SunPower Corporation (NASDAQ:SPWR) Q3 2019 Results Earnings Conference Call October 30, 2019 4:30 PM ET

Company Participants

Robert Okunski - Senior Director of IR
Thomas Werner - Chairman and Chief Executive Officer
Manavendra Sial - Executive Vice President and Chief Financial Officer
Jeff Waters - Chief Executive Officer, SunPower Technologies
Norman Taffe - Executive Vice President, North America Residential
Nam Nguyen - Executive Vice President and General Manager, Commercial Solar

Conference Call Participants

Brian Lee - Goldman Sachs
Michael Weinstein - Credit Suisse
Colin Rusch - Oppenheimer & Co.
Julien Dumoulin-Smith - Bank of America Merrill Lynch
David Katter - Robert W. Baird

Operator

Good afternoon. Welcome to the SunPower Corporation's Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at SunPower Corporation. Thank you, sir. You may begin.

Robert Okunski

Thank you, Kevin. I'd like to welcome everyone to our third quarter 2019 earnings conference call. On the call today, we will start off with an operational and strategic review from Tom Werner, our CEO; followed by Manu Sial, our CFO, who will review our third quarter 2019 financial results before turning the call back to Tom for guidance.

As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

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, today's press release, our 2018 10-K and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect our forward-looking statements.

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

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower. Tom?

Thomas Werner

Thanks, Bob. And thank you for joining us. On this call, we will provide an overview of our third quarter 2019 performance and an update on our strategic initiatives that are driving improved profitability and shareholder value.

Please turn to slide three. SunPower executed well in Q3, meeting or exceeding our financial targets for the quarter, including our adjusted EBITDA forecast. Volume, revenue and margin all came in on plan, driven by strong demand across our global DG business.

In SPES, we are positioned well for the fourth quarter with record booking levels in both our residential and new homes businesses. Our SPT business also delivered record quarterly shipments in Q3, with particular strength in DG markets including Europe, Korea, Australia and Southeast Asia.

Volume growth was enabled by capacity expansion initiatives across all fabs, including our P-Series JV.

Finally, we strengthened our balance sheet, generated cash at the business unit level and closed our safe harbor financing agreement with Hannon Armstrong.

Now, let me cover our segment performance in greater detail. First SPES. Please turn to slide four. Overall, both our residential and commercial businesses showed sequential revenue and megawatt growth with significant interest in our recently launched residential Equinox Storage solution.

In residential, demand for our A-Series panels is strong and we are ramping production to meet this need. We continue to build under industry-leading position in new homes where our backlog is now over 40,000 homes, with record bookings and shipments during the quarter.

To give you a feeling for the current scale of this business, we saw 80 new home communities go live with SunPower solar in Q3. The mix of cash, loan and lease across our residential business remains balanced, in line with forecast, with particularly strong demand for our loan products.

In digital, we launched our design studio app nationwide and continue to see significant use of this design software by our dealers, given the ease and speed of system design.

Finally, the rollout of our Equinox storage product is on plan. We are now completing beta deal test and will start shipping at scale at the end of Q1.

In C&I, we maintained our number one share position with volume increasing approximately 10% sequentially. Our origination team is executing well as we were awarded 65 MW of new projects during the quarter.

However, our project deployment execution has been disappointing. As a result, we are undertaking a number of initiatives in our commercial direct business that we believe will drive stronger financial performance, starting in the fourth quarter.

Our Helix storage solution is selling well, with the pipeline exceeding 145 MW and average attach rates of approximately 35% over the last 12 months. We have been awarded approximately 30 MW in storage projects to date.

Finally, we are seeing solid demand for our P-Series product manufactured in our Oregon facility, with recent deployments for both Chevron and Walmart.

In addition to the initiatives I just mentioned, we have made the strategic decision to realign our SPES business by combining our residential and small commercial dealer channels starting in Q4.

Please turn to slide five. We are reorganizing our SPES business into an indirect channel business in a commercial direct model in order to drive scale, lower channel costs and improve our margin profile.

This creates the largest residential and commercial dealer platform in the industry, with an installed base of 1.7 GW, over 300,000 customers in a network of more than 500 dealer partners.

This group also includes our new homes business where our share continues to exceed 50%. We expect this structure will enable us to improve margins through increased OpEx efficiency, supply chain leverage and potential cross-sell opportunities with storage and services. We are making significant progress towards achieving our greater than 10% EBITDA target in the channels business with Q3 coming in at approximately 5%.

For C&I, we continue to believe in the potential for this business despite our uneven performance this year. Given our number one market share, $3 billion pipeline, strong repeat customer track record and innovative storage and services offerings, we are well-positioned to continue to lead in the C&I market.

We are taking a number of steps to improve our project deployment execution and to reduce operating expenses. We're confident that these adjustments will return the commercial business to sustainable profitability.

Finally, I'm happy to announce the launch of our Equinox residential storage solution last quarter to capitalize on what we see is a significant opportunity for growth in the residential market.

Please turn to slide six. Equinox storage is the next major evolution of our Equinox energy platform, giving homeowners more freedom from utility outages and onerous peak electric rates.

With Equinox, homeowners can store energy for full or partial home backup during blackouts and reduce daily peak electricity consumption. Most importantly, Equinox storage is the only fully-integrated residential system designed, engineered and warranted by a single company which we see as a distinct competitive advantage in this rapidly growing space.

Built on the success of our Helix storage platform, Equinox storage offers residential customers an industry-leading solution with significant advantages compared to our competition, including battery cycle performance, smaller modular footprint and a superior warranty.

We are currently testing beta units in the field and are taking initial orders. We expect a national rollout starting in Q1 of next year.

Now, let's review our SunPower Technologies business. Please turn to slide seven. Our manufacturing team executed well again in Q3, delivering record shipments that exceeded plan, while meeting cost and yield targets.

Our next generation Maxeon-5 technology is hitting its performance goals and we are on track to achieve full ramp of our first Maxeon-5 line pair by the end of this quarter.

Production of our P-Series technology is also going well. And we expect to ship a combined total of 1.3 GW of P-Series this year from our joint venture in Oregon manufacturing facility.

Our SPT international sales group posted another strong performance will record overall volume for the quarter, led by our best ever shipments into our European DG channel. We continue to drive the mix in SPT toward the higher margin DG segment, with more than 70% of our shipments to this market in Q3.

SPT also continues to expand its footprint in the power plant segment with a solid backlog for 2020.

Finally, we are making good progress towards finalizing a potential investment to accelerate the scale up of Maxeon-5 capacity and expect to be in position to announce this agreement in the fourth quarter.

Now, let's take a closer look at the details of SPT's strong international market growth. Please turn to slide eight. Over the past year, SPT has roughly doubled sales volume outside of the US, with a primary focus on DG markets.

In EMEA, where SPT is the deepest and most mature dealer network, shipment growth in 2019 exceeded 40%. In APAC, annual shipment growth of 160% is fueled by strong core market DG demand in Australia and Korea, strong traction in several Southeast Asian markets as well as supply to selected power plant projects in the region.

Shipments to Latin America showed the highest growth, albeit from a small base, and we're increasing our sales resources in that territory. SPT currently does not sell into China and is therefore not exposed to China market demand fluctuations.

One of the factors that enabled rapid growth in 2019 is our P-Series joint venture. I would now like to provide a little color on the JV. Please turn to slide nine. Following the 2015 acquisition of Cogenra and the shingling technology, we engaged with our long-term partner in China, DZS, with whom we had structured a number of JVs and joint development agreements in various parts of the value chain.

Early in 2017, we signed agreements to scale up our P-Series technology within a JV located in Yixing, China, managed by DZS. DZS brought not only funding to the JV, but also significant manufacturing expertise and deep connections with the regional low-cost supply chain.

The first P-Series models were produced by the JV at the end of 2017. And in 2018, we sold just under 300 MW of panels from the JV. In 2019, we expect that our sales volume of JV produced panels will grow to almost 1.2 GW, more than a fourfold increase.

We see strong demand for this technology across all customer segments, driven by superior product attributes such as higher efficiency, better reliability and enhanced energy yield.

Our P-Series technology is unique and proprietary and we have taken steps to ensure appropriately strong IP protection. We're pleased in Q3 to receive our first issued P-Series patents in China, which adds to a growing portfolio of P-Series patents in key global markets.

Given the successful 2 GW ramp of our P-Series JV and the strong customer demand for this product, we are currently in discussions with DZS about further capacity expansion.

Please turn to slide 10. In summary, we are pleased with the company's performance in Q3 as we met or exceeded all of our key financial metrics.

Our SPES residential and commercial channel organization is performing well and we're highly focused on improving our commercial direct business execution.

SPT continues to drive strong global sales growth, fueled by expansion of our Maxeon-5 and P-Series capacity and with a bias towards DG markets.

Finally, we continue to improve our balance sheet and delivered strong cash generation performance for the quarter.

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

Manavendra Sial

Thanks, Tom. Now, let me review the financials. Please turn to slide 11.

We were pleased with our results as we met or exceeded our key financial commitments including our adjusted EBITDA forecast. Overall, our non-GAAP revenue was above our commitment as a result of strong execution and continued DG demand.

In SPES, revenue grew approximately 15% sequentially, with particular strength in our residential channel, including record bookings.

For SPT, we shipped 677 MW, another record and above our outlook, driven primarily by the international DG business. Our consolidated non-GAAP gross margin was 16%, in line with our outlook.

In SPES, gross margin was up sequentially, driven by an improved performance in both our residential and commercial channels. However, as Tom mentioned, while the origination engine in our commercial direct business remains strong and our backlog continues to grow, project deployment execution was below expectations.

We're implementing a number of initiatives in the fourth quarter to improve the overall execution in the commercial direct part of the SPES business. We expect overall SPES margin to improve in the fourth quarter and beyond, with strength in our residential business, given our strong backlog, improving cost structure including synergies achieved by combining our residential and commercial channel businesses and enhanced focus of the commercial team on the direct business.

In SPT, gross margin was higher than forecast on increased volumes, strong DG demand as well as the benefit from our leaseback transaction related to our Oregon manufacturing facility. Both segments are making progress on getting to their target models.

Non-GAAP OpEx was $68 million for the quarter, up from $61 million in the second quarter. Excluding a one-time $8 million OpEx benefit in Q2 that we mentioned last quarter, OpEx was slightly below Q2 on a comparable basis. We remain confident that 2019 OpEx will be less than $270 million.

CapEx for the quarter was $17 million, consistent with our NGT ramp at Fab 3, with our second line now in production.

Adjusted EBITDA was $42 million and up approximately $34 million sequentially. We expect to see significant EBITDA improvement in the fourth quarter as we benefit from a strong backlog, increased volumes of NGT and an approximate $20 million margin benefit attributable to certain legacy power plant projects.

I'd now like to discuss a few financial highlights for the quarter. Please turn to slide 12. As previously mentioned, we met or exceeded our key financial commitments for the quarter, with revenue and margin up sequentially, primarily related to further growth in our DG volumes.

For the quarter, we continue to successfully manage our working capital, while generating cash on the business unit level. Also, we closed a key financing arrangement in the quarter related to a safe harbor program. We believe that this arrangement with Hannon Armstrong provides us with a highly capital efficient and flexible structure to maximize the economics of up to 200 MW of safe harbor material.

We also positioned ourselves for margin expansion in 2020. We expect this expansion to come from further execution on our cost and technology roadmaps in our business segments, including higher NGT and storage volumes; revenue and cost synergies by combining residential and commercial channels; system cost reductions and enhanced focus of our commercial team to drive improvement in our direct business.

On the cost side, we continue to reduce corporate OpEx and expect it to be less than 2% of sales.

Before turning the call back to Tom for our guidance, I would like to provide an update on our cash forecast for the balance of the year. Please turn to slide 13.

On the left-hand side chart, we detail our major cash flow moves for the third quarter of 2019 as well as where we see those items for the year as a whole. We remain confident that we will achieve our goal of ending the year with more than $200 million in cash.

For the quarter, we generated approximately $22 million in cash as we met our goal of being cash flow positive at the business unit level for the third quarter.

We accomplished this while further paying down our legacy liabilities, expanding capacity and allocating resources to further fund our growth initiatives. We remain committed generating cash at the business unit level in the fourth quarter.

With that, I will turn the call back to Tom for our guidance. Tom?

Thomas Werner

Thanks, Manu. I would now like to discuss our guidance for the fourth quarter and fiscal year 2019. Please turn to slide 14.

The company's fourth quarter guidance is as follows. On a GAAP basis, revenue of $520 million to $720 million, gross margin of 11% to 12% and a net loss of $28 million to $8 million.

On a non-GAAP basis, the company expects revenue of $520 million to $720 million, gross margin of 16% to 19%, adjusted EBITDA of $74 million to $94 million, and megawatts deployed in the range of 445 MW to 645 MW.

On slide 15, the company's fiscal year 2019 GAAP and non-GAAP guidance is as follows. Revenue of $1.8 to $2 billion on a GAAP basis and $1.9 billion to $2.1 billion on a non-GAAP basis.

Gigawatts deployed is expected to be in the range of 2.1 GW to 2.3 GW excluding approximately 200 MW for the company's safe harbor program.

Non-GAAP operational expenses of less than $270 million and capital expenditures of approximately $65 million.

As a reminder, fourth quarter and 2019 guidance includes approximately $20 million in gross margin attributable to certain legacy power plant projects in the current quarter.

Finally, the company's fiscal year 2019 adjusted EBITDA is unchanged and expected to be in the range of $100 million to $120 million.

In summary, Q3 was a solid quarter for the company as we executed on our strategic initiatives and positioned the company for strong and profitable performance going into the end of year.

With that, I would like to turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Brian Lee with Goldman Sachs.

Brian Lee

Hey, guys. Thanks for taking questions. Maybe first off, just Manu on the guidance, that's a pretty wide range here, low to high-end, for all the metrics. Can you walk us through some of the puts and takes of what's embedded in the range here, i.e. what gets you to the high-end and what would fall out to put you at the low end? It looks like the megawatts deployed ranges is widest on SPT. So, maybe if you could just walk us through some of the moving parts here.

Manavendra Sial

Right. Thanks, Brian. So, if you think about the overall megawatt guidance, we increased our megawatt guidance slightly versus last time. SPT business, specifically our international BG, remains very strong. And then, there's a little bit of project deployment timing with our commercial business. So, as you think about the two bookends of the range, there's a little bit of lumpiness in SPT associated with project shipments that go into the big power plant, utility scale businesses out of our JV too. So, that explains the wide range in SPT.

Thomas Werner

Brian, this is Tom. There is no magic chair. Basically, what we did is we confirmed guidance from last quarter for the year. We moved megawatts a little bit up, but otherwise it's just confirmation of previous guidance. Where I would lead you to is we expect to be median, playing in the middle of that guidance.

Brian Lee

Okay, fair enough. And then, maybe just two from me and I'll pass it on. If you guys had told us at the beginning of the year that SPT gross margins would be mid-teens and highest across the business units, I think most of us would have been surprised. So, can you give us some sense of why SPT has been able to get here so quickly and how sustainable this level is into 2020? You're already at kind of that target range in the third quarter of 2019.

And then, conversely, I guess, on resi and commercial, what's the trajectory here to get to 20% and mid-teens respectively, which I believe were the targets heading into next year before?

Thomas Werner

Okay, Brian. Thanks. And then, I'm going to hand it off to Jeff and then Norm and then maybe Nam, the folks who run the business units.

SPT is having a very good year. And actually, it is at our guidance model in Q3, the one that we gave on at the analyst day. Jeff can talk about the factors that are driving that. What I would lead you to is, think of that plus or minus a couple points going forward. We think of being at that or better on a reliable basis towards the back half of next year, going into 2021. So, there will be some quarters where we might be close, but not quite, to that level. So, you're right. And I'll let Jeff give you some color as to what the drivers are to get to model earlier than most would have projected.

I'd like you to start thinking about our SPES business as a channels business, which is residential and – residential value-added reseller channel and commercial value-added reseller channel and new homes. All three are in extremely good position and are trending very favorably. Demand is excellent. And Norm can talk about that more. And think of getting to model there, though, I think similarly reliably towards the back half of next year and into 2021.

Our commercial is more of a work in progress. The origination engine is working. We're getting lots of awards. Our execution is uneven as we entered new states. So, that's probably a little bit longer to get to model, probably 2021 is what I would relate you to.

So, Jeff, if you just briefly say a few words and then Norm and maybe Nam.

Jeff Waters

Yeah. The underlying story on the good gross margin performance, again, it goes to the products and the technology and also the global DG market. As Tom highlighted, we've seen great growth in EMEA, we've seen great growth in Asia-Pac and even markets like Latin America. And whether it be the IBCs or the Maxeon series technology that we've had or the P-Series technology, because of the differentiation it has on the customer base, it allows us to drive price improvement which leads to good margins.

We would expect, as we head into 2020, that we'll be roughly in that area. I think the target model we put is 15% in the Capital Markets Day. That is a little further out, but I would say, between now and then, we'll be roughly around that area.

Norman Taffe

This is Norm, Brian. As far as margins go on the channels business, we did grow margins quite well in Q3. So, we added almost 5% of gross margin. And I can tell you that, in Q4, that growth will continue. In effect, in 4Q, we're already getting fairly close to our model. That's our current plan. Now, that is the Q4 and that's ramping very large. I think, as Tom said, to overall hit model consistently towards the second half of next year is likely.

Now, our margin improvement is really been driven by a couple of things. one, we're getting more A-Series mix. More A-series we ship, the higher our margins go. And the other one is new homes continue to be a bigger and bigger piece of our business. And as that backlog grows, our gross margins get healthier and healthier.

Nam Nguyen

This is Nam here. With commercial direct, to follow what Tom said, origination is looking great. Our Helix storage is getting a lot of adoption. We're going to focus on the execution side. I would say, year-over-year, we are seeing gross margin improvement. In terms of getting to our targets, as Tom mentioned, 2021 is the right timeline for us. And again, over the next quarter, it's the focus on execution.

Brian Lee

Great. Appreciate the color. Maybe just one housekeeping one, if I could squeeze it in. Manu, on the $20 million in gross margin for legacy projects expected in the fourth quarter, can you elaborate on what that's related to and if there's any recurring contribution beyond 4Q? And was this part of EBITDA guidance originally for 2019 or is it a new item? Thanks, guys.

Manavendra Sial

So, two questions. The gross margin related to the first quarter legacy project is primarily related to our remaining development project in Mexico, with a little bit of tail next year, but small. And then, it grows part of our original guidance.

Brian Lee

Okay. Thank you, guys.

Thomas Werner

Thanks, Brian.

Operator

Our next question comes from Michael Weinstein with Credit Suisse.

Michael Weinstein

Hi, guys. Can you talk a little bit about the EBITDA targets? 5% for EBITDA for commercial direct. What's the timing of that? Are you actually expecting it to come in in 2021 at that point or is it going to be at the ramp up period through that period?

Thomas Werner

So, I'll take that, Michael. So, the actual target that we gave at the analyst da was 7% to 10%. And we think we can exit next year close to that rate. Our goal on each of these targets is to be sustainably at those rates, meaning that each quarter is at or above that rate. So, the answer is specific for C&I at 7% to 10% exit rate next year sustainably in 2021. And it's adjustments we're making to our cost structure and the way we deploy projects that will result in the improvements.

Michael Weinstein

And on the 40,000 home backlog, how much of that is in California in 2020?

Thomas Werner

I'll go ahead and let Norm take that.

Norman Taffe

Yeah. Hi, Michael. As far as the new homes backlog, it's almost 100% California. Over 95% of that is driven by our super strong position in California.

Michael Weinstein

Got it. One last question. Just on the safe harbor plan for next year, should we expect that in the first quarter or more like a Q1 type item.

Thomas Werner

So, let me answer and then I'll jump back in if I didn't answer the question sufficiently. We have been putting inventory in our safe harbor program, as Manu mentioned, financed by an agreement with Hannon Armstrong. We'll still be adding to that inventory throughout this quarter, maybe a little bit in Q1. That will be good for 2020. We would expect similar for 2021 at the end of 2020.

Michael Weinstein

All right, great. Thank you.

Thomas Werner

Alrighty.

Operator

Our next question comes from Colin Rusch with Oppenheimer.

Colin Rusch

Thanks so much, guys. Can you give us some perspective on the current capacity you have for energy storage and the cadence for growth in that capacity?

Thomas Werner

Yeah. I'll say a few words and then Norm for residential and Nam for commercial. I would say we're modestly supply constrained in commercial now, but mostly we're able to supply. We've been able to add other suppliers. And then, on residential, the product has alpha-ed in their last quarter. It's beta this quarter. We'll take initial orders towards the end of this quarter with volume ramp at the end of Q1. Norm can give you a sense, though, for what we're planning for in terms of attach rates and the ability to supply.

Norman Taffe

Yeah. Hi, Colin. So, relative to storage, obviously, we're, probably not surprisingly, seeing extraordinary demand. We think it's going to be a huge part of our business going through the back half of next year, but we're brand new and we're just starting to take orders. I would say that our expectations have been kind of revising upwards to where we're now expecting 20-plus-percent attach rates overall and more than that in California. And so, that will be something that affects most of the second half of next year because we aren't going to start full shipments until February and March.

Nam Nguyen

I was going to say, on the commercial storage side, we have about 30 MW, as Tom mentioned, already in award. We have another 10 MW, but in the process of being constructed. And we're managing a couple of very strategic partnerships and do think we can manage the supply chain. But the backlog is strong.

Colin Rusch

And then, just thinking about middle of next year on the module business in the US and seeing competitors like LG and Panasonic bring increasingly compelling products to market, what are you seeing at this point in terms of pricing dynamics, ability to book out business that far and if you could put that in context of your thoughts around this JV for new capacity?

Thomas Werner

Yeah. I'll say a few things; and, Jeff, if you want to add on, you can. What we see in America is that we still have a highly differentiated lead. Some of the products you mentioned aren't available in America at scale. So, our A-Series is clearly the highest efficiency and highest power ratings. Our X-Series is as well. I guess, that would be matched by the next four. And our booking ability, as witnessed by the residential channel selling incredibly well this quarter, is unchanged. We have improvements of our own planned for the year. So, I'd say we remain largely – have the same view on demand for next year as we've had previously.

Jeff Waters

Yeah. This is Jeff Waters. Just speaking globally of, I would say, a similar picture, especially when you look at NGT or the A-Series product branding where we're introducing that overseas and at the cost structure of that product, especially as we build out more capacity, it will allow us to compete and compete very profitably even as competition comes, as we always expect it will.

Colin Rusch

Great. Thanks so much, guys.

Operator

[Operator Instructions]. Our next question comes from Julien Dumoulin-Smith with Bank of America.

Julien Dumoulin-Smith

Hey. Good afternoon, guys. Thanks for the time. Perhaps, you can summarize a little bit of what we're hearing out there or rather – some of the last questions rather. Can you comment a little bit about the drivers of the non-GAAP EBITDA year-over-year [indiscernible], especially after some of the trends that we've seen sort of year-to-date and then third quarter? Can you comment on maybe piecing them out, if you will, in terms of margin improvement versus A-Series, versus the Helix solution, et cetera?

Thomas Werner

Sure. I'll take a pass and then Manu can add from that. So, in the SPT business, what we've seen is a better job of managing the less profitable SKUs and reorienting that business. We actually modified the form factor of some of our longer, older technologies to be suitable for the DG market. So, our switch to DG has paid off well. Or our focus on DG in SPT has paid off well. And as you mentioned, A-Series, we highlighted the joint venture because, last year, that was lower, no margin. This year, it's maybe quite good margin. So, that's another factor that's caused SPT to perform better.

In the channels business, we have better economics on lease, by virtue of a new lease signed. And then, we have better performance in our business because of A-Series. It's a big driver. Demand is quite strong. And in that channel, the CVAR channel is similar to that. And then, in commercial, Helix storage has actually been a winner for us, offsetting some of the implementation challenges that we've had. Equinox will be similarly so in 2020.

So, we've been able to sort of cap the leakages and then harvest some of the R&D investments we made in products and solutions the last few years.

Julien Dumoulin-Smith

[indiscernible].

Manavendra Sial

No, no. Go ahead, go ahead.

Julien Dumoulin-Smith

So, I was going to just jump, if you don't mind, to the balance sheet side of the equation. Can you comment a little bit on where you stand with respect to revolver capacities or other liquidity sources just as we think about cumulative availability?

Thomas Werner

Yeah. So, I'm going to have Manu take that and I might add on a few comments after he's done.

Julien Dumoulin-Smith

So, from a revolver perspective, we're going to right-size our revolver to about $55 million just because with the cash generation in the business unit, both in terms of 3Q and expected fourth quarter performance, plus improvement in the model at SPES with a working capital like model and working capital improvements in SPT. We believe we need a lower revolver, driven also by the fact that they are effectively out of the utility scale business from a power plant perspective.

So, I from a cash point of view, what I'll say on a balance sheet perspective, I think our balance sheet got stronger in 3Q. With cash generation, we expect the business units to continue to generate cash in fourth quarter and we'll further pay down our legacy liabilities.

Thomas Werner

Yeah. Julien, as you look forward, of course, we have a convertible that goes current at the middle of next year. And as we've said on previous calls, the combination of the BU cash generation, improvements in working capital management, particularly in leased, and our ownership in Enphase, we have, we call, the operational ways of paying off that convert.

I do want to note as well that we did file a shelf registration a few weeks ago, maybe a month ago. And the point of doing that, of course, like all companies, is to have flexibility. If conditions were favorable, we would potentially look to raise capital in capital markets, even potentially in the near term.

Julien Dumoulin-Smith

And that's debt and equity?

Thomas Werner

I'm, Julien. Can you ask again?

Julien Dumoulin-Smith

Sorry. That would include debt and/or equity.

Thomas Werner

Yeah. We're evaluating. If we were to do something, of course, we'll consider both.

Julien Dumoulin-Smith

Excellent. Thank you, guys, very much.

Thomas Werner

All right. Thanks, Julien. I think we'll take one more question. One more question please.

Operator

Our last question comes from David Katter with Baird.

David Katter

Hi, guys. Thank you for taking the question. Just want to quickly touch on the SPT partnership. Is there any update there and how are discussions progressing?

Thomas Werner

Yeah. Thanks, David. I think [indiscernible]. So, we've made great progress towards finalizing potential investment. That investment, of course, is to accelerate the conversion of match three to match five, which is a great return on investment. We're in a position to announce that this quarter. We are making good progress. We've narrowed it down to one party. Of course, we maintain options. It is possible, depending on how those discussions go, that we could have an agreement to announce in the very near term. So, things are progressing quite constructively with one party, is what I would say.

So, thank you very much for – unless you have a follow-up, David.

David Katter

I'm all set. Thank you, guys.

Thomas Werner

Okay, thanks.

Thomas Werner

All right. Appreciate the questions very much. Appreciate your time. I think we'll have some things to talk about soon. So, we look forward to talking to you again soon and, certainly, at our next earnings call.

Operator

Ladies and gentlemen, that concludes today's presentation. You may disconnect and have a wonderful day.