SunPower Corporation (SPWR) Q2 2023 Earnings Call Transcript

SunPower Corporation (NASDAQ:SPWR) Q2 2023 Earnings Conference Call August 1, 2023 8:00 AM ET

Company Participants

Mike Weinstein - Vice President, Investor Relations

Peter Faricy - Chief Executive Officer

Beth Eby - Executive Vice President and Chief Financial Officer

Conference Call Participants

Sean Morgan - Evercore ISI

Tristan Richardson - Scotiabank

Pavel Molchanov - Raymond James

Philip Shen - Roth MKM

Kashy Harrison - Piper Sandler

Michael Blum - Wells Fargo

Andrew Percoco - Morgan Stanley

Brian Lee - Goldman Sachs

Colin Rusch - Oppenheimer

Ben Kallo - Baird

Vikram Bagri - Citigroup

Operator

Good day, and thank you for standing by, and welcome to the SunPower Second Quarter 2023 Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mike Weinstein, Vice President of Investor Relations. Please go ahead.

Mike Weinstein

Good morning. I would like to welcome everyone to our second quarter 2023 earnings conference call.

On the call today, we will begin with comments from Peter Faricy, CEO of SunPower, who will provide an update second quarter announcements and business highlights, followed by an update on 2023 guidance, including recent sales trends, backlog, operating expense, and financing. Following Peter's comments, Beth Eby, SunPower's Interim CFO, will then review our financial results. As a reminder, a replay of the call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, our [2023] (ph) Form 10-K and quarterly reports on Form 10-Q. Please see those documents for additional information regarding factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP metrics during today's call. Please refer to the appendix of our presentation, as well as today's press release for the appropriate GAAP to non-GAAP reconciliations.

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

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

Peter Faricy

Thanks Mike, and good morning, everyone. Today, I will discuss our Q2 2023 results, our preannounced reduction of our full-year 2023 guidance, and our view of the most important factors that could affect 2024. I will also talk about our approach to platform investment intended to continue growing market share and our continued focus on our five pillar strategy to build SunPower into the world's best residential solar company.

Before I do that, I want to welcome our new Chief Financial Officer, Beth Eby, joining us for her first earnings call. Beth came aboard two months ago from NeoPhotonics and a long successful carrier at Intel. I expect she'll play a critical role in developing and implementing the company's strategic growth plan and in leading SunPower’s Finance organization activities.

In the second quarter, we saw a slowdown in customer bookings and installations that frankly was steeper than we initially expected earlier this year, as the impact of higher interest rates has had a significant impact on consumer behavior. We reported negative $3 million of adjusted EBITDA this quarter, which was lower than we expected even though we've been projecting most of our EBITDA and cash generation in the second-half of the year. As Beth will discuss in more detail later, slower bookings across most of the country and higher installation expenses were the primary drivers of lower results in the quarter.

As we preannounced last week, we've reduced our 2023 guidance to reflect the current market conditions to new ranges of 70,000 to 90,000 new customers, $1,450 to $1,650 adjusted EBITDA per customer before platform investment and $55 million to $75 million of adjusted EBITDA. These new ranges reflect a reduction to projected operating expense this year, including a reduction in labor force and reduced platform investment as we delay some hiring in certain projects to maintain financial strength through weaker near-term market conditions.

Please turn to slide number four. We added 20,400 new customers in Q2. This is a 3% increase year-over-year. Adjusted revenue grew at 9% year-over-year as price increases continued to partially offset the impact of higher product costs, although higher installation costs were also realized in the quarter. SunPower’s new homes business secured a record $108 million in bookings in the second quarter, a 11% growth year-over-year. Record sales were driven in part by the growth of solar standard communities outside of California and an improved market for builders.

July trends continue to remain strong, while SunPower has completed over 100,000 new home installations more than any other solar company. SunPower’s overall retrofit backlog now stands at 20,000 retrofit customers with another 39,000 in the new homes channel.

Adjusted EBITDA per customer came in at $1,000 before platform investment, which primarily reflects higher installation expense and some modest write-down of inventory value. We also experienced a delay of some lease related revenue and customer recognition into Q3 in California, as we experienced some delayed interconnection completion from the State's utilities under a higher than normal caseload.

Sunbelt energy storage systems sales continue to show strength in California under the new NEM 3.0 rules, at a 49% attach rate in our direct channel in the State. We expect this number to climb as the increased value of batteries drives storage sales under NEM 3.0. Lease demand continues to grow with 108% increase in contract volumes in Q2. As we've noted previously, further growth for leasing is expected in 2023 and beyond, due to the combination of lease payment competitiveness versus higher utility bills and bonus tax incentives under the Inflation Reduction Act. SunPower remained customer centric and agnostic towards lease or loan financing and we believe that our current access to capital markets of the top tier residential solar company is a major competitive advantage.

Please turn to slide number five. Our Q2 customer growth of 3% year-over-year ended the first-half with 41,300 new customers more than halfway towards the new midpoint of full-year guidance. Adjusted revenue grew to $461 million and 9% increase. We also take note that our market share continues to grow as we highlight a 31% increase in project permitting in the first-half of this year versus the overall industry value of 13% permit growth as reported by Ohm Analytics.

Please turn to slide number six. We reduced our 2023 guidance last week, and I want to take a few moments to discuss why we did that and what are the actions that we are taking to offset some of the negative impact. While we are starting to see an improvement in year-over-year bookings in recent weeks, our reduced customer guidance for the year now reflects our recalibrated expectations for the full-year impact of slower top of funnel lead generation and bookings. In California, we've been expecting a decline in new bookings under NEM 3.0, given the strong pull forward in demand that we intentionally executed in Q1 under NEM 2.0. We're starting to see some recovery here though with a modest improvement in net bookings for June and July.

As I mentioned earlier, Sunbelt storage system sales in the second quarter are stronger in California under NEM 3.0, where we saw 105% increase to a 49% attach rate in SunPower direct channel. Looking beyond California, second quarter bookings have been weaker than our expectations earlier this year, and this is a major driver behind our decision to reduce guidance. Nevertheless, we are seeing stronger top of funnel lead generation and a more notable improvement in net bookings that's been in progress since the May low point boosted by stronger results in several States, including New York, Connecticut and Illinois.

New homes bookings have been tracking ahead of our projections this year, with the homebuilding industry more resilient than expected in the face of higher interest rates. Bookings accelerated ahead of expectations in Q2 to set a new all-time record boosted by NEM 2.0 sales in April. Importantly, we expect our backlog of 39,000 installations to position SunPower to benefit from customer recognition in 2024. We estimate that more than 70% of the customer recognition in the second-half of this year to reach the midpoint of the new customer guidance is covered by a combination of backlog and projected new homes installations. This gives us more confidence in the new range with the final outcome dependent on how incremental bookings and component sales to dealers trend for the remainder of the year.

As Beth will go over in a few minutes guidance for 2023 EBITDA and EBITDA per customer before platform investment have been reduced to reflect lower gross margin this year as a result of customer pricing mix, sales channel mix, inventory cost, and higher direct installation costs spread over lower volumes. As I mentioned earlier, the reduced guidance also reflects some delayed platform investment and reduced operating expense as we maintain financial strength of the near-term economic and market uncertainty.

Long-term, we continue to see substantial tailwinds for the U.S. distributed solar market, including low market penetration, climbing utility bills, a strained electric grid and a decade of tax benefits under the Inflation Reduction Act. Platform investment is intended to continue to position SunPower to gain market share as conditions continue to develop. We plan to adjust our investment pace judiciously as conditions change. Finally, we're projecting an improvement in cash from operations during the second-half of this year. We intend to manage this with plans for inventory reduction, continued expansion of customer financing capacity, and liquidity in place.

Please turn to slide number seven. With the summer heat waves hitting virtually everyone these days, I want to reemphasize that conventional electric utility rates are the primary competition for our industry. The U.S. Energy Information Agency reports that average U.S. retail electric rates continue to rise upward of 8% year-over-year in May, despite the moderating cost of bulk wholesale power and key fuels such as natural gas. Price increases continue to hit the Northeastern States in California with 10 States seeing increases greater than 15% year-over-year. More recent heat waves in the West Texas and other South Central States have strained electric grids and customer utility bills as well.

We believe that the steep cost increases and the impact of grid instability on residential customers continue to elevate the value proposition of residential solar as one of the most powerful ways to stabilize and reduce home electric bills. Despite lower fuel prices, the Edison Electric Institute is projecting a 20% increase and the electric utility capital investment from 2022 to 2024 over the previous three years. As these investments are recovered through electric bills, we continue to believe that the value of customer finance rooftop solar is likely to continue rising.

Please turn to slide number eight. Next, I'll share with you some of the most important progress we've made in Q2 as we move forward with the five pillars of our long-term strategy. For customer experience, SunPower remained the number one ranked home solar installer last year as indicated by our ratings and reviews on multiple platforms. For products, we launched a new larger 19.5 kilowatt an hour version of our SunVault energy storage system with a possible configuration of up to 39 kilowatt hours, a nearly 50% increase in energy capacity.

For growth, SunPower grew in SunVault Energy storage sales by 58% year-over-year in the retrofit category. The company more than doubled its SunVault pass rate in California year-over-year as solar power battery enabled maximum savings following the NEM 3.0 implementation. During each week of July, SunVault attach rates in California were consistently above 60% in the SunPower direct channel.

For digital, SunPower released an advanced cost saving mode for SunVault users, it provides seamless integration with the homeowners' local utility and enables the battery to discharge at peak times. And finally, SunPower Financials launched leased products in three new states: Texas, Pennsylvania and New Mexico, all have a significant population of single family homes eligible for the energy community's bonus credit as defined by the Department of Treasury under the Inflation Reduction Act.

Please turn to slide number nine. As we announced this morning, I'm pleased to share that we have been arrived with an agreement in principle with ADT for SunPower Financial to act as the exclusive lessor for their solar customers. We are very excited to be able to expand our reach beyond the borders of SunPower, to enable more Americans to benefit from home based clean energy. We expect this program to begin contributing meaningfully to SunPower's financial results in 2024 and gross margins that are roughly in line with the existing finance business. We continue to work on agreements with financing partners that would increase our lease financing capacity, we look forward to providing you with further updates as these arrangements progress.

Our lease bookings continued to grow strongly in the second quarter, our all-in cost of capital for leasing remains below 6.5%, including tax equity, with the added advantage of lower interest rate sensitivity across the full capital stack. We believe this to be equal to or better than our peers.

Before I turn it over to Beth for the financials, I'd like to thank Guthrie Dundas for covering the role of Interim CFO in addition to his regular responsibilities as Treasurer, thank you, Guthrie.

And on that note, I'll turn it over to Beth for more details on our Q2 results. Beth?

Beth Eby

Thank you, Peter. Please turn to slide 11. For the second quarter, we are reporting negative $3 million of adjusted EBITDA and $461 million of non-GAAP revenue, an increase of 9% year-over-year. We added 20,400 new customers in Q2, a 3% increase year-over-year.

Slower growth has been driven largely by the effect of higher interest rates on customer demand, despite stronger interest in lease financing. The drop in demand in California under NEM 3.0 was largely expected, but also contributed to lower results for the quarter.

Adjusted EBITDA per customer declined to $1,000 in the second quarter, primarily the result of higher costs spread over lower volume. In California, some lease customer revenue recognition was also delayed into Q3 by extended wait times for interconnection and permission to operate resulting from higher workloads at the State utilities. This affected Q2 results by approximately $7 million of EBITDA. We still expect to recognize all NEM 2.0 retrofit backlog by year-end.

Platform investment is primarily products, digital and corporate OpEx. This declined quarter-over-quarter based on actions Peter mentioned earlier to match our investment and OpEx levels to slower market conditions. Our aim is to maintain financial strength through this challenging period, as we position the company for continued gains in market share under stronger market conditions.

Adjusted non-GAAP gross margin dipped to 13.7% in the quarter, while customer pricing increased in the quarter, we saw some pressure on our ability to raise prices from increased supply in the market. These price increases were more than offset by higher cost for materials and labor. Separately, we incurred an unusually high charge of $8 million in the faster amortization of preinstall expenses, due to reduced cycle times and a write-down of $5 million of inventory.

Turning to the balance sheet. We ended the quarter with $114 million of cash and $164 million of net recourse debt, including $180 million of drawn revolver. We also had $424 million of inventory at the end of the quarter. We have plans in place to bring inventory levels down in line with second-half 2023 demand. We continue to value our ownership of lease renewal net retained value in SunStrong using a 6% discount rate. With growth in the portfolio, we now estimate the value of our stake at about $280 million.

Please turn to slide 12. We reduced our 2023 guidance last week to a new range of $55 million to $75 million of adjusted EBITDA, driven by an anticipated 70,000 to 90,000 incremental customers with adjusted EBITDA per customer before platform investment of $1,450 to $1,650. As Peter mentioned earlier, more than 70% of the customer installations required to achieve the midpoint of customer guidance in the second-half are accounted for within our retrofit backlog and projected new homes installation.

Platform investment plan for the year has also been reduced to a range of $50 million to $70 million and continues to be primarily comprised of product, digital, and corporate operating expense to drive our company toward larger operational scale, with growing adjusted EBITDA per customer and a superior customer experience in the years to come. We plan to delay these investments as we prudently match our cash usage to market conditions. Longer term, we expect this to maintain financial strength and support stronger growth in the future as the market improves.

Before we turn the call over for Q&A, I want to turn you back over to Peter to review some of the factors we are considering as we look ahead toward 2024.

Peter Faricy

Thank you, Beth. Please turn to slide 13. While we typically don't provide guidance for the next year at this point, I want to leave you with some factors that we are analyzing as we look forward to 2024. From a macro perspective, we expect that increasing utility rates and lower equipment pricing will be tailwinds for the industry. We also look forward to a more stable interest rate environment, as well as improved clarity on the bonus tax credits available under the Inflation Reduction Act.

For SunPower specifically, we see us benefiting from lower cost products, we intend to hold our platform investment at reduced levels for the near-term and we expect this to benefit financial results in 2024 as we keep an eye on long-term opportunities for growth and investment. Stronger-than-expected new homes bookings growth with a large backlog this year should add to customer recognition in 2024, with additional lease financing capacity expected to close this year, we expect sales to benefit in 2024 from the growing popularity of lease financing and bonus tax credits from the Inflation Reduction Act, SunPower Financial continues to grow its financing origination attach rates with SunPower customers and we will continue to seek additional opportunities for growth through partnerships like the one we announced today with ADT.

And finally, we expect to begin seeing financial benefit from our collaboration with General Motors in late 2023, as we start selling EV charger and solar equipment to Silverado customers.

With that, operator, I'd like to turn the call over for questions.

Question-and-Answer Session

Operator

Thank you so much presenters. [Operator Instructions] Our first question comes from the line of Sean Morgan of Evercore. Please ask your question.

Sean Morgan

I was just wondering as you kind of work through some of your existing inventory, do you expect -- when do you expect to start to see some of the benefit of some of this cost deflation we're seeing on the equipment side?

Peter Faricy

Yes, good morning, Sean. Thanks for the question. We expect to work through our inventory as we go through Q3 and Q4. And I would expect that on the improvement in equipment prices, that something will reflect in our guide for 2024 primarily.

Sean Morgan

Okay, thanks. And then on the VPP availability to customers, is that going to be limited by which grid the customers are, sort of, connected to or will that be something that anybody that has the home energy management digital system to be able to sort of access? Like how does that work functionally?

Peter Faricy

Yes. Yes, great question. So in the short-term, you're right. It is limited to which utilities have a program that we can participate in with our customers. And so think of it as we have programs where we work with individual utilities directly. And then we also have this partnership with OhmConnect, where we take advantage of both battery storage and reduction of usage as sort of a two-pronged approach to VPP programs. Our goal is that we can directly connect to the energy markets and become more independent of individual utilities over time. And so our vision is that all of our customers have an opportunity to contribute their battery storage in particular back to the grid as we go on in time. Think of that as something that we're working on and would love to launch in the future years.

Sean Morgan

Okay, thanks. And welcome to Beth.

Beth Eby

Thank you.

Operator

Thank you so much. Your next question comes from the line of Tristan Richardson of Scotiabank. Please go ahead.

Tristan Richardson

Guys. Appreciate the comments and the update on the macro. Maybe just curious on the leasing side, you noted 100% growth in bookings for SunPower Financial. But maybe can you give us a sense of where do you see, sort of, the overall customer additions in the ‘23 guide in terms of lease versus more traditional lease or loan/cash just as you think about lease just really taking share in the overall market?

Peter Faricy

Yes. Good morning, Tristan. So as you know, our business has traditionally been 20% cash, 80% financed. Of the financed a year ago at this time, we would have said that was 80% loan, 20% leased. We haven't quite flipped completely of the other side with loan and lease, but that's the direction we're headed. So think of it right now as maybe 60:40 lease and we're headed towards probably a run rate by Q4 of 80:20 lease. I think forward looking, we still as we mentioned at almost every call we're on, we really take a very customer centric approach. We offer our customers the opportunity for lease, cash and loan. And we think that's really important, because we really want to do what's best for them and what meets their financial needs.

What's interesting is that in this economic environment, leases have become a little bit better value than loans. And I think that's reflected in the fact that we're selling a lot more leases. But it's important from our perspective to be able to offer both vehicles, because that will change in time. And if interest rates drop, we'll be prepared to see an acceleration in our loan business. But right now, we're quite pleased with our lease capacity. We're quite pleased with the growth of the lease business. And as you saw with our announcement with ADT, we have a lot of opportunity to grow our lease business both within the SunPower footprint that you know today and outside of that footprint as we go forward.

Tristan Richardson

Appreciate it, Peter. And then maybe just on the platform investment. Can you talk about what you view is critical and key, product, digital and corporate investments versus those that might be more discretionary and are subject to like you said resumption out into ’24 and ‘25?

Peter Faricy

Absolutely. So, you know, in these economic times when things slow down, you do have to do more with less and you have to prioritize. So the two areas we're prioritizing are number one, the customer experience and number two profitable growth. And so those are the areas that you would say are everlasting and you would want to sustain those. The areas we're slowing down are some of the new projects we wanted to do this year on hardware and software innovation, those are things that we can get to in time, those are things that make more sense to invest in as the market recovers. So we're taking a very rational approach, but our goal is to never compromise the customer experience and to continue to support the market share growth we've had over the last four to five quarters.

Tristan Richardson

Appreciate it. Thanks, Peter.

Peter Faricy

Thank you.

Operator

And your next question comes from the line of Pavel Molchanov of Raymond James. Please go ahead.

Pavel Molchanov

[Technical Difficulty] taking the question. Historically, we would think of $0.15 a kilowatt hour as kind of a useful rule of thumb for states where residential solar makes economic sense. Given everything that's changed in the past three years, is that still the right number to, kind of, give a sense of where it is or is not viable?

Peter Faricy

I think if you were just taking a look, Pavel, at PV in particular, and you were doing an economic comparison, I think those numbers still hold water. I think what's changed a little bit is that increasing number of our sales are really system sales that include additional components like batteries, EV chargers. And so I think the economic difference will be a mix of how much can you save, but also how important is it for you to have resiliency with your power and reliability with your power and how important is it for you to be able to connect more and more of the other parts of your life. In this case, your electric vehicles to that same source of clean and expensive energy.

But I think in some of the states where we've struggled this year, like we've struggled in Arizona, you know, the economics there are more challenging to save customers money and really that's a call to action for us to develop lower cost solutions that meet customer needs there, because clean energy is as important in Arizona as it is any other state. The fact that the utility costs are a little lower there just means we need to work harder at providing more cost effective solutions for consumers.

Pavel Molchanov

And in that context, the fact that module prices finally are back on a downward trajectory, in fact, at an all-time low, will you be passing that on to the end user through lower system prices?

Peter Faricy

So we take an approach where we take a look state-by-state utility-by-utility and we measure three things. One, how much value are we providing to the consumer. Two, what's the opportunity for our dealers to make a fair return on their business. And then obviously we want to make a fair return on our business as well. So those are the factors we consider. But certainly, if we have lower cost products as we move forward, it will permit us an opportunity to pass that along to consumers. And I do think in addition to the disruption from interest rates and the low consumer confidence, certainly one way to address that is to lower the prices to the consumer.

And so as we get lower product prices, I would say in the short-term, in particular, absolutely. You could count on us passing along some percent of that to the consumer and stimulating growth again.

Pavel Molchanov

Thanks very much.

Operator

Thank you so much. Your next question comes from the line of Philip Shen of Roth MKM. Please ask your question.

Philip Shen

Thanks for taking the questions. First one is on ADT, congrats on getting that locked in. Can you help us understand when you expect that to be finalized? And then how much volume could that contribute in ’23? And then what else could you guys do with that partnership? Thanks.

Peter Faricy

Thanks, Phil. Yes, we're quite excited. I mean, for those who know the history of ADT, they're a leader in safety and security. They're one of the oldest companies in the United States. They've got a great brand. We're looking forward to working with their team. They're new to solar and we have this opportunity with leases to start with to really help them grow their business. And particularly with the popularity right now of leases, I think we're in a good position to really help them grow their business starting this year and for many years to come, we would hope.

I would expect that deal to have not really a material impact this year. If it does, it will be a small impact and really I think the opportunity for us to go bigger together is in 2024. We'd love to be able to be their partner on the loan side. And so we're working through that. And I would expect the deal to be finalized within the next few weeks, no more than the next month or two. But both parties are excited and interested to work together. I think this is just the beginning of different ways we can partner together and look forward to sharing more news as it comes about soon.

Philip Shen

Great. Thanks, Peter. Second question here on liquidity balance sheet. You started the year with $314 million of cash. I think you're currently at $114 million. Can you talk about your runway, quarterly burn, your long-term debt increased meaningfully as well? Can you talk about covenants at all? Is there any risk of tripping anything there? Thanks, Peter.

Peter Faricy

Sure. Well, as I mentioned in our revised 2023 guidance, we do expect cash from operations to improve in the second-half of the year. Beth, do you want to talk a little bit about our plans there?

Beth Eby

Sure. So to address where we started the year, one of the big things that happened early in the year was the repayment of the -- a large convert, and we drew down on a revolver unsold some Enphase shares to cover part of that. So that's one of the big reasons for the drop in the overall balance. From a plans going forward standpoint, we absolutely have a plan to improve our cash flow by reducing inventory and improving our receivables practices. We've got sufficient liquidity in place and do not need further debt.

Philip Shen

Great. Thanks guys. Welcome, Beth.

Beth Eby

Thank you.

Operator

Thank you so much. Your next question comes from the line of Kashy Harrison of Piper Sandler. Please ask your question.

Kashy Harrison

Good morning. Thanks for taking the questions. So Peter, maybe the first one for me. It sounds like you're implying that you don't expect the reduced platform investments to have an adverse impact on customer growth during 2024. Did -- if I inference correct? And if so, can you just help us understand what the expected return from prior platform investments was supposed to be? I'm just trying to understand what return you expect when platform investments rise and how I should be thinking about ramifications from less platform investments? And I have a follow-up.

Peter Faricy

Sure. So on the platform investments, to tackle your second question first. At Analyst Day, we laid out two ways that we thought the platform investments would help improve our performance and make us a more valuable company over time. First of all, we expected the platform investments to be able to help us grow. And what we said was twice the industry growth rate. There were -- you remember at the time, there's a lot of different varying forecasts as to how fast the industry would grow. And so what we said is, we'll peg our goal is by 2025 to grow at twice that rate or set it another way continue to gain market share. We actually began to gain market share five quarters ago and that has continued. And you can't predict the future, but I would say we feel pretty good about our position to continue to grow our market share as we look forward over the next two years.

The second-half of the platform investments is to build the growth and innovation that will allow us to not only attract new customers, but to be able to get more EBITDA per customer. And you might remember, we're using EBITDA per customer as kind of a proxy for our lifetime value of our relationship together with them. We don't see our relationship as one and done when they buy solar panels. We really see this as an ongoing relationship over the lifetime of their homeownership, and we would love to be able to serve them on panels and batteries and EV chargers and VPP services and beyond. So it's really helping us achieve that $3,000 to $4,000 of adjusted EBITDA per customer. That's the second part of the platform investment.

Kashy Harrison

Got it. That's helpful. Thank you. And then maybe for my follow-up question for Beth, congrats on the new role. You’ve indicated that you intend to reduce inventory levels to somewhere with second-half 2023 demand and inventories currently north of $400 million. Can you give us a sense of your perception of what the appropriate level of inventory would be in the current environment on a dollar basis? Thank you.

Peter Faricy

I don't necessarily define it in terms of dollars. I define it in terms of days of inventory and we're working on with the operations team to define what that is for various segments, because it’s different segments. We'll have different levels of risk of supply. So we will define those for the individual segments. But somewhere in the neighborhood of 60-days is about normal.

Kashy Harrison

Got it. Thank you very much.

Operator

Thank you so much. Your next question comes from the line of Michael Blum, Wells Fargo. Please go ahead.

Michael Blum

Thank you. Good morning, everyone. I want to ask a couple of questions about storage. Obviously, you saw a big, a nice tick up in attach rates. I'm wondering if you can just discuss customer reception to the larger battery, which I think would be geared more towards grid outages, but would come with a larger price tag. So I'm just curious in this environment how that's playing out?

Peter Faricy

Yes. Thank you, Michael. We were quite pleased with the growth in the attach rates for our SunVault in California, I think we've talked about just to give everyone perspective. In our direct business, we finished last year with attach rates, let's say, 18%-ish and they were above 60% as we were going through July. So we're very pleased with the growth there. I think what's interesting in California is that you should imagine a case soon where every consumer should have battery standard along with solar panels. It really doesn't make sense economically to buy solar panels without a battery going forward. And this model isn't new. It's very much the model that you see in countries like Germany. And so we're, sort of, gearing our sales presentations and our operations and our mindset to operate more like they do in Germany, which is what a customer buys from us, you should expect they'll buy for both.

You're making a great point, I think one of the opportunities we have, even though we're pleased with our attach rate being over 60%. I will say, it probably doesn't get to 100% until we could offer a lower cost grid tied battery only, one that does not provide backup power, but just allows you to tap into the savings. So we're exploring various ways to make that happen. We have options with our partners, with third-party options and internally and we'll continue to explore those. But look for more news on that at some point soon. I think that would give us an opportunity to really reach levels. I hope in the 90s -- 90% attach rate in California by the end of the year. So we're quite excited.

I think California interestingly enough has actually behaved like we thought it would this year. We had a terrific first quarter. We had a very slow second quarter and it's beginning to recover a little bit in Q3 and really the battery piece is the piece that we want to work on in California this year and end the year closer to recovery at a more normal state. So, batteries are a critical part of our business, and I think they're going to be an even larger part of our business as we go forward, particularly in California and new homes.

Michael Blum

Great. I appreciate those comments. Then just wanted to ask a question on your 2024 commentary, which was really helpful. I guess the question is, what are the elements that you think you can control in 2024, because clearly the macro will have some impact, interest rates economy, natural gas prices, et cetera, which are things that you can't control. So curious in terms of what you think you can do to control the situation from your perspective? Thanks.

Peter Faricy

Yes. I think the most important lever that we wanted to highlight is the fact that we control our costs. We have the ability to control how much we invest from a platform perspective. But we also have the ability to make our material costs more cost effective and give consumers more value in our offering. So really for any business as you're going through times that are slower growth than you would hope or that you expected, the most important thing I think you can do is do more with less, prioritize and really focus on the consumer. How do you provide more and more value for the consumer?

When you take a look at the industry data, the Wood Mackenzie estimate of 75 million households in the U.S. would save money today, if they added solar -- net of their solar cost, it's really compelling. We need to do a better job of building awareness for that and we need to do a better job of making sure that every one of those 75 million households is aware of how much money they would save if they went with SunPower tomorrow.

Michael Blum

Got it. Thank you so much.

Operator

Thank you so much. Your next question comes from the line of Andrew Percoco of Morgan Stanley. Please ask your question.

Andrew Percoco

[Technical Difficulty] for the time, just one quick question on the guidance for the remainder of the year. Can you just break down the levers that you expect to pull to get to your EBITDA guidance? I'm just looking at the customer count expectations in the back half of the year and other 40,000 customers or so, but a meaningful margin expansion implied in the guidance. So can you just break down how much of that is coming from gross margins and OpEx leverage? Thanks.

Peter Faricy

Sure. We -- if I start with the customer piece, because the number of customers drives the entire engine here, we did 41,000 customers in the first-half of the year. Our guidance implies we'd get 30,000 to 50,000 more. The midpoint is 40,000. So I think that's reasonable and probably a little bit conservative on our part, but it reflects this more uncertain market conditions, macroeconomic conditions right now.

I would say from a gross margin and OpEx perspective, we've taken actions to improve both. In particular, we highlighted the improvement we made in OpEx we go forward. And Beth, do you want to add a little bit more about the three things that we're really focused on to drive more cost improvement as we go?

Beth Eby

So one of the things that you saw in this last quarter is we have a few unusual items in our gross margin that we don't expect to repeat in the coming quarters. The first was $8 million of amortization of higher install costs over lower volume. We're working on absolutely getting those install costs down and we've normalized the volume. And then we also had about $5 million of inventory write-downs. And we always have a look at your inventory every quarter and always have a little bit of inventory write down $5 million was a little bit higher than normal. So we don't expect those to repeat next year.

And then put those on top of a normal focus on gross margin expansion and we do expect to improve gross margin significantly from where we are over the next couple of quarters.

Andrew Percoco

Great. Thanks for that. And just my follow-up question is related to the dealer accelerator program and how your strategy maybe changes in this environment?

Peter Faricy

Yes. Well, first of all, we're quite pleased with the program. I think the dealers as part of that program. If I just were to highlight two examples for you, one of the dealers we invested in last year, Renova, which had primarily been serving Palm Springs, Palm Desert area. That investment with them has allowed them to expand their operations into Arizona interestingly enough. And they're really making terrific progress. We're quite excited to continue to work with them. And they have a real strong expertise in serving very hot deserty climates, which really is a specialty, especially in this kind of climate and whether we're seeing this summer. And so you can imagine these guys being able to expand in Arizona and Nevada and really doubling or tripling down in their business, so we're quite excited to work with Vincent and his team.

We also are quite excited about the investment we made earlier this year in Wolf River out of Minnesota. And as we talked about, they were a great candidate for us, because all of their volume was 100% incremental to SunPower, they had previously not been part of the SunPower family. But they're also a company that shares our values for high standard for customer experience. You take a look at their ratings throughout that Upper Midwest area, they are the solar company to go to, if you want to have a great from experience.

So we're quite pleased. I think it's likely that our new investments will slow down, but I'll tell you that we're always looking for opportunities to work with new partners across the U.S. And so we don't have any particular investments that we're planning out at the moment, but we're always looking and scouring the U.S. for who would be the next best company for us to work with in that capacity. And if we find one, we'll certainly act on it.

Andrew Percoco

Great. Thank you.

Operator

Thank you so much. Your next question comes from the line of Brian Lee of Goldman Sachs. Please go ahead.

Brian Lee

Hey, everyone. Good morning. Thanks for taking the questions. I know you alluded to this a couple of times throughout the prepared remarks, Peter. But could you maybe give us a bit more quantification? You mentioned California was sort of down in 2Q in line with plan and then you've seen some modest improvement here in June, July, it sounds like. Can you kind of just give us sense of what those numbers we’re looking like. I guess what I'm trying to get at is, if I look at your guidance for the rest of the year, you've called out Southeast and Southwest. It seems like you're going to be down mid to high-teens year-on-year in terms of customer adds in the back half versus last year. How much of that is Southeast, Southwest versus California being down ex-percent, if you could just give us some context there?

Peter Faricy

Yes. Yes. Thank you, Brian. So yes, just to give color, I'm going to try to answer at the end of your question first. It really is any slowdown in customer growth will really ironically not be California, even though we were all interested to see how California would turn out at the beginning of the year. It will really be more focused on the Southwest, Southeast areas. California, I would say, for color, we talked about this in the last call. We actually did much better in Q1 and we had a pretty optimistic plan. But the rush of consumers that wanted to have some power products right before the NEM changes and qualify for NEM 2.0 was terrific. So we built up a very large business in Q1 with a big backlog.

We certainly expect it as the year went on to have a very large drop off in Q2 and I mentioned before, we took a look at what happened during the previous NEM change. So from NEM 1.0 to 2.0, this is exactly the behavior we saw. A big buildup in the final quarter and then a huge drop off in the quarter that follows. So really what's most interesting for us is what's going to happen now in Q3 and Q4. And what we baked into our guidance is I would describe as a moderate improvement in sales rate for Q3 and Q4. So far, July is tracking in California for that. And outside of California is tracking at that or maybe a little bit better than that so far in July.

Brian Lee

Okay. Fair enough. Appreciate that additional color. And then maybe one for Beth, welcome. You know, there's been some questions around the balance sheet and you made some comments around inventory and accounts receivable. So it looks like there's some working capital levers. But if I look at the model, I know the business has changed quite dramatically over the past several years and past cycle and half. But you really don't generate positive free cash flow in the back half of the year. I haven't seen it at least on a reported basis since, like, 2017. So I guess, point of my question would be, do you anticipate that free cash flow in 3Q, 4Q aggregate will be positive on the year? Or are we going to be looking more toward ‘24 to get to sort of more positive free cash flow run rates? Thank you.

Beth Eby

On a consistent basis, I would look more toward 2024. We have levers to pull particularly as you highlight on working capital, but we've also got some work still to do to make sure that those are consistently done.

Brian Lee

Okay. Fair enough. I'll keep the rest for offline. Thank you.

Operator

Thank you so much. Your next question comes from the line of Colin Rusch of Oppenheimer. Please go ahead and ask your question.

Colin Rusch

Could you talk a little bit about what you're seeing in terms of innovation around financial products? Are you seeing any combinations of loan and lease any other new approaches that we might start to see impact the market in the next call it six to 12 months?

Peter Faricy

Well, I think there's still quite -- I guess my feedback on that question would be there's still quite a bit to do, I guess, to transition to a world where not just some power, but all of our dealers and our ecosystem are indifferent to both lease and loan. So I think that is probably the primary thing we're focused on. So if I give you an example, we bought Blue Raven, many of you know, it's a terrific company. But that -- but Blue Raven has been traditionally leased -- sorry, loan only throughout its history. They did a few cash sales, but they've been 90%-plus loan. And so we're working closely with Blue Raven to help them migrate to offer lease and loan throughout their whole business.

So I think there's still maybe there'll be more innovations of the, kind of, financial products you'll see as you go forward. But I think right now, I would call it more of the meat and potatoes time, if you will. There's still a lot of basics to execute on and helping all of the entities that are part of the SunPower family be able to sell both lease and loan.

Colin Rusch

That's super helpful. Thanks. And then just in California as you transition into NEM 3.0. Could you talk about what you're seeing in terms of system size and configuration? Are you seeing smaller batteries, smaller system sizes at all?

Peter Faricy

Yes. Well, it's interesting. It's early and sales are slow. So those are my two caveats. But system sizes are a little bit larger than they had been in NEM 2.0 world and the battery attach rates we talked about earlier, but in our SunPower direct channel, they were above 60% during July. So I would say, should that play out, again, we're quite excited about where the business in California goes. I think if it gets back to, I'll call it, even a moderate single-digit growth rate next year for customers I think you'll see the revenue growth rate exceed that, because you'll have system sizes that are larger than average and you'll have batteries attached and that'll be a great opportunity for consumers to save money and great opportunity for us to continue to grow our business in California.

Colin Rusch

Thanks so much.

Operator

Thank you so much. Your next question comes from the line of Ben Kallo of Baird. Please go ahead.

Ben Kallo

Guys, and welcome, Beth. Peter, just going to -- you have the 2025 targets that you laid out, I think back at Analyst Day. And I know that there's a lot of uncertainty out there, but you know, as you talk about reducing the investment in the platform and how does that impact and how should we think about those targets out there?

Peter Faricy

Yes. Thanks, Ben. Our goal would be that slowing down our cost this year and in some cases reducing our costs, is exactly the lever that we need to pull to stay on track for 2024 and 2025. So that's our goal. We'll see how the second-half of the year plays out. Obviously, we'll give you guys more specific guidance for ‘24 as we close the year or we open up the year next year. But our current mindset is this disruption from the macro environment and interest rates is exactly that. It's a disruption for this year, but we'll pivot, we'll moderate and do more with less, we'll prioritize and we'll get the business on track for 2024 and 2025.

Ben Kallo

Thank you. My follow-up is just on the equipment side. So you have the unique relationship with Maxeon, and then with your own battery product. How do we think about that going forward? Do you think that you'll change any of that either regionally or the overall by, you know, allowing more, I guess, to being more technology agnostic if that's the right way.

Peter Faricy

Yes. Yes, thank you. Thank you, Ben. I think if I were to take a step back, Maxeon and Enphase, those are the two longest standing partners we've had, terrific companies make great products. We're quite pleased with the products that they sell us and the difference they make for our dealers and for our customers. Really, the big change going forward is, I think if there's any signal that came out of the booking slowdown in Q2 is it's a signal for all of us. We need to provide more value to the consumer and we need to provide lower prices as we go forward.

So really our decisions are going to be impacted by the ability of our current suppliers or any new suppliers to not only build great products and differentiated products, but also build products to provide much more value for the consumer and for our dealers.

Ben Kallo

Got it. Thank you, guys.

Operator

Thank you so much. And our last question comes from the line of Vikram Bagri of Citigroup. Please go ahead.

Vikram Bagri

Good morning, everyone. I wanted to follow-up on questions about balance sheet and inventory. Wondering if you may need outside capital if demand reaccelerates and inventory reductions that you're working on have to be reversed? And especially with higher battery attach rates, which is a big ticket item and could result in a meaningful increase in inventories. I was wondering if you may need outside equity at that point or you can rule that out?

Peter Faricy

Well, our current plan is to be self-sufficient. You know, from a capital perspective, as Beth mentioned, we want to deliver free cash flow. We want to be self-sufficient and be able to fund our needs within our own success of our business. I think the other part of our business, the SunPower Financial part of our business, as we mentioned in our comments, we have great capacity and great partners for both loans and leases. And we'll absolutely continue to grow our capital to expand those programs as we go forward.

But from a corporate perspective, I think one of the wonderful things about having Beth on board is Beth and I are working closely together. We really want to deliver terrific free cash flow for our shareholders and make us a self-sustaining company that doesn't require outside capital at the corporate level.

Vikram Bagri

Thank you. And as a follow-up, to the extent you can, can you talk about where the expenses are being reduced besides lower platform investments where the headcount reductions are happening and its impact on potential impact on market share. I also wanted to better understand the drivers behind the expense reduction. It appears that demand has slowed down this year meaningfully profitability is weaker. But when you look out in 2024, the customer backlog you have in California will run through the end of this year and will no longer be a factor in 2024? So is the decision to reduce expenses, primarily because of the conservative view you have on 2024 demand?

Peter Faricy

The quick answer would be, yes. I think the Wood Mackenzie came out with a perspective for next year at minus 4% growth. They're often probably at the lower end forecast for future years. But I think as any company would, we're being thoughtful and rational about how do we plan for various scenarios. And I think under the stress case of next year grow slower than we'd like, we'll certainly be prepared from a cost structure standpoint to be able to have a company that is strong and can deliver good results regardless of how the growth turns out at the industry level.

Our cost reductions have been very thoughtful. So you're always looking for where our discretionary costs. How can you identify waste? How can you identify cost reductions that don't impact customers? And so that's why I talked about our priorities are really the number one priority is the customer experience, number two priority is profitable growth. And that's how we're thinking about our cost reductions now and any future cost reductions we do as we go forward.

Vikram Bagri

Thank you.

Operator

Thank you so much.

Peter Faricy

Alright. Thank you very much for your questions. Yes, we look forward to seeing you all next quarter. Thank you.

Operator

Thank you presenters, and thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect. Have a great day.