Q2 2019 Earnings Call
Good afternoon, welcome to Sunpower Corporation's second quarter 2019 earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require any assistance during the conference. Please press Star and then zero on your Touchtone telephone.
I would now like to turn the call over to Mr., Bob Okunski, Vice President of Investor Relations Sunpower Corporation. Thank you Sir you may begin.
Thank you Amanda I would like to welcome everyone to our second quarter 2019 earnings Conference call.
On the call today, we will start off with an operational and strategic review from Tom Werner Our CEO , followed by Manu Sao our CFO , who will review our second quarter 2019 financial results before turning the call back over to Tom for guidance.
As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.
On 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. Today's press release, our 2018 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 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 also posted a supplemental datasheet detailing some of our other historical metrics.
Please note that we have updated our metric sheet to be more in line with our new corporate structure as well as to provide additional transparency for each business unit.
With that I'd like to turn the call over to Tom Werner CEO of Sunpower Tom.
Thanks, Bob and thank you for joining us.
On this call we will provide an overview of our second quarter 2019 performance.
And provide an update on our strategic initiatives.
That we believe will drive improved profitability and shareholder value in the second half of the year.
I would now like to review our Q2 performance. Please turn to slide three.
The results of our strategic transformation are bearing fruit as we met or exceeded our key financial targets for the quarter, including our adjusted EBITDA forecast.
Volume revenue and margin all came in ahead of plan driven by strong demand across our global DG business with particular traction in the us Europe and Japan, our SPT business delivered record quarterly shipments as we continued to expand our international footprint.
Given our strong first half performance and our significant visibility into the second half we are raising our adjusted EBITDA guidance for the year.
Now, let me discuss our segment performance in greater detail.
First an overview of Sunpower energy services, our North American DG business, Please turn to slide four.
SPE has executed well in the quarter is both our residential and commercial businesses showed strong year on year megawatt growth and sequential financial improvement benefiting from solid demand in a stable pricing environment.
In residential demand for our recently launched a series panels remained very strong.
And we are ramping production to meet this need.
We continued to build on our industry leadership position in new homes, where our backlog is now over 38000 homes.
The mix of cash loan in lease remains balanced inline with forecast with particularly strong demand for our loan products.
In relation to lease we were pleased to close our new innovative financing vehicle that nominally fund our needs into 2020, but also drive significantly better economics.
Finally, we continue to make progress on our equinox storage.
Product and remain on plan to launch this offering in the second half of this year.
In seeing Ivory maintained our number one position as volume rose, 50% sequentially, we see strong second half momentum in both our direct and CVR businesses as the balance of the year is more than 75% booked in our pipeline exceeds.
$3 billion, we expect this business to become profitable in the third quarter on an adjusted EBITDA basis are here to extort storage solution is selling well and our pipeline now exceeds 135 megawatts with average attach rates of approximately 35% over the last 12 months.
We also recently commissioned our largest multi site.
Solar plus storage project to date with whole foods.
As we have discussed in the past development of our ESP services business is a key focus.
Slide five shows our progress in this area.
We believe that services will become a significant driver of long term profit growth for Sps for several reasons first services allows us to move beyond the solar power market and enable our customers to increasingly participate in the broader energy marketplaces.
Second by bundling service services offerings together with our differentiated solar systems, we can increase customer stickiness with expanded margins.
Third we can mine or existing North American DG customer base.
The largest standing in the industry.
To sell services that enhance the performance and value of our existing systems.
Finally, we have designed our services platform to work not only with our own systems, but also to allow us to address the broader opportunity comprising solar systems from other suppliers.
On the right hand side of the page you can see how we organize the services space into three main categories.
Solar services storage enabled services in energy market services.
I'll spend a few minutes, explaining how we are addressing each category.
In solar services, we are focused on providing asset management own them and monitoring services to existing customers as well as using digital tools to drive a more efficient in satisfying customer acquisition experience for storage were focused on enabling our commercial customers to more efficiently manage their electricity consumption maximizing system performance and providing material cost savings, we are leveraging our cnine storage experience with our equinox storage solution for residential.
Finally energy market services that allow our customers customers to participate in a variety of existing and emerging revenue opportunities.
As we mentioned at our capital markets day, we are already active in several energy market programs.
For example, last year in the new England, ISO we deployed projects into the capacity market. During the second half of 2018 and are currently receiving payments in California. We are actively rolling out about 40 megawatts of solar and storage.
And to a local capacity recruitment program that will allow southern California, Edison to deferred transmission and distribution upgrades.
Now, let's take a closer look at one of our digital initiatives. Please turn to slide six.
With over 14 years of partnership with our residential dealers, we have developed many tools that enable their business.
As many of you know customer acquisition represents a significant cost for residential retrofit application.
Our digital team develop novel software to quickly and automatically design solar systems on customer routes.
Sunpower design Stewart studio creates optimized.
Systems quickly and efficiently using machine learning leveraging our growth from algorithms trained on our existing design library and contingents continuously improving accuracy.
A key advantage of this application is that it reduces design turnaround times.
From over 30 minutes to 30 seconds by allowing homeowners to create their own solar designs online our proprietary machine learning technology instantly characterizes the homes roof optimize assistance configuration and calculates performance.
Homeowners can then modify designs alive, adding or subtracting panels, while evaluating the impact on energy and build savings.
We are currently using this platform in two pilot markets inspect to roll it out nationally this quarter.
We expect to see rapid proliferation of this application throughout our residential business similar to what we have seen with the growth of our sales appointment generation service over the past two years.
As you can see on the right hand side of the page we are on pace to more than double the use of this service in 2019.
With more than 25% of dealer sales generated through appointments scheduled by Sunpower.
These digital applications increase our customer satisfaction and stickiness and support enhance margins.
Now, let's review, our Sunpower technologies business.
Please turn to slide seven.
Our manufacturing team executed well again in Q2 exceeding our shipment guidance and meeting cost and yield targets for the quarter with full fab utilization.
Our next generation Maxion, five technology is hitting performance goals and our cost reduction roadmaps are on plan.
Production of our P series Technology is also going well with our Dcs joint venture it two gigawatts of capacity in our factory in Oregon now in volume production.
Our SPT international sales channels posted strong performance with a record volume quarter in DG with Asps and margins coming in above plan, driven by particularly strong traction in Europe and Japan.
We continue to drive our our mix towards the higher margin DG segment with approximately 65% of our shipments into DG in Q2.
Demand for our newly introduced 400 wide product remains very high and we are on allocation in our DG channels for the balance of 2019.
We further expanded our footprint in the power plant space in Q2 remained fully booked in power plant for the second half of the year.
I'd now like to provide a brief update on our maxion five progress please turn to slide eight.
Maxion five offers the highest cell and panel performance in the industry. We recently began volume shipments into us residential market and are seeing very strong demand, we expect to ship up to 100 megawatts of maxion five this year.
This technology allows us to manufacture a premium product at a significantly lower cost and enabling us to materially expand gross margins.
Our backs five ramp plan is on track we are in full production on our first line with tool install almost complete for our second line with both lines are complete our nameplate capacity will reach 250 megawatts.
Our partnership discussions around Bax five are progressing and we remain confident that we will reach a final agreement in the coming months.
We have created three strong franchises with Sunpower and I'd like to spend a few minutes now highlighting the relevant value drivers. Please turn to slide nine.
Starting on the left with SPT, we're focused on driving topline growth and margin expansion.
Through the ramp of MGT and leveraging our highly capex efficient P series technology platform.
Given our differentiated products and very strong channel position in the rapidly growing DG market. We are confident in Sps ability to write to drive material margin improvement as we scale volume.
For North American residential we see our recently closed residential lease line driving margin improvement as we further grow our leasing business.
We are deepening our decades.
Okay dealer partnerships with enhanced digital tools ramping our eight series panels in introducing equinox storage in the second half of the year.
Our leading share in the new homes market gives us a strong position to capitalize on.
For North American commercial our focus is on driving continued share growth enabled by our hybrid direct and independent dealer model.
We expect to expand our leadership position in storage and services not only with new customers, but also by leveraging our 1.3 gigawatts installed base for additional revenue opportunities.
Overall, we are well positioned to achieve our target model in each business unit.
Before turning the call over to mining for the financials I would like to provide some comments on our confidence in achieving our 2019 financial forecast for the balance of the year.
Please turn to slide 10.
As you can see on the right we executed well in the first half of the year versus our plan.
Given this outperformance our significant second half revenue.
In margin visibility in further expense management initiatives, we are raising our 2019 adjusted EBITDA forecast.
Key drivers for the remainder of 2019 include the continued ramp of our E series in Gi product for the us residential market in associated margin uplift.
Improve economics associated with our new residential lease fun.
Implementation of our.
Innovative new project fund with Goldman Sachs renewable partners that gives us the ability to sell our commercial projects at notice to proceed.
Improving cash flow and working capital.
Continued strong demand in the international and DG markets for both our maxion in P series product lines, and finally high visibility in our SPT power plant business, which is fully booked for the remainder of the year.
We are therefore, raising our 2019 adjusted EBITDA forecast to be between 101 hundred $20 million.
In conclusion in Q2, we delivered performance that we believe is clear evidence of the success of our strategic transformation.
Sunpower wealth is sufficient to meet our second half.
2019 targets and to grow profitably into the future.
With that I'd like to turn the call over to Manu to review the financials Manu. Thanks, Tom non memory reviewed the financials. Please turn to slide 11.
We were pleased with that result, as we made a key financial commitments, including on adjusted EBITDA forecast overall, our non-GAAP revenue was above our commitment as we benefited from strong international DG demand as well as a strong open on execution in Sps.
Revenue was up sequentially as both at a third engine and commercial businesses saw improved demand throughout the quarter.
But SPP, we shipped 637 megawatts above forecast driven primarily by an international DG business. Our consolidated non-GAAP gross margin was 11% ahead of our forecast in SBS gross margin was up sequentially driven by an improved mix in our commercial business, while residential margin was impacted by onetime noncash charges.
For the quarter pricing in both residential and commotion remained stable.
We expect both resi and commercial margins to improve in the second half of the year, given our strong backlog and improving cost structure.
In SPP gross margin was better than forecast on increased volumes and strong demand in our higher margin DG business. I also want to highlight that SPD Q2 margin and EBITDA. It does include the impact of continued on costs of our audit and manufacturing operations. We expect these costs to decline in the second half of the year.
non-GAAP Opex was $61 million for the quarter down 10% sequentially as we benefited from our cost reduction initiatives and productivity gains from our digital investments get increasingly confident that 2019, opex will be less than $270 million capex for the quarter was $12 million consistent with that end Gd vamp at fab three and the continued install our second line in Malaysia. Adjusted EBITDA was $8 million, we see 2019, adjusted EBITDA improving on a quarterly basis as the benefit from our first type initiatives strong backlog increased volumes of NGC and example for storage and service offerings.
I'd now like to discuss a few financial highlights of the quarter. Please turn to slide 12.
As previously mentioned he met or exceeded our key financial commitments for the quarter.
We continue to prudently manage our balance sheet with Q2 cash in line with our forecasts modems skater in Sps, we closed two financing agreements in the quarter that you believe is significantly improve our working capital.
Management, including our Cnine notice to proceed financing program and a new lessee leased fund for better lease economics, we also positioned ourselves for margin expansion in the second half.
We expect this expansion to come from the further execution on our cost and technology roadmaps, including hiring GT and started volumes benefits from our recent keep close project financing initiatives and strong visibility in a global DG business, we remain confident in achieving our second half goes as the us significant visibility in both our business segments. Finally, you believe you have three unique franchises each with distinct value components and supported by industry deals and as a result, we have updated our quarterly metric sheet to reflect the key value drivers for each of the franchises that provides greater transparency to investors.
I'd now like to spend a few minutes discussing these key value drivers as well as the favorable trends that will support our growth. Please note that we have provided historical information on these key drivers in our hosted metric sheet on dot on our IR website.
Please turn to slide 13.
I'll focus my discussion on those elements that fee best exemplify the value for businesses and explain a view that investors need to look at sunpower on a sum of the box basis.
First Sps, we see two components of value in both residential and commercial on development engine and our opportunity for service and upset.
But as the development, we continue to see revenue per watt and megawatt growth enabled by strong dealer netbook as core drivers of our business storage would also become more important as you rollout the equinox product in the second half of this year.
We also see significant value in our ability to monetize on ongoing relationship with the customer but services in Upsells. But example, dr. was hit on new customer growth as well as on ability to leverage on greater than 285000 customer installed base put additional storage and services margin in Cnine. We continued to see strong demand with project sizes, increasing and a healthy second half 19 megawatt backlog with storage, becoming a more important aspect if any commercial deal on attach rates remain high as we've mentioned before on more than 1.4, Gigawatts installed base and more than 3 billion dollar pipeline provides a significant ability to expand our footprint with new products and services SPP is in manufacturing technology business, So megawatt shipments Sps bookings and visibility of the key metrics in DG, we are driving margin expansion in combination with volume growth as our DG business.
Has significantly higher margin than in power plants.
Finally, I'd like to point out that we have got in key value not 20% ownership in our China manufacturing JV at $35 million.
Before turning the call back to Tom for our guidance I would like to provide some transparency on cash forecast for the balance of the year. Please turn to slide 14.
On the left hand side, Scott, we detail our immediate cash flow moves for the first half of 2019 as well as data received those items for the year as a whole and provide a bridge for our goal of ending the year with more than $200 million in cash you have forecasting that our views will generate on $150 million of cash in 2019, given us strong visibility of second half EBITDA as articulated by Tom earlier, and working capital initiatives, we defined business unit cash generation to include cash impact from a project financing activities and monetization of that remaining development assets. In 2019. We also expect them would be really paid down our legacy liabilities, including out of market. Finally contract that runs through 2021. Finally, we expect to benefit from investing in high ROI initiatives, such as MGT digital and solar plus storage in conclusion, we remain on track for 2019 plan.
On and feel very confident in our ability to meet our long term model structure with that I would have done to call back to Tom for our guidance Tom.
Thanks, Manu for 2019, we expect financial performance to improve on a quarterly basis throughout the balance of the year.
I would now like to discuss our guidance for the third quarter and fiscal year 2019, Please turn to slide 15.
The company's third quarter 2019 guidance is as follows on a GAAP basis revenue of $430 million to $470 million gross margin of 8% to 12% and net loss of 55% to $35 million.
On a non-GAAP basis, the company expects revenue of $450 million to $490 million gross margin of 14% to 17%.
Adjusted EBITDA of $30 million to $50 million.
And megawatts deployed in the range of 550 to 600 megawatts.
On slide 16, the company's fiscal year, 2019, GAAP and non-GAAP guidance is as follows.
Revenue of $1.8 billion to $2 billion on a GAAP basis, and $1.9 billion to $2.1 billion.
On a non-GAAP basis Gigawatts deployed is expected to be in the range of 2.05 Gigawatts to 2.25, excluding approximately 200 megawatts for the company's Safe Harbor program.
non-GAAP operational expenses of less than $270 million and capital expenditures of approximately $65 million. Finally, the company is raising its fiscal year 2019, adjusted EBITDA to be in the range of $100 million to $120 million.
In summary, Q2 was solid quarter for the company as we executed on our strategic initiatives.
And positioning the company for a strong and profitable second half performance.
With that I would like to turn the call over for questions.
Thank you ladies and gentlemen at this time if you do have a question. Please press star and the number one key on your Touchtone telephone and if your question has been answered I assume over yourself from the queue. Please press the pound.
Our first question comes from the line of Brian Lee of Goldman Sachs. Your line is open.
Hey, guys. Thanks, Thanks for taking the questions I had two maybe first on the gross margins pretty encouraging to see you beat guidance for the second straight quarter here, So kudos to you.
But I was a bit surprised to see the components resi seemed weaker commercial better and then SPT was higher so.
Can you walk through some of that.
You know the moving pieces.
Cross the three buckets and then how we should think about each component into Threeq Q.
And then generally speaking it seems like you're tracking ahead of plan in commercial and SPT, but theres more upside potential on resi any thoughts around.
You know the the longer term targets you set out at the analyst day, if those are still relevant or if maybe you're starting to see.
Potential upside and some of those buckets.
Thanks for the question, Brian and this is Tom I'll start and then monitor can take it from there.
Hi, you're right.
Gross margins were good in Q2 on a trending the way we want and I. Appreciate the question about the models that we showed at analyst day, because I think thats highly relevant on commercial is pretty close to model.
Volumes are still.
Volumes in the second half year will be substantially higher so it's really good news for the commercial business because.
As margins have now come in closer to model are we capitalize on that with volume SPT is benefiting from.
Focusing on the DG business and of course the series product.
And so we expect both of those things to continue to bear fruit going forward. So the ASP trend I think is something we're confident in going forward.
Ill.
Manu explain Ramsey.
Residential does have.
Some accounting in it that he can explain what I would say about residential is we're quite confident about the.
A trend towards model on and.
On we need to just explain Q2, but.
In terms of the overall trend, we're still quite confident that we get to model all land just with my last comments about getting to model and I believe you can still find those slides analyst day slides on our website. If you want to look at the model for others.
On his yes, I wouldn't say, we're prepared to raise model on any of the businesses, but I would say that the guidance that we gave.
Our confidence is higher and maybe we get terrible sooner and some of the businesses then.
Than we were suggesting when we had to analyst day on terms of residential mining alright. Thanks, Tom So like Tom said.
On an asset engine margins are on improving throughout the year.
Here's the way to think about second quarter second quarter on Hana, a onetime noncash charge that was effectively of forgiveness off.
Some.
Some charge backs to dealers from prior years and now normalizing for that that would have put us at a higher gross margin compared to prior.
Five quarter. So the trends are positive, there's a little bit of reclasses around between Opex and gross margin and really enhance the gross margin for second quarter.
So as Tom said the trends in on US It entered a positive quarter on quarter and expect to continue through the through the year.
Okay fair enough that's helpful.
And then the second question and then I'll pass it on on on revenues.
You've been pretty consistent here in kind of the $4 million to $500 million range throughout the year.
And also what down what you're inferring here for Threeq as well so the first real step up seems to be in Q4 based on the full year outlook, you're providing industry Q guidance, but.
And correct me, if I'm wrong, if I look at the megawatt guidance. It seems like Q4 will actually be about 500 megawatts, which is actually not higher if anything it seems a little bit lower than the recent run rates. So can you kind of parse that out for us the better Q4 revenue run rate on what seems to not be necessarily higher volumes is this all mix related.
And if that's the case can you give us some.
Sense as we head into 2020 around.
The two drivers of topline growth potential topline growth I guess organically on mix and then inorganically on.
Incremental capacity and volume additions. Thanks, guys alright, great. There was lots of questions rolled into one thought on invest piece by piece from a revenue perspective.
You know Sps is a higher mix, both residential and commercial off the open on Sunpower.
Revenue in the back half of the year on megawatts in the back half of the of that drives a higher revenue. Both businesses are doing extremely vented high bookings and residential commercial bookings also very good stronger backlog coming in the back half of the year, which gives us increasing confidence.
In the back half revenue number those are those revenue numbers in Sps.
We'll expect to grow in line with the model that we laid out.
At the analysts day.
Hoboken acid engine.
And commercial businesses.
So that was that was from a revenue perspective from a from a megawatt perspective as you one of the can give the fact that ethane is that the back half of the year.
Megawatts includes about 200 megawatts for our safe Harbor that does not auto five.
Megawatt.
Guidance on legal and deployed guidance. So you have to add 200 megawatts to that.
A fourth of that in third quarter and fourth of that in fourth quarter.
And then Brian .
In terms of 2020 and beyond.
How do you think of revenue growth onto Theres, the baseline megawatts deployed in and we guided.
Our growth.
And on our analyst day.
On in we do have the catalyst of.
The Safe Harbor, plus we will have an ITC catalyst again next year in America in rest of World markets are really strong.
Places like Europe , before our Korea Latin America.
Other parts of southeast Asia that are doing quite well, we think that goes into next year as well I think is super important to narrow as well that we expect revenue per watt.
To increase meaningfully over the next few years as we increasingly attached storage and services to a lesser extent.
Our net the case for residential and commercial in SPT, a big driver will be more a series of focusing on DG and of course, we're not done when a series as we ramp a series.
Our SPT team is working on a successor product as well.
So in the out years that will help revenue as well.
So thats, how I would think of longer term revenue growth.
Okay. Thanks, guys appreciate the color.
Thanks, Bart and Frank.
Thank you and our next question comes from the line of Michael Weinstein of Credit Suisse. Your line is open.
Hi, This is Mike Malone fearful of Michael's line Shane.
Can you just touch upon.
And GT manufacturing Road mine plan.
Where we are on.
Adding the third line will be on the first two alliance and then I've a follow up.
Sure.
So we think of alive.
MGT can really comes in line pairs. So we've implemented a line pair so you could call it two lines, but its on its online pair.
The equipment for that second half or that that second line.
Is being installed and will be operational soon.
And so we expect to be pretty close to the nameplate run rate of 250 megawatts in Q4.
John in terms of.
The next line on Japan, how you count.
We expect to make that commitment for that line.
During the fourth quarter, probably towards the end of the fourth quarter.
Their commitment right now would be our plan to happen after.
Weve signed a funding agreement.
And so thats the plan that.
We have in front of us now and of course, none we ramp.
Subsequently in more aggressively next year post funding converting more aligned to maxion five.
Got it and then separately could you just a chip on the bi facial exemption, which was recently granted by the government and.
How do you see that technology, specifically for your JV.
In China.
For NGL. Thanks.
Yes so.
My facial.
It is not new to us we ship bi facial product in 2009 to just show project with Nextera energy.
Two we know bi facial extremely well.
The P series product is actually.
It has a better bi facial ratio or.
Hi, co efficient then.
Then does our IVC products through the Pcrs product in China is particularly well suited for bi facial we don't actually shift out of that joint venture into America showed the motivation from the tool one exclusion.
Slide five is not there for us because of course, we have an IVC technology exclusion on so if we do buy facial it would be P series or most likely that it would be for rest of world markets.
In the CVD that may change that.
But that would be their current position and it's important to note.
By facial really only make sense in power plant.
In DG applications.
You don't have adequate space between the module and the reflective surface for the math to work. It doesn't it doesn't mean, we won't see bi facial modules in DG. It just doesn't make sense economically.
That's helpful and just one last question and ill get back in the queue. Just could you just talk about the improving residential lease economics.
And model job just you touched upon it but a fair.
Not anything more on that generally thanks.
Yes, so we've we've done I'm going to let norm to answer that question here in the second understand safety awards norm broadens the residential business I think many of you know that.
Slide on we've done three prior funds with BAML of course, you improve.
Different each market as you work with them.
And we've raised a lot of lease volumes and so norm in his team and Montes team worked closely with BAML to improve.
Hi, the actual implementation of.
Of.
The.
Fourth waste volumes due on safety or so.
Yes, Thanks, Tom Yes, the only thing I would add there was.
We have very good partners with with BAML.
Allowed us to really achieve our key objectives.
Both in terms of lowering our cost of capital and allowing us to actually take more money.
Back to ourselves on those leases also supported our son's strong partnership very well in that this lease fund actually allows us to deconsolidate real time leases. So we get the cash up front and then we participate with our partners on strong and over the longer term economics at least at the same time, that's quite innovative and unique and very supportive with our our whole trend toward being more transparent about our economics and focused on getting cash upfront.
Thanks for hip.
Thank you and our next question comes from the line of Julien Dumoulin Smith of Bank of America. Your line is open Hey, good afternoon graduation.
Maybe just a quick just a quick housekeeping item before I move on.
That's embedded in your guidance here in the back half of the year and where thats to be accounted for and then I've got a follow up real quickly.
Hey, Julien we launched a your connection there briefly you said something about something being embedded in the back half guidance, Oh, sorry, I apologize about that.
The Enphase shares just whats is where is that it reflected in your guidance and what are you assuming there.
If for the balance of 19 here.
So from a and fits perspective.
We are assuming that.
We own about 85% of the Enphase tall.
So weve got nothing in our PML, nor our cash forecast from this day forward on Enphase for 2019.
It will be an 85% owner and will be an 85% or at the end of the year.
Got it okay excellent and then if I can just turn back to the sustainability of the cash improvement that you're talking about.
I suppose can you give at least a little bit of a flavor as to some of the items in the back half of the year and how you think about that moving forward I mean, there's a lot of more specific questions I suppose you could ask but.
Perhaps at a high level and at risk of being overly specific that's probably the best way to frame.
The question at large here.
Sure Julien you want a summary of how do we think of cash in the back half the year on what the drivers are for cash.
Yes, but with an eye towards how do you think about the sustainability of the business unit cash as well as corporate and the and Capex going into 20 right. So.
You point being what changes.
So as you think about the back half of the gas.
Elements of cash so three big pieces.
The business units are generating cash in the back half of the year.
On the backs of strong EBITDA performance and better working capital model that should continue in 2020 and beyond.
The legacy liabilities is.
The second piece that should start reducing as you think about going from 2019 to 2020 and beyond and then the Capex will be primarily invested in.
Hi, ROI investments most of it going to enjoy.
I think too early and I would just.
Hi jump on the upstream part of our business had a pretty significant transformation that was a significant part of our cash burn in previous years, and thats gotten quite a bit better on that.
Business is benefiting from a series from the new DG product from strong markets performing well by the way gaining share in those strong markets. So there's been quite a turnaround and SPT that we would expect to continue as we invest in our MGT product.
The preferred bidder structured just what's the expectation there and how that would contribute here as best you at least initially understand it today.
When you say preferred bidder youre returning do in GT funding, yes, sorry.
What would that structure look like under the preferred bidder, if not specific to yes actually I will of course until we have it into where final definitive.
I can convey exactly with average work like what I would say to you broadly.
Is it significant funding.
We're broadening agreement as to what that looked like it allows it is.
Structured in a way that can be exclusively invested in the upstream business.
And the only other dimension I think I'm comfortable conveying here is timing, which hybrid mother measure and low loan number of months.
Thank you all very much all the best.
Thank you.
Thank you and our next question comes from the line of Colin Rusch of Oppenheimer. Your line is open.
Thanks, so much guys.
So as you look at the energy storage and the services opportunity. There can you talk a little bit about the supply chains preparedness to help support your guidance in terms of that growth and then how you think about some of the services in terms of the pricing dynamics certainly what we've seen in terms of.
Fast responding energy storage and.
In the mid Atlantic as is.
Been a lesson in terms of not getting too far ahead of ourselves. So just want to get some perspective on that from here from you guys.
Okay. So comment can you repeat the first part of your question in their respective parties.
The second part was on energy storage pricing and get into the open market, but in the first part is about supply chains preparedness does for growth there.
Okay. Thank you.
Okay. So I'll say a few words in Nam when who runs the commercial business may add a few comments I assume in terms of supply chain. The good news is.
We've been in the storage market now for.
In production for over a year year and a half.
In the commercial business Weve diversified sources.
It would be fair to say that supply and demand is always in alignment.
And generally speaking demand is greater than supply.
There's also been suppliers that are modulating how much how aggressive they are in terms of their supply.
We've been able to diversify supply in commercial and we're fine.
The work that we've done there is benefiting how we approach equinox storage for residential.
And sourcing for battery.
We think is going to be fine for us.
And when we released that product in the back half of this year.
Then I'll comment on services.
For us the bigger.
When you monetize and services for sure the customer.
Ill management is much more revenue generation than.
Grid services, then the market pricing for capacity or fast response as you indicated.
So our focus is on demand charge elimination, which has much stronger way more significant economics in terms of grid services, though is we.
I mentioned in our prepared comments.
We're a year into it.
We won a new England ISO capacity bid a year ago.
It was not that large but it gave us experience, we're bidding more significantly as a speaker or approximately in this timeframe.
On so that doesn't really materially im going to give you a broad answer doesn't really start to materially affect RPN allies. We model. It. It takes a couple of years before you're going to see that really moved the needle in our opinion now two or three years to run anything yes, just to add another comment.
Your comment around the supply is supply situation.
While there is a constraint on the battery supply side, we actually feel pretty comfortable with our position. We have a number of strong suppliers and I think it speaks to the strength of our pipeline as well as our deployment numbers and and our partners being being able to count on us for that pipeline and deployment. The certainty of deployment is very very critical.
On the.
Storage services side.
Jay.
We mostly deployed applications around demand charge.
Savings as well as energy arbitrage and the key markets that we've seen those economics work for our California as well as a few of the east coast markets, including New York, MMIS Juices, and New Jersey. So those are the big markets right now of course, the United States.
Great Thats helpful.
And then just following up on Juliens question around the Enphase physician. So today is exiting the market.
At about $182 million of value.
Can you just walk us through the logic of hanging onto that position when we're having so many discussions around cash about the operating business well, there's actually a farm file that shows prior to today, we have sold one seven.
One 1 million shares at a 7.5, so it's 13% and Dusty answer to previous question of 85%.
Hi, Andrew.
Hi.
On theirs.
Hi, contractual reasons in terms of the way we.
Originally got that investment.
That.
Effect on how we monetize that position.
Also frankly, we have a really good partnership with Enphase ally and it's quite effective in it I think holding the 85% gives you some impression of.
What we think of the partnership so it's a combination of the contract in the partnership.
Great I'll follow up offline. Thanks, so much guys, okay thats going on.
Thank you and our next question comes from the line of Pavel Molchanov of Raymond James Your line is open.
Thanks for taking my question.
In the cash flow statement for the June quarter, There was a 9 million dollar payment to solar world.
Is that the entirety of what you paid to acquire the Oregon facility.
The answer is no we had no upfront payment.
Back in the fall and then this is the.
This is part of that.
I think that upfront payment I don't remember exactly but it was mid Twentys that's right Tom.
Okay.
Can I ask I ask about the prospect of ITC extension some bills introduced in both the house and Senate for a five year extension, obviously, the pre buying in advance of 2020 would suggest the industry doesn't really believe that I'm curious if you are expecting this thing to get settled before the.
Let's say 80 2020 elections.
So our opinion is based on.
In my case several rounds with ITC.
On the last one of course was the I believe it was five year extension and that was very late in the process.
It was.
Part of the agreement.
That was reached on the.
Tax extenders, Bill as I remember it.
And I would I would estimate that that would be what would happen here as well.
And so on.
In my opinion given that experience.
Remember December we'd be when we know it does affect how much we safe harbor because of course, the more we safe Harbor if it were extended in December .
We will have that that extra material with no economic gain at that point.
So we are pre planning for that and I think thats one of the benefits of course being vertically integrated as we can adjust rapidly.
On so on those two bills were not optimistic I don't think is have we wouldn't think that it's going to happen.
I think this is just early signs in positioning for the potential for that.
And I believe the whole reason for this is that.
Most people voting believe in climate change and this is a way of bipartisan way that's worked in the past to expand renewables. So it went from zero percent the beginning of year to maybe 30% now and we'll see as the year develops that's how we think of it.
Okay I appreciate it.
Great. Thanks prevail on it Thats all the questions. We are going to take today, we really appreciate everybody's time, and we look forward to our next earnings call with you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.