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SunPower Corporation (NASDAQ:SPWR)

Q4 2011 Earnings Call

February 16, 2012 4:30 pm ET

Executives

Robert Okunski – Senior Director, IR

Tom Werner – CEO

Dennis V. Arriola – CFO and EVP

Howard J. Wenger – President, Regions

Analysts

Scott Reynolds – Deutsche Bank AG, Research Division

Sanjay Shrestha – Lazard Capital Markets LLC, Research Division

Jesse Pichel – Jefferies & Company, Inc., Research Division

Kelly A. Dougherty – Macquarie Research

James Medvedeff

Joseph Osha – BofA Merrill Lynch, Research Division

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

Timothy M. Arcuri – Citigroup Inc, Research Division

Operator

Good afternoon, and welcome to the SunPower Corporation's Fourth Quarter Year End 2011 Results Conference Call. Today's call is being recorded. If we have any objections, please disconnect at this time. I'd now like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Robert Okunski

Thank you, Ed. I'd like to welcome everyone to our Fourth Quarter 2011 Earnings Conference Call. On the call today, we will start off with an operating review from Tom Werner, our CEO; followed by Dennis Arriola, our CFO, who will review our fourth quarter and 2011 financial results. Tom will then discuss our strategy for 2012, as well as our guidance for the year. We will then open up the call for 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 our 2010 10-K, our quarterly reports on Form 10-Q, as well as today's press release. Please see those documents for additional information regarding those factors that may impact these forward-looking statements.

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

On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor. Our prepared remarks will run approximately 25 minutes, and then we will take questions.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 3. Tom?

Tom Werner

Thanks Bob and thank you for joining us today. Before Dennis covers the financials, I would like to take a few minutes to review our Q4 2011 operational results. 2011 was a transitional year for the industry. Excess capacity sharply compressed ASPs while policy changes in a number of European markets affected the timing and scope of demand.

Once again, we proved that our world-leading high efficiency solar panels and solar systems continue to be the preferred solution, as we maintain our pricing premium. We flexed our diversified downstream channels, as we adjusted our delivery plans within quarters between business segments and geographic markets to respond a changing market condition.

We are on track with our accelerated cost reduction roadmap which puts us in a competitive position versus panels on an efficiency adjusted basis. And we completed our company restructuring, Tenesol acquisition, and advanced our Total strategic initiatives. These milestones will improve our access to market, strengthen our balance sheet, and increase operating cost efficiency.

Turning to slide 4. In the fourth quarter of 2011, we had solid non-GAAP operating results on revenue, gross margin, EPS, and free cash flow. Our utility and power plant business outperformed with a significant start of major construction activities at California Valley Solar Ranch, as well as a 54-megawatt supply agreement with NRG for delivery between 2011 and 2012.

We also had excellent success with new initiatives in our residential business with strong demand for our leased product as well as adding high profile partners like Nissan and Orchard Supply Hardware through our Alliance program which already includes Force.

Our accelerated cost reduction programs are on track, the most important of which is our manufacturing step reduction program which will reduce cell production cost by 15% by the end of 2012. In the fourth quarter, we successfully operated one line using the step reduced process, and have begun replicating this technology on more lines.

We expect to have 40% of our production lines completed by year end. We are also executing on our previously announced reorganization which is a key contributor to reducing our 2012 operating cost by approximately 10% from Q4 2011.

We completed our Tenesol acquisition and I will discuss this further in a few minutes. Tenesol will significantly expand our market reach in our product portfolio and affirms the support and value our partnership with Total. Overall, for the year, we achieved record revenue and production for 2011 while successfully launching key new products, substantially accelerating our cost reduction roadmap in improving our balance sheet.

Year-on-year, our shipments grew 40% driven by our UPP and North American Commercial business segments, both of which were focused on US market. We made substantial progress in UPP, which I will detail shortly. We also expanded our residential channel by more than 20% for the year and remain the leader in installed US residential, commercial and public sector markets.

On the technology front, we began production of our Maxeon Gen 3 solar cells, which demonstrated efficiencies of up to 24%. We also announced our first contract for our C7 tracker, our concentrating tracker system at Arizona State University under a PPA with SRP in Arizona Utility. We expect that the C7 tracker will allow SunPower to achieve up to 20% lower power plant LCOE compared with other PV technologies, and over time, to compete with incentives and high solar energy locations against conventional forms of electricity generation.

Finally, we exited the year with nearly record cash levels and recently reduced our balance sheet leverage due to retirement of $199 million of our convertible bonds. With the continued commitment from total, we are well positioned to meet our goals.

With that I would like to turn the call over to Dennis, to review the financials. Dennis?

Dennis V. Arriola

Thanks, Tom, and please turn to Slide 5. As Tom mentioned, our financial and operating performance in the quarter was solid despite the challenging market environment. We took bold actions in the quarter to improve product and service delivery to our customers by reorganizing our company into focused regional groups. We also made difficult but necessary cuts to our operating expense structure that should reduce our overall SG&A costs by 10% year-over-year, without sacrificing any of our research and development spending.

Our non-GAAP revenue for 2011 was nearly $2.5 billion, up 12% over 2010. Non-GAAP revenue in the fourth quarter 2011 includes approximately $186 million from the commencement of construction of NRG's California Valley Solar Ranch project.

Our GAAP financial results will be recognized -- will begin recognizing revenue from the CVSR project beginning in the first quarter of 2012. And our GAAP and non-GAAP revenue for the year will be nearly identical on a full year basis.

In 2011, we produced 922 megawatts of cells compared to 584 megawatts in 2010. And we recognized 766 megawatts in revenue, up 40% from 546 megawatts in 2010. We purposely reduced megawatt production in the fourth quarter compared to Q3 2011 in order to manage our inventory levels.

In the fourth quarter, non-GAAP revenue was $749 million, up 6% over Q3 2011. Our fourth quarter 2010 results included revenue from the sale of 66 megawatts of projects in Italy.

The United States was by far our strongest market in the quarter, both in terms of revenue and megawatts, followed by Germany and Italy. Our non-GAAP gross margin for the quarter improved to 12.4% from 11.4% in the third quarter, despite the unabsorbed cost related to our fab capacity optimization in the quarter.

Let me now turn to our business segments. In our Utility and Power Plant business, or UPP, non-GAAP revenues were up 16% over the third quarter to $377 million and reflected the commencement of construction for the CVSR project. Non-GAAP gross margin for UPP also improved in the quarter to 17.2% from 12.6% in the third quarter of 2011.

In our Residential and Commercial segment, or R&C, revenues in the fourth quarter were $372 million, down slightly from $381 million in the third quarter as our results were impacted by weaker demand in Europe and lower ASPs. Those factors, in addition to startup costs related to our new residential leasing offering, resulted in a lower gross margin in the quarter compared to the third quarter.

Let me spend a moment on our residential leasing program. We spent a substantial amount of time and resources in 2011 developing our new leasing program. And while it took us a little longer than we wanted to launch this product, we now feel that we have a conservatively structured program that is competitively priced and offers our customers SunPower's world-leading technology.

From a revenue recognition standpoint, the majority of our leases will recognize revenue over the lifetime of a lease. The reception of the leasing program by our dealers and customers so far has been very strong, and we expect to further grow this product offering in 2012.

Non-GAAP operating expenses for the fourth quarter were $86.1 million and included $11 million for bad debt expense and approximately $2 million of transaction expenses related to our recent acquisition of Tenesol. Third quarter non-GAAP operating expenses were $73.7 million.

And while the restructuring program we announced in the fourth quarter will reduce SunPower's fixed and variable operating expense base in 2012, it will now also include operating expenses related to Tenesol. We're currently evaluating additional revenue and cost synergies from the Tenesol acquisition. In addition, we've commenced our research and development collaboration program with Total and expect to see benefits that will further enhance the efficiency of our technology and help us accelerate our cost reduction processes.

Non-GAAP other income and expenses for the quarter was a positive $7.4 million compared to a positive $12.8 million in the third quarter. And we benefited in the fourth quarter from a net gain of $9.3 million from the monetization of investments, which included the sale of shares in Woongjin Energy.

We ended the quarter with a non-GAAP profit before tax of $14.2 million, which exceeded our internal plan even without the benefit from the sale of the Woongjin shares. In the fourth quarter, we recorded a non-GAAP tax benefit of $3.5 million, which resulted in a $2 million tax benefit for full year 2011.

Earnings per share for the quarter on a non-GAAP basis were $0.16 per diluted share, which exceeded the high end of our guidance range for the quarter. On a GAAP basis, earnings per share was a loss of $0.84 per share. For additional details, our GAAP to non-GAAP reconciliations are attached on tables on our press release.

Now please turn to Slide 6 and I'll provide some comments on our balance sheet, liquidity and cash flow performance. In the face of a challenging market environment, we continued to focus on maintaining a strong balance sheet and solid liquidity position and finished 2011 with over $658 million of available cash. With support from Total, we were able to free up over $147 million in previously restricted cash by transferring letters of credit from a cash collateralized facility to one that benefits from our credit support agreement with Total. And as a result of our solid liquidity position, yesterday, we repaid $199 million in convertible debentures with cash and further deleveraged our balance sheet and improved our overall debt to total capital ratio.

We continue to focus on ways to improve our working capital efficiency and reduce the amount of cash that's tied up in our business. And in the fourth quarter, we improved our inventory turns to 6.6x from 5.9x in the third quarter and reduced inventory from $425 million in the previous quarter to $397 million at year end. We expect additional improvements in inventory turns in 2012 as we continue to roll out our regional modco strategy, including our new facility in Mexicali, Mexico.

Capital expenditures for the quarter were $46 million and $131 million for the full year. In the fourth quarter, we generated $286 million of free cash flow, which included the transfer of the $147 million from restricted to available cash and $51 million from the sale of Woongjin shares.

As part of the Tenesol acquisition, we further strengthened our balance sheet by issuing new common shares to Total in the form of a private placement. Total now owns 66% of SunPower's common shares and has consolidated all of its major solar activities under the direction of SunPower's management team. This increased ownership position is a vote of confidence in SunPower's technology, strategy and management.

With that, I'll turn it back to Tom.

Tom Werner

Thanks Dennis. Please turn to Slide 7. We’ve built our company to succeed in the current market environment starting with a differentiated technology that drives customer demand across a wide range of customer segments in markets. Strategically, we are focusing on four key areas.

Our go-to-market strategy, including leveraging our Total strategic investment and recent acquisition of Tenesol, our technology leadership position in both cells and systems, our accelerated cost reduction roadmap and our strong balance sheet and liquidity.

Now let me elaborate on our go-to-market strategy which I will discuss by focusing on our three geographic regions as we complete our go-to-market segmentation. The restructuring program that we are implementing improves our operational efficiency and supports our operating expense reduction plan. While we have not finalized our new segment reporting structure for 2012, the combination of geographies and market segments under regional leadership in three global regions will give us a much better view of the overall health of our business.

First North America. As I discussed earlier, we have seen excellent progress in our North American UPP business. It just finished a strong year of growth in our commercial business. CVSR is on plan to meet its Phase I construction milestone in Q3 2012. The CVSR team has made good progress in installing panels and as the EPC contractor, we are responsible for taking care of our local environmental and cultural resources.

Approximately 350 people are hired in working on site. This is great evidence of the economic opportunity that comes from large scale solar investment. We are working closely with our partners to ensure that the team meets all required DOE loan disbursement milestones and to finalize the formal application to draw down on the funds. The DOE is very diligently managing the milestone completion process. We will include GAAP revenue recognition from CVSR in our guidance for the first quarter. Including CVSR, we currently have an announced North American pipeline comprising more than 1 gigawatt of power plant with approved PPAs and permits. This provides us exceptional revenue and margin visibility over the next few years as we monetize and construct these projects. We are on track with important development milestones for 711 megawatts of Southern California Edison projects as well as on a number of other large-scale projects.

The strong backing of Total through our credit support agreements and banking relationships provide SunPower with a significant competitive advantage and facilitating financing for these multi-billion dollar projects. Our UPP America’s business, more than 85% booked for 2012, as identified pricing giving a strong visibility in this segment for the year.

Similarly in North America Commercial, we are more than 85% booked through the end of the second quarter. As a reminder, our commercial business is typically a three-day, nine month sales cycle, and we fully expect to meet our 2012 goals as we execute on existing commitments and add new projects to the pipeline.

One of the high profile North American Commercial project in construction now is our 13.8 megawatt DC ground mounted Oasis Power Plant at China Lake for the Navy. China Lake is important for two reasons. It’s the largest solar project of the Navy to-date, as well as the first 20-year PPA signed by a federal agency. With the completion of China Lake this year, we will have more than 50 megawatts installed or under contract in the federal segment to-date.

Thanks to our dealer partners, we remain Number 1 in the US residential market and we are happy to say that demand for our lease offering ahead of our previous forecast with more than 2500 leases signed by year-end 2011. I will talk about this in greater detail shortly.

Moving on to our EMEA region or Europe, Middle East, and Africa. As I mentioned earlier, we closed our acquisition of Tenesol last month expanding our downstream reach through their presence in 18 countries. With more than 500 megawatts installed, we are acquiring a bankable company and an important product portfolio expansion into building integrating and off-grade applications where we are now industry leaders.

Additionally, Tenesol provides us with a complementary EMEA footprint, enhancing our capabilities. Tenesol’s manufacturing facilities in France and South Africa provides important access to both markets and are consistent with our strategy to locate panel manufacturing near demand.

We will expand our presence in APAC or our Asia-Pacific region in 2012 including establishing a regional headquarters. In Japan, we have deepened our relationship with Toshiba, as demand for our high efficiency solutions on constrained roofs is very strong. We plan to increase our shipments to Toshiba in 2012.

India is beginning to deliver on its tremendous potential for solar power. We were pleased to sign our first significant supply contract in that market last year with Mahindra for 9 megawatts of panels and T0 trackers. We are expanding our downstream presence in Asia and expect India to join Japan and Australia, one of our three largest market in APAC.

Let me now spend a few minutes on a residential success on Slide 8. In California, which remains by far the largest North American residential PV market, we expanded our market share steadily over the second half of 2011. We believe that our market share increase was driven by several factors. First panel efficiency and quality. During this period of many panel options, customers are increasingly opting our industry-leading technology and product quality.

Second, we expanded our global dealer network by 20% in 2011. Unlike many of our competitors, we directly manage our channel to the North American market through a network of approximately 500 dealers. Finally, our new residential lease experienced very strong adoption following initial roll out in Q3. And we are happy to report that demand for this offering is continuing to exceed expectations going into 2012.

For this year, we are targeting further growth of approximately 25% in our North American dealer network and expect to expand our Alliance partnership such as those with Ford, Nissan and Orchard Supply.

Moving to our technology, please turn to Slide 9. We’ve entered production of our Maxeon Gen 3 cells with up to 24% efficiency. Gen 3 cells will be built in the panels with efficiency of 21%. We plan to eventually introduce a product with 22% panel efficiencies based on this technology. Gen 3 technology also allows for extension of our cost reduction roadmap. We believe that panel costs well below $1 a watt are achievable when Gen 3 is fully developed and ramped.

We will also begin commercial deployment of our C-7 tracker utilizing Gen 3 cells this year. A higher efficiency of Gen 3 cells is extremely important for leveraging our concentrator system.

Moving on to cost reduction, please turn to Slide 10. We beat our Q4 cost per watt target of $1.48 on a blended basis, coming in at $1.46 excluding the one-time cost associated with our reduced utilization and inventory. This equates to an efficiency adjusted cost per watt of $1.08. Our cost per watt on certain SKUs is up to 15% lower than the average. As you can see from the chart, we confirm our cost roadmap for 2012 and 2013 and plan to reach $1.00 a watt on an absolute basis by the end of next year. We expect to exit 2012 with costs less than $1.25 per watt on an average across our entire panel portfolio. That translates to approximately $0.86 per watt on an efficiency adjusted basis, with lower cost for large format panels.

Our efficiency effectively lowers the installed system cost per watt and with the efficiency adjustment you can see why we maintain premium pricing compared to commodity panels. Our accelerated cost reduction programs are on plan, the most important of which is our manufacturing step reduction program, which will reduce cell production costs by 15% by the end of 2012. Our Oasis program of BOS cost reduction of large scale power plants remains on track as well and enabled us to reduce BOS cost by 20% in 2011.

We continue to broadly deploy this solution, most recently at our China Lake project. Additionally, we have launched a similar program for roof tops. We will talk more about this on our next call.

Let me close by highlighting our strengthening ties with Total. Please turn to Slide 11. First, as I described earlier, we closed the acquisition of Tenesol expanding our access to new markets, and extending our product portfolio. In conjunction with this transaction, Total increased their ownership in SunPower to 66%.

Second, we agreed to establish a $24 million, four year R&D funding agreement to collaborate with us in achieving our technology milestones, as well as our cost reduction roadmap, including ramping production of our C7 tracker. Third, we completed the expansion of our Letter of Credit facility with Total’s support, enabling us to move certain agreement under our previously announced $1 billion credit support agreement. As a result, $147 million of previously restricted cash is now released, helping us [inaudible] the growth of our business.

Before turning to guidance, I wanted to update you on our CFO search. As you know, last quarter, Dennis announced that he is leaving SunPower. We are sorry to see Dennis go, as he has been instrumental in properly positioning the company for a long-term success. We wish him well.

As per the search, we are in the final stages of the selection process with candidates, and expect to announce our decision in the next few weeks. We will update our investors when we have made a final decision.

With that I would like to turn to our guidance for 2012 on Slide 12. For Q1 2012 we expect to recognize approximately 190 megawatts to 210 megawatts in revenue and see non-GAAP Q1 revenues in the range of $500 million to $575 million, which will include revenue from our CVSR project and our residential lease program. Gross margin is expected to be in the range of 9% to 11%. Non-GAAP loss per share is projected to be $0.05 to $0.20. We expect that GAAP loss per share of $0.45 to $0.60. Capital expenditures in the first quarter is expected to be in the range of $45 million to $55 million.

For the fiscal year 2012, we expect both GAAP and non-GAAP revenue of $2.6 billion to $3.0 billion. Volume recognized to be in the range of 900 megawatts to 1200 megawatts, and capital expenditures of $110 million to $130 million. We remain committed to achieving breakeven or better non-GAAP profitability, and the year-end unrestricted cash balance of more than $300 million while investing in cost reduction initiatives.

In summary, we see 2012 as a year of industry transition where the strongest companies, both strategically and financially will continue to gain share. With our long-term strategic initiatives to gain market share, leverage our industry leading technology and product differentiation, our cost reduction programs in successfully managing our balance sheet, we are well positioned for future success.

We will now open the call to questions. In addition to Dennis, we also have Howard Wenger, Regions President; Julie Blunden, our EVP of Public Policy and Corporate Communications; Chuck Boynton, Vice President of Finance and Corporate Development; and Bob Okunski, our Senior Director of Investor Relations. Questions please.

Question-and-Answer Session

Operator

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

Scott Reynolds – Deutsche Bank AG, Research Division

Deutsche Bank. This is actually Scott Reynolds for Vishal Shah. I just wanted to touch on the UPP business, 85% booked for the year, gross margins were better than our expectations. Can you talk about some of the main drivers behind the gross margin beat? And then also, on the R&C side, the second quarter of down margins, can you talk about some of the dynamics there that drove that performance?

Tom Werner

Sure, I will let Howard Wenger take both of those questions; gross margin upside and UPP and R&C.

Howard J. Wenger

This is Howard. Yes, we're really pleased with the performance of the UPP segment. We are in great position to have the 85% of our forecast plan booked for the year. Big drivers there are the CVSR project we announced; the deal with NRG for 54 megawatts, which included 30 megawatts of Oasis power block system. We also have a number -- it includes sales internationally as well. And the gross margin beat is associated with those sales and our forecast for cost reduction during the time period. And as far as R&C, as you know, the industry is going through dynamic change, significant oversupply. Our R&C business is predominantly a turns business, so we are subject to the forces in the market. So there has been a significant margin pressure in compression during the period, and that was the primary reason for the decrease in direct margin in the R&C part of the business. We're pleased, however, with our volume of sales in that segment.

Tom Werner

I would add a couple of comments – this is Tom, on the UPP business with strong this year and in 2013. The North America team, particularly has done a great job of getting PPA signed and advancing projects through the development pipelines of both ’12 and ’13 look pretty strong in North America UPP. And we are hitting both BOS and panel cost reduction. So that explains performance there.

The residential and commercial, I would give you a little look forward. The majority of our business is moving to a leasing model. And as we do subsequent calls, we will talk more about leasing economics and revenue recognition associated with leasing. But we are making a dramatic switch to a leasing model. And broadly speaking, that would be a positive on all fronts; margin, cash flow. However, it would be a big challenging by virtue of revenue recognition. Thank you for your question.

Operator

The next question comes from Sanjay Shrestha.

Sanjay Shrestha – Lazard Capital Markets LLC, Research Division

Great. Lazard Capital Markets. Two questions here, please. The first one on UPP segment. Are there significant permitting milestones you have to make to achieve your 2012 UPP targets?

Howard J. Wenger

This is Howard. The short answer is no. We've got the permit in hand for CVSR, and that's the big driver in UPP. So we're in good shape.

Sanjay Shrestha – Lazard Capital Markets LLC, Research Division

Got it. Great. And the second question, though, on Tom's prior comment, could you elaborate a little bit more on the relative economics of this new tracker -- the tracker product in terms of cost, potential margin? And what does it mean in terms of the future opportunity here?

Tom Werner

The new tracker product is a seven times concentration product, which as you look forward, means that we can take capacity out of our fab and recognize revenue with six to seven times the capacity of a fab when we utilize this technology. So it’s a real growth engine for your company and very, very capital efficient. And at the same time, where there is high solar influence, specifically direct normal sunlight, we can hit levelized cost of energy that we believe is up to 20% better than any other product in the market. So we are in a position to compete on a differentiated technology that has better levelized cost of energy economics and has great capital utilization, and we are commercializing – it will be our third project to build but it will be our first commercial project later this year and we are building the pipeline, it will become a significant part of our business in ’13, ’14, and ’15.

We are also investing the capital in the next couple of quarters to have the manufacturing capacity to support the growth in ’13, ’14, and ’15. So needless to say, we are very, very bullish on this product.

Operator

The next question comes from Jesse Pichel.

Jesse Pichel – Jefferies & Company, Inc., Research Division

Jefferies. I'd like to ask Scott Reynolds' question, but instead of for Q4, for 2012. Can you talk a little bit about your non-GAAP gross margin guidance of 7% to 10% for 2012 and what the components of that are between UPP and R&C? And I have a follow-up question.

Tom Werner

Sure. This Tom. I will say a few words and then either Dennis or Howard, you guys can comment as well. So one aspect of this is what you expect pricing to do, and we’ve built in to our turns business which is largely our residential and light commercial business, up to high teens reductions in ASPs this year. We think there’s a very wide range of possible outcomes on ASPs and of course, we are accelerating cost reductions that we are prepared to deal with the – as much of the range as possible.

The residential and commercial businesses are largely dependent on those two variables. The commercial business is – having said that, the commercial business is booked solidly through Q3. So the economics are pretty much known. So it’s an execution variable there. And we fully expect to execute.

The UPP business is essentially booked. And Howard’s emphasized CVSR, there are a number of other projects that are much smaller in nature but meaningful, and those have also completed their permitting process and are soon to complete their financing process. So we’ve got a number of projects. So it’s execution in UPP, in its progress on Oasis and so far so good on Oasis. So while our margin guidance is lower on that because we still see a transitional year in ’12, where it’s going to be extremely competitive in the turns business. And I think we all set. Jesse, we will take the next question.

Jesse Pichel – Jefferies & Company, Inc., Research Division

Yes. Leasing seems to be one of the fastest-growing segments of the market and appears to expand the solar TAM beyond the 1 percenters. How is your leasing product different from some of your competitors like SolarCity? If you could maybe highlight some of the differences.

Tom Werner

Sure. Leasing products, I will say a few words and I think Howard would want to say some, but if you think about it, a leasing product is perfect for our product because it rewards high energy production. And it’s – then the purchaser of a lease can get the world’s best solar technology and economics that is good or better than any other option. And so when you can get equal or better economics and a better superior technology with a couple of billion dollar company backing it on you know, a couple of billion dollar public company that has the Top 15 company in the world backing it, I think it’s got reasons to feel comfortable that the lease is stable and that your “future proof” that you are not going to have buyer’s remorse at some point in the future. You’ve got the best technology. So as soon as we turn the switch on leasing in Q3, in Q4 it was apparent that that hypothesis is correct.

Howard J. Wenger

Yes. This is Howard. I would just add that we have a much larger footprint than the competition. So when we've got a lease, we've got a very scalable model. We can roll it out. And you can see that in the market share results that we showed in the slides where we jumped up 8 points absolute in our market share to 25% in California, as an example. So that's another big advantage for us. And I think the customers really appreciate that the company that's supplying the lease is the one that's producing the technology backed by a very large company. So they know that we're going to be around in the future. It's making a big difference.

Dennis V. Arriola

Yes, Jesse, this is Dennis. I think the other competitive advantage we have here is we're working with third-party financial providers. Banks basically provide the capital for that leasing. When they look at SunPower, our balance sheet, as well as the support that we get from Total, that allows us to actually get more competitive financing rates that we can pass on to our customers. So when you couple that with the technology, our service and the overall cost of capital, we've got several advantages.

Operator

Our next question comes from Kelly Dougherty.

Kelly A. Dougherty – Macquarie Research

Macquarie. Tom, just wanted to talk about the cost improvements and how much of that you expect to come from the higher efficiency Gen 3 cells versus the process simplification, versus maybe focusing on the supply chain either on the poly side or on the -- just the component side and reducing costs there.

Tom Werner

The Gen 3 technology would be less than a few percent of our production this year ramping to 10% or 20% in ’13. So it’s not a big driver in the next year, but will be a platform that will develop off of a significantly step reduced higher efficiency product. And of course that’s sort of a Holy Grail. That’s what everybody’s targeting for is high efficiency at low cost. And our Gen 3 platform gives this foundation for that in the ’13, ‘14 timeframe. So it’s split between more effective procurement and that’s across everything we buy. When there is an inversion of supply and demand it happens all the way through the value chain.

We partnered with some significant suppliers over the year when it was the other way around. And so we are finding our partners to do – to partner with us in this market condition as well. The step reduction program is the more significant driver. I’d call it kind of 60:40, Kelly. That’s a rough estimate. Step reduction is more powerful because it allows us to make same products with less capital equipment, less touches of the wafer, which means less yield loss, less chems and gases and electricity, and it’s like energy efficiency, there’s nothing better than eliminating the use of. The other thing that’s really powerful about our step-reduction program, is its sustainable differentiation. It’s something that no one else is doing, and has many patents pending.

So step reduction is what’s going to drive us, but it’s probably 60% of the economics of the cost reduction.

Kelly A. Dougherty – Macquarie Research

Great, that's helpful. And then just with the CapEx, you previously mentioned having a reallocation more toward cost improvements, less towards just straight capacity expansion. Just wondering if you can break out your CapEx guidance for this year, what it -- $110 million or $130 million, how much of that you're spending on cost reduction? Is any of it for building capacity for the tracker? Just maybe how you think about the needs for tracker CapEx going forward -- or I'm sorry, for the concentrator?

Tom Werner

Let me comment philosophically very briefly and then Dennis or Chuck are going to answer your question specifically. You are exactly right. By virtue of our C7 product, we can expand significantly in ’13, ’14, and ’15 without adding nearly as much as fab capacity. So part of our CapEx for this year is pretty net capacity in place. I think they are going to tell you, is between – it’s 10% to 15% of that overall number.

The balance of it is split between the step reduction programs and the advancement of our Gen 3 product that we talked about in the earnings call. So broadly speaking that would be the split. If you guys want to give…

Dennis V. Arriola

Yes. I think that's accurate. As we look at -- for 2012, about 2/3 overall, you could put into the bucket of manufacturing, with a good portion of that coming -- almost half of that coming on step reduction. And the other, roughly half of that, coming in the form of modco -- what we're doing in Mexicali. And then we're investing quite a bit on C7 as well. So that's -- those are the breakups.

Kelly A. Dougherty – Macquarie Research

If I could just -- one more quick one, any comments on the trade situation and maybe how you see that playing out and affecting or not affecting SunPower in some way?

Tom Werner

My understanding is that the ruling or decision is pushed out a couple of weeks. So we will see – we have never been through a trade suite. We are not planning to capitalize either up or down. We are working with Total to accelerate our cost reduction roadmap and compete incredibly, aggressively. And if it happens, to be a positive that would be incremental or icing on the cake, so to speak.

Operator

Our next question comes from James Medvedeff.

James Medvedeff

Cowen and Company. I want to ask a little bit -- just a little bit of clarity on the R&D and SG&A comments that you made. With Tenesol coming in, is R&D basically flat year-over-year? And does SG&A drift up a little bit? Or are they actually both lower in 2012?

Tom Werner

This is Tom. I will take 20 seconds. R&D will increase also by virtue of our work with Total, a meaningful investment of four years, $24 million. It’s not – that’s not built into that numbers that you see. So you’d see a moderately increasing standalone R&D investment with the addition of Total on top of that.

Dennis V. Arriola

Yes. This is Dennis. And if you look at the SG&A excluding R&D, there's really 2 ways -- 2 buckets to look at. SunPower, excluding Tenesol, will be down year-on-year. As we said, approximately 10%. On an absolute basis, when you add Tenesol, it'll be up. But it's on a relative basis. When you look at the SG&A as a percentage of revenue, we're down year-on-year.

James Medvedeff

Great. That's what I was looking for. Just another one, you mentioned the bad debt expense. Can you just flesh that out a little bit and maybe give a sense of who, why, where and what it's looking like right now?

Dennis V. Arriola

Sure. This is Dennis again. I think, we, like most companies, have policies based upon delayed payments or tardy payments. We take a very strict look at that. And we had a handful of customers that were having some challenges, and we made the decision per our policies to set up reserves for those. So remember, whenever you do set up bad debt reserves, it doesn't necessarily mean that you forget about it. And we're going after these customers, either supporting them in prepayments or payment plans and/or looking at what legal ramifications or remedies we have.

James Medvedeff

Are they -- is this in Europe? Or is it in the U.S. or Asia? Or where geographically?

Dennis V. Arriola

Primarily Europe.

James Medvedeff

Yes, that makes sense. One final one. Why would LCOE only be down sort of 20% if the efficiency gains of the C7 Tracker are 7x? Is it the cost? Is it that much more expensive? Or is there some...

Tom Werner

If it come in at 20%, it’s 20% of competing technologies at the time we are in mass production. So the LCOE drop is significantly more than that, but it’s 20% better than competing technologies and ’13 and’14 timeframes.

Operator

Our next question comes from Joe Osha.

Joseph Osha – BofA Merrill Lynch, Research Division

Bank of America Merrill Lynch. Two and a half questions, I would say. First, on the UPP pipeline, can you talk about how much of that is DOE 1705 guaranteed?

Tom Werner

I think that’s pretty straight forward. That’s CVSR only and over what timeframe Joe.

Joseph Osha – BofA Merrill Lynch, Research Division

Well, I assume that most of your pipeline now, being as it's February, was stuff that kind of went into the pipeline late last year. So...

Tom Werner

So if you think of our overall pipeline, it’s 20% of our overall pipeline. We would put a number 5 gigawatt in our pipeline.

Joseph Osha – BofA Merrill Lynch, Research Division

Okay. And so that, essentially, other than CVSR, the rest of it is not related to what's going on with 1705?

Tom Werner

My math is horrible, I believe that would be more like 5%. And I’d call it 2.50 out of 5 gigawatts.

Joseph Osha – BofA Merrill Lynch, Research Division

Secondly, and this is the half question, there was some news out about some static, possibly related to the disbursements of the DOE guarantee for CVSR. Do you have any comment on that?

Tom Werner

Beyond what we said in our script, the short answer is no. We did – if you go back and take a look at the transcript, we covered that in a few sentences.

Joseph Osha – BofA Merrill Lynch, Research Division

Okay. So I heard that. I just wondered -- okay. Last, in terms of -- I know you don't want to disclose too much, but any comment on how ASPs might have trended in the Utility versus your retail and Commercial business?

Tom Werner

We are trying to – I think catch the end of it. So how ASPs trended and then it kind of faded out.

Joseph Osha – BofA Merrill Lynch, Research Division

Your UPP versus Residential and Commercial.

Tom Werner

Oh sure. ASPs in the UPP business are set one in two years prior. It’s a two to three year cycle business. And of course you’re forecasting where your costs are going to be in. And so, I think of the market price reference, and go down from there, to give you some sense of where things are at. And residential and commercial, I’ll let Dennis comment.

Dennis V. Arriola

Yes. For the full year ASPs, and we look at it from the RLC basis blended around the world, were down just below 30%. And for the quarter, the reduction was in the single digits.

Operator

The next question will come from Brian Lee.

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

Goldman Sachs. I just had 2. First off, if I take your cash balance and then strip out the retirement of the debt in Q1 and your guidance for ending '12 at $300 million or so, it seems to imply a cash burn of an additional $150 million over the next 12 months. Does that sound about right? And how do you think about your need for additional capital heading into 2013?

Dennis V. Arriola

Yes, that's -- Brian, this is Dennis. That's approximately correct. Basically, what I say is we are generating a positive operating cash flow. We talked about what our CapEx program is. We did also absorb some cash as part of the Tenesol acquisition. But as far as our overall capital raising plan for 2012, we don't anticipate today that we're going to be requiring to go out into the market in the capital side. I mean, if you look at where we ended up in the fourth quarter, with $658 million in available cash, as well as another $25 million under our revolver, we feel really comfortable that we have the resources necessary to finance our plan.

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

Okay. And then -- just my second question was on CVSR. How many megawatts did you guys recognize in Q4? And was that in line with your original expectations? Or would you say that you were able to accelerate that a bit?

Tom Werner

I would say, largely on plan and accelerating significantly in Q1.

Operator

Our next question comes from Timothy Arcuri.

Timothy M. Arcuri – Citigroup Inc, Research Division

Citigroup. First thing. Tom, when you're efficiency adjusting your module cost, you're taking your costs down about $0.38. And I always thought that it was about $0.035 per 100 basis points working efficiency. So are you comparing it to first solar or crystalline? Because it seems like you're comparing it to first solar. And then I had a follow-up.

Tom Werner

Sure. I think you can use your range of $0.03 to $0.08 at least. And it depends on the location. And it’s technology agnostic. So if you – we’d essentially, just like you would, we put it into a LCOE calculation. And so solar influence and cost of BOS are big drivers and creates the range. If we have low cost BOS and low sunshine, you are at the low end of the range; high sunshine, high BOS the other end of the range.

And don’t forget that that’s compared to our average panel price. For us a very large scale – we have a variety of sizes, and our large scale panel is substantially lower cost. So if we were to say – to target exclusively our large scale power plants, we would make one SKU that would be a large scale panel and our costs would come down rather dramatically.

Timothy M. Arcuri – Citigroup Inc, Research Division

Right. I guess the reason why I ask is because if you compare to crystalline and it's on the low end of that range, it's about a $0.20 adjustment. So even if you get to $1 per watt, you're going to be efficiency adjusted to like $0.80. So you're going to be selling modules effectively at cost if that's what crystalline is selling for. And then second question that I had was what are the restrictions, if there are any, on Total for buying the remainder of the shares outstanding?

Tom Werner

You got me. I have to comment on the $0.80 that if the competition is selling at $0.80, it suggests their costs should be in the $0.60s. And if we – we have a lot of people who are benchmarking and analyzing other people’s products, and if we see evidence of that happening, you can be rest assured, we are not going to stick to our targets, but we are pretty comfortable that an $0.80 cost is going to be extremely competitive. And we will see and we have to adjust we are wrong. There is a standstill agreement that was part of our deal with Total. Of course, they can be adjusted by the independent directors. But it is a process managed by our independent directors in compliance with the standstill agreement.

Dennis V. Arriola

Yes. And, Tim, this is Dennis. The actual components of that are contained within the affiliation agreement which we filed with the SEC as part of the overall acquisition. And you can see where the step-ups are, and as Tom said, any requirement for modifications are.

Tom Werner

So we are going to wrap up the call here. Please contact Bob Okunski, particularly the people in queue, if we did not answer your questions, I am really sorry about that. If we look at this side, going into a continuing transition year, we are on the offense. We have a differentiated go-to-market, differentiated technology. Our cost plan is on track. And we have Total partnership, we are in a position to be on the offense. So we look forward to the call next quarter. Thank you for your time.

Operator

At this time, that would conclude today's conference. You may disconnect, and thank you for your attendance.

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