Good day, ladies and gentlemen, and welcome to the SunPower Corporation First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Bob Okunski, Vice President of Investor Relations at SunPower Corporation. Sir you may begin.

Thank you, Brian. I’d like to welcome everyone to our first quarter 2019 earnings conference call. On the call today, we will start off with an operational and strategic review from Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our first quarter 2019 financial results before turning the call back to Tom for guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, our 2018 10-K and our Quarterly Reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during the call on the Events & Presentations page of our Investor Relations website. In the same location we have posted a supplemental data sheet detailing some of our other historical metrics. 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 first quarter 2019 performance as well as provide an update on various strategic initiatives that we feel will improve our competitive position and margin profile for the year. I'd now like to discuss our Q1 performance in greater detail. Please turn to slide 3. We executed well in Q1, meeting or exceeding our financial targets for the quarter including our adjusted EBITDA forecast. We beat our revenue and megawatt forecast in our upstream SunPower Technology or SPT business and saw strong demand in our global DG business with particular traction in Europe and Australia. I'll provide additional color on each business unit shortly. We also continued to lower operating expenses while further improving our balance sheet through the monetization of our C&I sale-leaseback portfolio, proceeds of which we will receive in the second quarter. Now let me discuss our segment performance in greater detail. First an overview of SunPower Energy Services, our North American DG business. Please turn to slide 4. SPES executed well in the quarter despite the impact of weather and installation delays in certain key markets, which limited megawatt volume. However, we were able to offset this impact due to the prudent management of expenses, improved operational efficiency and a stable pricing environment. The mix of cash and lease was in line with forecast while our loan product continued to gain traction with megawatt volume tripling year-over-year. We added to our new homes backlog, which is now more than 35,000 homes. Important milestone in Q1 was the introduction of our A-Series panels using our new NGT or Maxeon Gen 5 technology. These new products are the industry's first 415-watt rated residential panels and initial customer reaction has been extremely…

Thanks, Tom. Now let me ready the financials. Please turn to slide 10. We look deep with our results as we met our key financial commitments including our adjusted EBITDA forecast. Overall, our non-GAAP revenue was above our commitment as we benefited from increased international DG demand and overall strong execution. In SPES revenue was down sequentially, due to seasonality in both our residential and commercial businesses, where we saw our demand profile improve significantly, starting the last month of Q1 with this positive trend continuing into the second quarter. For SPT, we shipped 455 megawatts during the quarter as both our DG and power plant businesses came in ahead of plan. Our consolidated non-GAAP gross margin was 6% slightly ahead of our forecast. In SPES ready gross margin declined moderately due to severe weather in key markets so we were able to partially offset the impact as pricing remained stable for the quarter. Commercial margins were lower versus last quarter, primarily due to mix in the second half dated backlog. We expect commercial margins to improve as we go through 2019 given our strong backlog and improving cost structures. In SPT, gross margin was breakeven and in line with our commitments though our SPT gross margins were impacted by P-Series, Oregon and NGT-related ramp expenses during the quarter. Non-GAAP OpEx is $68 million for the quarter essentially in line with Q4, and we continue to see 2019 OpEx of less than $270 million. CapEx for the quarter was $7 million, as we managed the supply chain related to our NGT ramp at Fab 3 and started the install of our second line in Malaysia. Adjusted EBITDA was a negative $24 million also in line with our forecast. As Tom mentioned, we see adjusted EBITDA improving on a quarterly basis…

Thanks, Manu. For 2019, we expect financial performance to improve on a quarterly basis throughout the fiscal year with performance weighted towards the second half of the year given our commercial bookings, SPT backlog as well as improving seasonal patterns in our residential business. I would now like to discuss our guidance for the second quarter in fiscal year 2019. Please turn to slides 12 and 13. The company's second quarter 2019 guidance is as follows. On a GAAP basis revenue of $370 million to $410 million, gross margin of 0% to 3% and income of $0 million to $20 million. On a non-GAAP basis, the company expects revenue of $420 million to $460 million, gross margin of 7% to 10%, adjusted EBITDA of minus $5 million to plus $15 million and megawatts deployed in a range of 550 to 600 megawatts. The company's fiscal year 2019 GAAP and non-GAAP guidance is as follows: revenue of $1.8 billion to $1.9 billion on a GAAP basis and $1.9 billion to $2 billion on a non-GAAP basis. Megawatts deployed is expected to be in a range of 1.9 to 2.1 gigawatts, excluding approximately 200 megawatts for the company's safe harbor program non-GAAP operational expenses of less than $270 million and capital expenditures of approximately $65 million. Finally, the company is raising its fiscal year 2019 adjusted EBITDA to be in the range of $90 million to $110 million. In summary, Q1 was a solid quarter for the company as we executed on our strategic initiatives and positioned the company for strong and profitable second half performance. With that, I would like to turn the call over for questions.

Thank you, sir. [Operator Instructions] And our first question will come from Michael Weinstein with Credit Suisse. Your line is now open.

Hi, guys. So yes, thank you for the higher guidance for 2019 on EBITDA. With regard to the residential business prior shipment guidance said -- possibly implied that the business is growing slower than the 15% growth that you expect for the whole market. And I'm just wondering if you can clarify what was driving that or what the error is in that thinking -- that line of thinking?

So, Michael this is Tom. The number that we delivered in Q1 wasn't influenced significantly by weather and particularly us because we have a greater percentage of California business than I think most of our peers as a percentage of our residential business. And that's because of the lease approach that we've taken and also because of new homes. Most of our 35,000 new homes almost all of them are in California. Having said that, as we looked forward, we're quite confident in the growth number that's consistent with your comment. Of course, we're two months into the quarter. So it's -- that's based on how the quarter's going on. And it's also based on the fact that we have new lease structures that allow us to enter some states that we weren't in previously and importantly more aggressively than we were previously. So a combination of improved weather in California where we're quite strong and new lease and of course actuals that we've had quarter-to-date we're quite confident in our growth in Q2 and beyond.

Great. And one other question on battery storage. Maybe you could talk about the mix of battery storage that you're seeing attachment rates residential versus commercial in the quarter, where you see the trends are going. And then also who are the battery suppliers out there? When do you expect suppliers to change as you go forward into the future?

So, in terms of mix, it's important to note that SunPower is number 1 in commercial. And commercial systems are bigger and have more storage opportunities. So we first rate our software by interfaces that -- this demand charge elimination for the C&I business. And we first offered vertical and integrated offering in commercial. And as I mentioned in my prepared remarks, we have 38-megawatt hours to deliver in. And in fact, I would add to that, we're confident that, we will exceed our internal plans this year. So, the attach rates are certainly north of 30%. And I think improving maybe directionally towards 50%. In the residential business, what we're doing is, we're taking the experience from Helix storage. And we're doing something similar. And as you know on our -- a complete offering in residential is called Equinox. And we'll offer Equinox storage. We're just starting alpha of that product. And we'll be shipping this fall. In terms of attach rates, we're in the single-digits between 5% and 10%. We expect that to increase dramatically as we raise our own offering. And I think it's important to note that, that offering will be similar to other parts of Equinox. It is offered by SunPower. So you have one-stop shopping. If you have any issues you have one company to talk to and obviously that's relevant to the warranty rep. And that's been incredibly popular with BOS and Microinverters previously. And so we expect that with storage as well. In terms of battery suppliers, they are who you would expect. I think what you're going to see though -- when I say who you would expect that's obviously Tesla, LG are the big guys and then there's integrators that use their cells on -- to make systems like Lockheed is a good partner of ours in commercial. What we'll see going forward, though is the introduction of Chinese supply of battery cells, that are integrated either by Chinese or otherwise. And I think, we'll see that meaningfully, yet this year even certainly going into next year.

Great, thank you very much.

Thanks, Michael.

Thank you. And our next question will come from the line of Brian Lee with Goldman Sachs. Your line is now open.

Hey guys. Thanks for taking my questions. I just had two. First one was on the megawatts guidance. If I look at the megawatts deployed in Q1, and then the guidance for 2Q, it seems to imply that volumes are going to go flatter even down from Q2 levels. So wondering, why there isn't more growth in the back half of the year given some of the capacity expansion or maybe I'm missing something there?

So when you look at our overall volume, there's a lot going on with mix. Our SPT business has a lot of volume in P-Series that comes out of our joint venture. And that can change the typical pattern that you'd expect in the company that can dominate, the overall pattern. If you looked at our SPES business, a significant growth throughout Q2 to Q4 and it's consistent with our guidance comments earlier.

Yeah. So Brian, the only thing I'd add is, in the back half of the year, we have about 200 megawatts being directed from external sales to the safe harbor. So, you have to normalize the megawatts for that. So, you take the first half megawatts, take the guidance range and add 200 megawatts in. You will see a normal first half second half especially in SPES growing in the back half of the year.

Okay, fair enough. Yes, maybe I'll take that offline and try to get -- sort of more granularity around the delta there. But that's helpful. Maybe second question just on the California new homes spend data. Well, I know you mentioned new homes in general. But when you say a town of 35,000 customers in the backlog, can you quantify how much of that is California? And then is that a multiyear backlog? Just wondering what sort of cadence we should expect in terms of when some of that volume -- the P&L.

So, the answer to your questions are 97% California and one year. And just to reiterate we have a commanding lead in new homes with 60% here and 17 of the 20 top new homebuilders in California. So we would expect that number obviously to increase but think of it as a rolling one year.

Okay. So, maybe just a quick follow-up. I know there's different estimates out there. But if I kind of take the midpoint 35,000 customers in California -- or pretty close to 35,000 given the 97% share that would imply you have about 50% of the new homes solar market in California. Is that the right read there?

Yes. The answer's really close and we'll certainly check the math and make sure. But yes it's pretty close to what you said. Yes.

All right. Thanks guys.

Thanks Brian.

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

Hey good afternoon guys.

Hey.

Hey. Could you elaborate a little bit more on your safe harboring strategy as it depends on your technology? Just elaborate a little bit more on how you're thinking about the bucketing here and the stockpiling as it goes beyond 2019 here. And perhaps to the extent possible talk about the alternative financing arrangements that you might have or might be able to -- evaluating at this point in time.

Sure. I'll take the safe harbor numbers and then let Manu comment on the financing. So, it won't be what we started the safe harboring will continue to safe harbor to 200 megawatts or more by the end of the year. It will be all IDC technology and it's a combination of our various IDC technologies mostly the mainstream technologies that we run so EX and NGT. The A-Series will be part of what we safe harbor, but it will be a small percentage. So, it'll be all IDC. And as you think of past 2019 our comments were exclusively what will safe harbor through the end of this year then there's a three and a half, I think, month provision in the code. So, the safe harboring for 2020 goes into the first quarter. Well, obviously, it goes through the first quarter of next year, so our comments include the first quarter of next year. We have not given guidance. We do have a plan for what we would safe harbor for 2020 for use in subsequent years and it's at least comparable to that. But that's -- it's a little early for us to or commit with 2020 safe harbor if that's what you're asking. In terms of financing Manu?

Yes. So, just in terms of the financing process and structure, the structure will utilize minimal SunPower capital like we have said in the Analyst Day. We are currently in discussions with our financing partners who we've done several deals with over the past several years. We are targeting closing it in the second half of 2019. And we think we can utilize the same structure for safe harbor beyond 2019 as well.

So Julien there's a number of counterparties that have experience with safe harbor. They are quite comfortable with us because they've done a lot of business with us and they know the technology really well. And so that's been a distinct advantage. And I think we're forward winning here because I think we can get this done in the near term in the next few months.

And if I could clarify just real quickly, to the extent what you're safe harboring here, as you clarify that financing, could you see a step up in your ability to safe harbor? Or is the 200 megawatts sort of ideal in your mind? And then related, as you're signing backlog for future periods here, are you seeing the same customers come back and say "I'm going to safe harbor this and I'm also whether now or later going to commit to the remaining 90% 95% of the panels"? And are you seeing a disproportion of benefit on that side of the equation to sort of give you this duration in the 20 to 23 on panel orders if you follow.

So the first part?

The ability to step up.

Sorry. Thank you. So I -- yes we've said purposely both in our Capital Markets Day and in our comments today at least 200 megawatts. So the answer to your first part of your question is yes, there is an opportunity for more. It is early May, but we would expect that number to be at least an opportunity for more. It's a little early in the year in the second part of your question to have differentiated demand in the out years. It's starting to -- I think it's a partial yes. And because we can give precision in how much safe harbor we'll have in the opportunity because we're vertical integrated to control that and also because our product is highly unlikely to be devalued over time, certainly relative to other options. It is preferential. So we're seeing early stages of that but it's early in the year.

All right. Well, I'll leave it there. Thank you very much.

Thanks Julien.

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

Thanks so much guys. As you're ramping the Series A technology, what's surprising you here? And are you finding any areas for some incremental cost savings that you weren't expecting previously?

So thank you for the question. The next-generation technology that is the basis of the A-Series product, what's surprising us on the positive is our costs are actually coming in better than plan. And it's obviously a huge positive. And also the other thing that I would point to is our road map for CapEx improvement per watt as we fund more lines we have more confidence in sort of classic semiconductor improvements of more throughput lower cost capital, there could be suppliers that could be used on. So we see a CapEx improvement that's at least as fast as we've said on in our Analyst Day and probably better. And of course as we go through the summer, we'll be able to give greater clarity on funding for NGT and that will influence some of what I just said.

Okay. And then just in terms of the battery solutions, how concerned are customers with security and the communication solution at this point? Is that something that's coming out in sales conversations yet? Or is this something you've already solved and put to bed? How should we think about that going forward?

The answer is it hasn't been a big variable yet on -- it's a good question and one that we're preparing for. And I think this is a -- where we have an advantage because it is our own software. We're not asking someone else. So what we're doing, of course, is as we install we're learning and improving the software. And with 38-megawatt hours more to install plus 110 in pipeline, I think that we'll add features along the lines of what you suggest. But it's not been an important buying decision variable yet.

Great. Thanks so much, guys.

Thanks, Colin.

Thank you. And our next question will come from the line of Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question. In the press release, you referenced the stable module ASP landscape and that's confirmed by the PV insight benchmark data as well. What do you attribute the fact that module pricing has been unusually stable since November? And how long do you think that can last?

On -- so world demand is quite good. China's a big variable and there's been mixed signals in China, but we think it's mostly positive. Europe has very strong demand. And we're seeing a lot of new countries in the Far East. So when you look at the world demand there's a forward -- or things are very good. And then, of course, in America we have Safe Harbor. In Safe Harbor, we'll drive demand this -- throughout the rest of this year. And I think increasingly towards the back half of the year. There's just a lot of financial incentive to get modules this year. And, again, we benefit from being vertically integrated. We preplanned and we're already doing that. But the combination of world markets being strong with Safe Harbor, I believe that we're going to see this stable environment. If not increasing pricing environment this year.

Okay. And then following up on that. What percentage of residential new builds do you expect to include battery storage maybe by the end of this year?

Yeah. So on -- the answer to your question is 10 going to 20 next year in -- we'd call those approximate.

Okay. Within your own business mix?

Yes. Yeah. Unless we bring out our storage solution I think that there's upside there given some of our learning with storage -- the storage work we're doing in the C&I business.

Okay. Very clear. Thank you.

All right. I think we're going to have one more -- or two more questions and I'll wrap up.

Okay. Our next question will come from the line of Moses Sutton with Barclays. Your line is now open.

Thanks for taking the question. Can you provide any additional detail on the commercial sale leaseback monetization for $87 million? What might be included now in adjusted EBITDA that might get impacted once this closes?

Is the question on cash or EBITDA?

Either, would be fine.

So, from an EBITDA perspective, the gain, it's not included in our non-GAAP numbers. It is included in our GAAP numbers from that perspective. In terms of cash, we've got high single digits in first quarter and the rest of it is going to be as part of second quarter. And therefore, as I said in my prepared remarks, ifyou pro forma the money we're getting in second quarter our first quarter cash balance would have been greater than $250 million.

As you think of that structure going forward what it does and which is apparent I'm sure but I'd point it out it makes our P&L way easier to model because it's a cash-based P&L. And we expect that cash-based P&L to actually be potentially favorable with the structures that we're putting in place.

Got it. And the long-term debt increase by $30 million from fourth quarter, is it related to the commercial leaseback monetization similar to what you have with the ready lease debt? Or just anything here, is that going to be deconsolidated? Any color would be helpful.

Yes. I think just from – no, it's not related to the commercial sale-leaseback portfolio that actually shows up at other line.

Got it. Thanks.

Okay. Last question please.

Thank you. And our last question will come from the line of David Katter with Baird. Your line is now open.

Hi, guys. Just a quick one for me. Can you -- just touched on it, help us walk from that pro forma cash number of $250 million to the end year of $200 million? Just provide an update from the Analyst Day there.

Okay. So I think in the Analyst Day call we talked about our ending year cash balance being greater than $200 million. I think with the continued confidence in the fact that our businesses are going to generate cash in the back half of the year and the fact that some of our transactions are coming in materially better than we had anticipated. You'll see tailwinds to the number we quoted in the Analyst Day to be well north of -- greater than the $200 million mark.

Great. Thank you guys.

All right. Thank you everybody for joining our call. We much appreciate it. We look forward to our next call as our business is performing significantly better. So thank you again.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.