SunPower Corporation
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good afternoon. Welcome to SunPower Corporation's Third Quarter 2018 Earnings 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 our instructions will be given at that time. As a reminder, this conference call maybe recorded for replay purposes. I would now like to turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at SunPower Corporation. You may begin.

[Bob Okunski:]

Thank you, Brian. I would like to welcome everyone to our third quarter 2018 earnings conference call. On the call today, we will start off with an operational and strategic review by Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our third 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 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 historical metrics as well. With that, I'd like to turn the call over Tom Werner, CEO of SunPower, who will begin on slide 3. Tom?

[Thomas H. Werner:]

Thanks, Bob, and thank you for joining us. On this call, we will review our third quarter 2018 financial performance and provide an update on our technology roadmaps. We will discuss the status of our strategic initiatives including our acquisition of SolarWorld and provide additional details on our new segmentation. First, our Q3 2018 themes. Please turn to slide 3. We executed well in Q3, meeting our EBITDA forecast and further simplifying our corporate structure. In particular, I'd like to highlight the continued strength in our DG business with global DG sales up approximately 15% year-over-year. This growth was broad-based and included outperformance in the U.S., as well as in our core international DG business, which we define is Europe, Australia, and Japan. We were pleased that our Section 201 technology tariff exemption petition was granted by the administration during the quarter. This decision will help us further enhance our manufacturing footprint in the U.S. market. As a reminder, given the timing of the decision, we will not benefit financially from our exclusion until 2019, as we expect to recognize approximately $20 million in tariffs in the fourth quarter as we deplete our remaining tariff inventory. Our power plant equipment business was impacted in Q3 by the policy disruption in China. Following the China FIT policy change announced on May 31st, several of our customers delayed closing equipment supply agreements until market pricing stabilized. This reduced volume and revenue for our P-Series product in Q3 and we expect this to be the case in Q4 as well. However, since then, we have achieved record P-Series bookings in our global power plant equipment business and now have over 70% of our planned 2019 power plant segment sales volume in backlog and under contract. Finally, our technology roadmaps remain on track, including the ramp of our industry-leading NGT cell and panel technology, as well as the expansion of our P-Series capacity at our newly acquired SolarWorld Oregon facility and at our DZS joint venture. I would like to spend a few minutes providing a detailed overview of our new segmentation and why we believe this evolution positions us well for future success. Please turn to slide 4. Last quarter, we made the decision to transition to a new upstream and downstream segmentation for Q4 reporting. We've named these business units SunPower Energy Services or SPES which includes our leading North American residential and commercial businesses combined under one segment. And SunPower Technologies or SPT which consist of our upstream technology development in manufacturing operations, as well as all of our international sales. On the left of this slide, is the SunPower Technologies segment comprising a world-class R&D in manufacturing operations, as well as our global sales and marketing organization. SunPower is the long time solar industry technology leader and the most desirable product brand. SPT manufactures best-in-class solar product panels for both DG and power plant applications in production facilities across Asia and North America. 2019 capacity will be approximately 2.4-gigawatt evenly split between IBC and P-Series technology. NGT technology will offer customers similar performance to our X-Series products with significantly lower manufacturing cost. When fully ramped, we expect that the cost per watt of NGT will be similar to mono-PERC technology, but with superior levelized cost of energy due to higher performance and durability. We expect significant margin improvement in SPT driven by increasing NGT mix and scale. On the right hand side of the slide is SunPower Energy Services or SPES which includes our U.S. and Canadian residential and commercial businesses, as well as our asset management group. SunPower is the U.S. DG market share leader with an operating fleet of over 0.5 million systems across 38 states. The performance data from this fleet in our deep understanding of system operational characteristics represents a distinct advantage for SunPower as we increasingly attach storage to both our new systems and existing fleet. SPES delivers complete solar solutions for roof, carport, and ground mount applications to both residential and C&I customers through a combination of direct and indirect channels. Our solutions platform increasingly include battery storage and proprietary control technology, as well as service offerings enabled by these products. We believe that this will drive margin expansion for SPES as the mix of solar-plus-storage solutions increases over time. Overall, our new segmentation will drive increased business unit focus on cost structure management, faster decision making, and greater financial transparency. We believe that this change will highlight the inherent value in each of our segments, making it easier for investors to model our business based on discrete BU, P&Ls, and financial disclosures. I will now review our Q3 performance using this new segmentation, starting with SunPower Energy Services. Please turn to slide 5. Overall, our North American DG business or SPES executed well in the quarter. In residential, demand remained solid throughout the quarter as we grew megawatts by 10% year-over-year. Our cash and lease mix was in line with forecast with a record level of demand for our loan product accounting for 20% of our mix. Additionally, we continue to expand our leadership position in new homes ahead of the California mandate in 2020. With over 40% year-over-year megawatt growth for the quarter, more than 30,000 installed systems, and partnerships with seven of the top 10 homebuilders, 16 of the top 20 in California, we're very well-positioned to capitalize on the expanding new homes opportunity. In C&I, we continue to maintain our significant market leadership position during the quarter with 15% year-over-year deployment growth and 8 out of the top 10 commercial solar users being SunPower customers. In particular, we're seeing a shift in our business to more multi-site enterprise deals reflecting our scale, experience in the industry-leading technology. For example, we recently booked a number of enterprise deals including a 23-megawatt 21-location deal with Walmart. We see strong and growing interest in our Helix solar-plus-storage solution with 35% attach rates driven by enhanced customer economics attributable to demand charge savings. Looking forward, we are forecasting more than 20% annual growth in our U.S. DG business for next year. We expect further market share expansion in the residential business and we continue to allocate resources to drive growth in new homes in particular. Our commercial pipeline remains strong and more than $2.5 billion and we're fully booked for Q4. A key element of our commercial business going forward is our Helix solar-plus-storage platform and associated service offerings. Please turn to slide 6. The increasingly attractive economics of behind-the-meter solar-plus-storage are driving mainstream customer adoption. Almost every conversation we have with both new and existing commercial solar customers now include storage. According to Wood Mackenzie, this market is expected to grow at a CAGR of 45% through 2023 which would result in a market opportunity of over 2 gigawatts. Growth in this market is driven by storage system cost reduction and specific policies that benefit storage in a number of states, including California, Massachusetts, and New York. We currently have more than 9 megawatts or 18-megawatt hours of storage operating or under contract at 28 customer sites. Customer interest is high with attach rates approaching 35% in a pipeline of around $135 million. Additionally, our 10-gigawatt global installed base has given us the ability to optimize our system software to drive better storage performance algorithms that maximize savings for the customer. We're also pleased to be working closely with Lockheed Martin, a leader in the battery storage technology space and look forward to continued partnership to build out our storage footprint. Our near-term plan is to leverage our experience in commercial solar-plus-storage and adapt that to the residential market. We have installed hundreds of residential storage systems to-date, primarily through our new homes group and we plan to significantly expand the scope of our residential solar-plus-storage activities in 2019. Let's move on to SunPower Technologies. Please turn to slide 7. SPT executed well overall with international DG sales volume, ASP and margins coming in well above plan. Sales in the power plant market were impacted by the mid-year policy disruption in China with several customers putting solar equipment purchase decision on hold until market pricing for solar panels stabilize. This in turn impacted our P-19 volume and margin in Q3 and we expect this to persist in Q4 due to project timing push-out. In Q4 to-date however, we've experienced very strong P-19 bookings led by a 349-megawatt order for delivery throughout the first three quarters of 2019. We currently have over 70% of our planned 2019 power plant volume booked and under contract. For Q3, we were able to reduce the impact of the scheduled push-outs through margin expansion elsewhere. Our solar cell and panel manufacturing business executed well again in Q3, meaning cost and yield targets for the quarter with full Fab utilization. NGT technology development is ahead of plan with average solar cell efficiency of 25%. We are currently certifying our first NGT product, a 72-cell format panel rated at 450 watts that will be delivered to initial customer sites in Q4. We are also actively pursuing a variety of partnerships and other options to enable further NGT expansion to gigawatt scale. Finally, the ramp of P-Series technology at our DZS joint venture is on plan, with capacity planned to reach 2 gigawatts by the end of Q4. This will allow us to drive significant volume and revenue growth in 2019. As you know, we closed our SolarWorld asset acquisition this quarter, expanding our manufacturing footprint in the U.S. to take advantage of what we see is a significant growth opportunity. Please turn to slide 8. The rationale for this acquisition is consistent with our previous statements. First, we feel is the right time to invest in U.S. manufacturing to serve what we believe is a sustainable domestic market demand, particularly in the DG segment. The acquisition was catalyzed by the Section 201 tariff ruling. Second, the acquisition will enable us to serve our customers with locally manufactured high efficiency P-Series technology. Finally, we believe, there are significant operational synergies and we've been very impressed with the quality and skill of the over 200 employees in our new Oregon facility. Our initial focus will be at retooling the facility for P-Series panel production. We expect CapEx of up to $10 million to the end of 2019. P-Series equipment is already onsite and being integrated into the existing manufacturing line. We're targeting initial production in Q1 of 2019 with total P-Series manufacturing volume of up to 150 megawatts next year. Finally, our cost expenses and CapEx spend related to the acquisition are included in our current guidance. In conclusion, I would like to briefly summarize the execution status against our key strategic initiatives. Please turn to slide 9. We've made significant progress against our goal of simplifying our business model and delevering our balance sheet by selling non-core assets. As a result, we believe that heading into 2019, SunPower is leaner, more transparent, and completely focused on delivering improved shareholder value. We are on track to report our financial results in Q4 and beyond in our new segmentation. We're confident that this will drive greater internal accountability and improve investor visibility into the two key parts of our business. We've made excellent progress finalizing the development of our NGT technology and we are now in the process of ramping commercial production. Scale-up of our P-Series technology is also proceeding well with multi-gigawatt capacity in place at DZS in retrofit of our Oregon factory underwrite. Looking forward, we feel we are in a strong competitive position in the U.S. Given our Section 201 technology exemption and SolarWorld acquisition, we expect to materially increase our U.S. DG footprint in 2019 and beyond. With that, I'd like to turn the call over to Manu to review the financials. Manu?

[Manavendra Sial:]

Thanks, Tom. Now, let me review the financials. Please turn to slide 10. We were pleased with our results for the quarter as we met a number of key milestones including adjusted EBITDA forecast. Our non-GAAP revenue was essentially in line with our guidance as we executed well in all segments. Power plant revenue, while in line sequentially, was below plan as P-Series volumes out of our China JV were impacted by certain international project delays in our SunPower Solutions business. On the DG side, we saw both sequential and year-over-year revenue growth due to higher volumes. Overall, our consolidated non-GAAP gross margin was 4.7%. This was slightly below the lower end of our guidance as strength in our higher margin residential business was more than offset by the impact of project push-out in our global power plant equipment sales segment. Our gross margin results also reflected a one-time $8 million retrofit charge for one of our previously developed power plant project. Commercial margins were lower versus last quarter due to the timing of certain projects as well as mix. We expect commercial margins to improve in the fourth quarter. For the quarter, we recognized $22 million in tariff with $13 million in residential and $9 million for commercial. As we have previously mentioned, while we did receive our Section 201 technology exemption during the quarter, we will continue to recognize tariff impact in our financials to the end of the year until our remaining tariff inventory is depleted. Q4 tariffs are expected to total $20 million. In our power plant equipment sales segment, margins were essentially in line sequentially and lower versus planned, also impacted by the project delays and retrofit charge. As a reminder, we have essentially exited our global product development business with the sale of our North American portfolio last quarter. In residential, we saw strong results in the U.S. and Europe for the quarter. Overall, margin was approximately 15% lower sequentially and reflects approximately $13 million in Section 201 tariffs. Excluding these tariffs, our resi margin will be more than 20% and in line with our historical levels. In North America, cash on loan sales were 68% of our shipments while 32% were leased. Overall, we deployed 95 megawatts of residential products globally in line with our forecast. Non-GAAP OpEx was $66 million for the quarter, down 15% sequentially as we continue to benefit from our expense control initiatives, improved operational processes, and transition to a new segmentation. CapEx for the quarter was $12 million, slightly below our target as we managed our supply chain ahead of our NGT ramp at Fab 3. Adjusted EBITDA was $7 million, in line with our plan with our performance, primarily driven by strength in our DG business. I'd now like to discuss a few financial highlights for the quarter. Please turn to slide 11. As previously mentioned, despite the tariffs and other one-time charges, we met a number of key financial goals for the quarter including our adjusted EBITDA forecast. We also prudently managed our expenses and we were pleased with the results from our various expense management and cash initiatives. Additionally, we made significant further progress in our efforts to simplify our business and drive greater transparency and accountability. This progress included the completion of the sale of our microinverter business to Enphase, as well as selling our North American power plant development portfolio to Clearway Energy in Q3. Also, our resi lease portfolio transaction is proceeding and on track. If you recall, we monetized our equity stake in the portfolio in Q3 to a recent (00

[Thomas H. Werner:]

Thanks, Manu. I would now like to discuss our guidance for the fourth quarter and fiscal year 2018. As a reminder, our guidance assumes our estimated impact of the Section 201 tariffs and P-Series project delays in our SPS equipment sales business. Please turn to slide 12. Fourth quarter fiscal 2018 GAAP guidance is as follows

[Operator:]

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

[Brian Lee:]

Hey, guys, thanks for taking the questions. I guess, first-off, on the 200 megawatts or so P-Series push-out, is that all recaptured in 2019 and is that first half, second half, any sense on timing you can provide? And then, just wondering, since your EBITDA guidance is actually not changing for this year, despite the push-out, are these to be implied not really adding positive EBITDA, just maybe if you could help reconcile how you kept the EBITDA guidance without having the shipments in the numbers for this year? Thanks.

[Thomas H. Werner:]

Hey, Brian, thanks for the question. This is Tom. And if I don't get entirely which you're looking for, just feel free to ask again or clarify. On – so the answer is, yes, we expect to get the 200 megawatts back next year. That will happen over the first three quarters. And you can see from the bell electric (00

[Brian Lee:]

Okay. No, appreciate the color and that's helpful, Tom. Just a follow-up question would be around the manufacturing capacity. There's a lot of moving parts here. I know you guys are in the midst of both an acquisition transition and also technology transition. But can you help level set a little bit with P-Series, you have X, you have E, and then the NGT and then throwing on top of that, the SolarWorld deal which closed early this month. So, can you give us a sense of exactly how much capacity you have across each of these exiting 2018, and then what you'd be targeting to have, let's say, in 12 months or exiting 2019? Just trying to get a rough sense of where the capacity figures are going. And then to the extent if there's any ballpark figures you're able to share at this point, what sort of CapEx might be required on the part of SunPower?

[Thomas H. Werner:]

Sure. Let me do an overview, and then, I'll ask Manu to add any precision – sort of give you best I can top of my head overview and then, Manu will take it. So, let me start with P-Series. P-Series is going through a 1.2-gigawatt – this is our joint venture, a 1.2-gigawatt expansion that we'll take it to 1.9 gigawatts by the end of the year. And of that 1.9 gigawatts, we have the rights to take two-thirds of it. The total IBC capacity is about 1.2 in 2018. NGT represents one line pair out of that. So, about 70 – about 400 of X-Series and the balance is E-Series product. And in 2019, first, I'll let Manu jump in now if he needs to clarify any of that in 2019.

[Manavendra Sial:]

Tom, you got the numbers spot-on. The P-Series capacity is highly flexible, because we can access up to two-thirds without any CapEx on our books.

[Brian Lee:]

Okay.

[Thomas H. Werner:]

Oh, and the overall CapEx, I'll just give you a range. We're not guiding 2019, but I won't leave it totally wide-open either. You can think of a number that is actually modest between $50 million and $100 million.

[Brian Lee:]

Okay, thanks guys. I appreciate that.

[Thomas H. Werner:]

Thanks, Brian.

[Operator:]

Thank you. And our next question will come from the line of Michael Weinstein with Credit Suisse. Your line is now open. Michael Weinstein - Credit Suisse Securities (USA) LLC Hi, guys.

[Thomas H. Werner:]

Hey. Michael Weinstein - Credit Suisse Securities (USA) LLC Hey, when you talk about profitability in 2019, are you talking about adjusted EBITDA or some other metric?

[Manavendra Sial:]

So, as I think of profitability in 2019, there are two things. Number one, we are simplifying the business and it's easier to model the business once we get rid of lease accounting and the real estate accounting. And second, we are driving operating performance. So, EBITDA is still our metric, but operating income becomes a very relevant metric in our traditional P&L structure in terms of driving the business themes towards operating performance and operating cash generation. Michael Weinstein - Credit Suisse Securities (USA) LLC Right. And on the Analyst Day, when do you plan to host it and can you give us an idea of what kinds of things that you expect to talk about, the NGT expansion plan, Safe Harbor plans, California mandate, any other topics?

[Thomas H. Werner:]

If you – you can publish a preview when we announce when we're going to do it. I don't mean to – we'd be happy to have your input on. What will be at the centerpiece of either the February earnings call or the Analyst Day that would be in the first half of next year, probably on the earnings call though, we'll need to give color on how to model the two segments. So, that will be the focus of the earnings call. And of course to model the two segments, we'll talk about the primary drivers of each segment, which would be, of course, things that you mentioned, capacities and CapEx cash, things of that nature. So – but the focus would be that you would come out of that with models of both of the two businesses, and of course, as Manu mentioned, we expect those models to be way more straightforward than they have been the last couple of years. Michael Weinstein - Credit Suisse Securities (USA) LLC And, hey, one last question about leasing versus cash sales, how do you think about your mix going forward (00

[Thomas H. Werner:]

Yeah. So, I think of it is lease loan in cash. And I see, it's not something that we per se motivate behavior. We give customer the choice between those. And the customer behavior that we see now and is different than others is more cash and loan than lease. And we see that loan is actually increasing. And so, I think that trend continues going into next year. I'll let Manu give you the specific breakout in Q3, but I would say, on a go-forward basis, we expect cash and loan to increase as a percentage, but Manu will give you the numbers for Q3.

[Manavendra Sial:]

So, for Q3, cash and loan were about 68% and lease was about 32%. Michael Weinstein - Credit Suisse Securities (USA) LLC Okay. All right. Thank you very much.

[Thomas H. Werner:]

Thanks, Michael.

[Operator:]

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

[Aric Li:]

Hi. This is actually Aric on for Julien. First...

[Thomas H. Werner:]

Hey, Aric.

[Aric Li:]

...I wanted to touch upon, hey, just wanted to follow up on the 200-megawatt P-Series push-out. Were those orders that were replaced or was that just delayed timing? And secondly, can you talk about the positioning against higher efficiency mono-PERC products being offered in the U.S. from competitors in light of recent heavy spot price declines since June, as well as competitive landscape going forward, both with Section 201 tariff exemption in hand, as well as falling to step down? Thanks.

[Thomas H. Werner:]

Okay. There's a lot there. Let me answer those questions. First of all, the 200 megawatts was a push-out. So, the same customers are still the same customers in the future. There was a period of price discovery. That period is over, at least that which was caused by the Chinese Fit change. In terms of positioning against mono-PERC, we expect as we ramp our joint venture that that joint venture will be cost competitive and it is important to note that it's scaling quite nicely and it will be, by far, the biggest shingling technology in the world. And so, we think we have a technology lead in terms of shingling and will allow us to be cost effective. We can also produce the product on – we can produce the product in various form factors and those form factors allow us to have – in a similar size, but not exactly the same, allow us to have a bigger wattage output. So, we can position similar cost with more watts in a similar area. In terms of Section 201, it's a tale of two markets. In the DG market which the company is restructured and focused on mostly, we actually see pricing in Q3 that is in line with Q2; whereas, if you're focused on the power plant market, which has different attributes, the pricing has been very difficult, and most of mono-PERC is going into the power plant market, and therefore, is facing a very difficult market. I also want to mention that the P-Series joint venture has very, very little – or has a lower CapEx per watt, so is inherently more flexible and is structured in a way to be more flexible than the balance of our capacity – our IBC capacity.

[Aric Li:]

Got it. And then, just briefly following up on the SolarWorld acquisition, just wondering where that was reflected given that the 2018 guidance CapEx, for instance, is held the same?

[Manavendra Sial:]

So, from a SolarWorld perspective, we – from a cash point of view, let me start with that, we have the acquisition of the asset in our cash number and from a P&L perspective, there is a minimal impact to our P&L, which is why we were able to hold our EBITDA guidance even with SolarWorld.

[Aric Li:]

Thank you.

[Operator:]

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

[Pavel S. Molchanov:]

Thanks for taking the question. You've alluded to the broader industry-wide module pricing headwinds down about 30% year-to-date. I know you don't like to talk about your own pricing, but directionally, is that 30% price decline consistent with what you're seeing in your own sales mix or are you feeling a more of a mild impact from the Chinese headwinds?

[Thomas H. Werner:]

Significantly less, Pavel. Thank you for the question. The majority of our business in North America is DG, almost a huge percentage of it. And in our DG segments, big picture, resi and commercial, we saw in-line pricing Q3 to Q2 which is way different than what the power plant market saw. And even if you break it down between new homes, the RVAR (00

[Pavel S. Molchanov:]

Okay. Let me follow up on the tariff exemption, you guys got yours back in September. Is it your understanding that the trade representative is essentially finished with Section 201 exemption or are there some others that have yet to come?

[Thomas H. Werner:]

On – as we interfaced within our agency committee, they communicated that there might be tranches of – that they work on. And the longer it took or the more time that passed, we were getting the sense that that may not be the case. So, the best I could tell you is that they are still working and looking at things, but they have quite a bit on their plate and I have no idea what the pace is with any further decisions.

[Pavel S. Molchanov:]

All right. Appreciate it.

[Thomas H. Werner:]

Thanks, Pavel.

[Operator:]

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

[Jeffrey Osborne:]

Hey, great. Good afternoon. I just want to talk about, with the Section 201 exemption, how you think about pricing flexibility heading into 2019? Are you essentially passing on what was an EBITDA headwind on to your customers to take share in terms of pricing or how do we think about that?

[Thomas H. Werner:]

Yeah, I would think of it is that (00

[Jeffrey Osborne:]

Yeah. That's helpful, Tom. Just another question I had was, just maybe in terms of general terms, I know you can't get into specifics, but you've given great detail about your differentiation as it relates to offering solar-plus-storage as part of the bundle and the ecosystem that's evolving and attach rates going up. But just generally speaking, as you sell the bundle with solar-plus-storage, is that a higher margin business today? Obviously, the revenue potential is higher, but just in the early innings, is there some gross margin degradation as it relates to that storage attach rate going up and then over time, you'll get efficiencies? I just want to understand what the moving pieces there are.

[Thomas H. Werner:]

Yeah. So, we've installed a very small portion of our pipeline in storage. So, the margin accretion or dilution of storage has not been exhibited in the actual results of the company to-date. Storage will be accretive. It will be higher margin. And that's partially, because on a go-forward basis, we're using Helix storage which has hardware from our partner, Lockheed Martin currently with software written by SunPower. And so, we get the, quote-unquote, service revenue as part of our storage offering, and therefore, it's accretive. And as I look out several years in the future, we expect that to be even more so as we add other services on top of our solar and storage – Helix storage offering.

[Jeffrey Osborne:]

Thanks, I appreciate it.

[Operator:]

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

[Colin Rusch:]

Thanks so much. Can you talk to your opportunities for working capital reduction and the possibility for cash generation from the balance sheet just in that working capital?

[Manavendra Sial:]

Yes, I think – the way I think about working capital in two pieces. So, one is optimizing the supply chain across the globe from an inventory perspective, and then I think, in our downstream SPES business, there is a significant opportunity to have a better working capital mousetrap (00

[Thomas H. Werner:]

Colin, let me just add on a little bit to my Manu's question and then we're going to wrap it up unless you have a follow on, Colin. Our working capital, cash-to-cash cycle currently is good, but not as good as we've been in the past. And so, in 2019, we would definitely plan to get back to historical performance on cash-to-cash cycle. And we would expect to get better in certain parts of our business. So, in the SunPower Energy Services business, there are projects that we've previously built on our balance sheet that we don't plan on building in our balance sheet and we have financing established that we could not build those projects on our balance sheet as an example. And we think that by having the two BUs, they'll be more responsive to the market and we expect an inventory churn is an (00

[Colin Rusch:]

Great. And just a quick follow-up. In addition, in the storage application, what are the primary value drivers for those sales? Are you looking at load shifting for getting backup power, are there full-blown microgrid interests, what – how are these systems getting used primarily at this point?

[Thomas H. Werner:]

So, two things. There's some applications by our customer for microgrids but not us. So really, it's backup and it's demand charge illumination today. And very soon, there'll be – rate arbitrage opportunities is the next feature. So, it's backup and demand charge illumination, next step is rate arbitrage. And then, obviously, we want to participate in the ancillary services over time, and we'll have more to say about that over the next few quarters.

[Colin Rusch:]

Great. Thanks so much, guys.

[Thomas H. Werner:]

All right. Thank you, everybody very much for participating in our call. We look forward to the call in February. And as I mentioned, we'll spend more time on the segmentation and how to model each segment on that call. So, thank you very much.

[Operator:]

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