SunPower Corporation Price & Performance (SPWR)

As a reminder, a replay of the 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 in our actual performance and results may differ materially from our forward looking statements. These risks and uncertainties are described in the forward looking statement disclaimers contained in today's slide presentation, today's press release, our 202210 Form 10 ksA and our Please see these documents for additional information regarding factors that may affect forward looking statements and read forward looking statements disclaimers contained therein. Also, we will reference certain non GAAP metrics during today's call. Please refer to the appendix of the presentation as well as today's earnings press release for the GAAP to non GAAP reconciliations. Finally, to enhance the call, we have posted PowerPoint slides, which we'll reference during the call on the Events and Presentations page of our Relations website. We have also posted a supplemental data sheet detailing additional historical metrics. With that, I would like to turn the call over to Peter Faraci, CEO of SunPower. Thanks, Mike, and good morning, everyone. Today, I will discuss our Q4 2023 results, Our recent injection of new capital and the expected impact from cost reduction actions taken in the last few months.

We believe these cost reductions will make meaningful improvements to profitability and cash flow later this year and beyond. 2023 was one of the tough years this industry has had to endure. And we know that last year was as frustrating for you as it has been for us.

We have been taking concrete actions designed to position the company for success in 2024 and beyond, even if consumer demand declines. I look forward to sharing with you how we intend to continue delivering the best customer experience in the industry while we aim to reduce costs and improve profitability going forward. Please turn to Slide number 4.

I'm pleased to report that we have successfully raised $200,000,000 of new capital commitments including $175,000,000 of 2nd lien debt from SOLE Holding, the JV between Total Energies and GIP that holds the majority of our shares outstanding, which is inclusive of the 45,000,000 bridge loan financing already provided since December. In addition, we have also obtained new long term waivers from key financial partners and entered into an amendment to our revolving debt facility that includes access to an dollars of revolver capacity. Please turn to Slide number 5.

In the Q4, difficult market conditions driven by higher interest rates and net metering policy changes in California under NEM 3.0. As I will discuss further in a few moments, we've already taken actions that we estimate will result in approximately $100,000,000 of annualized run rate savings most of which we expect to be realized by mid year 2024. We added 16,000 new customers for the quarter as we transitioned away from NEM 2.0 installations. Our backlog of 52,100 homes this year reflects combination of retrofit, and new homes channels including a growing multifamily segment. Retrofit backlog now stands at 15,100 reflecting both our ability to execute on installations as well as the deliberate effort to resolve pending cancellations at year end. New homes backlog remained mostly steady at 37,000 while New Homes installations continued to improve grew 19% in Q4 versus Q3. Have more to add on our new homes segment in a few minutes. We began to see some improvement in new sales bookings in September and overall net bookings for Q4 were down 24% year over year on a revenue basis, including the resolution of cancellations. Winter is a seasonally slow period for the industry, as many of you know, So we will be looking for further signs of improvement [indiscernible] We continue to anticipate a growing value proposition for our customers over the long term as we expect traditional retail electric costs to rise, while solar and storage equipment costs decline in the years to come.

And that further clarity on solar tax credits for domestic content will also come to light over time. Storage and SunPower Financial sales attach rates continue to be bright spots for the quarter. With the storage attach rate at 76% in our California direct channel and a 23% attach rate overall. Moreover, storage attach rates for full year 2024 are expected to continue improving as we transition away from Sun Vault to expand our offerings and include a grid grid tied option for consumers. SunPower Financial reached a record setting 65% of [indiscernible] and continues to benefit from strong consumer interest and lease contracts. As noted previously, further growth for leasing is combination of lease payment competitiveness versus higher utility bills and bonus tax incentives under the Inflation Reduction Act. SunPower remains customer centric and agnostic toward lease or loan financing and we believe that our continued access to capital markets as a top tier residential solar company is a competitive advantage. As we begin this year, we've decided to simplify will no longer provide a calculation of EBITDA per customer before platform investment. With our emphasis on profitability under current market conditions, we are shifting our attention towards gross margin and cash flow going forward, and I'll share the details on that shortly.

Please turn to Slide 6. We see several factors at work this year that we believe provide a highly visible path towards improved profitability and cash flow. First, we've already executed on nearly 100,000,000 of COGS OpEx savings which we believe will reoccur annually with about 2 thirds of these savings from reduced COGS including the previously announced consolidation, of SunPower Direct installation sites lower cost panels, lower freight costs and reduced overhead. Furthermore, the majority of OpEx reduction the remainder from facilities costs. The cost to achieve these savings is relatively $9,000,000 expected to be incurred in 2024. 2nd, we expect to benefit in 2024 from new relation as well as lower cost of equipment particularly panels. As our supply chains evolve and diversify, we we expect to see opportunities to provide more value to consumers and shareholders without sacrificing quality as supplier competition heats up over the next few years. We expect to realize as much as a 37% decline in overall equipment expense from lower cost panels, inverters and racking systems.

Please turn to Slide number 7. We are pleased to be able to achieve cost savings without having to sacrifice quality. Using panels as an example, you can see that premium manufacturers are converging on panel efficiency. At the same time, best in class premium panel makers have also been able to achieve new levels of lower cost. We believe we can continue to offer customers and dealers the highest quality products now at prices that are much more affordable.

Please turn to Slide number 8. New homes performed better than expected in 2023 as the homebuilding industry proved to be surprisingly resilient in the face of higher mortgage rates. [indiscernible] Under our conservative assumption for slow growth and retrofit sales this year, we expect new homes to take a larger share of our overall sales mix in 2024. Total Q4 new homes bookings increased 18% versus Q3 and we've seen that momentum continue in early 2024. We saw even better momentum in California with an increase of bookings of 32% versus Q3. New home storage sales under NEM 3.0 in California increased 30 percent in Q4 versus Q3, holding steady at 22% attach rate. From an install perspective, we saw Q4 installations increase sequentially 19% versus Q3, declining only 4% year over year. Our latest backlog estimate of 37,000 homes reflects [indiscernible] 18 to 24 months of installations depending on the pace of home sales themselves. In 2024, we expect installations to grow compared to 23 in tandem with more new home construction. SunPower Financial continues to grow footprint across our sales operation achieving a record high 65% customer attach rate in Q4. Already entering the 2025 target range we previously This growth has been driven by strong consumer uptake of lease contracts which comprised 73% of the lease and loan financing in Q4 versus 26% the year prior.

We now have raised nearly $1,800,000,000 of loan and lease funds over the past 24 months. We plan to continue growing this program with additional partner funds over the coming months. We're also exploring opportunities to establish a regular programmatic approach to project financing, particularly tax equity. We continue to keep an eye on the securitized product markets for additional value opportunities. Please turn to Slide 10. We believe that SunPower Financial continues to bring multiple competitive advantages to the table. Including 1, a lower cost of customer acquisition 2, a customer focused sales approach whereby SunPower earned similar origination fees for lease or loan products. 3, a lower cost of capital driven by lower default rates from customers using higher quality equipment under an industry leading remote monitoring system employing sophisticated digital analytics to identify problems and finally, a longer history of granular that goes back to 2,009. Please turn to Slide 11. With U. S. Residential solar market penetration we view conventional electric utility rates as the primary competition for our industry. The U. S. Energy Information Agency reports that average U. S. Retail electric rates remained near all time highs as of November despite lower cost of bulk coal cell power and key Price increases continue to hit the Northeastern and Mid Atlantic States in California.

With nearly 28,000,000 potential customers in 10 states seeing increases greater than 10% year over year. We estimate that more than 50,000,000 potential customers reside in states where electric rates rising faster than the cost of inflation. In California, PG and E rates rose 13% in January with further increases under review.

We believe that these steep cost increases and the impact of grid instability on residential customers continue to elevate the value proposition of residential solar as one of the most powerful ways to stabilize and reduce home electric bills. Despite lower fuel prices, the Edison Electric Institute is projecting a 20% increase electric utility capital investment from 2023 to 2025 compared to the previous 3 years. As these investments are recovered through electric bills, we continue to believe that the value of rooftop solar is likely to continue rising. Please turn to Slide number 12. [indiscernible] and recapitalized balance sheet, I want to highlight what we believe is the most important differentiating factor that continues to distinguish SunPower from the rest the pack. A customer experience that is second to none.

Despite the financial struggles we've seen these past few months, some power remains top rated with customers earning an A plus rating with the Better Business Bureau and 4 to 5 star reviews with thousands of customers across multiple review sites. Our reputation is hard earned through the hard work and thoughtful interactions of thousands of SunPower employees It continues to be enhanced with an improving digital experience that encompasses the entire customer lifecycle. From system design to energy management, to ongoing and efficient customer support.

I'll now turn you over to Beth for more details on our Q4 results and then I'll close with some guidance for 2024.

Thank you, Peter.

Please turn to Slide 14.

For the Q4, we are reporting negative 68,000,000 dollars of adjusted EBITDA and $361,000,000 of non GAAP revenue.

Lower year over year installations at 16,000 reflects the impact of reduced bookings since May under higher interest rates and the California NIM 3.0 environment, as well as the winding down of NEM 2.0 installations. Increasing battery attach rates since 2022 have been driven by NEM 3.0 demand in California as well as lower cost options. We expect to sell out of SunVault and shift to lower third party cost or lower cost third party batteries Q2.

Adjusted gross margin declined in Q4 as a result of SunPower Direct pre install and install costs spread over lower volumes. Costs are expected to improve in 2024 after recent restructuring actions. Several items totaling 48,000,000 are also either not expected to recur in 2024 or were time shifted into Q1 including the restatement impact, adjustment for inventory write downs, warranty costs mostly related to our commercial business that we sold in 2022 a higher lease cost of capital on systems installed due to rapid interest rate increases were unhedged. And the delay of recognition reduced ITC warranty reserves on legacy projects from Q4 to Q1. Please see the appendix for more details. Turning to the balance sheet. We ended Q4 with 87,000,000 cash on hand and $208,000,000 of net recourse debt. Inventory level declined another 64,000,000 dollars to $261,000,000 on December 31, with efforts to reduce further continuing into 2024. We continue to value our ownership of lease renewal, net retained value in SunStrong using a 6% discount rate.

With growth in the portfolio, we now estimate the value of our stake to be about 320,000,000 dollars Before we turn the call over for Q and A, I want turn you back over to Peter for guidance on 2024 and closing comments. Peter?

Thank you, Beth. Please turn to Slide 15. As I mentioned earlier, we are shifting our reporting and guidance approach a bit to emphasize gross margin and cash flow rather than platform investment. That said, we've decided against providing customer EBITDA guidance on 'twenty four demand at this early stage, particularly as we intend to drive results this [indiscernible] through a combination of restructuring, carefully considered cost reductions and prudent working capital stewardship. Given the challenging market conditions, we are providing guidance on number 1, cash flow and number 2, gross margin. With respect to cash flow, we are guiding to be cash flow positive for the second half of the year as lower inventory, lower inventory costs, and reduced OpEx all kick in. We are also guiding to continue this trend to be cash flow positive for 20 25 as well. We are projecting a range of full year gross margins of 17% to 19% improving to greater than 20% in 2025. We plan to update you with full year EBITDA guidance later in the year once we've had the opportunity to complete an evaluation of our ongoing restructuring and recently announced recapitalization impacts. We've deliberately been conservative in our strategic planning for the year, and we're fully focused on goals for profitability, cash flow and results as we work to improve our financial strength this year to remain an industry leading residential solar company for 2025 and beyond.

Please turn to Slide 16. This slide is largely the same one we showed you last quarter in continues to list our view of the future as we reset and launch forward into 2024 after a difficult 2023. From a macro perspective, we continue to expect that increasing utility rates lower equipment pricing will be tailwinds for the industry We also anticipate a more stable interest rate environment as well as improved clarity on how the bonus tax credits available under the Inflation Reduction Act. For SunPower specifically, we expect to benefit from lower cost Finally, while we have reduced OpEx and deemphasized plans for high growth platform investment this year, we plan to keep an eye on long term opportunities for growth and investment. Adjusting our level of cash usage up or down, based on our expectations regarding the strength of the market in future periods. With that operator, I'd like to turn the call over for questions.

And our first question is Thanks and good morning Peter and Beth. Peter, curious maybe if you could provide some context around the recent capital commitments that were made particularly with Patrick and Patel and GIP, and kind of how that all came together. Just kind of thinking through their levels support because it's obviously pretty clear that there's a lot of support for SunPower and I'm just want to give a little bit of color. Yes. Thanks, James. So I think the number one question on the minds of shareholders and investors has been our liquidity. Appropriately so. And so most of the reports I think that that I've read or they came out last year thought that some power needed something on the order of $100,000,000 to get liquidity back in order. So I guess the first thing I'd put in perspective is $200,000,000 capital commitment is we're pleased. I guess is the way to say it. We're pleased at that level capital commitment because I think that puts us in a position to have the liquidity we need to execute against our business plan this year And a big part of the business plan, as I mentioned in my opening remarks, is getting us to cash flow positive and getting us back on this positive trail.

And then I think as you point out, the second part of this that is a very big deal is that you're looking for signals from your majority shareholders Total Energies and Global Infrastructure Partners are 2 of the most companies and investors in the energy space globally And when they put their capital behind something, it's it's after a lot of due diligence and a lot of homework and a strong belief in the future of the 200 is a very big number is just the fact that they're still committed to the future of the company.

Right. Totally agreed on my side. And then what are your thoughts on the D for additional lease capital as we go through this year?

Yes, that's a great question. So to take a step back, we had a terrific year in SunPower Financial as we pointed out in the slides in opening remarks. Really the idea that we could grow our attach rate from 39% to 65% last year was great. That's a really great signal that more more dealers and more and more customers are preferring to get their lease and loan financing from us versus other third parties. So that trend is terrific and we expect that to continue this year. And really if you take a look at the capacity we have undrawn on the loan side, we're really in great shape. We have $900,000,000 of available capacity. We're in a year where most people believe interest rates will stabilize possibly have a chance to decline over the year. And if loans begin to be more favorable, we're in a really good position But really, really where we want to build a lot more capacity is on the lease side. And as we pointed out, I think it's true across the industry as well that we just had enormous growth last year because the value of leases increased over the value of loans.

We don't have anything to announce on this call, but I would say stay tuned because increasing our lease capacity is our top priority after today's call.

Got it. Thanks, Peter.

Thanks James.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Colin Rusch with Oppenheimer and Co. Your line is open. Please go ahead.

Thanks so much guys. Can you talk a little bit about the pricing dynamics as you've gotten through a couple of quarters in California with NEM 3.0 and you start shifting the mix of what folks are buying. Can you just talk about on an apples to apples basis, how you're seeing pricing evolve in that market over the last call it 3 quarters? [indiscernible] So I guess 2 things on California. 1 is to be frank, we are disappointed that the market hasn't recovered faster than it has. We did see some I'd say, very modest recovery as we got to the end of the year, but clearly NEM 3.0 has had a big impact on consumer demand. Having said that, the consumers that are buying under NEM 3 0 there's 2 characteristics I'd point out so far. 1 is that as we talked about in my opening remarks, the battery attach rates are very high. And that's just for rational reasons. For all the customers in California, your savings is maximized by the addition of a battery. And so would expect at some point, you would all customers in California who order solar panels batteries will be seen as almost a standard product along with solar panels.

And then 2, what we're seeing is that system sizes have increased a little bit over NIM 2.0. It's a modest increase, but it's it is a material increase enough that that's driving up a little bit higher overall rate per customer in California. But I think that the big deal for California is really I think, it's to me, it's questionable whether California is going to be able to meet its clean energy goals. Without reassessing whether or not an M3O had the impact they thought it would. And I think from our perspective, we're concerned that California is not in a position to meet its goals with the CURB program that's out there. So we're working with our dealers and customers make the best of the current program. But I would say the feedback from consumers in California and dealers is very consistent. I think NEM 3.0 has clearly slowed down demand And in the long run, that's not great for anybody in California.

That's super helpful. Thanks. And then in terms of your dealer strategy and how you're working with those folks, given the evolving landscape, both from a regulatory perspective as well as from a capital perspective and looking at kind of where you run into some issues with with that dealer channel. Can you talk about where you're seeing incremental need to edit those things, edit those relation [indiscernible] Well, a couple of quick comments. First, I always like to recognize we were the pioneers in this business in building out a dealer network many years ago. The SunPower dealer network in particular our master dealers they're the gold standard for this industry. We spend a lot of time reviewing both their customer experience and also their financials to make sure that they qualify to be a SunPower Master dealer. So it's still very much a gold star and it's a critical part of our our family and our future. So I've said many times, but our dealer network will be a part of this company I feel like forever because it's such a critical part of our customer experience.

We grew our dealer count last year We grew it, let's say, 10% on the installing dealer side. And probably another 10% on the non installing dealer side. And so we still see opportunity out there to expand our dealer network across the country. I think right now in these challenging market conditions, the number one thing we're focused on is making sure we do everything we can to help these small and medium businesses be successful. Just like a lot of the big companies that have access to capital have struggled this past year with the change in demand that same dynamic has impacted these dealers as well. So our number one goal is to focus on helping build a strong viable, long term business for each of our dealers in our network.

Perfect. Thanks so much guys.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Ben Kallo with Baird. Your line is Please go ahead.

Hi, good morning. Thank you, Peter.

Just maybe along those same lines, could you talk about discussions with your dealers or prospective dealers as well as at the home level, the individual level, just I know it's very competitive with liquidity question marks that you had in the past Could you just talk about how that environment changed competitiveness and losing customers? And if that's past us, Yes. So I think this this level of capital commitment it's our hope that that would put aside any concerns from any of our partners, including dealers on liquidity, and the viability of the company as we go forward. That will be our goal. I think when you're going through a liquidity challenge like we have, it's thoughtful to believe that you need to continue to earn trust every single day with all of your key partners. And I would certainly include dealers at the very top of our list of groups that we want to continue to earn and build trust with as we go forward. [indiscernible] One of the most important things that dealers tell us is they love being part of the SunPower brand. We're really aligned with our dealers and how we think about the customer experience.

The importance of growing this business and the importance of of really expanding the market for clean renewable energy. So I think a lot of the dealers have been working alongside us to really make sure that we all work together to to change our business model as we go through this more difficult challenging year where demand isn't as strong as it was a couple of years ago. But from a dealer perspective, I just want to I can't iterate enough how terrific our dealers have been. They've been a really, really big part of our success. When you take a look at the customer rating that we've achieved, I often like to say that is in great part to the fact that our dealers have been aligned with us on really providing a great customer experience all across the U. S.

Well, thank you. As you move to more and more of technology agnostic, model, how does that impact dealers that may have traditionally been used to SunPower equipment only. And getting them through that over the hump. Thank you.

Yes. Thanks, Ben. I think that is a great And I think it's been on the minds of a lot of people because our strategy traditionally going back to the days when we were a panel maker ourselves was that having a exclusive differentiated panel made a real big difference in the market. And I think for many years that was absolutely true.

But part of the reason in the slide provided this time, we tried to show you our thinking is that the panel market has really changed a great deal over the past even just 3 to 5 years. And there's quite a bit of convergence on particularly among the premium panel makers who can make the highest quality, highest efficiency panel There isn't one panel maker anymore that hold that spot. There's really 2, 3 or 4 panel makers globally that I think we believe are equally high quality and capable of providing a really great customer experience for the life of the warranty and beyond. So really the next thing then is how do you provide those high quality products at a much more affordable price. And I think the feedback from our dealers so far has been very strong that in this market in particular, we really collectively need to do a better job of providing not just high quality product, but high quality products that are much more affordable price. So it's early, but I would say the signals for our equipment strategy have been been very positive so far.

Thank you.

Thank you. [indiscernible] And our next with UBS. Your line is open. Please go ahead.

Hey, great. Thanks for taking the questions. I was wondering if you had could add any additional color on the shift in the [indiscernible] So is it multiple suppliers, 1 supplier Just any comments about the change in the product? Thanks.

Yes. So John, we will provide more detail on that. We're not quite ready to discuss that yet. But as we talked about on our previous calls, SunVault is a terrific product. We're very proud of it.

Was our 1st generation battery and we're excited to be able to sell down that remaining inventory and move forward. But looking forward in the battery business, it's really a game of scale and you need to have the size and scale if you want to continue to invest in innovation and be able to provide high quality, low cost options. So as we move forward, I think what you'll see us announce is partnerships with battery makers who fit that bill. Those battery makers who have the highest quality standards that match our brand and our customer experience, but could also provide a great value. And we look forward to sharing more of those details with you as we move forward.

Perfect. Thanks. And maybe just a quick follow-up. Any comments obviously some of the other companies we cover have commented about the difficult weather situation in California. That was a meaningful impact in 1Q? Thanks.

Thanks. Yes, the atmospheric rivers, I think this is 2nd year in a row we've been hit by this in California. So is an ideal We prioritize the safety of our employees and our dealers over anything else. So when weather conditions exist that don't allow us to safely put people up on the roof and install residential solar our highest priority is the health and well-being of our people over having more installations done. So it has been slow, but I would also say, if you recall, January of 2023, I believe there was a record number of atmospheric rivers hitting California as well. So we had relatively modest expectation for January and I think it's been line with those so far.

Appreciate your thoughts.

Thanks.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Philip Shen with ROTH Roth Capital Partners. Your line is open. Please go ahead.

Hey guys, congrats on securing some additional capital here. I'm going to ask a bit of a tough question here on dealer health. I know you've already touched on this a couple of times. That said, checks suggest that some of your master dealer relationships may be strained as many of them have not been paid for a while. For installations already done. Can you talk about the health of your relationships with Master Dealers have you lost any exclusivity agreements you had talked about and touted some of these dealer relationships in the past, Peter, How do you rebuild that trust And then as it relates to the priority of the new capital can you talk about the order [indiscernible] people getting paid creditors, vendors and then dealers or are you going to prioritize dealers first and then go to creditors and vendors? So how long ultimately does that capital last and what's order of that capital flow. Thanks. [indiscernible] Phil. So on the dealer piece, I think I mentioned [indiscernible] has actually increased year over year. We continue to be very selective about bringing new dealers on board and the interest level across the U. S. And becoming SunPower dealer still remains high and we look forward to adding more dealers as this year goes on.

Specifically on master dealers and then the dealers that we call dealer accelerator dealers, where we've made an equity investment, that count last year was flat. So in a tough down market that count being flat, I think, is probably in line with what our expectations are. And our goal as always been to continue to build a stronger and stronger partnership with all of our dealers and that includes our master dealers and our dealer accelerated dealers as we go forward. And then on the capital piece, we really believe, as I mentioned earlier, that the capital provided puts us in a position to meet our 2024 business plan and get to a point that we're developing we're delivering free cash flow and positive cash flow in the second half of the year. Beth, do you want to add any comments to that as well?

Sure.

The objective, as Peter mentioned, is that we put in a conservative 2024 plan, and that does still get us with the cost reductions that we put in place where we're going to be consistently free cash flow positive in the second half. [indiscernible] Okay. Thanks, guys. As for as it relates to the second $50,000,000 tranche, do you guys anticipate needing tap into that What might be some of the requirements in order to tap into that? Or is that available to whenever you need it. And do you see the need for additional equity or capital outside of $200,000,000 [indiscernible] today.

Thanks.

So we are going to continue to monitor the residential solar market. If it declines below our expectations, we will need to make additional moves. The discussions with our sponsors on that additional $50,000,000 are related to us meeting our business plans. [indiscernible] additional financing, we are always going to be on the lookout to lower our cost of capital.

And we have a ongoing need, as Peter mentioned a couple of times, for additional rounds of project financing, particularly in the lease space.

The only thing I'll add to that, Phil, is that the thing that looks uncertain this year is really the demand side. Our forecast for this year have been much more conservative than we were a year ago. Particularly given what happened in 2023. So I think we're going to be on our toes with regards to our cost structure as well. We're constantly taking a look at are the costs we have how do we make as many of our fixed costs into variable costs and how do we keep our overall cost structure lean strong and in line with market conditions as we go forward.

Got it. Peter, thank you very much.

Thank you. And one moment as we move on And our next question is going to come from the line of Jordan Levi with Truist Securities. Your line is open. Please go ahead.

Now that you've got the near term financing concerns taken care of here, I'm just curious how you think about the resiliency profile of of the go forward business? And maybe just touches on the last question, but asked in another way. Do you believe now that you're in a position to handle a longer term downtrend in demand? And what sort of level maybe just some thresholds around demand levels would require additional financing? Yes. So, two comments on that, Jordan. Thanks for the question. I think one of the reasons that we continue to share the cost of retail electric rates is that fundamentally that's really the biggest driver of this business in the in the long term. And I think when you talk to customers, why did they buy residential There's a group of reasons. There's certainly the wanting to do good in the world and use clean energy instead of fossil fuels. There's certainly a theme around resiliency with grid instability. But the number one reason at the top the list is really cost saving. And so, as we see retail electric rates rising much faster than the cost of residential solar, That spread getting bigger is really the fundamental driver of bigger demand.

And this is still a market. I think we have to keep in mind, even though last year was a very tough year, still 4% penetration in this market. There's tens of millions of customers out there that we could save money for this month if we can get in front of them with a lease offer or a loan offer or cash offer to help them get residential solar. So really the fundamentals of this business from our perspective are still very strong. On the cost side, what we really tried to do was for perspective again in 2022, we grew revenue [indiscernible] And I think last year, if I were to be vocally self critical, one of the areas that that we didn't do as well on was we still had a relatively optimistic revenue plan last year of 22% growth coming into the year and obviously that turned out not to be the case for the year. So the way we thought about it this year is how do we stress test our top line and how do we prepare for scenarios in case demand declines and declines even more than we expect. And so we've really thought about building our cost structure to be able to weather that storm this year, if that makes sense.

That's really helpful. I appreciate that, Peter. And then maybe just as a follow-up as we go forward here, what are sort of the major benchmarks or data points would point to to get a good sense of where you're coming in, in terms of hitting profitability improvement targets. Is it sort of that second half of the year free cash flow inflection? Or are there other things we should be tracking as well?

Yes, definitely. I mean, I think the for color, our year is definitely back half loaded. And that's really a function of the fact that we're selling through higher cost equipment in the first half of the year. And selling lower cost equipment in the second half of the year. So that part is pretty straightforward. But same thing for cost of capital. Our cost of capital is a little higher at the beginning of the year and will be lower in the second half of the year. Those two things plus the full year kick in of all of our cost of goods sold and OpEx savings really create a very different picture for the second half of the year. Beth, do you want to give any more color on that?

No, I think we've with the restructuring that we announced a couple of weeks ago, We are in a position where most of the cost reduction for the year has been done. We still have some ongoing productivity improvements that will be delivering through the year. But the cost reductions have been implemented. So we're looking forward to a much more cash flow positive here this year. Thank you all for all the comments.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Kashy Harrison with Piper Sandler. Your line is open. Please go ahead.

Good morning and thanks for taking the questions.

So first one for me, I know we're not getting customer guidance 2024, but I was wondering if you give us maybe some more color on 4Q23 installation mix, specifically what proportion of installations were California NIM2, what proportion were and then how should we think about non California? Sure. So on the customer side, I would say 2 things for color. 1 is, as I said in my opening remarks, we do believe that the new homes business wind up being a greater share of our total customer count this year That's really due to the fact that there's a new home deficit in the U. S. And frankly new homebuilders have done a great job of managing higher interest rates and the economic environment. More new housing starts for the most part, means more new solar, which is terrific. So would expect that segment of our business to have an opportunity to grow in 2024 But we've been, as I mentioned earlier, very conservative in how we thought about the rest of the retrofit market. And that includes our dealers, SunPower Direct and Blue Raven. And we've been I would say our customer expectations there are in line with the Wood Mackenzie and the OM Analytics forecast for this year.

And then back to the Q4 for California NIM, most of the California NEM 2.0 installs finished up by the end of the 4th quarter. As we mentioned, we did actually go through and really work hard to understand what customers in California were serious about really getting residential solar. So we weeded out those cancellations and really got the installation done at the end of the year. So I think you're really beginning to see the mix in the Q1 of this year be primarily from MEM 3.0. Got it.

And then maybe a question on the business post restructure.

Following all the employee rationalization and cost that you're taking out, can you give us a sense of [indiscernible] level of customer the level of installations you could do theoretically in a recovery scenario without adding more employees?

So in other words, what is the level of demand that would require you to start making platform investments? So the way we've thought about it, it's a great question We really have 4 different ways to go to market today. We have our terrific dealer network we talked about earlier. We have Blue Raven, which is as you know a part of the SunPower family and growing and thriving across the mid part of the U. S. And then within our direct business, to give you some color, we have the ability to do our direct business both with our own employees and also with installing partners. And so almost think of it as a process with multiple hurdles. When demand is uncertain or volatile or low, we probably won't put ourselves in a position where we're doing very much, if any, of our direct business. And we'll really rely upon the dealer network in those geographies. When demand levels begin to increase, we'll be thoughtful about participating ourselves to make sure that we cover customer demand with some power direct But even at the beginning of SunPower Direct, we'll be looking for ways to keep those costs as variable as possible and using installation partners a way to do that in the beginning before you have enough volume to put your own teams in place.

The dream scenario is that Demand for residential solar gets so high that SunPower Direct has teams in the major metropolitan areas across the U. S. But we're not in that position today. And I think part of the rationalization from 'twenty two to 'twenty three was really kind of recognizing this new level set of consumer demand And so we're being, I would say, erring on the side of being cautious and thoughtful at this point.

Helpful. Thanks. And just one final one.

Apologies if this was mentioned and I missed this or there's some details somewhere. But What are the terms on the 2nd lien note specifically what's the interest rate on the loan from Total GIP? And then how should we think about the maturity date?

So the interest rate on the 2nd lien is 13% cash or 15% if paid in kind. And for both the amendment to our first lien, the maturity was pushed out at the 5 year maturity and the second lien will be after that.

Thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Brian Lee with Goldman Sachs and Co. Your line is open. Please go ahead.

Hey, everyone. Good morning. Thanks for squeezing me in. Maybe couple of follow-up questions to the prior question around the second lien term loan. So 13% to 15% interest rate based on how you pay it. There's also it looks like about $75,000,000 75,000,000 shares of warrants being granted. Can you give us a just kind of how do they work, the penny warrants work? And then also it's just $13,000,000 to 15% cost of debt on top of that, that's kind of 40 plus percent of the shares out that they potentially could could receive in share compensation as well? Like I understand that's a sweetener in any of these financing packages, but thought process around kind of including that level of equity exposure as well for this deal?

So we actually look at this as excellent support from our key shareholders. And very important for improving our liquidity and getting us to the point where we can be free cash flow positive in the second half. The warrants are are penny warrants for a substantive share of the outstanding. They do come in tranches. If we don't need to draw that that last $50,000,000 of financing, then we there won't be as many warrants outstanding. So it gives us the chance to work through the business plan at a little less little less dilution but the financing is there if we need it.

Okay, fair enough. And then Beth, you mentioned the first the 1st lien loan also had a maturity push out I know in the press release you talked about a long term waiver. What are the terms around the long term waiver? And also have any of the key covenants changed? I know liquidity, interest coverage were the key ones before. Have any of the covenants themselves actually changed or what's sort of the the scope of the longer term waivers that you've received here?

Yes. So there was a maturity push out The only covenants for 2024 are liquidity covenants, which are lower. As we said in the press release, the the Q1 liquidity is $20,000,000 $30,000,000 for Q2, Q3, dollars 50,000,000 for Q4. And then in 2025, we'll start to ratchet up some of the other covenants that we that we had had in place in terms of net leverage ratio interest coverage and asset ratios. [indiscernible] it is a pretty good set of covenants that we can meet for 2024. And then start ratcheting back to a normal normal situation through 2025.

Okay, fair enough. One for me, I mean presumably based on that you don't need to post positive EBITDA in 'twenty four and you'd still stay compliant given the way the 24 scope of the covenants are structured. But I guess if 1, is that right? And then 2, what's the thought rationale behind the no EBITDA per customer. I understand [indiscernible] the restructuring, the financing packaging having just come together. But in terms of unit economics no longer being relevant, can you kind of walk us through that thought process because I always thought that was a key sort of framework around the longer term profit targets for you guys. Thanks.

So the first one is our EBITDA ratios in our in our covenants have always been a trailing 12. Given where we are at the moment, I a not having EBITDA covenants in 2024 is is important and does not mean that we aren't going to have EBITDA Well, so yes, I'd add one other quick point here, which is you're right, Brian. The unit economics, which was a big topic in our Analyst Day, that still is important. And I think it's an important part of the story. It's really about the EBITDA per customer before platform investment. Given that this is a time where platform investment will be a small part of our investment, it really doesn't make sense to talk about EBITDA per customer before platform investment kind of a metric. But as I think one of the reasons that it was critical for us to make progress on battery attach and storage attach is if you go to the core economics of the business, We've traditionally been a residential solar company that just sold solar panels. Period. And so part of our investment thesis is the fact that we believed we could drive a bigger customer ring with batteries, someday EV chargers, other programs, but also a critical part of this is making sure that every time someone does their lease or a loan, they do the lease or a loan with us.

So once we have a chance to reassess this year, particularly on the demand side, and incorporate the capital. We'll come back to you with EBITDA guidance later on in the year. And I think the EBITDA per customer metric will still make sense as we move forward, particularly once we get through this this bottoming out of consumer demand, if you you will.

All right. Thanks a lot. I'll pass it on.

Thank you. And one moment for our next question. And our next question is going to come from the line of Andrew Piccolo with Morgan Stanley. Your line is open. Please go ahead.

Great. Thanks so much for squeezing me in. I did just want to come back to the the 24 guidance for a second. I know you're not giving [indiscernible] whether that be Wood Mackenzie or other sources, on top of your gross margin expectation. It implies that you still have a good amount of work to do on the OpEx side to get to point where you're generating positive adjusted EBITDA. Can you just give us a sense for how much potentially on a dollar basis you expect to cut out of cash OpEx in 2024 versus $330,000,000 or so in 2023?

So I think what we announced few weeks ago, I think the bulk of that work is already done. Announced pretty significant savings in OpEx as well as some moves on Our cost of goods sold And so the bulk of that work is pretty much done.

Yes. The other comment I'd add Andrew for color is that as the mix between our businesses shifts this year, we'll likely do less panel only sales to dealers. So think of that as potentially a little lower margin, a little lower ASP. And we'll be mixing out higher in other segments like SunPower Financial and New Homes. That have higher ASPs or higher margins. So I do think that between the being more conservative and how we have planned for the top line and then really being aggressive on leaning out the company and making it a much stronger OpEx and COGS cost structure we feel like we're in a good position to endure what is likely to be a still a pretty tough 2024.

Okay, understood. That's super helpful. And then I guess the last question I have just relates to SunStrong. You clearly still have some residual ownership of that JV. Is there an opportunity to potentially rotate that asset or sell down that residual ownership as another source of capital, just thinking through other potential sources of capital from here to the extent demand doesn't improve in line with your expectations?

Well, we would always look at all options as sources of capital to reduce our cost of capital. That's not something that we're actively looking at.

Okay. Thank you.

Thank you. Next question. And our last question is going to come from the line of Mike Oblum with Wells Fargo. Your line is open. Please go ahead.

Thanks. Appreciate it. I'll just squeeze 2 quick ones in here, if you don't mind. The first is just will this funding that you announced this morning, will that definitively remove the going concern language in your financials and what's the path there? Then kind of unrelated, but you give us any updates on your contract that's coming up here with Enphase in a little bit? [indiscernible] So while we are are still in discussions with auditors and reviewing plans We do not expect at the moment to have a going concern provision in their 10 ks that's coming out.

And then regarding Enphase, no update to provide on this call.

They're still a terrific partner of ours. We really are quite aligned with how they think about the quality and the engineering and the support of their products. And I think they've made also great strides in improving the cost structure and providing better value for consumers over time. So we've had a terrific partnership with them as we go forward. And think when there's new news to announce there, Badri and I are happy to share that more broadly.

Great. Thank you.

Okay. Thanks everyone.

We're very excited again about this new capital commitment of $200,000,000 and we're really focused this year driving positive free cash flow and profitability Thank you all for your questions today and we look forward to talking to you next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.