet the – sort of the high standards that we are setting for 8point3 we might sell those to other parties. But as to the majority of the assets that will develop in OACD countries we would intend to sell the 8point3. The benefits are obvious, we get a cash sale upfront, we get a 100% revenue treatment. We will not recognize the full margin of the cell to 8point3 as I mentioned in the prepared remarks, but the great thing is we will get dividend growth and future IDR. So, we are very motivated to develop assets, hold them until completion and then sell the 8point3.

Got it. Thank you.

The next question comes from Krish Sankar, please announce your company name.

Yes, hi it is Bank of America/Merrill Lynch. I have two questions. The first one, it's on the module economics associated with the ConEd deal that you announced. How do you balance doing business like that when there is no long-term cash flow upside because of no drop-down to 8point3? And the second follow-up question is more on Asia, Japan and China is a focus for you. I'm kind of curious what you see on the China demand side, given all the noise you are hearing on the macro. And also on the Japan side, you guys price in US dollars. Are you seeing any competition because of the module – the other competitors pricing in Japanese yen? Thank you.

Sure I will take the first one Krish, thank you. On the ConEdison deal, this is a terrific transaction for SunPower, we have a channel that we are going to sell in New York that is a great partner and so we look at this as accretive to our overall model. We are going to do business many different ways across the country and around the world. Many of those will be buy and hold and sell to 8point3 and many of those will be a cash sale. And we look at ConEd as a terrific partner and a win-win for us and the utility.

I will expand China, Japan and also comment on ConEd. First China, the short story is that the fundamentals remain quite strong for power plant business. And the reasons china is going solar of course of the economics that we are seeing around the world and the need, the obvious need to improve air quality and those macro trends I think it is a plant the near term concerns that you read about. So, China is quite strong and we will remain quite strong. And as I mentioned we’ve installed the 100 megawatts and our pipeline is growing in China. On Japan, you are right there is FX headwinds, Howard runs the DT business since it is a global business. He is allocating product as you can infer from our comments and our financials around the world; and we’ve had a long history as a company. It is one of the reasons why we are diversified in all meaningful solar markets so that we can flex when there is things like FX or policy change and in fact you are seeing that in our financials and the tie to ConEd is that as Howard remarked, our residential business is doing great and we expect it to do even better and one of the ways it will happen is we will have a diversity of channels to the customer and ConEd, just a great example of how things are evolving.

Thanks, Tom. Thanks, Chuck.

The next question comes from Julien Dumoulin-Smith, please announce your company name.

UBS. Good afternoon.

Hi Julien.

Hi. So, a quick question here, more in the context of thinking about the pipeline here. Your 12 gigs to 13 gigs for 8point3, and then ultimately the 1.5 gig Infigen deal, how do we think about reconciling those three, ultimately? Ultimately what's reflected in that 13 gigawatts for 8point3 as far as we should be thinking about the latest developments here?

Sure. Mark and I spent a lot of time in the roadshow talking about the pipeline we have a very strong pipeline between both companies and that’s medium to late stage pipeline it is not the combined pipeline between the two companies, you know primarily in OACD countries and so the way we look at this is we have the ROFO list that effectively allows us to go through the guidance period at 12% to 15% and then beyond there we have the additional portfolio of assets between both companies and so I look at that as additional fire power for sustained long term growth and execution. You know both of us are very motivated to have a very low cost to capital long term, we see it as a competitive advantage for both companies and I think it is a big advantage for the 8point3 shareholders to have such great visibility for long term execution.

Right. But just to be clear, the Infigen portfolio didn't qualify as medium stage, for instance?

As Tom mentioned, Infigen is in three buckets, it is in early stage around many different states in North America, medium stage which is concentrated in a few states, and late stage which for example 55 megawatts is already contracted and would be great assets to sell the 8point3.

Okay, fair enough. And then just on the partnership side, obviously the utility announcements are great. Just curious, how are you thinking about that scaling that up across the country? What are you hearing out there in the marketplace to realize those opportunities, be it on the residential or utility scale side?

Yes, this is Howard. We are really excited about the three utility partnerships, two of which we have announced in Dominion and ConEd Solutions, just a quick word about the ConEd Solutions, which makes it particularly interesting, it is in probably the second leading market in the U.S. and New York. It’s a sister company is the incumbent regulated utility and ConEd Solutions is the unregulated utility and marketing in the same location and the reason I bring that up is that it is really an indication of the trend of what utilities really want to be part of the solar business now. That’s what we are seeing. There is a no longer really fighting solar, but we are trying to figure out a solution to combine solar with the traditional utility business. So we are in talks with a number of companies to – and we are well positioned because SunPower as you know has a great differentiated solution, we are developing a turnkey solution with both hardware and software, so we are able to essentially white label and be co-marketing, co-branded offering to customers in partnership with utilities. You asked about scaling up. This will be my final comment is around how we’re going to do that. The utility business if you look at there is over 35,000 electric utilities serving North America. So it's unlike other parts of the world where you might have one or two dominant utilities. In the U.S. there really are single dominant utilities. So we see the way to scale up is partnering with a number of utilities while continue to develop our own independent channel in parallel. Solar delivers less than 1% of the electricity business in North America so there is a lot of room for growth.

Got it. But just to be specific here, are you having conversations with vertically integrated regulated utilities in the context of providing them a solar platform or a solar product market?

Yes. One of the emerging new models is called community solar, shared solar, there are a number of different models that are subsets of that and we are working with a couple of utilities, for example, regulated utilities to develop a product and offering around that model. So the answer is yes.

Great. Thank you.

Thanks.

We have time for one final question. It comes from Pavel Molchanov. Please announce your company name.

Raymond James. As I'm sure you've noticed guys, your stock is trading like you are in the oil business of late; same as six months ago. So I thought I would just ask you to comment on any linkage between your operating geographies – certainly Japan, Mideast to petroleum pricing, vis-à-vis power economics. And if you can quantify what the percentage exposure of your business mix is, that would be helpful.

Yes, Pavel. Thanks for the question. And I think you’ve written on is but if not hopefully I'm consistent with your comments as well; which is that I think it’s like 10% of the world’s electricity is actually made from petroleum. Or less than 10%, I think it’s actually 9%. So the direct correlation is quite low on that measure. There are correlations, right? You have FX, and FX influences both businesses. So, it would be fair to say that it’s not really an economic tie, it’s certainly not a direct economic tie between the two. It’s perhaps a macro environment tie only. And in time as we drive the economics of solar, I think that correlation will be broken and in fact countries when there are a macro challenges, will actually be incented to go to solar. So we would expect that correlation to not be very good going forward, but we will see.

Appreciate it.

Okay. Thanks, Pavel. Thank you all for joining us today. We look forward to talking to you in three months time in our next quarter call. Thank you.