SunPower Corporation
Q1 2012 Earnings Call Transcript

Published: 4 May 2012

[Operator:]

Good afternoon, and welcome to the SunPower Corporation First Quarter 2012 Results Conference Call. Today's call is being recorded. [Operator Instructions] I would like to turn the call over to Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

[Robert Okunski:]

Thank you, Victor. I'd like to welcome everyone to our first quarter 2012 earnings conference call. On the call today, we will start off with an operating view from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our first quarter 2012 financial results. Tom will then discuss our guidance for the year before opening up the call for questions. 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 our 2011 10-K, our quarterly reports on Form 10-Q, as well as today's press release. Please see those documents for additional information regarding those factors that may impact these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call on the Events and Presentations page of our Investor Relations website. In the same location, we have posted a supplemental data sheet, detailing some of our historical metrics. On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor language. Our prepared remarks will run approximately 25 minutes and then we will take questions. With that, I'd like to turn over the call to Tom Werner, CEO of SunPower who will begin on Slide 3. Tom?

[Thomas H. Werner:]

Thanks, Bob, and thank you for joining us today. On today's call, we will review our Q1 operational performance, update you on our Q -- our 2012 strategy, detail our first quarter financials and outlook for the balance of the year. Please turn to Slide 4. Overall for the quarter, we executed well, leveraging our downstream channels to mitigate the impact of challenging industry conditions. Our North American utility business outperformed and offset the price pressure in the rooftop business. We also executed on our technology roadmap during the quarter as we started volume production of our Gen 3 solar cell technology and met our manufacturing step reduction targets for the quarter. We also made the strategic decision to consolidate our Philippine fabs to lower our expenses. With a conservative capital structure, flexible balance sheet and the continued support of Total, we are well-positioned to successfully manage the business through this industry transition. Before discussing the details of the quarter, I want to remind everyone, we have resegmented our business into a regional geographic split, which better aligns our business with our local market focus. Revenue and gross margin for the quarter were better than our plan as our North American utility business outperformed. In North America, our 250-megawatt California Valley Solar Ranch project remains on track, and we are confident that we will meet our September milestones. As of the end of Q1, we had installed more than 35 megawatts at CVSR. We also continue to monetize our pipeline as evidenced by our announcement yesterday on the sale of our 25-megawatt McHenry Solar Project to K Road Power, an independent power producer. The project will create up to 144 local jobs with power generated being sold to the Modesto Irrigation District under a 25-year PPA. We continue to see significant momentum in our U.S. residential lease program as we nearly doubled the number of leases signed in Q1 versus Q4. We are on track with our integration of Tenesol, and we see significant opportunities for the second half of 2012 in South Africa, as well as in the off-grid business. In Asia Pacific, Japan remains our largest market where we shipped record volumes during the quarter. Our high efficiency panels are extremely well-suited for this market. We increased our lead in efficiency by starting production of our world record 21% efficient modules utilizing Gen 3 cell technology. These new products once again took the standard for the industry. Last month, we announced a strategic decision to consolidate our Philippines manufacturing footprint. This decision will drive supply chain efficiency, lower expenses and reduce cost per watt by at least $0.02 this year. We met our accelerated cost targets for the quarter, and we are confident in achieving our 2012 goal of $0.86 per watt or better on an efficiency adjusted basis by the end of 2012. Our step reduction initiative is on track, with 2 lines at Fab 2 running the new process. Initial yields and efficiency are at or ahead of plan, and we expect all 12 lines in Fab 2 to be running on the new process by the end of this year. Finally, we retired $199 million in convertible debt in Q1 and carefully managed our working capital resources. Moving on to Slide 5. As we mentioned last quarter, we are well-positioned to succeed as the solar industry moves closer to competing with traditional generation. We are focusing on 4 key strategic drivers

[Charles D. Boynton:]

Thanks, Tom. Good afternoon and, please turn to Slide 11. As Tom mentioned, our financial and operating performance in the quarter was consistent with our forecast. We also undertook a number of strategic initiatives to improve our model for long-term profitability and cash flow generation. Today, I will discuss 3 key themes. First, I will talk about our operational performance for the quarter, followed by an update on our key strategic initiatives and lastly, discuss how our business model positions us for future growth and sustained long term cash flow generation. Let me first cover our operational performance. Our non-GAAP revenue for Q1 2012 was $580 million compared to $451 million in Q1 '11, an increase of 29% and above our plan. We benefited from strength in North America, but this was partially offset by market uncertainty in Europe. Non-GAAP revenue in the first quarter 2012 includes approximately $176 million from the continued construction of CVSR. We also recognized $90 million in GAAP revenue from the project in Q1. The delta between GAAP and non-GAAP revenue is due to real estate accounting requirements, and we expect non-GAAP revenue will be approximately $100 million higher for the year and this will reverse in 2013 when we finish the project. Additionally, Q1 '12 is the first quarter that Tenesol was included in our financial results. Global ASPs for the quarter were in line with our forecast, and we maintained our significant pricing premium. Cell production in Q1 '12 was 297 megawatts compared to 184 megawatts in Q1 '11. We also recognized 196 megawatts in revenue, up 47% from 133 megawatts in the comparable period last year. Q1 utilization was greater than 90%. Our non-GAAP gross margin for the quarter was above our plan at 12.7% despite a sequential revenue decline of 28%. This compares to a non-GAAP gross margin of 11.3% last quarter. We benefited from our North America utility business and our ability to flex our model to minimize geographic risk. Now let me spend some time on our regional performance. In Q1, non-GAAP North America revenue was $368 million, accounting for 63% of total non-GAAP revenue with a non-GAAP gross margin of 16.5%. For Q1, we installed more than 35 megawatts at CVSR and continue to ramp our installation rate. In U.S. residential, we continue to see strong traction with our lease product. I'll provide additional detail on our leasing success later in my comments. In EMEA, non-GAAP revenue was $156 million and declined 37% sequentially due to challenging industry conditions, policy uncertainty, as well as typical seasonality. Our 2 largest markets in Europe, Germany and Italy declined to 12% of total revenue versus 14% last quarter. Non-GAAP gross margin for the quarter was 2.9%. In APAC, revenue was $57 million. We continue to see good demand pull for our product in Japan where we shipped a record volume of panels to our partner Toshiba. Non-GAAP gross margin for the quarter was 14.5%. Total non-GAAP operating expense in the first quarter was $79.6 million, down 18% sequentially as we started to see cost savings from our Q4 restructuring and successfully managed our variable expenses. We remain committed to reducing OpEx by 10% year-over-year, including Tenesol. Non-GAAP other income and expense for the quarter was a loss of $9.7 million compared to a gain of $6.3 million in Q4 '11. Q4 '11 non-GAAP OIE included a $16 million onetime non-GAAP gain related to the sale of our equity stake in Woongjin Energy compared to a $3 million non-GAAP gain in the sale of the remaining equity interest in Woongjin in Q1. We ended the quarter with a non-GAAP loss before taxes of $15.8 million and recorded a non-GAAP tax benefit of $5.8 million. It is important to note that our non-GAAP tax rate represents our estimated cash tax rate for 2012. Loss per share for the quarter on a non-GAAP basis was $0.12, which was in line with our outlook for the quarter. On a GAAP basis, loss per share was $0.67. GAAP loss per share included approximately $54 million in pretax items, primarily related to $12 million in stock-based compensation, a $16 million difference in GAAP gross margin for our CVSR project, $3 million noncash interest and amortization expense. $9 million for the write-down of third-party inventory and approximately $7 million in restructuring, integration and acquisition charges. Our weighted average shares outstanding were 112 million, which included the shares issued in conjunction with the Tenesol acquisition. Please turn to Slide 13, and I'll provide some comments on our balance sheet and cash flow performance. We continue to focus on maintaining our conservative capital structure and flexible balance sheet for the first quarter. Cash and cash equivalents at the end of the quarter totaled $302 million and reflects the redemption of $199 million of our convertible debt in February. Available revolver capacity was $125 million at the end of Q1. We also continue to work closely with Total during the quarter, and finalized a $600 million Liquidity Support Agreement to provide assurance to the DOE in support of Energy's CVSR loan guarantee. With this agreement, we now have strong visibility on revenue and cash flows for the project through at least the end of 2013. We remain focused on ways to improve our working capital efficiency and reduce the amount of cash tied up in our business. In the first quarter, we had negative cash flow from operations of $137 million. This is primarily due to strong performance in working capital in Q4 2011, our seasonal inventory build and projects under construction such as the recently announced MID project. We expect positive cash flow from operations for the balance of the year. Capital expenditure for the quarter was $33 million. Now I'd like make a few comments regarding 3 initiatives that we feel will position us for success in both the near and long term

[Thomas H. Werner:]

Thanks, Chuck. I would now like to turn to our guidance for 2012 on Slide 13. For Q2 2012, we expect to recognize approximately 250 to 275 megawatts in revenue and see non-GAAP Q2 revenues in the range of $575 million to $650 million, which will include revenue from our CVSR project and our residential lease program. Non-GAAP gross margin is projected to be in the range of 12% to 14%. Non-GAAP loss per share is projected to be a negative $0.20 to a negative $0.05. We expect a GAAP loss per share of a negative $0.95 to a negative $0.80. Capital expenditures in the second quarter are expected to be in the range of $35 million to $40 million. For the fiscal year 2012, we are reiterating our previous guidance. We expect both GAAP and non-GAAP total revenue of $2.6 billion to $3 billion, volume recognized to be in the range of 900 megawatts to 1.2 gigawatts and capital expenditures of $110 million to $130 million, including our CapEx reductions related to our fab consolidation. We remain committed to achieving breakeven or better non-GAAP profitability in the year end, unrestricted cash balance of more than $300 million, while investing in cost reduction initiatives. In summary, we see 2012 as a year of industry transition, where the strongest companies will gain share. With our solid downstream positions, industry-leading technology and product differentiation, cost-reduction programs and successful balance sheet management, we are well-positioned for future success. We will now open the call to questions. In addition to Chuck, Bob and myself, we have Howard Wenger, President of Regions.

[Operator:]

[Operator Instructions] First question comes from Vishal Shah.

[Chad Dillard:]

This is actually Chad Dillard dialing in for Vishal, from Deutsche Bank. I was just curious, what percent of your 2012 revenues will be from capital projects?

[Thomas H. Werner:]

Yes, sorry about that, we didn't hear the question. Your connection is not that good. Can you try one more time?

[Chad Dillard:]

Sure. So what percent of your 2012 revenues will be from capital projects?

[Thomas H. Werner:]

Okay. What percent of 2012 revenues will be for...

[Howard J. Wenger:]

Regarding capital projects.

[Thomas H. Werner:]

Capital projects, okay. So capital projects would be self-developed and that would be North America, Howard or Chuck, roughly half of the projects that we built. Is that the number?

[Howard J. Wenger:]

Yes, 50%.

[Chad Dillard:]

Okay. And then can you talk about the downstream development efforts in international markets, specifically what areas or geography are you focused on, as well as has Total made any capital commitments to downstream project development efforts?

[Thomas H. Werner:]

Yes, this is Tom. I'll say a few words and Howard you can take the majority of the question. Probably really where we've -- previously over the last 12 months or, really restructured our company, we eliminated all of our European self-development. We focused on our American development, and we've increasingly invested in developing projects throughout the rest of the world. And with that, Howard, I think maybe you could talk about specific regions and how things are going.

[Howard J. Wenger:]

Sure thing, Tom. We are focused primarily in the Middle East and Africa in terms of self-developed larger ground-based systems of 10 megawatts or greater. So places such as Israel, and then the Arabian Peninsula and then in Africa. We have a significant amount of megawatts that we're developing in South Africa. Those are the primary areas for international development. We also have some development still in Greece. And we're looking in areas of the Asia Pacific such as Thailand and China. One thing I would add is that with our partnership with Total in some of these areas, we're working with them to provide systems at their own facilities, these are again larger ground-based systems in these parts of the world that I just mentioned, as well as working with them in areas where they have a particular advantage or a long-term presence such as the Middle East.

[Operator:]

Our next question comes from Satya Kumar.

[Brandon Heiken:]

This is Brandon Heiken speaking on behalf of Satya Kumar from Crédit Suisse. I was wondering if you guys could talk about the lease program and how that's contributing to margins. I know last quarter, the Residential and Commercial margins were a bit weaker than the utility, and I was wondering if this rollout of the lease program is reversing that or if there are any other observations there?

[Thomas H. Werner:]

Okay. Yes, this is Tom. Let me say a few comments and then I'll ask Chuck to continue. The lease product is a really, really successful product for SunPower, and it's really successful because broadly speaking you can get the world's best product at pricing that allows you to be cash flow positive day one. So you have what is, therefore, could be interpreted as a approaching grid parity today with the world's best product. And what works well for us is that the advantages of high efficiency are embedded into the lease itself. So the homeowner no longer needs to understand high efficiency or high energy production or standard reliability or life or any of those things. It's built into the lease. They simply need to understand, world's best product and cash flow positive day one. So our lease volume doubled quarter-on-quarter. Now specific to your question, the impact on the P&L, Chuck.

[Charles D. Boynton:]

Yes, Brandon the overall lease margin will be low double digits. And the driver of that is the lease revenue will be in the full system value, not just on the panel or the panel and the inverter. So the actual margin per watt is higher, but the gross margin percentage is lower.

[Brandon Heiken:]

Okay. And I'm not sure if you mentioned it or not, but did you talk about your direct exposure to Japan? And I was wondering if you could give an update on the JV with Toshiba and how that's affecting sales in Japan?

[Thomas H. Werner:]

Yes, we've commented it on Asia Pacific. It's really dominated by -- currently dominated, by our relationship with Toshiba, and we shipped record volume in Q1 to that region. So for the company that we are, thanks to Toshiba's excellent performance, we're doing quite well in Japan. Howard, can you comment further?

[Howard J. Wenger:]

Yes, we're really pleased with how things are going with Toshiba. We're entering our second full year with them. We have multiyear master supply agreement with them, and as Tom mentioned, we had a record quarter in terms of shipments. So they're very well-positioned in the market, and we are looking to expand our presence there, even beyond Toshiba. But they're clearly the centerpiece of our strategy in Japan.

[Brandon Heiken:]

Did you mention the specific exposure to Japan for megawatts or the revenue?

[Thomas H. Werner:]

I believe we gave the number of megawatts for Asia-Pacific and that is -- the majority of that is Toshiba.

[Howard J. Wenger:]

Yes, about 27 megawatts in Q1.

[Operator:]

Our next question comes from Kelly Dougherty.

[Marina Shvartsman:]

Yes, this is Marina Shvartsman on behalf of Kelly Dougherty from Macquarie. We have a question, when you talk about being cost competitive on efficiency adjusted basis at $0.86, what are you guys assuming some of your Chinese peers produce by the end of this year?

[Thomas H. Werner:]

Okay, $0.86 per watt, what did we -- did anybody here, what...

[Howard J. Wenger:]

Adjusted basis and cents per watt.

[Thomas H. Werner:]

Yes -- no, I can't hear the last part of your question.

[Marina Shvartsman:]

I just wanted to see what are you guys assuming the Chinese peers are producing by the end of the year when you talk about meeting your 2012 cost reduction plan being $0.86 per watt on the efficiency adjusted basis? Do you see yourself being competitive with the Chinese peers? And is $0.86 pretty much going to be enough to be competitive?

[Thomas H. Werner:]

Yes, okay. Thank you for the question. The answer to your question's unequivocally, yes. We compete with the Chinese today favorably. Wherever BOS is most expensive, high efficiency has the highest high-value, and we compete very favorably on a levelized cost of energy basis. It would be fair to say where there's low sunlight and low-cost BOS, the competition is difficult for us today. Over the next 2 quarters to 8 quarters, we think we can get cost down on our product faster than conventional technology, so that we'll be cost-effective in even the low-cost BOS areas. So to give you specific segments, in residential today, we compete on a cents per kilowatt hour basis today, and we will be more effective, even more effective over time. In utility, large-scale power plants where you have land mitigation and your footprint is quite large, we compete very favorably. And in between, we compete, but we bring other things to bear to win and over time will be able to compete directly on the economics. So it's a long winded yes, but it depends on the end market.

[Operator:]

Next question comes from Tim Arcuri.

[Seth Tennant:]

It's Seth on here for Tim. I was just wondering if you might -- do you have any idea on how much you added to your pipeline in the quarter?

[Thomas H. Werner:]

Sure. Question is again, we're having a little trouble with our line. The size of the pipeline, I think, is that your question?

[Seth Tennant:]

Yes, specifically what you have added to the pipeline in the quarter for larger scale projects.

[Thomas H. Werner:]

Okay. So what's been added to the pipeline. I think Howard can take that and talk about the medium-sized projects, which gets a lot less attention and then give you a sense of the additions to the pipeline.

[Howard J. Wenger:]

Yes, as we mentioned during Tom's remarks that we have approximately 5-gigawatt pipeline, and what happens with this pipeline over time is we continue to evolve it and bring it to the point where we can construct the project. And so we achieved a number of significant milestones on projects in the quarter, namely Antelope Valley, which is the project 601 megawatts on 2 sites. We've got an unconditional approval of the permit with a fully approved PPA. So we can proceed to financing for that project. So that's really good news. We announced the Modesto Irrigation District project that we sold to K Road. We announced that yesterday. That's a 25-megawatt AC project. And then as Tom mentioned, we have 4 or 5 other projects in the 10 to 30 megawatt range that we'll be constructing over the next 12 months in North America. And so we continue to evolve the pipeline, add to it, get them ready for construction, and so it's moving to plan for the coming year.

[Thomas H. Werner:]

And we have work we're doing on the latest generation of RFOs, but the work is not far enough along to talk about publicly.

[Operator:]

Our next question comes from James Medvedeff.

[James Medvedeff:]

It's Jim Medvedeff from Cowen. Sticking with the line of question we were just on, when you talk about evolving the pipeline, 5 gigawatts is that the, that's -- how much of that is actually sort of set to be -- ready to be constructed and how much of it is still sort of a year or 2 away in terms of permitting and PPA and that sort of thing?

[Howard J. Wenger:]

This is Howard. I'll answer that question. 1 gigawatt of about 5 gigawatts have been announced and are set for -- they're either in construction, which includes California Valley Solar Ranch, that's a 2-year construction schedule. We're just underway there. That's 250 megawatts. I mentioned the 601 megawatts of the Antelope Valley, and then we have additional projects that fill out that 1 gigawatt that we've announced and are ready to be financed and constructed. So then you have behind that another 4 gigawatts that are in various stages of development.

[James Medvedeff:]

So if you don't book any additional -- is it buying the land or booking, how is it that something gets into the -- if you do nothing, it'll end the year at 4 gigawatts, what is it that you have to do to get it back up to 5? And sort of what is the milestone that gets it from a glint in the eye to in the pipeline?

[Howard J. Wenger:]

Okay, to answer the pipeline, the projects that we mentioned that are in pipeline are projects that we have a line of sight to in terms of the land where we actually have control of the land. And then there are various stages of development. The 3 key elements of development to get a project ready for financing and to construct are

[Thomas H. Werner:]

So the 4 gigawatts has at least one of those 4 things in place. And to become a project, it needs to get one or more of the other 3. But in almost all cases, I believe in all cases, we have a land position.

[Operator:]

And our final question comes from Ahmar Zaman.

[W. Karen Tai:]

This is Karen calling on behalf of Ahmar. Okay, I wanted to dig a little bit deeper into your cost reduction roadmap. What was your efficiency adjusted cost in the first quarter? And how does your Generation 3 cells affect your overall processing cost? And what other steps are you taking in terms of cost reduction, is it diversifying some of your wafer suppliers?

[Thomas H. Werner:]

So I'll take the last 2 parts of the question, and then Chuck I'll turn to you for the efficiency adjusted Q1 cost. So Generation 3 is materially the same processing cost, yet a point higher of efficiency. So we get the system benefit of higher efficiency without adding processing cost. We can take Generation 3 and also step reduce it. So we think in time it will be a lower processing cost than previous generations, while still being higher efficiency. The third part of your question is, what are the big drivers to reducing cost? That would be the step reduction programs that we're making, the same generation of cell technology with less steps or less complexity. And it's roughly proportional to the number of less steps, so by the end of this year we'll have 15% less steps and therefore, roughly 15% less cost because of that. Also because we're in an oversupply environment, so our suppliers and that means there's opportunity to get cost down in the supply base, and we, in fact, are doing that. We're also using this as an opportunity to value engineer our developed material, and we can see significant progress. And then really importantly is balance of system cost dominate the overall total system cost, and so as we go forward, it's really critical that companies attack balance of systems cost. And we've got both a rooftop project called Halo and a ground-mounted project called Oasis. And those are -- Oasis is particularly far along. Chuck, efficiency adjusted Q1 cost?

[Charles D. Boynton:]

Yes, Karen, if you look at our last quarter we provided a chart in our earnings release that showed the efficiency adjusted chart versus our actual roadmap. We were actually below our plan for Q1. We can give you more color on the call afterwards, we're not providing the exact efficiency adjustment for Q1.

[Thomas H. Werner:]

Okay. Thank you, and thank you for joining our call. We look forward to our call next quarter. Thank you very much.

[Thomas H. Werner:]

Thank you.

[Operator:]

Thank you for your participation in today's conference. You may now disconnect.