SunPower Corporation (SPWR) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SunPower Corporation Annual Meeting of Stockholders. I will now turn it over to Tom Werner.

Good morning, ladies and gentlemen. I am Tom Werner, President and Chief Executive Officer of SunPower Corporation. It's our pleasure to welcome you to our 2020 Annual Meeting of Stockholders held virtually with a live audio webcast. The meeting is now called to order. Before proceeding to the formal business of the meeting, let me introduce the company's other directors who are with us today: François Badoual, Cathy Lesjak; Tom McDaniel, Julien Pouget; Denis Toulouse, Franck Trochet; and Pat Wood. I would also like to introduce members of our management team who are in attendance. Manavendra Sial, Executive Vice President and Chief Financial Officer; Peter Aschenbrenner, Executive Vice President, Corporate Strategy and Business Development; Vichheka Heang, Vice President, Corporate Controller and Principal Accounting Officer; Ken Mahaffey, Executive Vice President, General Counsel and Corporate Secretary; Eric Potts, Senior Vice President, Commercial Direct; Doug Richards, Executive Vice President, Administration; Norm Taffe, Executive Vice President, North America Residential and Commercial Channels; and finally, Jeff Waters, Chief Executive Officer of SunPower Technologies and soon to be Chief Executive Officer of Maxeon. I would also like to introduce Scott Whelton, a representative of Ernst & Young, the company's independent public accounting firm since fiscal year 2012. Ken Mahaffey, our Executive Vice President, General Counsel and Corporate Secretary, is appointed inspector of election and secretary for this meeting and will also act as presiding officer. Mr. Mahaffey will conduct the formal part of this meeting. After the formal business is completed, I will make some brief remarks and take questions. Before you start, Ken, I do want to say, we are also -- just to comment on diversity and inclusion, we are also prioritizing diversity and inclusion at SunPower with our Board having recently approved a formal program for a review and oversight of our diversity and inclusion programs and efforts as well as annual public reporting of diversity metrics beginning in 2021. Our thanks to shareholders, Nia Impact Capital, for their support and partnership in this process. With that, I'll turn it to you, Ken.

Thanks, Tom. A list of rules of conduct for today's meeting has been posted and is now available through the virtual shareholder meeting website. As stated in the rules of conduct, if you have questions or comments during the formal portion of the meeting, please submit them via the virtual shareholder meeting website, and limit your remarks to the items on the agenda. I received proof of affidavit of mailing from Broadridge, the company's proxy agent, and notice of this meeting has been duly given. And that either notice regarding the availability of proxy materials for the meeting or copies of the proxy statement and proxy card have been furnished to all stockholders of record as of the close of business on March 19, 2020. We have at this meeting a list of stockholders of record as of that date. Immediately before this meeting, account of those shares present by proxy totaled 147,168,417 shares of common stock. This represents approximately 86.69% of the outstanding voting shares as of the record of date. As inspector of elections, I have determined that we have present, via our meeting website and by proxy, a sufficient number of shares to constitute a quorum. The meeting is duly constituted and we may proceed with the business of the meeting. We are going to vote by proxy and online ballot. So if you turn in your proxy and do not intend to change your vote, you do not need to vote because we will count your proxy. The proxies solicited by SunPower will be voted as instructed by the stockholders completing and returning proxies. Those of you who did not turn in a proxy or wish to change your votes should click the Vote Here link on the virtual shareholder meeting web page. The votes cast today will be counted in the final tally along with the proxies previously received. We will announce the preliminary voting results at the end of the meeting. The polls for each matter to be voted on at this meeting are now officially open. At today's meeting, there are 3 proposals to be voted upon by the stockholders. The first item to be voted upon is the election of the 3 directors to serve as a Class III directors until SunPower's 2023 Annual Meeting of Stockholders. Last year, SunPower's proxy statement set forth the instructions for submitting a stockholder proposal for the nomination and election of directors at this year's meeting. We received no such proposals. Our Board has nominated Tom McDaniel, Thomas Rebeyrol and Tom Werner for election as our Class III directors to serve until the 2023 Annual Meeting of Stockholders or until their successors are duly elected and qualified. Each of the nominees is a current member of our Board and is consented to serve if elected. The second item to be voted upon, on an advisory basis only, is the compensation of our named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, compensation tables and related narratives and descriptions in SunPower's proxy statement for this annual meeting. Our compensation programs are intended to align our executive officers' interests with those of our stockholders by rewarding performance that meets or exceeds the goals that our Compensation Committee establishes, with the objective of increasing shareholder value. Our Compensation Committee annually review the compensation programs for our named executive officers to ensure that they achieve the desired goal of aligning our executive compensation structure with our stockholders' interest and current market practices. The Compensation Committee believes that our executive compensation programs, executive officer pay levels and individual pay actions approved for our executive officers, including our named executive officers, are directly aligned with our executive compensation philosophy and fully support its goals. Accordingly, our Board recommends that stockholders vote in favor of approval on an advisory, nonbinding basis of the compensation of our named executive officers as disclosed in our proxy statement. This vote is not intended to address any specific compensation item, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in the proxy statement. The third and final item to be voted upon is the ratification of the appointment of Ernst & Young as our independent registered public accounting firm for fiscal year 2020. Since no other matters have been properly brought before this meeting, we will now finalize voting. If you intend to vote today and have not already done so, you must submit your vote now in order for it to be counted. We will not accept ballots, proxies or votes, or any changes or revocations submitted after the closing of polls. Again, if you've already submitted your vote by proxy and do not wish to change your vote, you need not vote now and your shares will be voted as you previously instructed. [Voting]

The polls for each matter to be voted on at this meeting are now closed. No additional ballots, proxies or votes or changes will be accepted. As inspector of election, I now report -- I will now report on the preliminary voting results. Based upon all the proxies and ballots received, the following have each been approved or ratified, as applicable, by a majority of the shares present via our meeting website or by proxy. First, the election of Tom McDaniel, Thomas Rebeyrol, and Tom Werner to the Board of Directors to serve until our 2023 Annual Meeting of Stockholders or until their successors are duly elected and qualified. Second, the compensation of SunPower's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, compensation tables and related narratives and descriptions in SunPower's proxy statement for the annual meeting. And finally, third, the appointment of Ernst & Young as our independent registered public accounting firm for fiscal year 2020. The final detailed results of the voting, including any ballots recorded during this meeting, will be disclosed in a current report on Form 8-K that we will file with the SEC within 4 business days of today. This concludes the formal business of the meeting. There being no other matters for consideration at this meeting, I hereby adjourn SunPower's 2020 Annual Meeting of Stockholders. I will now turn the microphone back over to Tom. After his brief remarks, we will allow time for appropriate stockholder questions, and we'll attempt to answer as many questions as time allows. Only validated stockholders will be able to ask questions in the designated field on the virtual shareholder meeting web portal. Please note, Tom's remarks on the ensuing Q&A session may include forward-looking statements that are not historical in nature and refer to future events or our future financial performance, which are subject to risks and uncertainties. Such forward-looking statements are based upon information available to us as of today's meeting, and therefore, our actual results may differ materially due to a number of factors and risks. Please refer to SunPower's most recent filings with the SEC for a detailed discussion. Please note that except as required by law, we assume no obligation to update any forward-looking statements made here today. Thank you.

Okay. Thank you, Ken. You've dialed in and logged into the portal, so I'll be referencing slides that are on the portal. And since I'm only going through about 7 slides, I'll be clear on which slide I'm speaking to. If you can go to Slide 3, it says Q1 '20 overview. My prepared remarks will be brief, and then I'll take questions, as Ken mentioned. So first, Q1. We had a very good start to the year. We were profitable. Q1 is a seasonally difficult quarter in solar, and we've actually guided to breakeven or slight loss, and we beat -- we outperformed and we're profitable. We're quite proud of that. So a very strong start to the year. Of course, at the end of the quarter, the COVID crisis or pandemic started, and that impacted mostly our international business because we know that outside of America is where the COVID pandemic was earliest. Our channels business outperformed, and I'll have 2 slides to speak to that specifically. In our -- Maxeon international business was quite strong until end of the quarter, and I'll go through a couple of slides on Maxeon. We were early to respond to the COVID disruption. I have one slide on that, so I'll cover that in just a second. Importantly, the company has been defensive in reacting to COVID, albeit early, but also offensive as we continue to invest in Maxeon and multiple generations of Maxeon solar cell technology and module technology, at the same time, as working and investing heavily in Equinox storage for residential to add to Helix storage for commercial that already is shipping. And then on digital -- I mean I'll say more on digital on a separate slide. Our Maxeon spin-off transaction is expected to close this quarter, pending government approval and the raising of debt. And I'll just say, as I said on earnings, that we still expect to close this at the end of this quarter. And our focus is to manage the company consistent with the crisis, which means cash management during the crisis, making prioritized investments so that we're favorably positioned as business returns or improve. And so we're very focused on both the short term and what business will look like as the markets -- as our markets improve. Let's go to the next slide, Slide 4, which is our response to COVID. We were early to act. I think we can say objectives we did on -- we were one of the first to start putting cost-saving measures in. That's important to you as an investor because that means that we're saving more cash. It means our balance sheet will be stronger. And we all know that in a crisis, the winners on the other side of the crisis have the strongest balance sheet. So starting on the left-hand side of the slide. The first priority for us as a leadership team was the safety of our employees, and of course, safety of any stakeholders that we had an impact on. Our philosophy or our approach is to have precautions that are at or greater than local requirements, and we'll continue with that approach. Well, I will mention that all of our factories are either running or will be running next week, consistent with Jeff Water's comments on our earnings call last week. And they've done a really incredible job and we're both very proud of the work that's been done in the factories to make sure they're safe. As I mentioned, on the left-hand side, we have almost 1,500 people who are working from home and will for the foreseeable future, and we implemented salary reductions for virtually all of those employees. I think we're very proud that our employees actually, in many cases, volunteered. And we hope that, that won't be an extensive period of time, but it's the right thing to do now. As I said, that will enhance our balance sheet when things improve. You can read the last 2 bullets. And moving to the middle column. We've also focused on what we can do offensively, and specifically, how do we increase demand. I'll comment on virtual sales with -- in the channels business, led by Norm Taffe. He did a very nice job of creating programs like 0 money down, 6 months on SunPower, and that's had an impact as our demand indicators are improving and are close to pre-COVID levels. You do need to calibrate that, usually, April and May are much better than the beginning of the year, but it's good to see leading indicators coming back to pre-COVID levels. And then moving to the right on the actions that we took in terms of salary reductions and hiring freeze and no merit increase along them our capital expense management. We've been able to implement programs that would yield $100 million in cost and cash savings. That leads to $500 million of liquidity over the next 12 months, and I'll have a slide on that. Let's go to the next slide, please, Slide 5. Okay, I'm going to cover 2 slides on channels because we're very proud of the performance of this part of the business, and this is 75% or 80%. Assuming the split happens, this will be 75% or 80% of SunPower, sometimes, we call that the new SunPower. The business grew quite well, 50% year-on-year, 109 megawatts. It actually met our guidance. We stayed at the high end of our guidance, made money, and it was at the high end of our gross margin. Gross margin is a super important metric for the new SunPower because it's an indicator of profitability and positive cash generation. And 15% is leveled off the threshold to accomplish these 2 things. Our new homes business is a highly differentiated and highly sustainable differentiation compared to our peers. We have 45,000 homes in backlog. We're crossing our 50,000th new home to put solar -- SunPower solar on. We work with 18 of the top 20 homebuilders. This is clearly a core strength of SunPower. That same team had an agreements with Tech Credit Union, a $1 billion loan financing, which will allow us to offer our own line program, which has obviously the advantage of great visibility and improved economics for SunPower. Importantly, we added 10,000 new customers and we have 319,000. The importance of that metric is, as we introduce Equinox storage, we will first focus on new installs, but we'll also have the ability to retrofit a very large installed base of 319,000 and growing and 2.5 gigawatts. Next slide, please. Slide 6. We made the transition to online sales, and we were able to do that, we think, very, very effectively and more effectively than others because it's an investment that we started years ago. Our digital team under Norm's direction was prioritizing their efforts for several years, including -- we started selling online about 9 or 12 months ago. And so when we -- the COVID crisis occurred, the conversion into online sales was natural for us. We had a 9-month running start. We're able to train 2,000 of our dealers on how to sell online. The differentiation of our online selling is that it is truly online selling, meaning we have SunPower Design Studio, that middle bullet, that we introduced in Q3 of 2019, which allows a salesperson to design the system with the customer on the virtual screen behind them. And so together, they can design a system. Used to take 30 minutes, which was pretty fast, now it takes 30 seconds. So in some way, selling online, because of SunPower Design Studio, is actually more effective. We've generated 40,000 designs with SunPower Design Studio. So it's a proven technology. We're also digitizing the entire sales process, and we're doing that under a set of software we call mySunPower. mySunPower is going to be something that will add capability through the rest of this year. In the near term, it's allowing us to manage the customer experience from the first lead generation, first contact, the design permitting. And actually, in many cases, we can do installation without visiting -- we can do a survey of the house without visiting the house because the customer can take pictures or even video and upload that to us. So we can manage increasingly the entire experience. Well, also, mySunPower will offer the customer an improved monitoring app and it will also include the ability to monitor other features that will roll out through the rest of this year and will include features for our dealers to manage the installation process. So mySunPower is going to become an incredibly important part of our overall customer-facing experience and our dealer-partner experience. Next slide, please. So now I'm switching gears. Just let me say a few more comments about channels before I talk about Maxeon. Our channels group has the world's best dealer network in -- well, North America's best dealer network because we've been at it for 15 years and because we have unique features. 35 of our dealers are master dealers that sell only SunPower, and they represent 50% of our sales. So we have a highly differentiated dealer network. And as I mentioned several times, we're introducing Equinox storage, and we expect to be shipping and installing, commercialization of that product late this quarter or early next quarter, and it will ramp very quickly thereafter because demand is very strong for that product. Now I'd like to go through a bit of an overview on Maxeon. Maxeon had a very good first quarter. Revenue was up 9% year-on-year, $250 million in revenue. Importantly, the channels for the -- Maxeon international channels were modeled off of what we're doing in America. So Maxeon 2 has a differentiated dealer network, and that dealer network is increasingly focused on selling to the DG market, and we see that it's working, with 28%, almost 30% growth in the DG market year-on-year. And DG revenue is, in fact, 70% of Q1 revenue. As you see on the left, we have a broad and diversified geographic focus, which is important because geographies perform -- markets perform differently. And we've learned over 20 years to be -- diversification allows us to be less sensitive to market shifts. And as I mentioned at the beginning, COVID impacted the business, both from a supply and a market -- from a supply and demand challenge. The supply side has largely got mitigated and demand is improving. But in the months of March and into April, the Maxeon team was solving both supply and demand challenges. And as I said, supply is largely resolved and demand is improving. Next slide, please. On Slide 8, capacity is nearly doubling next year. On the left-hand side, we focus on Maxeon. And we see that Maxeon capacity is increasing modestly. But very, very importantly, you can see that Maxeon 5 is increasing dramatically over the next -- less than 24 months. Maxeon 5 has significantly higher margins than Maxeon 2, the product it's replacing. So this is a margin expansion strategy, and it's also far more capital efficient, so this expansion can happen in the capital-light way. On the right-hand side, we have what we call our P-Series technology or shingled technology, which is highly differentiated and patented. Our production of this technology is primarily in China, although we produce it in Oregon as well. And then you can see in this slide that we're expanding in our joint venture quite rapidly, going to 5 gigawatts by 2021, in Yixing, which is part of our HSPV joint venture. That has the feature of P-Series or shingled capacities inherently, capital efficient. And it's even further capital efficient because it's a joint venture. We have the rights to 2/3 of the output. So we have the opportunity to expand quite rapidly in international markets -- in all markets with our P-Series technology. Next slide, please. As we prepare Maxeon to spin, and as I said, we expect towards the end of this quarter, the key objectives of Maxeon post spin that they've been working on for quite some time, are, first, will be rapid revenue growth, as shown on the previous slide. And that will allow us to gain share in key markets, particularly where DG is strong. As we spin, we'll be -- Maxeon will have more than sufficient liquidity to upgrade fab 3, as I showed on the previous slide, and to -- in a capital efficient way, go to 5 gigawatts of P-Series in our joint venture in China. That will result in, the middle bullet is, improving margins, significantly improving margins in Maxeon because we're replacing on legacy products with higher margin, higher efficiency, so higher performance, and therefore, commanding the same or better price products, that being Maxeon 5, which, as you know, has the same or better efficiency but it has 64% more area, and therefore, significantly more energy to produce at roughly the same cost. So it has inherently higher margins. In time, we expect to have -- to add to our modules on -- module-level power electronics and adjacent offerings as well. It's a natural extension. So work is being done. More on that later. It will take our experience of steep and quite long in Europe, and some other markets like Japan and Australia. And we'll expand the channels that we have in those markets and the experience we have in those markets to other markets. And then lastly, the profile of Maxeon is different than it's been in the past. A lot -- the part that's similar is it that we'll have significant technology leadership. But now we can deploy at a predictable and accelerated cadence because we'll have 2 things, we'll have the capital and we will partner, as you can see on the bottom, last bullet, big partners, TZS and Total. TZS in particular, it is used to automation, lower capital and expanding quite rapidly. And it will also allow us, the second bullet, to diversify our DG and power plant mix, do both, but grow DG faster. Let me end with the next slide on Slide 10 and talk about liquidity and then I'll take questions. As my new CEO called on -- our CFO covered on our earnings call, over the next 12 months, we'll have $500 million of liquidity. And you can see the sources of that liquidity. We start with our ending cash and then we have 5 sources of liquidity to get us to $500 million. I think it's important to note that Enphase shares have significant upside. If you use today's stock price, it would be materially higher than the $100 million that we show. And so our current view is that we would have at least $500 million of liquidity. Of course, things change, but that's our current projection. And as I mentioned earlier, a strong balance sheet is one of the key parameters to being favorably positioned as the market improves. Next slide. So I'll end here and I'll take questions. [indiscernible]

Great. Thanks, Tom. Let me take a couple of seconds here to -- for the questions to load. First question is, has there been any problem getting materials for panels for inverters that may impact installations in Q2 and Q3?

We don't expect an impact on Q2 or Q3 installations because of supply. There were challenges, however, in Q1 that our heads of supply chain of the 2 businesses did a fantastic job of resolving. Got very creative with helping suppliers get back online and finding alternate logistics. And there were delays, but we were able to manage through those delays. And we don't expect any impact on either Q2 or Q3.