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SunPower (SPWRA)

Q3 2011 Earnings Call

November 03, 2011 4:30 pm ET


Thomas H. Werner - Chairman, Chief Executive Officer and President

Robert Okunski - Senior Director of Investor Relations

Dennis V. Arriola - Chief Financial Officer and Executive Vice President


James Medvedeff

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Kelly A. Dougherty - Macquarie Research

Brandon Heiken - Crédit Suisse AG, Research Division

Min Xu - Jefferies & Company, Inc., Research Division

Unknown Analyst -

Scott Reynolds - Deutsche Bank AG, Research Division


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Good afternoon, and welcome to the SunPower Corporation's Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] I would like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Robert Okunski

Thank you, Ed. I'd like to welcome everyone to our third quarter 2011 earnings conference call. And I'd like to thank everybody for their patience for the call. On the call today, we will start off with Tom Werner, our CEO, providing an overview of our third quarter performance; followed by Dennis Arriola, our CFO, who will review our third quarter financial results and discuss our Q4 and 2011 guidance. We will then open up the call for questions. And 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 2010 10-K, our quarterly reports on Form 10-Q, as well as in 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 slide, which we will reference on 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, you will find our Safe Harbor statement. Our prepared remarks will run approximately 25 minutes and then we will take approximately 15 minutes for questions.

With that, I'd like turn the call over 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. And as Bob mentioned, sorry we're starting a little late. On today's call, we will review our Q3 operational performance and preview our 2011 results. We will update you on our panel cost roadmap and detail our third quarter financials and outlook for the year.

Please turn to Slide 4. We met our third quarter plan finance despite a period of rapidly changing market conditions as our diversified channel strategy enabled us to reallocate products between segments and regions. Our Utility and Power Plant business exceeded our forecast, and we gained share in Germany and the U.S. in our Residential and Commercial businesses. We continue to invest in our downstream channel, and we are further differentiating our business through new product development by leveraging our industry-leading technology. These actions, along with a strong, flexible balance sheet and the continued full support of Total, position us well for long-term success.

Specifically for the quarter, we met our outlook for revenue and exceeded plan for EPS in Q3. Gross margin was slightly below our plan due to product mix. We reduced price at the beginning of Q3 in our Residential and Commercial business, which is our regular process but very different from what we saw from many of our competitors. Our capacity was fully utilized for the quarter, which led to record cell production of 270 megawatts. We also achieved record yields in Fab 3.

On working capital, we executed well as inventory turns were up sequentially, DSOs declined and overall inventory was stable. With $475 million in new credit facilities completed during the quarter, our liquidity position improved and cash flow is more than 25% due to higher revenue, project completions and expense control programs. We also continue to see the benefits of our relationship with Total from their support of our financing activities, as well as our potential joint R&D and project development activities.

Looking forward to Q4, we have seen a pickup in demand in the EU markets, especially in Germany. We're also seeing strong demand for our racing product in the U.S. and started construction on the 250-megawatt California Valley Solar Ranch power plant. We expect the pricing environment to remain very competitive through at least next year.

At the beginning of Q4, we reduced pricing in our R&C segment in response to lower-than-planned industry ASPs and our strategy to gain share of account with our dealers. This strategy is working but will impact our revenue and margins in this segment in Q4. As we saw in Q3, we will continue to maintain a substantial premium in the market due to our differentiated technology and brand position.

Additionally, we expect to implement company-wide restructuring program in the fourth quarter to reduce our operating expenses and improve operating efficiency, consistent with the more competitive marketplace. Furthermore, we are prudently managing our manufacturing capacity to meet today's demand-driven environment, specifically in order to balance inventory levels and working capital going into the first quarter of next year, we will reduce Q4 production output by up to 20%.

As a result of our focus on the balance sheet, we are reallocating CapEx dollars from fab expansion to our cost reduction programs with a plan of accelerating our 2012 cost reduction roadmap. A key part of that roadmap is our cell process step-reduction program, which remains on plan. We've already ramped one line under the new step-reduced configuration, producing tens of thousands of sales to date that meet or beat our specification. We are confident that this program, along with other changes, will reduce our cost per watt by 15% next year.

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