This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day and thank you for your standby. Welcome to the Maxion Solar Technologies second quarter 2021 earnings conference call. At this time, all participants are in listen on the moon. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. As a reminder, this conference call is being recorded. I would now like to turn the call over to Robert Lane, Head of Investor Relations. Please go ahead.
spk03: Thank you, Operator. Good day, everyone. Welcome to Maxion's second quarter 2021 earnings conference call. This is my first earnings call with Maxion, and I'm excited to be part of this exceptional team. With us today, our Chief Executive Officer, Jeff Waters, Chief Financial Officer, Kai Strobeck, and Chief Strategy Officer, Peter Aschenbrenner. Let me cover a few housekeeping items before I turn the call over to Jeff. As a reminder, a replay of this call will be available later today on the Investor Relations page of Maxion's 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, the 6K, and other SEC filings. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a supplemental slide deck on the events and presentations page of Maxion's Investor Relations website. We will reference certain non-GAAP measures during today's call. Please refer to the appendix of our supplemental slide deck, as well as today's earnings press release, both of which are available on Maxion's investor relations website, for a presentation of the most directly comparable GAAP measure, as well as the relevant GAAP to non-GAAP reconciliations. I also want to remind everyone of a few changes that we started last quarter in the presentation of our numbers. First, we report and guide adjusted EBITDA, excluding the mark-to-market fair value remeasurement of our prepaid forward and physical delivery forward. Second, we report and guide non-GAAP gross profit and non-GAAP operating expenses by excluding stock-based compensation expenses and restructuring chargers. Finally, we want to point out that comparisons to the second quarter of 2020 reflect a carve-out of Maxion's results while it was still part of SunPower last year. We began operating as an independent company on August 27, 2020. With that, let me turn the call over to Maxion's CEO, Jeff Waters.
spk10: Thank you, Rob, and good day, everyone. I'll start by giving a business overview and covering recent accomplishments. Kai will then review our financial performance and outlook, and we'll conclude with Q&A. Before we get to the results, I have some comments on employee health. Malaysia is currently experiencing a difficult wave of the COVID-19 pandemic, and proactive testing at our Malaysia facility has revealed an increasing number of positive cases. We have therefore temporarily paused production in line with government regulations while we deep clean the facilities and focus on our highest priority, the health and safety of our employees. All other Maxion facilities, including Mexico, France, and the Philippines, are undergoing proactive testing, and we're pleased to report there are no indications of material positivity rates. I continue to be proud of the work done by our teams globally as we defend against this global pandemic. Moving to second quarter results, the quarter was very productive operationally in our push to drive growth and solidify our balance sheet. Results were in line with guidance with revenue of $176 million and strong bookings that put us in a solid position for growth in the second half of the year. Our distributed generation business in Europe performed especially well, posting record revenue for the quarter while laying the foundation for our beyond the panel strategy. We're seeing strong growth in both our Maxion and Performance products, and we believe that we will continue to grow our share in 2021 in nearly every European market we serve, with especially significant share growth in Italy, France, and the Netherlands. European DG is important to us for many reasons, not the least of which is that it is among our most profitable markets. As supply chain costs normalize and we grow revenue beyond the panel, we believe that our European business will be a key driver of profitable growth. In addition to posting quarterly financial results consistent with our targets, the company also executed well on key operational initiatives. We posted strong, positive operating cash flows in the second quarter. Coupled with a successful equity raise in April, we are firming up our balance sheet. With respect to key margin drivers, we completed the phase out of our oldest cell technology, During the second quarter, we produced our last Maxion II solar cell and commenced installation of Maxion VI equipment. Our new technology will deliver significantly higher margins than Maxion II, and we are on schedule to ship our first panels later this year. This shift will also be coincident with logistic savings from the optimization of our factory network. where by the end of the year, we will be servicing Asian and European Maxion 3 and 6 customers from Malaysia rather than Mexico. The company is focused on our three strategic pillars for profitable growth that we believe will transform the company. Our execution on these three pillars will enable us to achieve our target business model within 2023 of at least 20% revenue growth, greater than 15% gross margin, and greater than 12% adjusted EBITDA In our panel innovation pillar, the highlights this quarter were the progress on our Maxion 7 cell development and the announcement of our disruptive new Maxion Air technology platform. We've been manufacturing the solar industry's highest efficiency, commercially available solar panels for over 15 years. That legacy is solidly intact today with Maxion 5 and 6, and we expect that Maxion 7 will extend our module performance lead. We took successful steps this quarter to demonstrate critical Maxion 7 performance milestones on the pilot line being built in our Fab Four. As both residential and commercial consumers get more educated on sustainability and the benefits their panels are creating both locally and for the planet, they are increasingly thinking about panel lifetime. Namely, how long will those panels sustain sufficient power output and how long will they reliably and safely work on their rooftops? In this area, no other commercially produced technologies come close to our product's performance. Both our Maxion and Performance series offer outstanding longevity. Panel performance is about more than efficiency, and you can expect to hear more on this later this year. We also announced our new Maxion Air technology, a super-thin, super-light panel that we believe will enable an annual market of around 4 gigawatts worth of commercial rooftops in Europe alone. We expect to begin shipping Maxi on Air in 2022. For our DG channel pillar, we're seeing strong growth broadly. As a reminder, we have a unique downstream sales approach where we have 1,200 and growing channel partners that represent our technology and brand and who have the ability to convey the value of our industry-best panels to their customers. These relationships built on trust that are developed over time and we're building on a decade-plus of investment. Our channel sits at the foundation of our Beyond the Panel strategy, as our partners are in a position to effectively communicate the value of new technologies like microinverters and storage. With the introduction of Performance Line AC products in July, we target exiting the year with about 20 percent of our non-USDG sales attributable to AC modules. Storage will be one of our next key areas of focus. In the focused utility scale pillar, as a reminder, our approach is to pursue markets where we have a unique value proposition. As a U.S. publicly listed company with global operations, a trusted reputation for our business practices, and a deep commitment to ESG, we're an especially attractive partner to many developers across the globe. This led to our announcement of 1.8 gigawatts of production expansion for the U.S. market. where our corporate culture and experience are especially important. In the near term, our early success in winning Primergy's one gigawatt Gemini power plant in Nevada has put us in a strong position to selectively fill out our remaining 2022 available capacity and to focus primarily on booking 2023 and beyond. Since our announcement in April regarding our P-series capacity expansion to supply the U.S. markets, we have seen sustained strong interest from utility scale developers, which has led us to accelerate our planning for a second phase of capacity. We're very encouraged by the recent U.S. legislative proposals with incentives that support domestic solar manufacturing. We believe that if enacted, they provide a great platform for Maxion to help the U.S. government achieve their goal to reestablish a domestic solar manufacturing value chain and to do so deploying cutting edge solar technology at critical scale. We recently submitted to the DOE's Loan Programs Office an application to support the deployment of a three gigawatt performance series solar cell module factory. We intend to move forward with this project pending successful negotiation of a DOE loan guarantee and the passage of enabling legislation including the Solar Energy Manufacturing for America Act and the America Jobs in Energy Manufacturing Act of 2021. The goal is to start solar panel production in the U.S. as early as 2023. Shifting outside of the U.S. in the rest of world utility scale business, supply chain costs are still elevated, but customer pricing expectations are getting more in line with these higher costs. Given that, we expect to begin converting our sales pipeline into book business in the near future. Combined with the continuing scale up of our bifacial P5 performance series capacity, we're increasingly confident in renewed shipment growth in our rest of world utility scale business as we enter 2022. As a reminder, our JV structure enabled Maxion to largely reallocate our volume to the Chinese market during the first half of 2021. We expect to provide an update regarding our utility scale backlog in Q4. Before I turn the call to Kai, A quick mention about our ESG effort. In June, we published our inaugural sustainability report, highlighting our initiatives, achievements, and plans related to the key ESG themes. Our commitment to responsible manufacturing and supply chain sourcing goes back to the inception of SunPower. Now as Maxion, we aim to establish our leadership in driving a holistic approach to sustainability in our industry. This report, aligns our ambitions and long-term goals with the United Nations Global Compact, the world's largest voluntary corporate sustainability initiative, which we joined in December of 2020. We believe we generate long-term value for our employees, customers, shareholders in the communities where we operate by holding ourselves to a higher standard in the way we conduct our business, as highlighted in the sustainability report. I will turn the call over to Kai to review our financial performance.
spk02: Thank you, Jeff. And hello, everyone. I will discuss the drivers and details of our second quarter performance and then provide guidance. As Jeff mentioned earlier, total revenue for the second quarter came in at $176 million, consistent with our guidance range of $165 to $185 million. Our revenue was up 6% sequentially mainly thanks to our exposure to the growing European DG markets. Total shipments for 2Q were 434 megawatts, in line with our guidance range of 415 to 475 megawatts. ASPs held mostly steady in the second quarter at 41 cents per watt on a blended basis, down 3 cents from the first quarter of 2021. The sequential ASP decline is mainly attributable to product mix as P-series products accounted for 47% of total shipments compared with 36% in the first quarter of 2021. Overall sales revenues for the second quarter were again dominated by the DG business with utility scale accounting for only 11%. As a reminder, Like in recent quarters, we intentionally reduced our exposure to utility scale, as industry price trends have not been supportive of our margin targets for that business. These trends started to change in the second quarter, but due to fairly long sales cycles, this did not affect our 2Q revenue. Gross loss came in at $2.8 million, or negative 1.6% of sales. That is better than our guidance range of a $5 to $15 million loss, mainly due to the reversal of a $5.5 million withholding tax provision from prior years that favorably affected our cost in the second quarter. Included in our cost of goods sold is a $15 million impact or 8.5% of sales from our out-of-market polysilicon contracts. $2.5 million of which was a loss on the sale of ancillary polysilicon in the market. Apart from those factors, the sequential decline in gross margin is the result of a slight shift in product mix towards more P-series, as well as continued cost increases from industry-wide supply chain development, affecting prices of polysilicon, freight, aluminum frames, and copper. We estimate that the supply chain costs for our products sold in the second quarter were up by approximately $15 million, or 8.8% of 2Q21 sales year on year. About one-third of it was due to the freight cost inflation. Non-GAAP operating expenses, which adjusts our GAAP operating expenses for restructuring charges and stock compensation expenses, came in at $31 million. right at the midpoint of our guidance and compared to $35 million in Q1 2021. The sequential operating expense decline was expected as the efficiencies of having a largely Asia-based cost structure become visible, while transition costs related to the separation from SunPower continue to ramp down. Adjusted EBITDA for the second quarter was negative $27.3 million, as compared to negative $25.7 million in Q1 2021, and better than our guidance range of negative $30 to $40 million, due in large part to the before-mentioned $5.5 million tax reversal. Gap net loss was $77 million as compared to $39 million in the first quarter of 2021. The sequential decline was mainly driven by a $35 million swing in the mark-to-market fair value measurement of our prepaid forward, from an $8 million gain in the first quarter to a $27 million loss in Q2. Recall that this item is closely related to our stock price development. Over the past few quarters, Every dollar of movement up or down in the price of our stock at a given balance sheet date versus the prior balance sheet date has caused an approximately $2.3 million remeasurement gain or loss, respectively. Second quarter net loss also included restructuring charges of $5.2 million, in line with our guidance range of $5 to $6 million. As mentioned in our last call, these charges which are included in our gap operating expenses, are largely related to the closure of our module factory in Toulouse, France. Moving on to our balance sheet, we are pleased to have closed the quarter with $267 million of cash on hand and net increase of $136 million sequentially, driven mainly by $170 million in net proceeds from our equity issue in April. and $33 million in positive operating cash flow in the second quarter, and offset by our capex spending during the quarter. The sequential improvement in operating cash flow was achieved through careful working capital management and supported by $45 million in customer prepayments. Inventories were up by $12 million, and DIO up three days sequentially to $212 million and 105 days, respectively, at the end of the second quarter. With that, our inventory levels are well positioned to take advantage of the sales opportunities in the second half of the year. Second quarter capital expenditures totaled $52 million, near the lower end of our guidance range of $50 to $60 million, and we're primarily funding the transition from our legacy Maxion II technology to our higher margin Maxion VI technology. The purchase of cell and module equipment for our 1.8 gigawatts of P-series capacity for the U.S. market, as well as our Maxion VII pilot line investment. Now, I'd like to turn everyone's attention to our outlook for the third quarter. As we leave the first half of 2021 in the rear view mirror and enter the seasonally stronger second half of the year, we continue to face fierce headwinds from a supply chain cost perspective. As logistics costs have skyrocketed amidst global disruption and polysilicon prices have plateaued at levels not experienced for years. At the same time, we are incurring expenses and opportunity costs for phasing out Maxion 2 and transitioning to Maxion 6 for the transformation of our manufacturing network and due to COVID-related disruptions. We are also taking action to manage the exposure from our out-of-market polysilicon purchase contract. These transient challenges, as well as our investment in operational improvement, continue to drag down margins in the second half But we are confident that the current disruptions will taper off and the improvements to our operations and our business, including technology upgrades, manufacturing footprint optimization, and prudent cash management, will position the company for profitable growth and be a catalyst for additional business opportunities once the situation has normalized. With that in mind, our guidance is as follows. Please also see a detailed breakdown of our guidance in our supplemental earnings lots. We project shipments in the range of 580 to 640 megawatts, driven by seasonal tailwinds in our core DG markets and a material uptick in our utility scale business. Our expectation for increased shipments next quarter supports projected revenues in the range of 220 to 240 million dollars. or up 25% to 36% sequentially, reflecting ASPs that are holding relatively steady by product lines. At the midpoint, this revenue guidance reflects a year-on-year growth of 11% over the third quarter of 2020. Non-GAAP gross loss is expected to be in the $10 to $20 million range. which includes charges related to our out-of-market polysilicon contract in the range of $20 to $23 million. This assumes a significantly increased sales volume of ancillary polysilicon compared to recent levels, as our commitment for quarterly poly-offtake volumes from our supplier is stepping up in the third quarter. We plan to take advantage of high pricing levels in the polysilicon market to opportunistically sell any excess poly that is not consumed into our value chain during the quarter. This way, we expect to realize attractive market prices for those poly sales and increase our cash flow, but also incur a loss to our P&L as our contractual purchase prices are even higher. In that context, and to keep you abreast of our remaining purchase obligations. As per the end of the second quarter, those stood at $191 million worth of polysilicon at the contracted prices to be purchased to the end of 2022, for which we have made $74 million in prepayments already. In summary, we expect non-GAAP growth loss for Q3 to be larger than Q2, due to a higher out-of-market polysilicon charge, rising supply chain costs, increased costs relating to our transformational activities, and the COVID-related shutdown. Also, unlike Q2, in Q3 we do not expect to experience another withholding tax reversal. However, We believe all other aspects of our business that drive profitability are on plan and would otherwise provide a sequential improvement to gross loss while we keep investing in the improvement of our business. Non-GAAP operating expenses are expected to be $31 million, plus or minus $2 million. We see this operating expense level as our near-term baseline, now that the spin-off activities are largely behind us. In future quarters, you can expect us to be disciplined on spending as a percentage of revenue, but on an absolute basis, you'll also see continued OPEX investment in our future technology platforms, global channels, and focused approach to utility scale. Adjusted EBITDA is expected to be in the range of negative $30 to $40 million. This is largely driven by the same factors that are affecting our non-gap growth loss. Further, we are projecting restructuring charges to be in the range of $3 to $4 million for the continued restructuring of our manufacturing network. Our capital expenditures are expected to be in the range of $55 to $65 million for the third quarter. Based on our guided 2021 capex of $170 million and internal cash flow projections, We expect to maintain a strong liquidity position through the end of this year, and we will provide further information about 2022 CapEx plans and business outlook by the time of our Q4 2021 earnings call in early 2022. In conclusion, we are pleased with how our team performed this quarter. Hitting or beating our plan and guidance is a practice we intend to maintain. At the same time, we will continue to set ambitious targets for ourselves. Our sales team is energized by positive demand trends, especially in Europe. Utility scale global pricing trends are headed in the right direction for expected first half 2022 bookings. And in the U.S. utility scale, we are actively discussing exciting opportunities for potential made-in-America products from 2023. On the margin side, the investments we are making today in both the Maxion and Performance Line products should pay dividends for years to come. And of course, all of us at Maxion are looking forward to the conclusion of our out-of-market polysilicon contract in the end of 2022. With that, I'll turn the call back to Jeff to summarize before we go to Q&A.
spk10: Thanks, Kai. Excitement levels are growing here at Maxion. Our collective focus is on achieving increasingly ambitious quarterly targets, on executing key operational initiatives to enhance our financial profile in 2022, and on our three strategic pillars to transform Maxion in 2023 and beyond. Those pillars, again, are our leading panel innovation, our differentiated DG channel, and our focused utility scale approach. We'll provide more detail about our progress as we execute this strategic plan and intend to hold Maxion's first ever Capital Markets Day as an independent public company in the first half of 2022. Now let's go to the Q&A session. Operator, please proceed.
spk01: As a reminder, if you have a question at this time, please press star, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, for us at PoundKey. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.
spk08: Thanks for taking the question. Based on your guidance for Q3, it looks like if you did not have the out of market charges, gross margin would have been in the kind of 5% to 7% range. What would that number be in a more normalized logistics and just generally supply chain environment as well? In other words, how much of a hit are you taking from everything other than your PMLOC contract?
spk10: Thank you for the question, Pavel, and I'll turn it over to Kai for more detail. But, you know, as you pointed out, there are some significant headwinds that we believe to be temporary in Q3, like logistics, that are having an impact. And, Kai, let me turn it over to you for some more detail.
spk02: Yeah, that's right. And, again, thanks for the question, Pavel. As we said, for the second quarter, we have provided in my remarks kind of a comparison compared to a year ago, which we consider a time when prices and supply chain costs were still more normalized. Costs went up year on year by about $15 million, as I said in the remarks. I would expect something similar probably in that range also for the third quarter. So, um, $15 million is probably a good, um, good mark for that as well.
spk08: Okay. That's helpful. Uh, obviously a lot of manufacturing in the Philippines where COVID is now yet again, serious as it is throughout Southeast Asia. Are any of your fabs in the Philippines disrupted running below capacity or otherwise? affected by the pandemic and by the social distancing restrictions?
spk10: Yeah, so, you know, first, as I discussed in the prepared remarks, our thoughts and prayers go out to the people in Malaysia that are in particular being pretty hard hit these days. Within the Philippines, as you said, there is also an increase in the infection rates. I would say across all of our plants, and I would include Malaysia in that as well, we do have very strong operating processes that have really helped us withstand the vast majority of the surges of COVID over the course of the last year plus. And within the Philippines now, we're not seeing any disruption to our operations. There are also not any local limitations on transportation that are creating issues, but we've also come up with plans and have processes in place to help mitigate any effects from that as well. So I'm very pleased to say that we have been able to not only keep our employees safe across all of our factories, but in particular in the Philippines, things are operating at full operating capacity. The same is true with our Mexico plants as well.
spk08: And what's the capacity statistic in Malaysia at the moment? Sorry, so the capacity... Or just what utilization are you able to run at in Malaysia at the moment? Sure.
spk10: So, you know, with the current issues that are being faced across Malaysia and the country, our plant is going to be shut down until August 19th, and we will be reopening. We are in discussions to open up some specific smaller operations for some critical path activities. But for now, it is closed until August 19th. You know, we expect, given the great track record that we have and also the very positive feedback we've gotten from local health authorities in Malaysia, you know, we're confident that we'll be able to reopen. But I would say more importantly, we're confident in being able to keep our employees safe. As you know, the rise in Malaysia has really been countrywide. We're still, I would say, confident across all of our factories with the procedures we have in place that we have not to date in any of our plants seen any kind of implant spreading of COVID. But as you know, our employees don't stay at our factories 24-7. It's really when they're back home and they're out and about when the infections tend to occur. And we do have good plans in place and processes in place to help mitigate the stopping of any employees coming in that are infected. Okay.
spk08: And then lastly, just at a high level, have you had any revenue shortfall revenue dislocation because of an inability to produce on schedule, you know, per the customer's needs?
spk10: I think we have not. And certainly it's, if you look at the production stoppage that we have in Malaysia, we do have inventory, uh, that will help, especially in the near term to make sure that our module factories are able to still producing as, as there is a brief stoppage in cell production. And we'll continue to work to mitigate those effects. Now, if there were to be any kind of a bubble, you might see it happen in Q4. But again, with the inventories that we have in place, I'm confident that we'll be able to manage it the way that, um, based on current plans to reopen that factory on August 19th, we should be in good shape.
spk08: Thanks very much.
spk01: Thank you. Your next question comes from the line of Julian Dimmel and Smith with Bank of America Securities. Your line is now open.
spk09: Thank you, Operator. Good afternoon, Tim. Thanks for the opportunity. Appreciate it. Well done on holding the line here. Thank you. Absolutely. So perhaps just if I can focus on the financing side in talking about this new angle around U.S. expansion, can you talk about some of the parameters of what it might cost you? What is the size of a DOE loan guarantee? And then ultimately, a little bit preempting some of the commentary looking forward to 22, how do you think about financing any such expansion here, you know, organic cash flow or otherwise? You can speak to it a little bit. Maybe some of the parameters around the U.S. investment principally. I suppose that's more tangible.
spk10: Yes, I'll cover the first part, and, Kai, certainly you can fill in with any details that you see fit. As we said, the planned expansion is for both a FAB and for a ModCo and three gigawatt of capacity coming out of both. The DOE loan guarantee, first, you know, I guess one thing to point out is that that program is fully funded, so it's not awaiting any additional congressional approval. And current plan is that that would supply 80 percent of the capacity requirements or the CapEx requirements with the loan guarantee. And maybe with that, Kai, if you want to add any additional color to help with the question.
spk02: Yeah, I think just overall, we really believe that this project represents a unique opportunity for us for really, really strong value creation. And one of the cornerstones is the loan program, as Jeff just mentioned. Currently, that provides 80% of the capex plus some other defined expenditures that can also be funded at an 80% rate from this loan program. Of course, that's really important. We also believe that there are maybe further state and local level incentives available that can go towards that initiative. So overall, we're really confident that with a strong backing from the U.S. government for this project and given a strong value proposition that we will be able to secure sufficient and appropriate funding for this. But we are not in a position right now to discuss further details, but we are really excited about this opportunity when it comes to PATH and all the different items are in place.
spk09: Just to clarify on that, To tend to which that loan guarantee may or may not materialize, what about under the OSOF bill? Would that suffice? Would that be adequate, said differently, to make the economics work for you, if you will?
spk10: Yeah, I think we would need to consider that situation. You know, what I would say is that we have a very high level of confidence in the DOE loan guarantee. As we said, it is fully funded. We've been having a number of conversations with of various constituents in the government in Washington, D.C. So I'd say we're very confident that that DOE loan guarantee will come through. As we said in the prepared remarks, the OSOP bill is also very important. You know, we'll say as we went through and did the analysis, the incentives that they put in place are actually, you can tell that they did it in an educated way. It very much meets the needs and requirements that you would need to produce in the U.S. in a cost-competitive way. The combination of those two, combined with who we are as a company, with manufacturing capability that we have, with technology that we have, we think it creates a great opportunity for us to really help the administration and the government achieve their goals of producing very competitive, leading-edge, cost-effective solar in the U.S.
spk09: Sorry to clarify this, just real quickly if you can. Are you still expecting to ship energy from 2Q22 as initially planned? Or are there signs of delay given the broader utility slippage as we see the late? Sorry to throw that one in there.
spk10: Everything is still absolutely to plan, and that still will absolutely be coming out of Mexicali. So what we're talking about with this 3 gigawatt expansion, that is an expansion over and above the 1.8 gigawatt that we announced last quarter coming out of Malaysia and Mexicali.
spk01: Thank you. Your next question comes from the line of Philip Shen with Broad Capital Partners. Your line is now open.
spk06: Hi, everyone. Thanks for taking my questions. First one is on P-Series. I think you said you might give a more detailed update later this year, but was wondering if you can share how much volume you might expect for P-Series in Q3 and Q4, and then maybe just give a little bit of color on how you're thinking about 2022 given the the input costs and just the pricing and so forth. Thanks.
spk10: Thank you, Phil. Yeah, so as you know, we've been carefully tracking and monitoring the market in the rest of the world utility scale market for the product that's coming out of our Chinese P-series production. And what we have begun to see is getting more of an equilibrium between the pricing that's out there in the rest of world market and the current supply chain costs. And we have begun to see some more of that business become profitable. And we've seen that with some additional booking of business that we've done within Q3 and some shipping in Q3. And as we look into 2022, the large pipeline that we have of opportunities is turning more favorable. I would say it's a little early to to fully predict and we're not quite prepared to give full insight into exactly how much of that business we expect to come back and for us to be able to fulfill in 2022. But I say it's definitely trending in the right direction. So our confidence is very much building for 2022 return to volume in the utility scale market.
spk05: Great. And maybe I just can you go ahead, Kai.
spk02: Sorry, Phil, just Just to add for your question in terms of the growth of P-Series in the near term. So the growth that we have guided for the third quarter here sequentially, really the vast majority of that is coming from the P-Series. As you know, our IBC capacity is kind of kept at levels roughly around where we have been shipping So most of the growth in the near term is going to come from P-Series, from our joint venture, and then, of course, in 2022, also from the additional, our own supply chain from Malaysia and Mexicali.
spk06: Great. Thank you for that. And as it relates to, I think you talked about this briefly, shipping and logistics. What's your sense as to when, and sorry if I missed it, but what's your sense as to when you think The shipping situation improves. I think this morning or overnight in Asia, yet another port in China shut down. I think the port of Ningbo due to COVID. So it seems like things are incrementally getting worse. But do you expect things to improve in Q1 or Q2, or it's more of a hope?
spk10: Yeah, it's a great question, Phil. I think everybody is trying to understand exactly what's going to be going on with logistics and forecasting. It is a very dynamic situation. I think it's probably too tough for us to handicap at the moment. You know, what I will say we are doing is really trying to get after and attack logistics costs in ways that we can control it. You know, so one in particular, if I look at our IBC product today, You know, we produce cells in Asia that we then ship into Mexico to produce into panels, and then we then ship panels out of Mexico to the European and Asian markets. So we are, I would say, have a high level of exposure to transportation. This goes back to when we were part of SunPower. It was very much a U.S.-focused business. We're in the process, as we've discussed now, of building up a module manufacturing in Malaysia And from there, we will then service for IBC the European and Asian markets and be able to really cut down on shipping and logistics, which, you know, it's that kind of infrastructural change that we think will make us less sensitive to logistics as we have been and are today. The other thing that I would add, it's also one of the things that we like a lot about the incentives that are going in place to help with the U.S. market, certainly being able to produce in regions is not only very good from a cycle time, but from a logistics cost perspective, from a working capital perspective, it's good all around. So it's one of the reasons why we're aggressively pursuing a U.S. presence as well.
spk06: Great. I think you may have presented the Maxi on Air at the SNEC conference this year in China. How was the reception there? And then can you talk about – what the order book looks like for Maxion Air, you know, what are you seeing that might be promising?
spk10: Yeah, first, it was very well received at SNAC. I think it is, you know, you can explain Maxion Air. I think when you actually see it in person, it is a bit of a game changer. And I think what's been interesting as well is the reach out that we've heard from customers that, including roofers and others that traditionally have not been people that have reached out to us as customers. So there's a lot of excitement in the channel globally for it. Our current plans are that we are going to be scaling up production, at least the initial production for it in 2022. That product really starts to hit the sweet spot when our Maxion 7 cells are available. So you can start to think of Max Air as building up in 2022 using the current cell technology In 2023, we will then get into more of a scale using Maxion 7. And Maxion 7, because of some of the heat and reliability improvements that it has that make it even better than what we currently have with IBC, it helps us do cost reductions and improve the performance of Maxion Air in a way we think that will broaden its applicability and marketability. So I see some nominal revenues for that in 2022. It's really 2023 when you'll start to see it scale.
spk06: Okay. Thanks for that. And as it relates to your AC panels, I think you're targeting, you know, 20% of non-U.S. sales to be with a microinverter by the end of this year. I think you reaffirmed that in a slide. But I was wondering if you might be able to give a little bit more color on how that's going. What do you think that could look like in 2022? Maybe what kind of – price premium that offering gets relative to just the module and what the future might hold for that segment.
spk10: Sure. Let me give some comments on that, Phil. And certainly, Kai, if you think I've left anything out, you can jump in. You know, I'd say first, what we've talked about publicly is that we expect the penetration of AC panels for our business outside of the U.S. to continue to grow. And as you said, we expect it to approach upwards of 20 percent by the time we exit 2021. We expect that to continue into 2022, so we would expect it to be above 20 percent in 2022. I'm sure we'll get more specific as we get closer to 2022. In terms of how it's going, I would say it is a product that our channel has embraced, and I would say there are some markets that are better positioned for AC You know, France is a good example of that. There are other markets like Italy where it's a bit from a kind of a standing start position. We are going to be starting to see growth in Italy, especially as we get a certified system for the second half. You'll start to see things grow in Italy. But, you know, I think this is really where the value of our channel lies. comes into play, because there is an education that needs to go on with consumers as to the benefits of an AC panel. And that education process, in particular across Europe, but also now spreading into Australia for us, I would say is going very well, which is leading to the growth that we're seeing. What's also adding, I would say, to the growth is that we've now expanded that AC panel from our Maxion IBC panels to our performance series panels. So that also helps us hit a different price level of customers as well. So I would say so far so good. We're very excited about it, and I think it portends a lot of positive progress for us, especially as we get into 2022.
spk06: Great. And just one follow-up, and I'll pass it on. In terms of the AC panels and the countries that are most suitable for it, Can you talk through the characteristics of those countries or markets that make it more attractive there? I'm guessing a high labor market, more rooftop. But can you comment on what percentage of what you're seeing today is rooftop? Is it 100% rooftop, or is there some segment that actually wants it that's not rooftop? Thanks.
spk10: Thank you, Phil. You know, let me provide some upfront commentary, and then I'll have Peter Aschenbrenner maybe provide some additional color on some of the market applicability. You know, I'd say there are markets. First of all, I would say that where we see the panel, the market for AC panels is on the rooftop segment. And there are definitely markets like France that I would say have more of a running start when it comes to AC panel adoption. And that's where we've seen more of the early uptake. Peter, let me hand it off to you and provide some more color.
spk07: Okay. I think that, Phil, the short answer is that all of our ACPB is on rooftop. We think that will continue to be the case for some time. You might get a system or two where that's not the case, but by far the majority of the systems are on the roof. And the value proposition for the installer, which really drives ACPB penetration, is around logistics, streamlining, design, flexibility, and ease and speed of installation. So it's something that when the installers re-engineer their logistics and installation teams, it's just a much simpler process for them, fewer parts to worry about, quicker installation, et cetera. For the end user, I think they really like the granularity of the monitoring solution. and not having to have big boxes on the wall with string inverters. So those are things that drive penetration so far.
spk06: Great. And sorry, one last question. Is the margin profile for the AC panels healthily better than corporate average? I'm wondering if as you grow this segment, that might be a source of margin improvements.
spk10: On a margin percentage basis, we're seeing margins comparable. So if you have the DC panel versus the DC panel with the microinverter, the margin percentages are comparable. Or put another way, we're getting effectively the same margin on the microinverter as we are on the panel itself. So yes, it's good accretive upside for us.
spk06: OK. Thank you both. I'll pass it on.
spk01: Thank you, Phil. Once again, if you would like to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Again, that's star 1 to ask a question. Your next question comes from the line at David Arcaro with Morgan Stanley. Your line is now open.
spk04: Oh, hi. Thanks so much for taking my question. You had a pretty nice bump up in operating cash flow in the quarter. I was wondering if you could make any comments on how operating cash flow might look for the back half of the year. any working capital nuances or just how do you expect operating cash flow to trend in the back half? Great. Thank you for the question, David. Let me hand it off to Kai.
spk02: Yeah, absolutely. Thanks. Thanks, Dave. Yeah, you know, if you look at the operating cash flow, a really good performance this quarter, 33 million positive. We really focused on that one and we were also helped by some prepayments that came in. We continue to focus for sure on the operating cash flow. You have noticed that our inventory levels actually have gone up quarter to quarter. So the second quarter number has not been helped by inventories. And we expect actually over the back half of the year to bring our inventory levels down as we fuel the growth that we have guided in terms of sales. So I would expect some tailwind on the operating cash flow side from those inventory developments. And as we said, we expect for the second half of the year to continue to be in a good and strong liquidity position, continue to be after the operating cash flow and also after making some capex as we have guided So we feel pretty good about our liquidity position and the outlook for the back half of the year, and we continue to focus on operating cash flow. Got it.
spk04: Understood. That's helpful. And then I was just wondering, you alluded to it earlier, but maybe just on the volumes that will be coming out of Mexicali next year, have you made progress booking further orders for 2022 as that comes online beyond the big projects, obviously, that you have starting to kick in? in 2022? And I guess how has, how has demand shaped up for, for locking in orders for next year for that plant specifically?
spk10: I would say demand has been very strong for 2022. And as you know, we, we booked up a fair amount of the volume with the primer G one gigawatt, which leading then us really securing some smaller deals to fill up the balance. I'd say right now, our focus and attention is more on 2023. And there, again, a lot of opportunities. It's really more around us closing and us looking for the most ideal opportunities that exist for us in 2023. But when we look at the demand for the panels coming out of that factory, again, because of the technology, because of the performance, because of who we are as a company, because of the positioning that we have in Mexicali, we are seeing great demand that has us really set for 2022. It's really more around 2023 and filling up the book with the best business that we can.
spk04: Okay, great. Thanks so much. Great. Thank you.
spk01: And once again, if you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Again, that's star one to ask a question. And we have no further question at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect.
Disclaimer