Good afternoon. Welcome to SunPower Corporations, Second Quarter 2018 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). And I would now turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at SunPower Corporation. Thank you sir, you may begin.

Thank you, Sandra. I'd like to welcome everyone to our second quarter 2018 earnings conference call. On the call today we will start off with an operational and strategic review from Tom Werner, our CEO; followed by Manavendra Sial, our CFO who will review our second quarter 2018 financial results before turning the call back to Tom for guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, our 2017 10-K and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides which we'll reference during this call on the Events & Presentations page of our Investor Relations website. In the same location we have posted a supplemental data sheet detailing some of our historical metrics as well. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on slide three. Tom.

Thanks Bob and thank you for joining us. On this call we will review our second quarter 2018 financial performance and provide an update on our strategic initiatives. Additionally we will highlight some key things for the quarter, including strong Q2 execution, continued investment in our DG business, status of our NGT cell and panel technology and our decision to accelerate the implementation of a new corporate structure and segmentation presentation. First our Q2, 2018 highlights, please turn to slide four. We executed well in Q2 with strong performance across the board as we exceeded our revenue margin and EBITDA forecasts for the quarter. In particular, I'd like to highlight the continued growth in our DG business, with global DG sales up 45% year-on-year. In the U.S. our residential business beat [ph] plan and we continue to grow this business. We also saw continued strength in our core International DG market, including Europe, Japan and Australia. Strong C&I bookings during the quarter included recent awards for more than 40 megawatts of enterprise contracts for two fortune 50 customers. Interest in our Helix storage solution remains, strong, with storage attach rates up 35%. In our upstream business, SunPower Solutions again performed well with record booking in Q2. We executed well on our Fabs, meeting costs and yield targets for the quarter with full Fab utilization. NGT Technology Development is ahead of plan and we hit our first Silicon milestone on our full scale manufacturing line in Fab 3 - more on NGT later. We continue to simplify our company and generate cash through the sale of non-core assets, including completing the sale of our ownership stake in 8point3 and announcing the sale of our microinverter business to Enphase. We are making good progress on sale of our 400 megawatt lease portfolio…

Thanks Tom. Before I get started I want to take a moment to say how excited I am about joining SunPower. I appreciate the time and effort by the team given the transition and look forward to speaking with many of you in the future. Now let me review the financials; please turn to slide 10. We were pleased with our results for the quarter as we exceeded our review, margin and adjusted EBITDA forecasts. Our non-GAAP revenue was above guidance as we executed well in all segments. Power Plants was up sequentially, primarily due to project timing and the continued growth in our SunPower Solutions Equipment business. On the DG side, our commercial revenue was up more than 25% year-over-year and Q2 bookings were above plan. We also saw strong sequential and year-over-year performance in our U.S. residential business as our North American team executed very well. Overall our consolidated non-GAAP gross margin was 11.7% ahead of plan as we benefited from the strength in our high margin residential business. Commercial margins were inline sequentially and year-over-year. We expect commercial margins to improve in the second half of this year. In our Power Plant segment, margins were breakeven as we continued the transaction or our development to panel supply agreement. In residential, as I mentioned we saw strong results in the U.S. with Europe and Japan again ahead of plan. Overall margin was 22%, up both sequentially and year-over-year. In North America, cash and loan sales were 61% of our shipments, while 39% were leased. Overall, we deployed 96 megawatts of residential products globally, in line with our forecasts. Non-GAAP OpEx was $77 million for the quarter and consistent with Q1. CapEx for the quarter was $16 million also in line with our forecast. Adjusted EBITDA was $59 million…

Thanks Manu. I would now like to discuss our guidance for the third quarter in fiscal year 2018. As a reminder, our guidance assumes our estimated impact of the Section 201 tariffs for Q3 and 2018 as a whole. We expect Q3 tariffs to be around $25 million. Please turn to slide 12. Third quarter fiscal 2018 GAAP guidance is as follows: Revenue of $425 million to $475 million, gross margin of minus 1% to positive 1% and a net loss of $215 million to $195 million. Third quarter 2018 GAAP guidance also includes the impact of revenue and timing deferrals due to real-estate accounting, as well as the impact of charges related to the company’s restructuring initiatives. On a non-GAAP basis, the company expects revenue of $450 million to $500 million, gross margin of 6% to 8%, EBITDA of negative $10 million to positive $10 million and megawatts deployed in the range of 400 MW to 430 MW. Third quarter guidance excludes the impact of the company's proposed acquisition of SolarWorld Americas, as well as the potential financial impact of timing differences related to its previously announced proposed asset sales. Additionally, third quarter Adjusted EBITDA guidance assumes an approximate $10 million inventory charge related to the company's second quarter impairment of legacy manufacturing assets. For 2018 please turn to slide 13. For fiscal year 2018 the company now expects adjusted EBITDA to be in the range of $95 million to $125 million. The balance of the company's fiscal year 2018 non-GAAP guidance remains unchanged. On a GAAP basis given the company's second quarter asset impairment charge of $369 million, our net loss is expected to be in the range of $860 million to $830 million. With that, I would like to turn the call over for questions.

(Operator Instructions) And our first question comes from a line of Brian Lee with Goldman Sachs. Your line is now open.

Hey guys, thanks for taking the questions. I guess first off just, you know high level comment. I know you spent a lot of time in DC the past year or so. Does the shift away from IBC basically mean you're, you know you're walking away or giving up on pushing for an exemption on the section 201. Could you update us on that process?

No, it does not mean that. Actually we're investing in NGT, we’re bringing out our next generation technology which is a larger format IBC product that has substantially lower cost and we’re doing that in Malaysia. We think our petition on exclusion remains quite strong. We are exactly what they asked for in your exclusion criteria. We hit that exactly. We had productive interchange with the inter-agency committee and still do, although to a limited nature recently and we do know that they are actively working on the decision. So we still expect exclusion and we’re still in just investing in our IBC technology.

Okay, I appreciate that update. I guess staying on that line of questioning, on the IBC capacity you have – correct me if I'm wrong, 1.2 gigawatt of capacity today, 800 being E-Series and 400 X-Series. Will all of that convert to NGT? I know you mentioned E specifically, so curious what happens to the X. And then can you speak a little bit to you know what the CapEx budget needed for the transition will be and then lastly, as you make the transition, will you have some capacity that temporarily has to come offline and see our effective capacity over the next couple of years until your fully transition is lower than the name plate that you have today. Thank you.

Okay, thanks Brian for the question. I appreciate the level of detail. So our plan right now is to convert E-Series, the 800 megawatts to NGT and the extra wattage output will make the capacity that’s there quite a bit harder, higher, and that’s somewhere between 50% and 70% higher. I think we can transition lines without a big gap in capacity, that’s your third question. I don't think there's going to be much transition. We've built one line so far. It’s actually half of a line pair. That half line pair by the way produced for silicone a few weeks ago and will be in volume production in Q4 and is producing 24% plus, so efficient; so the technology works. In terms of Fab 4, its only two years old; its X-Series; its beating its name plate capacity, so that will be a call we’ll make after E-Series and that's going to be a question of can we get the equipment, minimal equipment conversion to convert that Fab. If I had to guess or if I had to project in the long run, the answer would be yes. And then lastly CapEx, that is the feature of NGT technology that is among the reasons why we want to do this conversion aggressively, because our CapEx is well under half of what it used to be, and we think it can be well below $0.30 per watt and as we implement more of that, I’ll update you in time, but certainly well below $0.30 a watt. So just to keep track, 70% more power, 30% to 40% less cost and less than $0.30 per watt CapEx.

And okay, just to clarify, the $0.30 a watt CapEx would be – we would want to calculate that off the higher wattage that NGT produces and then that's for the brown fields you're doing or would that be a greenfield number? Thank you guys.

Yeah that, it is with our higher wattage, brown field number, but the number will improve, so by the time we meet greenfield is my guess, because it'll be lower than that even for a greenfield.

Alright, thank you.

Yeah, it’s important to know within GT that the team is working on their current REV of the technology plus two successor revisions of it and mostly on REV 1 [ph] though, so that's why that affects my projections. Thanks Brian.

Thank you. And our next question comes from the line of Michael Weinstein with Credit Suisse. Your line is now open.

Hi guys. Thanks for the details so far. Are you waiting for any specific milestones before accelerating NGT CapEx at this point and what challenges do you expect to see the switch from the five inch to the six inch?

So, in the near term we're still working up the yield curve. We actually have a nine panel where we measure mechanical yield, electrical yield efficiency, lifetime, the silicone, etcetera, you have the idea. A couple of those are not at our projections and as we perfect the technology we have to get certain statistical milestone. We expect to hit the meaningful ones this year, so technology is I would say largely unplanned or completely unplanned technically. We're still working on our funding for how we’ll ramp the technology and I'll just go ahead and talk about funding, so you don't have to follow up and ask. We are planning to fund this through our customer advances or partnerships; we're in discussions with both. We do not plan on doing any capital markets raise from the transition to NGT. The guidance I gave for next year's capacity is largely in place with the first half line pair, so funding it occurs would allow us to upside that number most likely.

Great, and a separate question, how do you think about the distributed generation sale versus leasing strategy now, you know thinking about California and also the recent IRS Safe Harbor rule?

So we think that there's a long term trend to owning systems; that's always been the case for SunPower. We've always had the “you can choose what you want customer,” so you can raise a loan or buy with cash and there's always been a bias towards either a loan or cash with our technology. And of course with the ITC going down, the economics will work better for loan and loan is doing great for us this year, so we’re already seeing a bit of that trend. Now I wouldn't necessarily call that, because the ITC I think will start seeing that more toward the end of next year. While I’m talking about residential, I want to mention new homes as well. The new homes market, I could tell you might ask about that next. New homes market is doing quite well in California. It’s actually transitioning to the 100% ruling, so that business; we're number one in that business. We’re doubling that business from ’17 to ’18, so it’s another positive trend. So to answer your first question, I see loan and I see that happening already, and then I wanted to add that comment on new homes.

Okay great, thank you.

Thank you. And our next question comes from a line of Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question guys. You've alluded to the fall off in industry wide module pricing about 12% in the last two months because the Chinese actions. Hey, has your premium relative to the commodity Chinese modules changed at all during this two month period?

Thanks Pavel. So let’s talk segments and in the power plant segment we sell predominantly our P-Series products, because now we're selling equipment on and as our TCS joint venture ramps, our costs are coming down and we can maintain a premium. I would say what we see is there's a modification in pricing; there’s a bit of a premium expansion and then we react to it. So we’re seeing most of that decrease in power plants. In the DG business it's more insulated from that, because there is more value and high efficiencies. So there is two things there, one is smaller sales, channel is more important, service is more important. Secondly, because we have the highest efficiency, the best technology, its somewhat insulated. But I would say the same thing to your question there will eventually be some price movement in the DG business and we don't allow the premium to expand indefinitely. We do respond to that, typically we are responding, so it's mostly Power Plant though in the near term.

Okay. And a quick follow up, you've talked about simplifying the financial reporting for quite a while and in Q2 non-GAAP revenue versus GAAP revenue, almost identical Q3 guidance, same thing. Should we expect this to be the norm where the where the two sets of metrics essentially converge?

I’ll comment and then if Manu wants to add, he can. I think the answer is yes. What we're doing to simplify the financials is exiting the Power Point business, sold 8point3 and are selling residential leases to residential leases, it will look like a cash sale and selling 8point3 of course eliminates real-estate accounting in the partial revenue rec and all the whole cost stuff. So a significant simplification through the residential lease sale and the sale of 8point3 and of course self-developed power plant hit project accounting. So it’s almost like we look more like recognizing revenue, like when we were in IPO and I appreciate you remember that since you've been with us a long time. And you can just model per watt – in margin per watt. That’s our goal to get back to P&L revenue per watt, margin per watt. Want to add anything?

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

Okay, clear enough. Appreciate it.

Thanks Pavel.

Thank you. And our next question comes from the line of Jeff Osborne with Cowen and Company. Your line is now open.

Hey, good afternoon. Just two quick ones. I was wondering – I might have missed it, but did you give the Section 201 impact for Q2. I know you gave it for the guidance.

I'm going to give you for first half and second and then the folks at my team here can work out the split in Q2. First half was $17 million, second half was $51 million and I’ll note that that’s more than we spent on R&D in the second half of the year. So the impact on tariffs is really, really significant, and of course we hope that we’ll hear a ruling soon that exempts us, so we can take that $51 million and invest it in our R&D and American manufacturing. What was the number for Q2, do you have it?

It was deminimis Tom, because most of the…

Cash number?

And the cash number was about $15 million.

Yeah so most of it was Q2 about, about $15 million of the $17 million. Now remember and maybe we can clear this up on any follow up calls, we are now putting it is as part of the standard, so it's going into inventory. So there's a difference between cash cost and P&L cost.

Got it, and then can you give us an update on Oregon, you know how much if the deal goes forward and closes. What the CapEx would be? Is there any hiring activity ongoing now and just what’s sort of the logistical operation planning that’s under way?

Sure, so we did plan on closing SolarWorld already. We obviously haven't. We've had a few challenges. We are working though those. We do expect to close this quarter. And we’ve noted on the previous calls that the size of the transaction is not material, therefore they are not disclosed. And I’ve said I think previously, but I’ll say it again our plan is to convert the P-Series module manufacturing in the module part of the facility. We are finishing the (inaudible) of the cell that they make in their cell fab, so we can take the cell from their cell fab and directly make it into P-Series. There will be $10 million or $15 million of capital equipment that moves into the facility, some of that already exists, so it’s not all an incremental CapEx.

Okay, thanks.

Thank you. And our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open.

Hey, good afternoon.

Hey Julien.

Hey Julien.

Hey. So just following up a little bit on sort of the cash flows here, just the moving pieces here. Can you comment a little bit on Power Plant? You talked about some portfolio sale back half of the year; obviously the microinverter business, lease sale, except on the resi side potential. Can you talk about sort of the cash inflows here relative to the cash outflows for the business and just thinking about potentially reconciling that against the CapEx, especially on a go forward basis of funding NGT and how you think about the scaling at NGT. You talked about that 2020 cost structure. Are you supposed to read into that in terms in any sort of accelerated timeline to deploy that at this point, particularly given the microinverter sale in the quarter, etcetera. But at a minimum, can you talk to some of the plus and minus here, ’18 maybe onwards as well?

Sure, I’ll take the question materially and them Manu might add a little bit on top of it. First let me cover the divestitures. So we have lease, microinverter and power plant, all three we expect to close in Q3. And we have not guided a number for proceeds from those transactions. I would say it could meaningfully be used to ramp NGT. I’ll let Manu comment though of how we think of the use of the funds and balancing out on what we are spending on. In terms of NGT acceleration, the technology works. So we are getting the yield up and getting to the output levels that we expect out of the first half line. We expect that to happen in the next three or four months and be ramping in Q4. So we are ready to ramp that technology. The next line certainly in the first quarter of next year, and so yes, there is a timing decision we are making. That will date off of potential partnerships versus internally funding the next lines and so yes, we are making some trade-offs decisions in terms of use of CapEx. Julien, I would also point to, you are going to know the numbers on maybe all three of these transactions in the not too distant future. I think we should make good progress on these in the next month or two. Anything you want to add?

I think the only thing I would add is, as we think about the back half of the year you got three elements from a cash point of view. We have improved operating performance of the business that will continue as we get into 2019, so positive cash generation from a business perspective, we’ll have asset sales and we’ll use some of those proceeds in the back half of the year to invest that in the business, NGT included. We have significant headroom from a timing perspective; CapEx produced in the first half and second half.

Just to reconcile that really quickly, you wouldn’t issue external capital to finance NGT. It sounds like you really want to be oriented towards organic elements here?

Exactly. Yes, thanks Julien, that’s exactly right.

Great.

Alrighty, we’re going to take one more question.

Thank you. And the next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much. Guys could you talk about the cadence of R&D spending with these initiatives and how we can think about those trend lines through the balance of this year and into next year?

Sure. We spend on NGT technology and our IBC technology, call it $30 million plus or minus per year and we think that will materially stay the same each quarter. There is some pre-op associated with ramping. We typically take that in COGS, so we don’t call that out necessarily, separately. So I think – and this assumes by the way that we get excluded from tariffs. If we continue to pay tariffs we are going to have to make changes, and R&D would be a likely place where we would have to reduce. But assuming we get excluded, I expect that run rate.

Great, thanks so much. I’ll take the rest offline. Thanks guys.

Okay Colin, thanks very much. I want to remind everybody, we do plan an Analyst Day. We are currently planning that for the first half of next year. So we look forward to talking to you on our next earnings call. Thank you so much for calling in.