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SunPower (NASDAQ:SPWR)

Q1 2014 Earnings Call

April 24, 2014 4:30 pm ET

Executives

Robert Okunski - Senior Director of Investor Relations

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

Charles D. Boynton - Chief Financial Officer and Executive Vice President

Howard J. Wenger - President of Regions

Analysts

Vishal Shah - Deutsche Bank AG, Research Division

Andrew Hughes - BofA Merrill Lynch, Research Division

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Shahriar Pourreza - Citigroup Inc, Research Division

Brian K. Lee - Goldman Sachs Group Inc., Research Division

James Medvedeff - Cowen and Company, LLC, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

Colin W. Rusch - Northland Capital Markets, Research Division

Operator

Good afternoon, and welcome to SunPower Corporation's First Quarter 2014 Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. I would like to turn the call over to Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Robert Okunski

Thank you, Sheila. I'd like to welcome everyone to our First Quarter 2014 Earnings Conference Call. On the call today, we will start off with an operational review from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our first quarter 2014 financial results. Tom will then discuss our updated 2014 guidance before opening up the call to questions. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, our 2013 10-K and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements.

To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call, on the Events and Presentations page of our Investor Relations website. In the same location, we have posted a supplemental data sheet detailing some of our historical metrics.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 4. Tom?

Thomas H. Werner

Thanks, Bob, and thank you for joining us today. I'll start with a brief overview of the quarter and then review our strategy and explain why we are well positioned to lead the solar industry into what we believe will be a sustained period of growth.

First, our results. We exceeded our financial targets for the quarter, driven by continued strong demand for our industry-leading high-efficiency solutions across all geographies and end channels. ASPs remain solid across the board, and we expect this to continue for the balance of the year. In our distributed generation business, we posted another great quarter, led by strength in Japan, which accounted for 22% of our shipments. In the U.S., we were pleased to sign 2 innovative lease financing transactions within the last month: one with Google for approximately $250 million in fair market value lease financing; and our ITC back-leveraged deal for $42 million with Hannon Armstrong. We also exited the quarter with strong bookings in our commercial channel.

In our Power Plant business, we executed on our project schedules, including the 579 megawatt Solar Star projects where we have grid-connected more than 170 megawatts to date. We also received a 70 megawatt C7 cell package order from our JV in China. We are pleased to see the ramp of the JV's project pipeline and subsequent C7 order volume growth. We also executed well on our technology roadmaps during the quarter, and we're pleased to receive NREL certification for a 25% efficient solar cell made on our pilot line running Fab 4 technology. Higher efficiency sales produced using fewer process staffs will allow us to further drive down levelized cost of energy for our customers.

I would now like to spend the remainder of my time explaining why our strategy positions us well for industry leadership and sustained profitable growth. Please turn to Slide 5. As we all know, the long-term opportunity for solar power is tremendous. These cost reduction and technology improvements have made solar power competitive with traditional generation in many markets. No more -- nowhere is this more evident than in Chile, where we are constructing a 70 megawatt merchant power plant that will sell electricity directly into the grid without any incentives. SunPower is uniquely positioned to capitalize on this enormous market opportunity. Our strategy to -- is to proactively identify markets that will offer for large-scale and competitive customer economics and then to leverage our industry-best technology and downstream channels to take a leading share in these markets. Our decade-long investment in the Japanese market is a good example of this approach. The chart on the right side of the slide shows the projected 2016 demand mix based on data from a number of third-party firms. SunPower is extremely well positioned to address this global demand due to our leading share in North America, JV in China, strong channel partners in Japan, established go-to-market platform in Europe and partnership with Total in the Middle East, Africa and Latin America. SunPower is also the only solar company with deep expertise across all application segments. This allows us to tailor our approach to each market based on local conditions and segment attractiveness.

A key element to deliver a long-term sustainable profit growth is technology differentiation. Since becoming a public company in 2005, we have often heard that PV panels are an undifferentiated commodity. This is simply not true.

Please turn to Slide 6. We showed this slide at last year's Analyst Day. It clearly shows why customers choose SunPower for their rooftop systems. On a typical space-constrained rooftop, SunPower panels produce over 50% more energy than conventional solar systems in the first year of operation. By year 25, this advantage will grow to 100% due to superior reliability and much lower performance degradation rates. The bottom line is that SunPower customers generate over 75% more energy over the lifetime of their systems. As customers and financiers become more educated about panel degradation rates and system residual value, SunPower's technology advantages and associated economic benefits become increasingly clear. When incorporated into a yield co, or a lease vehicle, these long-term reliability and performance advantages are directly monetized. Chuck will share more information about our current thinking about yield cos and other monetization options. The primary driver behind this lifetime energy advantage is our higher panel efficiency.

Please turn to Slide 7. This slide shows how SunPower panel efficiency compares with the efficiency of panels from the top 10 panel suppliers. There are many reports and press releases regarding high-efficiency products and champion laboratory efficiency results, so it's quite revealing to compare what is actually being shipped today. As can be seen, SunPower panels clearly stand above the pack. However, our high-efficiency technology is not the only reason we are the leader in distributed generation market.

Please turn to Slide 8. SunPower's distributed generation go-to-market channel platform, financing options and product suite are also clearly differentiated versus our competitors. Our global dealer network of 1,800 dealers and strategic channel partners provide an unparalleled market footprint in 10 countries with minimal fixed cost and rapid scalability. We offer our customers a spectrum of financing options, including cash sales, secured and unsecured loans, PPAs and lease, all tailored to their individual needs. Our product offering includes not only complete solar solutions but also performance monitoring and energy assurance products that enhance our customers' ownership experience. We are adding energy management and storage functionality to our DG offers and are actively piloting these systems in several markets. Finally, we continue to extend our leadership in the large commercial rooftop space as the supplier of choice to Fortune 500 customers, as well as federal and public sector institutions.

I'd now like to talk about our leadership position in the global Power Plant business. Please turn to Slide 9. We also showed this slide at Analyst Day and we are providing an updated pipeline size today. Since May of last year, our pipeline has grown from 6 gigawatts to more than 7.5 gigawatts as we have added opportunities in all geographic regions. A key growth driver internationally has been our partnership with Total. This partnership has already resulted in more than 300 megawatts of booked projects, and we are jointly pursuing many more projects in a number of promising emerging markets.

SunPower's Power Plant business advantage is a result of several factors. First, our Oasis power block system is the gold standard for balance of system with 850 megawatts deployed globally to date. Secondly, we are seeing increasing traction with our C7 concentrator technology, particularly in China, the world's largest PV market. C7 is a triple win, driving more competitive levelized cost of energy, maximizing local value creation and multiplying SunPower's fab capacity by a factor of 6. We have approximately 30 megawatts installed or under construction in the U.S. and are planning to start installation on 2 projects totaling 120 megawatts in China later this quarter. Finally, SunPower has a world-class project development team with a long history of EPC execution to budget and schedule. By joining forces with Total in a number of emerging markets, we can effectively project this capability on a truly global stage.

I'd now like to provide a short update on the construction of our 350 megawatt Fab 4 facility. Please turn to Slide 10. Fab 4 remains on track. We plan to produce between 50 and 100 megawatts in 2015 and more than 250 megawatts in 2016. With strong and growing demand for our panels and a stable pricing environment, our expansions team is highly motivated to meet or exceed these targets. Fab 4 will produce our most efficient solar cells to date, enabling panel cost reduction of up to 35%. As I mentioned in the last call, we're also evaluating locations for our next significant capacity expansion and expect to make a decision on the additional capacity within the next few quarters.

Before handing the call over to Chuck, I would like to touch briefly on the recent rollout of our new customer portal. As we have said on previous calls, SunPower is very focused on improving our customers' ownership experience. Please turn to Slide 11. The recently launched Customer Portal 2.0 provides a key touch point for our customers, allowing them to track energy production, see their savings, view educational videos and get their questions answered. We launched our latest portal at the beginning of April and it has been a great success from a customer satisfaction and branding standpoint. Why is this important? First, when we deliver a superior customer experience, we get a customer for life. This is a foundational principle for our energy solutions business model. Second, the new customer portal facilitates referrals. A happy customer always tells her friends about their experience, and referrals are by far the most effective type of lead. Third, the site enables self-service support, which increases the speed of issue resolution and drives down customer support cost. Finally, the new portal constitutes a flexible and powerful platform to add additional services and adapt to changing market conditions.

In summary, Q1 was another strong quarter for SunPower. As we look to the balance of 2014, we are confident in delivering continued strong financial performance and driving significant growth in 2015 and beyond. With that, I would like to turn the call to Chuck to review the financials. Chuck?

Charles D. Boynton

Thanks, Tom. Good afternoon, and please turn to Slide 12. As Tom noted, Q1 was a very good quarter as we beat our plan in all regions and end markets driven by strength in both our DG and Power Plant businesses. In addition to our solid non-GAAP margins, GAAP was also better than planned due to the completion of our 250 megawatt CVSR project. I will comment on a few key items from our Q1 performance on Slides 12 and 13, but spend the balance of my time discussing economic optimization of solar assets.

For the quarter, our factories ran at full utilization. Additionally, our construction of Fab 4 remains on plan, and we continue to implement our new technology in Fab 2. Inventory was at a 2-year low as megawatts recognized exceeded production. We are pleased with our cash conversion cycle for the quarter as we achieved a multiyear best of 4 days. Over the next 2 quarters, the EPC retention receivable for Solar Star will move from long-term to short-term AR, which will inflate our DSOs temporarily until the cash is collected when the project is complete. Our non-GAAP gross margin for the quarter was 22%, driven by solid performance from project sales in EMEA, along with execution on our other Power Plant projects, including Solar Star. We also benefited from strong ASPs in all residential markets. Americas margins was on plan as we continue the construction of our Solar Star projects. As we mentioned in our last call, we will soon commence construction of our 135 megawatt Quinto project. But unlike previous projects, we will not recognize development or construction revenue for this project in 2014.

Our North America residential business was solid, with total deployments of 35 megawatts with 24 from cash sales. Lease bookings for the quarter were 6 megawatts, with 172 megawatts booked to date, representing $620 million in net contracted payments, excluding the residual value. The higher mix of cash sales played an important role in our cash conversion cycle and earnings for the quarter. In addition, NCI for the quarter was $22 million, higher than forecast, driven by faster-than-planned lease connections.

Q1 was also another solid quarter for our global DG business where demand continues to outpace supply. In total, we deployed 108 megawatts of residential products, including 52 from APAC, 21 from Europe and 35 from North America. For Q1, EBITDA was $122 million, up $7 million sequentially. Excluding the impact of NCI, the adjusted EBITDA was approximately $100 million.

Before turning the call back to Tom for guidance, I will spend a few minutes discussing the economic optimization of solar assets. We announced last quarter that we built Quinto on our balance sheet, deferring the developer and EPC margin until we sell the project at COD. By maintaining ownership of projects through construction, we reduce the risk to potential buyers and realize a greater return for SunPower. Our industry-leading product reliability and technology advantages allow us to enhance our return further by maintaining an ownership interest through project operation. There is a material benefit to our return by capturing the lower annual degradation, longer system life, best energy performance and lowest risk that our systems provide. Our technology advantages, combined with our worldwide footprint and development experience with more than 4 gigawatts of systems deployed, give us the confidence today to announce our holdco strategy.

Please turn to Slide 14. As you know, there have been significant discussions concerning a number of alternative financing vehicles for the industry. We firmly believe employing these structures will significantly reduce the overall cost of capital for the industry and for SunPower specifically. We have created our holdco strategy to capture the increased value of our solar project portfolio and will include systems from all 3 of our end channels: utility, commercial and residential. The structure of our planned holdco is on Slide 14, which also summarizes the P&L and balance sheet impact of implementing this strategy. Today, we have over 500 megawatts of assets under contract, and we'll continue adding to that total through 2015. This strategy gives us the option to continue to hold assets, sell them individually to strategic buyers or other yield vehicles or sell equity of a holdco to the public, whichever maximizes the benefit to SunPower shareholders.

Please turn to Slide 15. Initially, we will primarily focus on the U.S. market with our Quinto and Henrietta utility scale projects. Additionally, we expect to contribute North American commercial PPA projects, as well as our residential lease assets. As we expand our portfolio, we expect to add residential systems through future ABS transactions, international third-party financing vehicles, as well as commercial projects in Europe and Japan. Finally, we will look at adding jointly developed projects with Total in top tier countries around the globe and potentially leverage significant future growth through our footprint in China. As you can see on the chart, we have more than 500 megawatts of assets under contract, with 172 in residential, 81 in commercial and 264 in Power Plant, which consists primarily of our Quinto and Henrietta projects.

Please turn to Slide 16. I would now like to talk about the value of residential leased assets. As we stated in the past, without debt, residential leases consume cash since tax equity financing does not cover the hardware and installation costs. We are happy to report that we closed our first ITC back-leveraged transaction, which provides enough cash to cover the total cost. Based on this success, we will continue to expand our leasing program in 2014 and '15. To provide more transparency on our leasing program and retained value of our leases, we are showing our most recent lease data for Q1 sales. We believe we have a significant advantage in average system size and lease price per kilowatt hour, which translates to a higher retained value. In addition, we use a conservative approach to price escalators with an average annual escalator of 0.3%, which we believe will significantly reduce future default risk and positively impact our residual value. The combination of lower power degradation rates and the reduced default risk gives us a significant financial advantage in the residential channel.

Moving to Slide 17. This is a simple example of how our holdco strategy is expected to positively impact Power Plant project NPV. As shown on the slide, selling at COD with the SunPower advantage increases the value between 30% and 60%. Let me put that in real terms. When we sell a project at COD, as we did with our projects in Israel and Italy, we're able to generate more than $2 per watt in margin. We feel this value is, on average, indicative of what we expect for self-developed projects going forward. We also believe that demand for high-quality projects by existing and future yield cos will remain strong for the foreseeable future, and we will leverage this demand profile to maximize return. Additionally, we also have the option to take it a step further and decide to sell the project to our own yield co, further improving NPV. As we have mentioned, our holdco strategy gives us a number of options to monetize our projects and increase our project returns significantly.

I'd like to close by turning to our outlook for megawatt growth through 2016. Please turn to slide 18. We are growing deployed megawatts by 65% over the next 3 years. The recognition of the deployments depends on the size and scale of our holdco strategy. In summary, we will continue to focus on maximizing returns for our shareholders, whether selling our systems for cash or holding them to receive a higher retained value and longer-term cash flow. As I mentioned, holding projects will impact the P&L, but we will continue to prudently manage the mix between cash flow and retained value. Ultimately, we plan to monetize our holdco by harvesting the cash flows, selling all or part of the entity to a private buyer or the public via a yield vehicle. We do not expect to make a decision on this until late 2015 or '16.

In closing, our Q1 performance reflects the sustained competitive advantage of our industry-leading technology, strong project execution and diversified downstream model. With our 7.5 gigawatt pipeline and plans to leverage our holdco structure, we remain confident that we'll be able to significantly grow shareholder value over the next 3 years.

With that, I'll turn the call back to Tom.

Thomas H. Werner

Thanks, Chuck. I would now like to discuss some of the highlights of our guidance for the second quarter, as well as our improved 2014 earnings outlook.

Please turn to Slide 19. For Q2 2014, we expect to recognize revenue on approximately 275 to 300 megawatts with full year megawatt recognized in the range of 1.2 to 1.3 gigawatts. On a non-GAAP basis, we expect Q2 revenue of $575 million to $625 million with full year revenue between $2.5 billion to $2.65 billion. For Q2, we see non-GAAP EPS in the range of $0.15 to $0.35, and for 2014, we are raising our earnings guidance range to $1.10 to $1.40. For 2015, we see year-over-year non-GAAP earnings per share growth of more than 50%, but this depends on the size and scope of our holdco. On a GAAP basis, we expect Q2 revenue of $500 million to $550 million with annual revenue of $2.55 billion to $2.7 billion. In relation to earnings per share, we see Q2 2014 in the range of a loss of $0.10 to a profit of $0.10 and 2014 earnings of $0.75 to $1.05 per share. Capital expenditures in the second quarter expected to be in the range of $30 million to $40 million as we continue to ramp construction of Fab 4.

We'll now open the call to questions. In addition to Chuck, we also have Howard Wenger, Regions President, and Bob Okunski, our Senior Director of Investor Relations. First question, please.

Question-and-Answer Session

Operator

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

Vishal Shah - Deutsche Bank AG, Research Division

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

Thomas H. Werner

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

Vishal Shah - Deutsche Bank AG, Research Division

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

Charles D. Boynton

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

Howard J. Wenger

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

Operator

The next question comes from Krish Sankar.

Andrew Hughes - BofA Merrill Lynch, Research Division

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

Howard J. Wenger

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

Andrew Hughes - BofA Merrill Lynch, Research Division

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

Thomas H. Werner

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

Operator

The next question comes from Ben Kallo.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

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

Thomas H. Werner

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

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Right, yes.

Thomas H. Werner

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

Howard J. Wenger

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

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

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

Thomas H. Werner

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

Operator

The next question comes from Shahriar Pourreza.

Shahriar Pourreza - Citigroup Inc, Research Division

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

Thomas H. Werner

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

Shahriar Pourreza - Citigroup Inc, Research Division

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

Charles D. Boynton

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

Thomas H. Werner

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

Operator

The next question comes from Brian Lee.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

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

Charles D. Boynton

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

Brian K. Lee - Goldman Sachs Group Inc., Research Division

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

Charles D. Boynton

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

Thomas H. Werner

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

Operator

The next question comes from James Medvedeff.

James Medvedeff - Cowen and Company, LLC, Research Division

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

Thomas H. Werner

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

James Medvedeff - Cowen and Company, LLC, Research Division

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

Thomas H. Werner

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

James Medvedeff - Cowen and Company, LLC, Research Division

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

Thomas H. Werner

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

James Medvedeff - Cowen and Company, LLC, Research Division

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

Thomas H. Werner

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

Operator

The next question comes from Patrick Jobin.

Patrick Jobin - Crédit Suisse AG, Research Division

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

Howard J. Wenger

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

Patrick Jobin - Crédit Suisse AG, Research Division

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

Thomas H. Werner

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

Operator

The next question comes from Colin Rusch.

Colin W. Rusch - Northland Capital Markets, Research Division

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

Thomas H. Werner

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

Colin W. Rusch - Northland Capital Markets, Research Division

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

Thomas H. Werner

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

Howard J. Wenger

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

Colin W. Rusch - Northland Capital Markets, Research Division

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

Howard J. Wenger

Stable. Stable ASP throughout the rest of the year.

Thomas H. Werner

Okay. Thank you, everyone.

Howard J. Wenger

Thank you. Have a good day.

Operator

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

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