Ladies and gentlemen, thank you for standing by and welcome to SunPower's Fourth Quarter 2019 Results Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Vice President of Investor Relations, Bob Okunski.

Thank you, Andrew. I'd like to welcome everyone to our fourth quarter 2019 earnings conference call. On the call today, we will start off with a review of operations and a strategy update from Tom Werner, our CEO, followed by Manu Sial, our CFO, who will review our fourth quarter 2019 financial results before turning the call back to Tom for guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the safe harbor slide of today's presentation, today's press release, our 2018 10-K and quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during the call, on the Events & Presentations page of our Investor Relations website. In the same location, we have also posted a supplemental data sheet detailing some of our other historical metrics. With that, I'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 fourth quarter and 2019 performance and update you on our strategic transformation. Let’s start with a recap of 2019 and an update on our proposed Maxeon transaction. Please turn to Slide 3. We entered 2019 with a goal of fundamentally transforming our business while improving financial performance and strengthening our balance sheet. We successfully achieved these goals. First, we announced the proposed spin-off of our Maxeon business to shareholders in a transaction that will provide significant capital for future growth. We believe this will unlock meaningful shareholder value and allow Maxeon to continue to expand their share of the rapidly growing global DG business. Our decision to exit the power plant development business and focus on the DG market is bearing fruit as we recorded record global DG shipments in 2019. We also simplified our financial model and executed plans to monetize non-core assets, thereby delevering our balance sheet and improving liquidity. Additionally, during 2019, we executed on several critical new product development initiatives including our new Maxeon 5 technology, further improvements to our Helix commercial offering, the initial launch of our Equinox residential storage system and the ramp of our P-19 technology in Oregon. Our success in streamlining OpEx helped improve profitability and our focus on working capital management significantly enhanced our liquidity. We progressively improved our financial performance throughout the year and ended the year with over $420 million in cash, including our recent capital raise as well as returning more than $30 million in convertible debt this quarter. Our strategic focus on DG markets drove year-over-year DG shipment growth of 75% and subsequent share growth in many key markets. I'd now like to provide a quick status update on…

Thanks, Tom. I'd like to start out by spending a few minutes discussing our perspectives in 2019. Please turn to Slide 16. 2019 was a pivotal year for the company as we successfully executed a number of strategic initiatives, improved our profitability and set the stage for future growth. We improved our EBITDA by approximately 70% versus 2018 after adjusting for NCI related to the accounting of a residential lease portfolio and Section 201 tariffs. Additionally, we improved operating cash performance, reduce overhead and continue to delever the balance sheet. We also achieved our two core goals, improved our financial transparency for investors and transitioned to a much simpler cash based model. As a result of our efforts, we have two strong solar businesses positioned for success. In SPES, our industry-leading origination engines in residential and C&I remains strong and both entered the year with great pipeline positions. Additionally, we are seeing solid demand from our financing partners for this pipeline, which should translate into a decreasing cost of capital. SPT also exceeded plan posting a record shipment for the year. This was primarily due to our ability to rapidly expand internationally footprint and the ramp of our Maxeon 5 and P-Series products throughout the year. I'd now like to discuss the financial results for the quarter. Please turn to Slide 17. Overall, our non-GAAP revenue was above prior year and prior quarter as a result of strong execution in SPT and our residential business. In SPES, revenue grew more than 50% sequentially with particular strength in our residential channel, including record bookings. For SPT, we shipped approximately 800 megawatts, another record and above our outlook. Consolidated non-GAAP gross margin was 21%. In SPES, gross margin was up sequentially, driven by an improved performance in residential. However, as Tom mentioned,…

Thanks, Manu. I would now like to cover our guidance for the first quarter and fiscal year 2020. Please note, our guidance is for the company pre-split though we have provided 2020 guidance on a post split pro forma basis in a table in the appendix. As a reminder, our first quarter guidance reflects the impact of seasonality in our business as well as commercial direct project timing. We will also continue to evaluate the potential impact of the coronavirus on our full year guidance. Please turn to Slide 21. The company's first quarter 2020 guidance is as follows: revenue of $435 million to $470 million on a GAAP and non-GAAP basis; GAAP gross margins of 3% to 7% and net loss of $85 million to $70 million. On a non-GAAP basis, the company expects gross margins of 9% to 12%, adjusted EBITDA of negative 15% to breakeven and megawatt recognized in the range of 520 to 570. On Slide 22, the company's fiscal year 2020 GAAP and non-GAAP guidance is as follows: revenue of $2.1 billion to $2.3 billion on a GAAP and non-GAAP basis. Gigawatts recognized is expected to be in the range of 2.5 to 2.75 gigawatts. Non-GAAP operational expenses of less than $260 million and capital expenditures of approximately $100 million. Finally, the midpoint of the company's fiscal year 2020 adjusted EBITDA is unchanged. Though we have widened the range slightly, given the restructuring of our commercial direct business, which we see contributing approximately $5 million in EBITDA for 2020. We now see 2020 adjusted EBITDA between $125 million and $175 million. In Summary, Q4 was a solid quarter for the company as we executed on our strategic initiatives and positioned the company for a strong and profitable performance going into 2020. With that, I would like to turn the call over for questions.

[Operator Instructions]

Andrew, you there?

Yes. Our first question comes from the line of Brian Lee with Goldman Sachs. Your line is now open. Pardon me. Our next question comes from the line of Michael Weinstein with Credit Suisse.

Hey, guys. Can you hear me?

Yes, certainly.

Can you maybe just expand a little bit about the – what are the execution problems that you're having in commercial direct? And what – obviously, you expected to have them fixed by the end of the year. I'm just curious what the delay in fixing them is and what they are.

This is Tom. As I said in my prepared remarks, our origination part of the commercial business is doing great. In fact, in fourth quarter, we had excellent bookings and awards, awards where we've been selected and then ultimately we booked 26 megawatts of projects. And on the other end of the spectrum or the value chain, we're adding storage to more and more systems. So that's working great. What's not working great is perfecting the projects and executing on them. We had an unusual number of projects that were delayed by virtue of permits or interconnection issues. And then any time there's a delay that means we have fixed costs that are under absorbed and we have to deploy and redeploy. And so the primary issue has been project delays. In some cases, there are delays. The way we contracted, resulted in some LTs. Now, importantly, we've taken a lot of action in the last month that would improve the execution part of the value chain, lowering our fixed cost, so that we have less under absorption issue, if there is a project delay. Restructuring contracts that were less liable for LTs on things that we shouldn't be liable for that we've had to clean up. And then we've reorganized so that the probability of delay is reduced because we've integrated the development team in with the execution team to reduce the likelihood of further delays. We'll see the benefit of all those actions starting in Q2. We expect to have the first half actually breakeven after a positive Q2 and certainly, the second half in a breakeven condition.

Is that the primary driver of being cash flow positive in the second half of the year for the solar company or…?

I think we could be cash flow positive with the commercial business at breakeven and then, of course, then it only gets better from there, the biggest driver with the commercial businesses, the momentum of the company would be – is when you look at the channels business, the performance of the channels business in Q4 was outstanding. It comes into the New Year, really strong. We're expecting EBITDA growth in that business and more than doubling, this year compared to 2019. The SPT business has been turned around compared to 2018. So as we fix commercial and you think of the new split companies, the momentum we have with the fixed commercial, the other two are already there. So commercial, once we get there. So one [indiscernible] answer to, yes, it drives cash flow positive, but it really drives the momentum of EBITDA profitability and significant cash flow positive thereafter.

I think I have just one more question. I think you said that the impact of the coronavirus is built into the guidance for this year. And I'm just wondering what – did you break that out during the call, I didn't – don't recall.

Yes. I'll just add color, right. We just had a couple of sentences on it. And of course, it's evolving in real time. There are some shortages within China. And of course, the China supply chain supplies all of solar. And there are shortages as we have seen in [indiscernible] modules predominantly, those are factories that aren't running at 100%. Those factories are coming back online. They have the secondary challenge that logistics within China have been challenged because some of the logistic options have been reduced. That, too, is evolving and it's our understanding that coronavirus did things but perhaps there's positive signs forming. So if those positive signs continue and the trends of the factories coming online in logistics being improved, we expect to manage through this and hold the guidance as we guided today.

All right, thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Brian Lee with Goldman Sachs.

Hey guys. Thanks for taking the question. Sorry about earlier. Can you hear me?

Yes.

Great, thanks. I guess, first off, just on the updated EBITDA guidance for 2020 here, obviously, it's a little bit wider $5 million on the low end, $5 million on the higher end. Commercial, at least when I listen to the call, it sounds like the narrative has gotten a lot worse. So I might have missed this, but what was sort of embedded in your EBITDA for commercial prior and what's embedded there? And if I take that into the context of the overall guidance for SPES not moving a ton. Does that infer that you're a little bit more positive on the residential side and things have actually improved there to offset some of the drag happening in commercial? Just maybe some of the moving parts there to help us parse to where you're not thinking the guidance here?

All right. So thanks for the question, Brian. And this is Tom. I'll take this. So for the year, yes, we're expecting even better performance out of the channels business or planning on better performance out of the channels business, ended the year quite strong. It's profitable in Q1, and it's growing, and it has a tailwind of Equinox storage in the back half of year. So we're very positive on the channels business. The commercial business can be sized this way. We expect EBITDA between – somewhere between zero, and 10 or 15. And given the performance in Q3 and Q4, Manu and I decided to put an extra five on either end, simply because of that. We fully expect to manage this business back to a breakeven condition going into the second half of the year, in which case, at that time we'll just adjust guidance appropriately. But the answer to your question is yes, channels is doing great and by the way so is SPT.

Okay, that's great. I appreciate the color and then maybe if I could just squeeze two more here and I'll pass it on. On the spin-off transaction here, I know you talked about being on track for Q2. Can you provide a little bit of granularity as to sort of what milestones you have achieved since November when you first announced it? And then kind of what's still on the schedule here before we get to the Q2 completion of the spin? And then second one would be on more housekeeping. The SPT gross margin if we exclude the legacy asset sales, do you have that number? I believe, you had talked last quarter about $20 million of revenue on the legacy asset sales, if we strip that out, what's the clean gross margin for the segment? And is there any additional legacy asset sales expected in 2020 that will impact margins? Thanks guys.

Okay. On the cleanup things, I'll let Manu cover that SPT gross margin and other asset sales. I will take the opportunity to indicate though that if you take out assets sales, our EBITDA of our core business that is being split is well over doubling year-on-year and has great momentum, and I broke it out in the previous answer, SPT and channels are doing very well and commercials will be on an upward trend. In regards to the split, I'll say a few things, and Jeff can add anything that I might have missed. What’s on the critical path is antitrust approvals, probably China will gate that. We do already have a couple of antitrust approvals in favorably. And so our partner in China, of course, is giving us indications of the timeline and that is what basically the expected date of that plus four weeks is what we're indicating to you. The second thing is we're raising debt to match the equity investment. We want to have that debt materially raised prior to the spilt and that will take us up to a very similar timeframe. So those are the two things in the critical path. In terms of some of what’s gotten done on the transaction, I'll let Jeff cover some of that.

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

Okay. Just on the gross margin normalization, normalizing for the sale of the development asset. SPT's gross margin would be roughly 18%. That's a few hundred basis points higher than prior quarter on an apples to apples basis. So the business is performing extremely well and coming into 2020 with great strength.

All right, helpful guys. Thanks.

Thanks, Brian.

Thank you. And our next question comes from the line of Philip Shen with ROTH Capital Partners.

Hey, guys. Thanks for the questions. First one is on your SPES resi business, you guys did, I believe, 279 megawatts for full year 2019. Can you give us the specifics on how much you expect that segment to grow in 2020 if you strip out some CVAR megawatts there? I'm getting to maybe a 17% to 20% year-over-year growth. I know the market is doing well. We're forecasting 25% year-over-year growth in 2020. So I just want to see how that growth is doing for you guys? Thanks.

Yes. So I'll just say a quick comment and turn it to Norm Taffe, who runs that business that, of course, we've got great momentum in that business. And we're managing to profitable growth. So, we're careful not to grow just to grow. And as we add Equinox, I think that's really important because we expect that to really enhance that can be as much as a 25% improvement per watt when it is attached.

Thanks, Tom, and thanks Philip. So, yes, I just to add some color to that. I guess from a megawatt standpoint, you mentioned CVAR numbers you quoted are independent CVAR. CVAR is another incremental 120 megawatts growing quite a bit next year as well. And growth-wise, our current forecast on the megawatts basis is roughly what you said, 17% to 20%. I will also like to point out that revenue is growing faster than megawatts quite significantly. So our expectation is that will be ahead of our model, which is between 10% and 20%. There's – we expect to be able to exceed that on a revenue basis.

Great. Thanks, Norm. And I guess, what I was doing was taking the SPES channels megawatts guidance of 430 and to 480 lens and then subtracting out of 100-plus megawatts there to get to that 17 to 20. But it sounds like you're affirming that 17 to 20 for the resi line item specifically. As a follow-up there, can you speak to the attach rates for resi storage that we might see? So let's say, resi megawatts ends up being closer to 320-ish megawatts in the year, what kind of attach rate for resi storage specifically could we see in the year? Thanks.

Yes, happy to answer that. This will be certainly the back-end loaded side. I would say our confidence in attach rate is increasing because the demand in the pool is stronger than I think we had thought a quarter ago. It's early for us to be able to tell you what it's specifically going to be. But now we're thinking that in Q4, we could be north of 20% attached before new designs or even higher than that, which originally we have had a smaller plan there just because we didn't know exactly the new product ramp, but still speculating to some extent. But every time when you look at it the more comfortable [indiscernible] cash rate is going to be very high.

Great. One of the things we're hearing the channel is that one of the bottlenecks in storage right now might be electrician labor. To what degree do you think that's – that you guys or your dealers are experiencing that? And it seems like the demand is strong, but then it might be mitigated by that potential bottleneck?

Yes, I can comment on that. It is something that is a concern out there. I wouldn't say one thing that positions us very well is that we have an extremely loyal dealer network with that capacity being really exclusive to us or when they're designing solar plus storage applications. So while we still may be limited, frankly, by just the amount of that channel we have, the ability of us to have a loyal network, we think, gives us a great opportunity. And at the rates to worse since we're ramping, we don't expect to materially impact our growth. Next year that could be a bigger issue maybe to do more things clear for, but we don't think that's going to affect our business.

And Phil let me add to that. Remember, it's Equinox story. That's important because it's designed by us. It’s designed to have two boxes and that's less than almost any other offering, which makes it easier to install. And one of the things we're perfecting maybe overstated, but improving during the beta. Our case is the time to install and creating standard methods for our deals, and we're doing that on a go-forward basis with our dealers. So it's helpful to know that shortage because we can design in improvements and we're factoring that. And there are other points of differentiation with the Equinox storage that I think you’re going to find very interesting going forward.

Great. Thank you, Tom, Norm.

Thank you.

I’ll pass it on.

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

Thanks for taking the question. Let me ask kind of a macro one about the market. This is our first conversation since Congress or the White House, perhaps blocked solar ITC extension last December, despite the industry's strong effort to get it extended. What do you think went wrong with getting that done? And could anything change in 2020?

I'll take that. And I would say there is constructive – our understanding is there are constructive talks up until the end although this happens. It's been our experience with tax bills or our observation with tax bills and things degraded and there was a separation towards the end. Given that it's an election year, we're less optimistic this year on a change. That does not mean that [indiscernible] are not doing our best effort to have some moderation on the reduction, but we're less optimistic given that it's an election year.

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

Sure. The ITC – U.S. ITC just had their hearings December 5th, so it is now just a couple of months ago. They issued the reports. It's basically a synopsis of what happened at the hearing. They'll issue their recommendation in early March. And if I were to educate and speculate, I would think that there will be unchanged tariffs, 201 tariffs. And I'm optimistic that the tariff rate quota on solar cells would be addressed or potentially increased because one of the positives out of the 201 tariffs has been a dramatic increase in module production in America. And of course, that can't happen, if you can't get solar cells. So I would – my educated guess is that wouldn’t expect to change for the next couple of years in 201 and hopefully action on the [indiscernible] for solar cells.

Appreciate it.

Thanks, Pavel.

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

Hey, good afternoon guys. A couple quick ones, I might have missed. Did you disclose the safe harbor amount either in megawatts or dollars spent?

Yes. So [indiscernible] couple of hundred megawatts of safe harbor. We are on track to that. Most of that came in, in second half of 2019, there's a little bit of a trailing in first quarter, still covered under the 2019 safe harbor rules.

And we have a modest amount of safe harbor built in our 2020 forecast, that's something that we’ll be evaluating over the next quarter or so, and that could have an impact. And if it did, if anything, I would educate a forecast favorable impact. But either not significant or not something we're ready to commit to yet. But nonetheless, we have a modest amount for safe harbor for 2021.

Got it. And then two other quick ones. The Equinox storage, when does that come out of beta, Tom? Or when do you expect to start selling it?

I’ll let Norm to take that.

Hey, Jeff. This is Norm. Yes, so the product goes and will come out of beta in Q2, we'll start selling more broadly late Q2.

So what we've done in the beta testing is writing the procedures to install and improving and sort of standardizing the install. Also Norm and his team have made the decision to upgrade what we’re going to revise in terms of the scalability of the offering and that's based on feedback we've gotten. And we think that that – it makes sense not to have a [indiscernible]. So it will be an breadth or an updated version of what we had originally talked about. They can backup more modes within the hub.

Got it. And the last one I had, Tom, was on the SPT side. Can you just touch on what you're seeing in Europe in the six or seven countries that you operate in, general trends by country would be helpful?

Sure, I am going to let Jeff Waters to take that.

Let’s say by and large and for us in Europe over the course of 2018, we saw the rate growth in Europe, over 80% growth. And it's on a country-by-country basis. We tend to see a pretty strong, pretty uniformly across probably double-digit number of companies that we sell or the countries that we sell into. I don't know that I would call any outs being specifically strong, but they are, I would say, very receptive consumers, especially on the residential side or very receptive to our Maxeon family products. So we're expecting for 2020 to see double-digit growth out of Europe and continue to build out the great dealer channel that we have there.

So Jeff, I'd say there are the places in Europe where we're particularly strong. We had historically – historical strength in Benelux, as an example, like the Scandinavian countries are actually doing quite well. And of course, Jeff and his team have built great channels in Japan and Australia, both of which are growing quite well for us as well. So those would be a few I'd point to.

Okay, thank you.

Thank you.

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

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

Thanks very much guys. Can you talk a little bit about the pricing dynamics on the energy storage solutions? How sensitive are the customers at this point? And how much pricing power do you feel like you have going through the balance of the year? And then I've got a follow-up.

Okay. I'll let Norm to take that.

Yes. Hi, Tom, I think that it's still early, but from a market perspective, we see the pricing on the storage being at least margin equivalent, if not margin accretive. I also like to emphasize that what it really does for us is significantly improve the revenue per customer. So while it doesn't just help additive gross margin that lowers our cost of sales and more revenues for the same customer. And right now, I will tell you part of the reason for what Tom indicated that we are offering maybe more extendability of the product is our indications are that the demand is for bigger batteries than what we originally expected. And that also helps margins because you amortize the installation cost over more megawatt hours. And so we're anticipating a bigger storage installs than we were originally.

Great. And then just on the product side, certainly, there's an awful lot going on with battery chemistry at this point. As you guys look at the applications and the potential for one cost reduction and two product cycles, what are you expecting in terms of your ability to drive costs out of the supply chain as well as evolve with emerging chemistries that are coming to market?

That's a great question. I think that it's -- I'd like to point out, strategically, we have focused on an architecture, which is battery agnostic, meaning we can ride what will be a – we believe, a major essentially a nationwide or worldwide really drive down the pricing of battery technology, obviously driven even more by the EV market than us. So that has been a key to our strategy. So the cell technology can be replaced with other cells and our other software control. So I think right now, the costs we see are as good or better than what we had forecasted – expect that over time, those will continue to come down and we'll be able to take advantage of that.

All right. Thanks so much guys.

Okay. Thank you, Colin, and thank you all for calling in. We really appreciate it. We look forward to our Q2 call with you.

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