SunPower Corporation
Q1 2014 Earnings Call Transcript

Published: 25 Apr 2014

[Operator:]

Good afternoon, and welcome to SunPower Corporation's First Quarter 2014 Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. 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, Sheila. I'd like to welcome everyone to our First Quarter 2014 Earnings Conference Call. On the call today, we will start off with an operational review from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our first quarter 2014 financial results. Tom will then discuss our updated 2014 guidance before opening up the call to 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 the Safe Harbor slide of today's presentation, our 2013 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 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. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 4. Tom?

[Thomas H. Werner:]

Thanks, Bob, and thank you for joining us today. I'll start with a brief overview of the quarter and then review our strategy and explain why we are well positioned to lead the solar industry into what we believe will be a sustained period of growth. First, our results. We exceeded our financial targets for the quarter, driven by continued strong demand for our industry-leading high-efficiency solutions across all geographies and end channels. ASPs remain solid across the board, and we expect this to continue for the balance of the year. In our distributed generation business, we posted another great quarter, led by strength in Japan, which accounted for 22% of our shipments. In the U.S., we were pleased to sign 2 innovative lease financing transactions within the last month

[Charles D. Boynton:]

Thanks, Tom. Good afternoon, and please turn to Slide 12. As Tom noted, Q1 was a very good quarter as we beat our plan in all regions and end markets driven by strength in both our DG and Power Plant businesses. In addition to our solid non-GAAP margins, GAAP was also better than planned due to the completion of our 250 megawatt CVSR project. I will comment on a few key items from our Q1 performance on Slides 12 and 13, but spend the balance of my time discussing economic optimization of solar assets. For the quarter, our factories ran at full utilization. Additionally, our construction of Fab 4 remains on plan, and we continue to implement our new technology in Fab 2. Inventory was at a 2-year low as megawatts recognized exceeded production. We are pleased with our cash conversion cycle for the quarter as we achieved a multiyear best of 4 days. Over the next 2 quarters, the EPC retention receivable for Solar Star will move from long-term to short-term AR, which will inflate our DSOs temporarily until the cash is collected when the project is complete. Our non-GAAP gross margin for the quarter was 22%, driven by solid performance from project sales in EMEA, along with execution on our other Power Plant projects, including Solar Star. We also benefited from strong ASPs in all residential markets. Americas margins was on plan as we continue the construction of our Solar Star projects. As we mentioned in our last call, we will soon commence construction of our 135 megawatt Quinto project. But unlike previous projects, we will not recognize development or construction revenue for this project in 2014. Our North America residential business was solid, with total deployments of 35 megawatts with 24 from cash sales. Lease bookings for the quarter were 6 megawatts, with 172 megawatts booked to date, representing $620 million in net contracted payments, excluding the residual value. The higher mix of cash sales played an important role in our cash conversion cycle and earnings for the quarter. In addition, NCI for the quarter was $22 million, higher than forecast, driven by faster-than-planned lease connections. Q1 was also another solid quarter for our global DG business where demand continues to outpace supply. In total, we deployed 108 megawatts of residential products, including 52 from APAC, 21 from Europe and 35 from North America. For Q1, EBITDA was $122 million, up $7 million sequentially. Excluding the impact of NCI, the adjusted EBITDA was approximately $100 million. Before turning the call back to Tom for guidance, I will spend a few minutes discussing the economic optimization of solar assets. We announced last quarter that we built Quinto on our balance sheet, deferring the developer and EPC margin until we sell the project at COD. By maintaining ownership of projects through construction, we reduce the risk to potential buyers and realize a greater return for SunPower. Our industry-leading product reliability and technology advantages allow us to enhance our return further by maintaining an ownership interest through project operation. There is a material benefit to our return by capturing the lower annual degradation, longer system life, best energy performance and lowest risk that our systems provide. Our technology advantages, combined with our worldwide footprint and development experience with more than 4 gigawatts of systems deployed, give us the confidence today to announce our holdco strategy. Please turn to Slide 14. As you know, there have been significant discussions concerning a number of alternative financing vehicles for the industry. We firmly believe employing these structures will significantly reduce the overall cost of capital for the industry and for SunPower specifically. We have created our holdco strategy to capture the increased value of our solar project portfolio and will include systems from all 3 of our end channels

[Thomas H. Werner:]

Thanks, Chuck. I would now like to discuss some of the highlights of our guidance for the second quarter, as well as our improved 2014 earnings outlook. Please turn to Slide 19. For Q2 2014, we expect to recognize revenue on approximately 275 to 300 megawatts with full year megawatt recognized in the range of 1.2 to 1.3 gigawatts. On a non-GAAP basis, we expect Q2 revenue of $575 million to $625 million with full year revenue between $2.5 billion to $2.65 billion. For Q2, we see non-GAAP EPS in the range of $0.15 to $0.35, and for 2014, we are raising our earnings guidance range to $1.10 to $1.40. For 2015, we see year-over-year non-GAAP earnings per share growth of more than 50%, but this depends on the size and scope of our holdco. On a GAAP basis, we expect Q2 revenue of $500 million to $550 million with annual revenue of $2.55 billion to $2.7 billion. In relation to earnings per share, we see Q2 2014 in the range of a loss of $0.10 to a profit of $0.10 and 2014 earnings of $0.75 to $1.05 per share. Capital expenditures in the second quarter expected to be in the range of $30 million to $40 million as we continue to ramp construction of Fab 4. We'll now open the call to questions. In addition to Chuck, we also have Howard Wenger, Regions President, and Bob Okunski, our Senior Director of Investor Relations. First question, please.

[Operator:]

[Operator Instructions] Our first question comes from Vishal Shah.

[Vishal Shah:]

Deutsche Bank. I just wanted to follow up on your guidance for the year. You had a pretty strong Q1 but you've only raised your guidance by $0.10. Is that just the holdco, yield co strategy, that you're holding more projects on your balance sheet and not recognizing earnings? Or is it capacity? Can you just talk about how you -- how we should think about the next couple of quarters?

[Thomas H. Werner:]

Yes, sure. Thanks, Vishal, for the question. Yes, you're right on -- as -- we talked about our profile in Q1 and the fact that we're building Quinto on our balance sheet, starting to build it this year. Chuck alluded too that there may be other projects we'll put on our balance sheet, so that's the most significant factor for sure. And do note that it is late April and we've raised our projection for the year rather substantially in less than 4 months. So first, we're proud of being able to raise again, and secondly, it is primarily the holdco is the difference.

[Vishal Shah:]

Just on that front, I mean, the -- you also benefited substantially from the NCI in common Q1. What kind of assumptions are we -- should we be making for NCI for the rest of the year? And given the recent financings, what kind of -- what's your outlook for leasing business for the next few quarters in 2015?

[Charles D. Boynton:]

I'll take the NCI one first, Vishal. This is Chuck. We had a strong quarter NCI. Our dealers performed very well, and I would say accelerated NCI from Q2 and Q3 into Q1. $22 million versus a plan of, I believe, was around $15 million. I'd expect Q2 to be roughly in the $10 million to $15 million range.

[Howard J. Wenger:]

Vishal, this is Howard. With respect to our leasing business, it's going to grow in 2014 relative to 2013.

[Operator:]

The next question comes from Krish Sankar.

[Andrew Hughes:]

Bank of America Merrill Lynch. It's Andrew Hughes on for Krish. Quick question on the pipeline. The 7.5 gigawatts globally, it sounds like the 517 under contract with the offtake agreement, can you sort of categorize where in the development cycle the balance of 7 gigawatts is? What is sort of more near-term opportunities? What is -- what's more long term?

[Howard J. Wenger:]

Sure, this is Howard Wenger. That's right, we've got 7.5 gigawatts worldwide, about 4 gigawatts in the Americas and the balance outside. We've got around 300 megawatts in near term, meaning the next 4 quarters, that are significantly advanced in the pipeline. I would say that's probably on the lower end of the spectrum, but that gives you a sense. And we -- as we said before, we expect approximately 25% of our ongoing pipeline to be realized into real projects, and that assumption holds going forward.

[Andrew Hughes:]

Great. And then just in terms of the Middle East opportunity there, any updates on how you guys plan to address that market as far as domestic content requirements are at play? I mean, will it be a C7 market primarily? Or are there other -- might that be a location where you plan to put your next manufacturing facility?

[Thomas H. Werner:]

So we'll consider all of the above. C7 works ideally, so replicating or leveraging what we did in China is a logical thing to do. But it's still early stage. And we don't rollout other parts of the value chain being in the Middle East. The -- a couple of other thoughts. Having Total is a huge advantage. Having done business, Total, for 90 years in the region. It's our sense that the large opportunities in the Middle East are still a few years off. There will be a number of tenders in the near term. We feel well positioned for those. So mix of technology reserving options, but we completely understand the local content requirements and think we're well positioned to meet those.

[Operator:]

The next question comes from Ben Kallo.

[Benjamin J. Kallo:]

Robert W. Baird. As far as the pipeline goes in this additional 1.5 gigawatts, I know, Howard, you said 300 megawatts in the near term. But do we see some type of acceleration as you keep on working on these things in parallel where you start adding more? And then I have a follow-up.

[Thomas H. Werner:]

Ben, when you referenced to parallel, is parallel markets in different parts of the world, is that what you mean?

[Benjamin J. Kallo:]

Right, yes.

[Thomas H. Werner:]

I'll say a few comments and I'll turn it to Howard. There is absolutely an element of that. There are different markets that are coming in line -- online at different speeds, and also the time to permit is radically different depending on the market. And so I would point to sort of the positive extreme, which is China. It's huge and it's the largest solar market on the planet. It will be the largest electricity generation -- a new capacity electricity generation by far in the world in the next 10 years. And when the project is approved, it's very short time to market. So yes, you can see China coming on in parallel to other parts of the world for us. So there's definitely an element of that, mostly driven by China. Do you want to add anything, Howard?

[Howard J. Wenger:]

Yes, the only thing I would add is that agree with your -- agree with Tom, of course, and we will see acceleration as we approach grid parity markets. And that's what's happening. And so we're starting to see the pricing intersecting with the grid and the fossil fuel alternative, and you'll see continued acceleration.

[Benjamin J. Kallo:]

All right. My follow-up, Tom. I think you mentioned by year end we would hear more about a much larger expansion of a new fab, a new factory. Could you talk about what you're seeing in the fundamental market, where the financial market, we don't have much differentiation between technology but in the fundamental, which gives you confidence with even some of the Chinese guys expanding capacity, that you're going to do something big like that and that you have -- there's a demand out there for you? And I'll jump back in queue.

[Thomas H. Werner:]

Yes, and I think you said in the finance market, is that right? Yes, so as the market moves to lease and to yield co or predecessor structures to yield co, that becomes more of a product differentiation strategy because the benefits of lower degradation, higher output through rated kilowatt or watts and longer life, which ends up with higher retained value, those 3 factors, they are directly monetized by both lease and by holdco. So those factors couldn't excite us more because we have a clear and distinct advantage. Now on top of that, our Oasis product in Power Plants, we've been able to get costs down as significantly as the module. So when you combine those 2, we're quite happy to compete on cost per kilowatt hour or dollars per megawatt hour. We're taking that same approach of Oasis to our rooftop business and creating power blocks where we think we can aggressively get cost out and balance of system in DG business as well. So I would say that the way financing has moved has given us the confidence then to say make more of our products. So I -- and also I would say that our Fab 4 technology, our confidence is increasing in the performance of that product, so we're derisking technology. The Fab 4 is on track. We're increasingly confident in the competitive space, which leads us to let's expand faster, let's get going on the next capacity expansion.

[Operator:]

The next question comes from Shahriar Pourreza.

[Shahriar Pourreza:]

Citigroup. Just one question and I just have a follow-up. We -- I just want to focus on the utility scale side for a second. We've seen some life being brought into utility scale solar in the U.S. We've seen some sizable RFPs from Dominion in Virginia, Duke Energy in the Carolinas, Southern Company in Georgia and Texas and Minnesota. And then you've also seen some large tenders in Jordan, as well as in Dubai. The question is do you have the capacity, even with this recent expansion, to take on some of the more larger utility scale projects with the C7 and the Oasis?

[Thomas H. Werner:]

The answer to your question is yes. Now of course, that depends on the timing, meant most of which you mentioned is in the next couple of years. And as we can direct certainly the Middle East business to C7. And as you know, by the nature of your question, we get 6x -- we leverage our factory capacity by 6x with C7. So the answer is yes. We are getting more output out of our existing fabs as well, as we improve yields in the way we operate the equipment. So it's a combination of C7 running the existing fabs more effectively and the new fab coming online. And then, of course, the fab that we talked to Ben about a few minutes ago.

[Shahriar Pourreza:]

Got you, got you. And then just one quick question on a potential as you think about a yield co or selling to an existing yield co. You sort of, unless I'm wrong, have a relatively low cost of capital. So the, I guess, the advantages of you doing a yield co will be creating an arbitrage between dropping down an asset from the sponsor into a yield co. Is that sort of where you see the advantages of forming a yield co? Or are you actually going to get cost of capital advantage? Because I was under the impression you already have a low cost of capital.

[Charles D. Boynton:]

This is Chuck. We do have a low cost of capital, so we benefit in whether we're doing construction loans or other financings. We've been able to demonstrate getting, we think, the lowest pricing in the industry. As it relates to long term with holdco, do we do it on yield co or not, that will really depend on the buyer IRR and the factors at that time. There could be structures where we're selling parts of projects to strategics or yield cos and we retain some ownership. Because we do believe that monetizing our projects over the long haul, there's a lot of value to be captured with residual degradation and the technical benefits.

[Thomas H. Werner:]

If I could just add on, yes, we expect a buyer IRR improvement for our projects. In other words, selling price of our projects will improve. And with the yield co, we're 100% confident that we'll get the product advantages. So it's a real important trend and one that really favors us. Thank you, Shahriar.

[Operator:]

The next question comes from Brian Lee.

[Brian K. Lee:]

Goldman Sachs. Just a quick one on the recent Google announcement. Can you provide a bit more detail around the structure? Is this all tax equity from Google and some combination of tax and cash equity from your end? I guess, I was just wondering why you're contributing to this fund and why that seems different from what you did with the BofA fund in January.

[Charles D. Boynton:]

Thanks, Brian. This is Chuck. That's a very similar structure to the other funds that we've done where Google is the tax equity investor and SunPower is the cash equity investor. We would then likely take ITC back leverage, like we did with Hannon Armstrong, to effectively cash flow this fund. So the great news is we've got a high-quality corporate who's doing a tax equity investment. And we'll put that together with an investor like Hannon Armstrong to then cash flow these year 1 for SunPower and then we'll enjoy long term the payment streams from the residential fund.

[Brian K. Lee:]

Okay, that's helpful. Second question was on the holdco, yield co structure and I guess it's more of a philosophical one, if I could. I understand the arguments around NPV and economic value creation and your slides do a good job of that as well. I guess, what I'm wondering is, if you look at what yield cos in the market today trade at, they trade at, to some degree, dividend yield but also on EBITDA multiples and maybe command a premium on that basis. But as you shift from system sales to power sales, I guess my understanding is EBITDA would directionally go down in the near term before it give cumulative -- the cumulative effect of the power sales would make your EBITDA generation go higher. And so from a stock valuation perspective, if, in the market, either trading at EBITDA multiples, you could actually see a negative impact. So I'm just wondering, is that the right way to think about the rationale and sort of the mechanics directionally from an EBITDA perspective when you think about that being a potential driver of valuations?

[Charles D. Boynton:]

Indeed. Tom mentioned as well in his comments that our -- the SunPower corporate EBITDA numbers would be influenced by this potential change. And it's all about building shareholder value. We believe that we're building great projects that have tremendous cash flows. And if we can get investors to value us appropriately, then we'd likely keep those. And if, in fact, we're not getting full value, then we create our own yield co or sell the projects. And so we do think this is sort of an arbitrage in being able to demonstrate how great our projects are. It's similar to the software industry when they change from enterprise licensed software to the SaaS model. It's long-term recurring revenues and cash flows, and we think that we're in a great position to benefit from this move.

[Thomas H. Werner:]

And we're giving investors a long runway to evolve thinking with us, so there's several quarters between now and that decision. So there's several times more for us to talk about this.

[Operator:]

The next question comes from James Medvedeff.

[James Medvedeff:]

Cowen and Company. I wanted to ask a little bit more about the C7 business. It seems to be gaining a bit more traction than -- it's been a while in the development and now it seems to have really started to be rolling out. So you you've got a 30 megawatt project in the U.S. and I guess the Chinese project is now up to 120 megawatts. The last I heard, that was 20. What's been going on with that whole program?

[Thomas H. Werner:]

Sure, and thank you for the question. So those are both combined numbers. So it's a -- the projects we're building in America, there's 2 or 3 that add up to 30 -- 2 that add up 30. And there, the latter, the larger of the 2 is in construction. It will be done towards the end of this year. And of course, that's great experience for us because it allows us to build that supply chain and to get more experience with the performance of the product and also allows us to reinvest earnings from that product to the next generation. The same thing is happening in China. There are 2 projects, one's 100 and one's 20 megawatts. We'll start construction soon. And that is a joint venture structure. And those are considered small, almost prototype projects in China, so you can imagine the upside potential over the next few years is considerable above those 2 projects. We're also localizing C7 in China, which will leverage the manufacturing expertise in China, which will allow us to get costs out further. So it's a very virtuous up cycle in China for sure with a lot of upside potential.

[James Medvedeff:]

Okay. My follow-up question is in a different area, but it was nice to see the additional disclosure on channel outlook. I know it's not just geographic but also by channel. I wonder if there's a -- can you characterize how much of each of those channels is in each of the geographies?

[Thomas H. Werner:]

Okay, you got us thinking. And how would I think...

[James Medvedeff:]

The more you tell us, the more we're going to ask for it. That's just the way it works.

[Thomas H. Werner:]

No, we understand that. I'll let Howard give you just a little color. You probably have a pretty good sense that there are very few markets where the Power Plant business and the rooftop business are big. It's really Japan, North America. There's a couple of emerging markets where they're both big. And then what you see is one dominates the other. Europe is a rooftop business. Middle East is a Power Plant business. China is largely a Power Plant business. So that's a broader view. Do you want to add anything, Howard? That's how we see it. We hear you and that's something we'll consider as we communicate over the next few quarters.

[James Medvedeff:]

Just as a quick follow-up to that, is there a significant ASP, or more to the point, gross margin, or even more to the point, return on capital differential between any of the geographies or any of these channels?

[Thomas H. Werner:]

Yes, I'd say plus or minus 20%, so it matters. I'm thinking return on capital, too. Of course, our return on capital needs to be higher than our WACC, so you can get a sense of the variation. I think we'll take our last question from Crédit Suisse or 2 more. So Crédit Suisse, please?

[Operator:]

The next question comes from Patrick Jobin.

[Patrick Jobin:]

Two quick questions. First, just to follow up on the residential solutions business. You mentioned growth in the leasing business in '14. Are there any bottlenecks to that growth with financing now secured? Or how should we think about accelerating growth in the leasing business?

[Howard J. Wenger:]

This is Howard. No, we're set now with financing, at least, for the next 6 to 9 months, so we're in good shape there. And there really are no bottlenecks to growing our lease business. And we expect to grow it quite substantially north of 50% 2014 over 2013.

[Patrick Jobin:]

Okay. And then a question on China. You've been one of the few companies who's successfully gone into the market. I just want to understand, from your perspective, what enabled you to have a successful market strategy within China. And then just some more color on how that opportunity could evolve through '14.

[Thomas H. Werner:]

So I'd say several things about what we're doing different. One is that it's a 4-way joint venture. It's a very creative structure because this structure has a utility, has a state-owned enterprise and a government entity at city. And so that gives you all the elements to build out a project. You have the technology, you have access to the grid, you have land and then you have local supply. Obviously, those are all matters of degree. So it's a unique joint venture structure. The other thing that we have is we have C7, which allows us to put intellectual property into China to increase local employment. And of course, those are key things that, that country would like as it expands its energy markets. The potential, the Chinese market, solar market is so much bigger than the -- I think it's the sum of the next 2 places -- next 2 countries would equal China, and we expect it to grow faster. So the size of the opportunity in China is big and rapid. The challenge for us, of course, is to build out the infrastructure so that we can capitalize on that. There's also parts of China where there's real weather challenges. So it can be a bit seasonal. So for example, the 2 projects we're building this year, we're going to want to get what we're going to do materially done by, say, November. But lots of upside, certainly lots of work to be done, but lots of upside to China.

[Operator:]

The next question comes from Colin Rusch.

[Colin W. Rusch:]

Northland Capital Markets. Tom, I just wanted to clarify the comment that you made on EPS growth and just make sure I understand the underlying assumptions. Did I hear you say that you're looking at 50% EPS growth in 2015?

[Thomas H. Werner:]

Yes, but let me be precise. Take this year, multiply it times 1.5 and that would be up 2. And then it depends on what we do with holdco. If we do more holdco, of course, that would lower that number. So that's how you think of it.

[Colin W. Rusch:]

Okay, great. And then on the module ASP trajectory in your guidance, so it sounds like you're putting a little bit more holdco -- or more products in the holdco this year. Underlying your guidance this year, can we just get a sense of what you're looking for in terms of ASP declines for the balance of the year? And then what have you seen to date on those module ASP declines?

[Thomas H. Werner:]

I'm going to let Howard talk about ASPs and then, Howard, if you could thank everyone for joining the call.

[Howard J. Wenger:]

Okay, sure. Yes, we're seeing a lot of strong demand in most of the world, every part of the world, frankly. And so module ASPs are quite stable. We're migrating more and more of our business to packaged solutions and integrated downstream to the customer. And so ASPs, actually the mix -- as the mix changes, we'll go up for the company and varies depending on projects, et cetera. One thing I wanted to mention on lease and the cash business in North America is that we are a customer choice company, so we lead with that. And we offer a number of solutions to our customers, and so that can also have an impact on the company's ASP, how much of our business is leased, how much is cash. And we actually had a really strong quarter in Q1 for cash. And when you look at the economics from a consumer perspective and for customers that can afford it, cash is actually better than lease. And so we're offering both. We're offering lease, we're offering cash, we're offering loan, and that will also impact ASP. And Tom has delegated a responsibility for me to thank everybody for joining us on this earnings call. So thank you.

[Colin W. Rusch:]

Howard, just one -- just clarification. So the key part of the question was, what's the assumption in your guidance for this year in terms of ASP declines on an apples-to-apples basis for those modules?

[Howard J. Wenger:]

Stable. Stable ASP throughout the rest of the year.

[Thomas H. Werner:]

Okay. Thank you, everyone.

[Howard J. Wenger:]

Thank you. Have a good day.

[Operator:]

That concludes today's conference. Thank you for participating. You may disconnect at this time.