Maxeon Solar Technologies, Ltd.

Good day, ladies and gentlemen. Welcome to the Maxion Solar Technologies third quarter 2021 earnings call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Mr. Robert Leahy of Maxion Solar Technologies. Sir, you may begin.

Thank you, Operator. Good day, everyone, and welcome to Maxion's third quarter 2021 earnings conference call. 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. Also, 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 gap measure, as well as the relevant gap to non-gap reconciliations. Finally, we want to point out that comparisons to the third quarter of 2020 reflect a carve-out of Maxion's results for a portion of the quarter 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 CEO, Jeff Waters.

Jeff Waters 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. I'm proud of how the Maxion team performed in the third quarter in the face of unprecedented upstream supply chain headwinds. We navigated increased materials cost and logistics, set another record in European DG sales, and are on track for our key strategic initiatives, including our North American performance line capacity, the ramp of Maxion 6, and our Beyond the Panel strategy. These strategic initiatives are coming at just the right time as the march toward a global low-carbon economy is accelerating, evidenced most recently by the momentum for solar manufacturing incentives in the U.S. The world has an insatiable appetite for solar, And Maxion has the panel technology, global channels, and reputation to be a leader in making that happen. So while the supply disruption occupies much of our focus currently, we're building for the more permanent disruption brought by the move from fossil fuels to renewables. This is what gets Maxion employees out of bed in the morning and drives the enormous upside potential for our business. Before we discuss the business results, I want to provide an update on our employee safety. In August, a group of employees at our Malaysia facility tested positive for the COVID-19 virus. We responded with an aggressive mitigation effort, shutting down the facility for 15 days and reopening in a structured process as a majority of our employees became fully vaccinated. By October 1st, 99% of our employees in Malaysia were fully vaccinated. The local government in Malaysia supported our overall response to the situation and we're very pleased that our employees are safe and the facility is fully reopened. In our other major factories, more than 75% of our Mexico employees are vaccinated, and close to 60% of our Philippines employees are vaccinated, which is three times the national average. Now turning to our Q3 results. Let's start with the upstream solar supply chain. We took a number of actions to mitigate the impact of steep cost increases in certain materials and logistics to enable Maxion to maintain financial stability and to stay on track toward our 2023 transformation. As we mentioned in our second quarter earnings call, prices for freight, polysilicon, copper, glass, EVA encapsulant, and aluminum all increased materially from 2020 levels. Some of these costs, including freight, unexpectedly spiked even further in the third quarter. Our highest exposure to supply chain inflation this quarter was on outbound Asia freight pricing. We responded by reinventing our module packaging design to increase packing density by 5% and by switching to air freight for some of our solar cell shipments to Mexico, which helped Maxion preserve our reputation for excellent on-time delivery. Shipping cells by air directly to our modcos in Mexico allowed us to avoid the ports of Southern California. Our outbound supply chain to Europe is even more challenging, but we were still able to set another sales record in the quarter for our European BG business. To mitigate the potentially continuing effects of logistics constraints, we took the initiative in the third quarter to establish outbound Asia rail transport capabilities which have a significant speed advantage that gives us more options to maintain delivery commitments in Europe. As well, ramping up our IBC Modco in Malaysia is allowing us to save significant shipping costs to Asia and Europe as compared to shipping from Mexico, as was done previously. Looking to 2022, we have further mitigation efforts on the horizon. First, Maxion 6 modules will have a more than 20% packing density advantage compared to the Maxion 2 capacity they replaced. Second, our performance line Modco in Mexicali will radically increase our supply chain proximity to the U.S. market, and it will benefit from supply chain assurance as we ramp up our captive cell production in Malaysia. And third, as we scale our beyond-the-panel business, our supply chain will further diversify. Looking into 2023 and beyond, we expect more potential for logistics leverage, first with our new thin, lightweight Maxion Air product, with the introduction of Maxion 7 and its higher efficiencies in watts per panel, and most significantly, with our opportunity to establish solar cell and module production in the United States. In summary, we are facing difficult upstream supply chain industry conditions, but our operations team has managed to keep our employees safe while delivering products to our customers on time and managing costs with both a short and long-term focus. Now I'd like to report on our three strategic pillars for profitable growth that are transforming Maxion. Execution over the next five quarters on these pillars will enable us to achieve our target business model in 2023 of at least 20% revenue growth, greater than 15% gross margin, and greater than 12% adjusted EBITDA margin. First, on leading panel innovation. I'm pleased to report that our teams in Malaysia and Mexico are on track to ramp an incremental 250 megawatts of Maxion 6 and 1.8 gigawatts of performance line in 2022. Together, these two initiatives will more than triple Maxion's in-house capacity compared with third quarter levels, and will do so with enhanced gross margins. To appreciate the volume impact of these initiatives, see slide four in our supplemental earnings deck. Our first Maxion 6 module shipped in October, and we're on schedule to have more than 200 megawatts of capacity online this quarter, growing to over 500 megawatts in 2022. As a reminder, we're installing Maxion 6 in the fab where our legacy Maxion 2 production had been since 2010. We expect that the performance increase and higher ASPs of Maxion 6 will enable us to deliver gross margins over 20 points higher than Maxion 2. When fully ramped, Maxion 6 will further build on our legacy of leading technology. In the third quarter, our Maxion 7 pilot line went live and consistently produced cells that were of the highest efficiency ever recorded for our IBC technology. We're excited about the future of Maxion 7 and the potential of this latest architecture to deliver yet higher levels of performance and durability with disruptive process simplification and cost savings. In the focused utility scale pillar, we continue to increase our attention on the United States, where policy tailwinds and strong customer demand offer significant opportunity for Maxion. We recently made our first G12 format solar cells in Fab 3, and we're on track to begin performance line module shipments from our Mexicali ModPIL in the second quarter of 2022. Our sales efforts for the utility scale market are in full swing with a primary focus on 2024 delivery. U.S. customers appreciate that Maxion is a U.S. publicly listed company with superior technology, North American manufacturing, and a culture that deeply values ESG themes and the sanctity of contracts. We previously announced our gigawatt-scale supply contract to provide panels for PrimerG's Gemini project near Las Vegas. Today, we're happy to announce that we've reached an agreement with our partner and shareholder, Total Energies, to supply up to approximately 400 megawatts of panels for one of their major projects in the U.S. The majority of those deliveries will be made in 2023. In connection with that contract, we expect to receive a prepayment in excess of $50 million by the first quarter of 2022. This transaction is another strong testament to the attractiveness of our performance line supply chain for the U.S. market, as well as the support and confidence from our strategic partners. We continue to selectively address the rest of world utility scale markets. We booked our first major project in India this year with nearly 200 megawatts to be shipped between Q3 and Q4. Our rest of world utility scale pipeline is still multiple gigawatts. However, the impact of China's new energy rationing policies has kept us largely on the sidelines in terms of closing bookings in the near term. Fortunately, our JV model allows us to respond to such events. And in the near term, we'll continue to leverage our JV partners' ability to deploy products in the domestic China market, where PPA prices are more correlated with upstream spot prices. Last but certainly not least, a few words on our differentiated DG channel, which posted several notable achievements in the third quarter. Overall volume in Europe was record-breaking, with robust growth led by Italy, the Netherlands, and Germany. In Latin America, we have several countries now among our fastest growing markets globally, with our initial footprint heaviest in Mexico and Brazil. In the third quarter, our Mexico team increased the size of our installer partner network by approximately 40% and is now working to roll out a consumer financing product offering, Maxion's first in the region. We anticipate that this program will be available to consumers beginning in the first quarter of 2022. We see consumer finance as a significant value add to our DG channel, similar to the traction demonstrated for such offers in the U.S. market. Our AC panel volume outside the U.S. increased 50% sequentially in Q3 and is projected to increase more than 50% sequentially in Q4. Italy, a Maxion stronghold, did not secure microinverter product certification until September. but it is now ramping quickly with a full suite of Maxion AC panel options in both IBC and performance lines. In top European markets, France, the UK, and the Netherlands, we're on track to have AC panels be more than 20% of sales as we exit the year. And in Australia, we're on track to exceed 30%. As we look to 2022, we expect beyond the panel revenue to grow rapidly, driven by ongoing overall module volume growth, continuing increases in tax rate, and introduction of other adjacent hardware, in particular battery storage. Going forward, we believe non-panel revenue will be the most appropriate metric to measure the success of our Beyond the Panel strategy, and we will provide guidance for this metric in our 2022 Analyst Day. Before I turn the call over to Kai, I'd like to provide an update on our plans for manufacturing in the United States. On our last call, we stated our intent to move forward with a 3-gigawatt cell and module facility on U.S. soil pending successful negotiation of a DOE loan guarantee and the passage of enabling legislation, including the Solar Energy Manufacturing for America Act, also known as SEMA. Since then, the DOE invited us to proceed to the second phase of their process. This is the next of several steps in the DOE process, which could ultimately result in a conditional commitment and a final loan agreement from the DOE. Additionally, the most recently negotiated draft of Congress' Build Back Better Framework, also known as the Reconciliation Bill, emerged with a modified version of SEMA, plus additional incentives for our downstream customers. We are strong supporters of this transformational legislation, and if it passes, Maxion is in a great position to ramp capacity and be a key contributor to establishing a domestic U.S. solar supply chain. With that, I will turn the call over to Kai to review our financial performance.