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spk01: Ladies and gentlemen, and welcome to the Maximum Solemn Technologies fourth quarter 2021 earnings call. Currently, all participants are on 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 is being recorded. I would now like to turn the conference over to your host for today, Mr. Robert Leahy of Maximum Solemn Technologies. Sir, you may begin.
spk04: Thank you, Operator. Good day, everyone, and welcome to Maxion's fourth 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 20F, 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 GAAP measure, as well as the relevant GAAP to non-GAAP reconciliations. With that, let me turn the call over to Maxion CEO, Jeff Waters. Jeff Waters Thank you, Rob, and good day, everyone.
spk08: 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. Last quarter, we challenged our team to maintain our strategic transformation roadmap in the face of prolonged supply chain headwinds, and they rose to the occasion. In spite of continued supply chain and logistics price pressure, extended lead times, and new challenges from Omicron, our teams executed to plan in line with fourth quarter top and bottom line guidance and hit key milestones on our transformation roadmap. We completed our upgrade from Maxion 2 to Maxion 6 and made our first volume shipments. We're now also upgrading the Maxion 5 lines to Maxion 6 and plan to complete the full conversion by mid-year. Our first mono PERC cell lines in Malaysia are up and running, and our new performance line Modco in Mexico commenced mass production in late February. Customer demand for this capacity is very high, and we recently announced over 700 megawatts of incremental orders with over $70 million of prepayments. In our DG business, the European sales team posted yet another record quarter while achieving an AC module mix of more than 25% in four of our largest markets. And finally, negotiations with SunPower culminated last month in a new supply contract, which not only reset pricing for our products to current market levels, but also enhanced and accelerated our ability to more broadly address the U.S. market. The foundation of a transformed Maxion is nearly in place. We are on schedule to complete this transformation just as our legacy polysilicon contract approaches expiration. Industry-wide supply chain headwinds, including the recent war in Ukraine that has disrupted global trade, represent an unwelcome challenge for our transformation process. But the presence of strong macro demand growth and ESG tailwinds reinforces our resolve and belief in the value we are creating as we execute our remaining transformation milestones. With that said, I'll start by discussing our highest priority, employee health and safety. In Asia and the Americas, Omicron's ability to spread quickly took Maxion and the world by surprise in December. But our employee vaccination programs helped mitigate the impact, with vaccination rates at 99% in Malaysia, 96% in the Philippines, and 75% in Mexico. Before Omicron impacted the Philippines, we supplemented vaccination initiatives with an aggressive testing program and hotel capacity for increased quarantine resources. We also designed a sophisticated shift system that helped contain the virus and prevented any material production impact in the fourth quarter. Thus far in the first quarter of 2022, we have seen a material uptick in cases with our employees in our Malaysia facilities. We are executing similar actions to what we developed for our facilities last year, with employee safety being decidedly our highest priority. Omicron also had a broader impact on the supply chain environment in the fourth quarter, and we continue to experience global supply chain disruptions with the war in Ukraine and the ongoing COVID-19 pandemic. The solar industry has not been shielded from these highly elevated costs and extended delivery times. Our approach to the situation is unchanged from last quarter. Identify and mitigate any costs we have the ability to influence and execute on our long-term transformation initiatives, which will reduce our exposure going forward. One example is the introduction of Maxion 6, which, combined with a redesigned packaging system, improved packing density by more than 25% compared to the same shipments of Maxion 2 earlier in 2021. We also ramped IBC Modco lines in Malaysia and can now ship product to Asia customers in less than four weeks, compared to our previous reliance on Mexico, which took more than 10 weeks for delivery. In North America, our newly ramped performance line capacity in Mexico can deliver product to U.S. customers via truck in one to two days, compared to most solar companies taking at least 10 weeks shipping on the water from Asia. On a more tactical level, we're also renegotiating contracts with shipping partners in Asia, concentrating more volume and fewer partners to secure better pricing. Although we don't have line of sites any relief for supply chain spot prices this year, we are addressing increased raw material costs by bringing on additional commodity suppliers, which will help us mitigate a portion of glass and aluminum price increases. In summary, we're using this current challenging environment to make Maxion a stronger company, and we're pleased with the results of the progress that will help mitigate the impact in the near term and position us for success when the environment normalizes. Now let me spend a few minutes on the three pillars of our growth strategy. First, leading panel innovation. At the beginning of 2021, approximately 40% of our IBC capacity was 2010 vintage Maxion II technology. While this product performed better than the vast majority of competing technologies, it was time for an upgrade. We closed 2021 with more than 140 megawatts of new Maxion VI cell capacity, which will increase to approximately 250 megawatts by mid-year when this part of the technology refresh is complete. This is a critical project for our gross margin turnaround, providing more than 20 points of margin improvement over Maxion 2. We'll see further margin upside in 2022 as we convert our Maxion 5 capacity to an additional 250 megawatts of Maxion 6 by mid-year. As additional evidence regarding the superiority of our technology, we recently increased our IBC module warranty to an unprecedented 40 years. This decision was not taken lightly, as Maxion and our customers both treat our industry-leading warranty terms as sacrosanct and a key differentiator versus our competition. Fortunately, we have access to comprehensive field degradation studies dating back over 15 years, rigorous measurement of actual warranty claims on our product shipped since 2004, and proprietary physics of failure models to correlate and extrapolate this historical field performance with predicted longer-term degradation rates. This data, vetted by third-party experts, ultimately met our high standards for increased warranty coverage. We are thrilled to be in the position to offer extended peace of mind to our customers and are seeing a strongly positive response from installers and end customers, especially in the residential segment. Now, a few words on Maxion 7. The excitement among our Fab Four pilot line engineers and technicians is increasing as they consistently produce our highest efficiency ever for IBC solar cells, and we're on track to produce our first modules next quarter. We expect that Maxion 7 will further distance our product performance from the competition and enhance our pricing power in the market, particularly in conjunction with our recently announced 40-year warranties. As development progresses, we're continuing to review options and the timeline to fund the Maxeon 7 production ramp. Now let's move on to our focused utility scale strategy, where we are ramping our U.S.-focused supply chain and experiencing increased market traction. We started initial mass production in Mexico of our shingled bifacial modules in February, and the first customer shipments are scheduled for April. COVID-related travel restrictions and inbound component shipment delays represent a headwind for the speed of our full manufacturing ramp. But our operation teams are highly focused on the task at hand, particularly considering the strength of demand for this product. Since our last earnings call, we executed contracts with two customers to supply over 700 megawatts of our bifacial performance line panels through 2024, bringing our contracted backlog to over 2 gigawatts. These contracts include prepayments of over $70 million. Coincident with these orders, we executed price callers on a significant portion of our BOM costs. With demand for our utility-scale product in the U.S. far outpacing supply, we are investigating options to expand capacity beyond our current 1.8 gigawatts, either in Mexico or the United States, depending on legislative events over the next few months. Outside of the U.S., Our utility scale sales team provided a meaningful contribution to our fourth quarter revenue as we recorded the final shipments to our project in India. However, we remain selective on our rest of world power plant business. Now to our differentiated DG channel. We closed 2021 with another record quarter of EMEA region volumes. And our DG group in Europe is off to a very fast start in 2022. The combination of megawatt shipments to date and backlog for the first half of the year at this point in the first quarter are almost double where we were at the same time in the first quarter last year. We expect continued strong demand in our European business and are actively pursuing tactics for de-bottlenecking our factories and reallocating supply from lower margin regions. This achievement is due to the combination of a truly differentiated product married with a robust direct to installer channel model that has been cultivated for more than a decade. This channel platform allowed us to ramp AC module sales from zero at the beginning of the year to over 25% of total volume in the fourth quarter in France, the Netherlands, Australia, and the UK. Other regions, including Italy, Austria, and Scandinavia, some of which launched later in 2021, saw similar initial growth trajectories, which are continuing in 2022. Customer feedback on the value proposition of a factory integrated product has been decidedly positive and supports our plan to launch storage sales in 2022. The success of our channel model in Europe and Australia is a strong motivator for geographic expansion, particularly in the Americas. We have several exciting initiatives progressing in Latin America. We are now increasingly focused on growing our direct presence in the United States. While SunPower sells our product with great success in key markets such as California and the Northeast U.S., when we look at the U.S. market as a whole, we see significant opportunity for volume and margin expansion by leveraging our deep expertise in channel sales, particularly to a large number of local installers across the U.S. who have historically had no access to our market-leading products. With demand for high-efficiency solar products increasing due to competitor exits and strong EV adoption, We're very excited to be engaging more directly in the USDG market. Our revised supply contract with SunPower provides us with the opportunity to launch our own USDG channel, starting with commercial this year and including residential next year. We have a lot of exciting initiatives coming together in 2022. We plan to complete the multi-year transformation of our core module business to achieve our target financial model in 2023. And we're launching new initiatives, including Beyond the Panel, that have the potential to propel us beyond these targets. We look forward to sharing our progress with all of you as we continue to execute in 2022. With that, I will turn the call over to Kai to review our financial performance.
spk10: Thank you, Jeff. And hello, everyone. Let's turn to our financial results. I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter. Fourth quarter shipments were 577 megawatts, above our guidance range of 540 to 570 megawatts, on record European DG volumes and the final deliveries for the 192 megawatt Ayana project in India. We are especially pleased with this performance, given the headwinds posed by supply chains and the global shipping industries. Total revenue for the fourth quarter was $221 million, inside our guidance range of $215 to $235 million, and slightly above our third quarter 2021 revenue of $220 million. Revenue in the fourth quarter was impacted by sequentially lower North American DG volumes. Gross loss came in at 4.8% of sales, or $10 million. at the midpoint of our 5 to 15 million guidance range. Included in our cost of goods sold is a $14 million impact for 6.4% of sales related to our out-of-market polysilicon contract, which was in line with our guidance range of $13 to $17 million. Three out of the 14 million was attributable to ancillary polysilicon sales with the reminder going towards polysilicon that was consumed for cell manufacturing. As an update, at the end of the fourth quarter, without giving effect to any potential inflationary price escalation clauses, our obligations for this contract stood at $126 million worth of polysilicon at the contracted prices to be purchased through the end of 2022. for which we have made $49 million in prepayments already. Gross margin was also impacted by about $6.9 million in underutilization charges that were mainly driven by our capacity transformation initiatives of ramping Maxion 6 and our internal performance line. As you can see on slide four in our supplementary earnings presentation, we made meaningful progress in the fourth quarter. Once our facilities are fully ramped, we expect to enjoy near-full utilization based on our utility scale backlog and bookings run rates from DG customers. Supply chain costs, including logistics and raw materials, remained at highly elevated levels compared to historical standards. In the fourth quarter, supply chain costs were an estimated $46 million higher than during the same quarter last year. equivalent to 21% of fourth quarter revenue. The sales team passed on some of these costs where contractually possible. All of these developments were a challenge to manage, but thanks to extraordinary efforts by our teams, we secured outcomes in line with our projections. Non-GAAP operating expenses came in at $33 million, generally consistent with our guidance range. As a reminder, Non-GAAP operating expenses adjust our GAAP operating expenses for restructuring charges and stock-based compensation. Adjusted EBITDA for the fourth quarter was negative $39 million within our guidance range of negative $32 to $42 million. GAAP net loss was $73 million compared to $65 million in the third quarter of 2021. A large part of the sequential decline was attributable to $5 million of non-cash impairment charges related to equipment in our HSPV joint venture. Moving on to our balance sheet, we are pleased to have closed the year with $192 million of cash and restricted cash, down only slightly from $203 million at the end of the third quarter of 2021. despite significant capex during the quarter and negative EBITDA. We were able to maintain a healthy cash balance due to continued operating expense austerity measures, disciplined management of working capital, and a $43 million cash prepayment from Total Energies for the utility-scale project in the U.S. that we announced in our previous earnings call. This amount represents the lion's share of the contractual prepayment for that project, but further prepayments are expected in connection with that project in the first half of this year. Inventories at the end of 2021 were $213 million, down from $220 million in the prior quarter as we completed deliveries for the Ayana project. DIO went from 83 days at the end of third quarter to 85 days at the end of the fourth quarter. Fourth quarter capital expenditures totaled $37 million, below our guidance range of $45 to $50 million, due to our strong focus on cash management and payments. Total capital expenditures for 2021 amounted to $154 million. That is lower than our previous guidance of $170 million for the year, mainly due to a focus on the optimum timing of the spend. Our philosophy for new CapEx continues to stress maximum capital efficiency without sacrificing speed of getting Maxion 6 North America performance line and Maxion 7 into the market. Now I'd like to turn everyone's attention to our outlook for the first quarter of 2022. We started 2022 with a clear line of sight to a transformed Maxion, but we still have a few quarters of transformation execution in front of us, as well as the final year of our legacy PolySilicon contract. Our focus is unchanged from Q4. hyper-discipline cash management, and efficient execution of our Maxion 6 and performance line ramps. Since the majority of the quarter is behind us, some of our guidance ranges are narrower than in previous quarters. With that in mind, our guidance is as follows. Please also see a detailed guidance breakdown in our supplemental earnings slides. We project shipments in the range of 475 to 495 megawatts. The midpoint of this forecast represents a 16% sequential decline due mainly to the lumpiness of our utility scale projects. Specifically, our fourth quarter 2021 included the final shipments for the IANA project and our next major project, approximately one gigawatt to Gemini, will not start shipments until the second quarter of 2022. DG volumes are also forecasted to decline sequentially in Q1 in certain markets, mainly due to typical seasonality. First quarter revenue is projected to be 210 to 220 million dollars. European DG demand is expected to remain strong and offset some seasonal softness in other regions, including North America. Blended ASPs are forecast to grow from 38 cents per watt in the fourth quarter of 2021 to approximately 44 cents per watt in the first quarter of this year, as calculated using the midpoint guidance of revenue and shipments. This pricing increase is driven in part by a higher mix of DG volumes but also includes a DG-specific ASP increase attributable to March deliveries being governed by the new SunPower supply contract. Non-GAAP gross loss is expected to be in the range of $7 million to $30 million. At the midpoint of the range, this is flat sequentially. Due to a more favorable product mix combined with strong demand in our core markets, and offset by increases in supply chain costs and higher underutilization charges as our PERC factories in Malaysia and Mexico commence volume production. We expect charges related to our legacy out-of-market polysilicon contract in the range of 11 to 13 million dollars, which are included in our guidance for non-GAAP cross-loss. Non-GAAP operating expenses are expected to be 35 million dollars. plus or minus $1 million. Adjusted EBITDA is expected to be in the range of negative $28 to $34 million. Note that starting from 2022, we will report adjusted EBITDA excluding the equity in income or losses of our unconsolidated investee HSPV, which is a non-cash item. This way, adjusted EBITDA is more representative of Maxion's operational performance. Our capital expenditures are expected to be in the range of $22 to $26 million for the first quarter, down from $37 million in the previous quarter, and reflecting the reality that our large transformation projects currently underway are nearing completion. For the year 2022, we are expecting overall capital expenditures in the range of $85 to $90 million, primarily to complete the 1.8 gigawatts of performance line cell and module capacity and to finish the conversion of our IBC cell capacity at Feb 3 in Malaysia to Maxion 6, plus some R&D and corporate capex. That capex number is slightly higher compared to what we indicated last time, mainly due to the shift of some capex payments from 2021 into 2022. Also, Please note that this number does not include any capex for the production ramp up of Maxion 7 in the Philippines. As mentioned last quarter, this ramp is expected to require capex in the range of $60 to $80 million. Less than half of this may be spent in 2022 with the remainder in 2023. We continue to evaluate the exact timing and the funding options required to support this capex spend as well as other growth opportunities available to us. Also not included in our current CapEx projection are capital expenditures for moving forward with a new U.S. or expanded North American manufacturing footprint. We remain later focused on our liquidity to ensure we are able to fund high-priority and high ROI initiatives. In addition to the increasing cost of materials and freight, Working capital has been a challenge and will likely remain one due to the lengthening of supply chains, which lead to increased buffer stock levels and elevated levels of material and product in transit, as well as our need for new supply chains to fuel the growth of the company. We have put in place and are continuing to evaluate many structural and tactical initiatives, like, for example, securing prepayments from our customers to compensate for these headwinds. The tragic events in Ukraine have brought about new and unprecedented levels of disruption in global trade and have sent energy, logistics, and commodity costs skyrocketing. At the same time, clean and sustainable energy from solar panels has never looked more attractive to many potential customers. We are determined to complete the transformation of our company that we started over one and a half years ago and emerge from it with an overhauled technology and product portfolio, and with legacy contracts like our out-of-market take-or-pay polysilicon agreement behind us. With that, I'll turn the call back to Jeff to summarize before we go to Q&A.
spk08: Thank you, Kai. In summary, Maxion is on track to hit our long-term financial targets, and I believe we are now well past the halfway point of the transformation phase. Because of continued supply chain headwinds in the recent war in Ukraine that has increased the financial challenge of this transformation, we are navigating the current situation with heightened intensity and focus. We are convinced more than ever that Maxion's technology, channel expertise, and ESG values are a winning combination that will drive long-term success. Now let's go to the Q&A session. Operator, please proceed.
spk01: Thank you. Ladies and gentlemen, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Julianne Damoli with Bank of America. Your line is open. Thank you.
spk07: Hey, guys. It's Alex on for Julian. Just a quick one for me to kick off. I mean, when you think about, you know, capacity expansion, you know, whether in the U.S. or Mexico, I mean, what are you looking there, I guess, from, I guess, a geography standpoint, whether around, you know, policies or incentives that you might be able to get? And then what would be the timing on that sort of expansion? Thanks. Well, thank you, Alex.
spk08: So when we think about the expansion, I think one of the things that we are driving toward is getting a little bit more localized in our manufacturing strategy. So that's why we look at our U.S. market approach. Our first foray there was with Mexicali. And you're seeing a similar thing as we ramped up our Modco in Asia to support our Asian customers. And this is the kind of move that, especially with freight costs being where they are these days, it shows you just how important that can be. As we think more broadly in longer term, it is really around looking at the specific markets and, as you said, monitoring what's going on with various trade policies. We feel we're in a good position now. We've got a great and growing infrastructure both to serve Asia and Europe and also to serve the U.S. We'll continually be on the lookout. We are a very growth-oriented company. and as new opportunities and new markets prevail themselves and as trade policies dictate that, we'll continue to look to respond quickly. Got it.
spk05: Sorry, it's Julian here. I just wanted to chime in if I can. I'm sorry about earlier. If I can just clarify your comments about the EU and opportunity there, can you, define a little bit more about what kind of accelerating phenomenon you have there. I know you addressed it in part in the commentary and obviously some records there, but as you think about sort of the balance of this year here and the acceleration, I mean, you're even seeing some of your peers in the manufacturing space kind of lean in capital raises to address almost proactively the expanded opportunity set. How do you think about kind of right-sizing your capabilities against the emerging opportunity in Europe? And ultimately, how do you perceive that for yourselves, right, just against the competitive backdrop at the same time?
spk08: Sure. You know, I think first and foremost, when we think about Europe, we think about the dealer channel that we have there. It's very pervasive, very deep, gives us a very unique approach to go direct through local dealer partners that go direct to customers. So we've got a great foundation there that allows us not only to sell directly our panels at a premium, but to also move beyond the panels we've talked about in previous calls, adding things like microinverters to moving forward here with storage in the near future. So as we look at Europe grow, we feel like we've already got a great foundation there. One of the moves that we made, at least initially, was to move our Modco capacity that served Europe from Mexico to Malaysia. So it does get us closer. There's always a bit of a balance here between wanting your factories to be somewhat close to where the raw materials are coming, but then also have them close enough to the markets they serve as well. For right now, we feel good about that. I think if in the future it were to make sense for us to look at adding manufacturing capacity to Europe, much as we would any of the markets, we would always take a quick look at that. and move as quickly as we needed to, whether it be Motco capacity for IVC or even looking at putting in more deliberate production for our performance series products. So, again, we've got a really good footprint in Europe that's been built up over the last decade, and all the growth that you're seeing in Europe right now we're benefiting from, as we reflected in the calls, just with the bookings that we're seeing to date, 2X where they were last year, and just the excitement for the growth that we have there.
spk10: So if I can expand on one of the things.
spk06: Sorry, go ahead, Scott.
spk10: Sorry, Julian. I just wanted to expand on one of the things Jeff just said about the performance series capacity. So as you know, on IBC, which is very successful in Europe, we've been busy, too. convert our capacities over to MEC6. Of course, you're trying to maximize whatever capacity we have in place and get modules as quickly as possible into those markets. But we are also in the unique position that we have that HSPV joint venture where we have headroom in terms of our uptake and taking additional performance panels from there, which is also a really, really good option in those markets that currently show very strong demand. So in terms of our capital life model there, that's always a channel that we can ramp up as we need it.
spk02: Thank you.
spk01: Thank you. Our next question comes from the line of Pavel with Raymond James. Your line is open.
spk09: Yeah, thanks for taking the question. Let me also start with Europe. I'm curious if just in the last four weeks during the war, has there been any noticeable, you know, you can call volume, you know, sales quotes, particularly from the frontline countries, basically Germany and everything to the east of Germany. Has there been this kind of noticeable push to accelerate energy transition, you know, as per a lot of the political rhetoric?
spk08: Yes, thanks, Ravel. You know, I would say our demand in Europe has been so strong quarter on quarter. You know, we just continue to see quarter on quarter growth in DG, in some cases almost defying a little bit the traditional seasonality that we've seen. So, although bookings have been strong over the course of the last four weeks, For us, it's not like a step function increase. I would say it's just more of an adder to the growth that we've already seen. Peter, go ahead.
spk06: Yeah, Pavel, so as Jeff said, there's no question that we're seeing increased interest and demand from end customers on top of what we would normally see at this part of the season anyway. I would say the broader political response, while There's a lot of discussion and interest, I think, in figuring out ways to move more quickly. I feel like it hasn't gelled yet completely, and so I think we'll expect to see that continue to evolve over the next weeks and months. But customer interest is for sure strong.
spk09: Okay, that's very helpful. In China... I remember a year ago, and I think even in 2020, you mentioned that pricing domestically in the Chinese market was so strong that the joint venture had no export capacity. Everything was going for domestic sales. Can we get a latest on that?
spk08: We're still seeing essentially the same dynamics. know as you see elevated supply chain costs the uh the response to supply chain cost increases from china happens much more quickly than you see it overseas so that overseas lag still persists and you know although we are we do continue to look for opportunities we do have a you know a long uh a long pipeline of opportunities to go after overseas and we did speak about the one deal we had within india We'll continue to look for those, but I would say at least here for the near term until we get past this big supply chain rift that we're in now that you would expect to see it more toward China.
spk06: And what I would add to that, Peter, that I think your comment was based specifically or I took it to be based specifically more about the power plant, the large-scale business. We are selling... an increasing amount of product from that joint venture into the DG business globally. And as you'll see from the slides that we posted, a significant fraction of our DG businesses is using product from HSPV.
spk09: Okay. And lastly, fair to say that plans to build manufacturing footprint in the U.S., still on hold pending clarity on Washington, correct?
spk08: That is correct. I would add a little bit of color in that the demand that we continue to see for our product, you know, based on, you know, who we are as a company, but also the differentiated nature of our product is very strong. And although we are still hopeful and very engaged in pursuing a U.S. option, assuming that SEMA comes through and our loan guarantee comes through as well, we're still, I would still say, optimistic on that. In the event it doesn't, we are also looking at expansion in Mexicali. We think it's important for us to expand because there is a very strong appetite for our market, and especially in a market that's willing to pay for the value that we bring as a supplier.
spk09: Got it. Thanks very much.
spk08: Thank you.
spk01: Thank you. Our next question comes from the line of Philip Shin with Roth Capital Partners. Your line is open.
spk03: Hi, everyone. Thanks for taking my questions. Congrats on all the recent contract wins and your prepayments. And, Jeff, I think you were just talking about expansion in Mexicali. And, you know, based on some of the checks we've done, sounds like you might be sold out in 22 and 23. So I was wondering if you can comment on that. Is there available products for customers? And then from a pricing standpoint, I was wondering if you might be able to share a bit of the terms. Do you think you're pricing at a premium to the Southeast Asia suppliers, or do you think you're pricing at a discount? I mean, you have the benefits of much more clear freight costs, and it's from Mexico, and there are a number of other advantages. So I was wondering if you're charging a premium for that, and if you're not, then why aren't you? Thanks.
spk08: Sure. Thanks, Phil. And, yeah, it's fair to say that we are not completely but essentially sold out for 2023. 2022 and we are already beginning to take orders for 2024. you know from a pricing perspective i'd say we most certainly get a premium from what we're seeing out in the market and a lot of that comes from again from who we are as a company from our product technology and also where we sit with the factory in mexicali what we've been doing to really to help kind of shore up our margin projections in that part of the business. The first is to secure business at very healthy pricing. So even when we look at where we see the potential for the market and applying some risk on supply chain, we still have good business that we're booking when we get out into 23 and 24. We also, where we can, we are trying to put in some controls around costs. So working with key suppliers on some of the bigger parts of the the bill of materials costs for us to help lock those in or, at minimum, help tie them back to market indices. So we feel good about that part of the business. And, like I said, it is the kind of thing that has us bullish in the future on adding more capacity.
spk03: Yeah, what could the timing of that be? What else would you need to see to get confidence around that? I mean, you're already sold out for 22 and 3, and so are you – just about there, and how much more expansion could it be?
spk08: Well, I think we feel like we're on the cusp, maybe here within the next two to four months, of really understanding what's going on with SEMA. So to an extent, we're really looking hard at SEMA. We're going through and basically preparing for SEMA to pass and for us to get the loan guarantee. We are you know, already down into final site selection for the plants. So we're gearing up so that once we get a green light on SEMA, we would move quickly into building that U.S. factory. I'd say once we get some clarity around that, that would then dictate for us how we would think about expansion, you know, whether it be in the U.S. or if SEMA doesn't happen, we would be strongly considering Mexicali.
spk03: Right. So basically the expansion of Mexicali is predicated on what happens with SEMA and the the U.S. bill. Is that fair?
spk08: It is fair. You know, and I would think about it, too, that we're, I think one of the things that we've learned as a company is it's important to, especially in the utility scale space, for cost to be cost competitive. It's really important for you to go out and build the right scale. So we're not talking about, you know, small hundreds of megawatts facilities. You know, these are multiple gigawatt facilities when we look at adding the capacity. So, yeah, fair to say that We'll wait until we hear from SEMA and then you'll see us move forward or pivot as appropriate.
spk03: Got it. As it relates to your pricing, it looks like it may have moved up from 39 cents in Q4 to 44 cents in Q1 based on the midpoint of the guide. But that's only one month of benefit from the new SunPower contract. Can you break out the Q1 ASP margin uplift from the SunPower contract?
spk08: uh could we see possibly 50 cents for an asp in q2 and should we see further sequential increase in margins in q2 yeah maybe i'll give a comment and then kai if you'd like to add some color uh please do you know i'd say that first what you're talking about the asp increase that is a blended asp increase so uh You know, certainly the prices that we get on our IBC product in DG are demonstrably higher than what we get in the utility scale space, even though we are seeing, I would say, very good pricing for our performance series panels and utility scale within the U.S. I really wouldn't want to go into any more detail around our pricing, you know, certainly, especially as it relates to SunPower. You know, what I would say is that that agreement that we did with SunPower, I think was really good for both companies. You know, for us, it did allow us to get our, with the renegotiation of it, our pricing up to more market rates for 2022, at least for the last three quarters of 2022. And it also gives us the opportunity beginning in 2023 to address the U.S. market. And, you know, in there, you think about SunPower, a big player in the U.S., but there's still a good 90% of that market that they don't address. And when you think about some of the competitors in the premium space that have dropped out, we see expansion in the U.S. as being a great growth motivator for us in 2023. So we're really excited about that. And certainly that would also have a positive impact on ASPs when you look at it at the corporate level.
spk10: So just technically, Phil, just to add here, this is Kai. So you're right, it includes a March, the first quarter numbers include the new contract starting from March, and that gives a bit of an uplift. But also, as Jeff mentioned, there are other factors that are also going on, the general product mix, because we have less power plant in the first quarter and more DGE in general. And then it's also true that then in the second quarter, we should see the full quarter impact of that. But we're not giving any specifics on that.
spk03: Okay. Thanks. And then as it relates to the margins on the Mexicali facility, I was wondering if you could share, I mean, Jeff, you talked about a premium in pricing. Can you share roughly what the margins look like there? I mean, We know what the corporate margins are, but are you double-digit percentage margins there potentially, or how does that look? Thanks.
spk08: Well, you know, the way to think about our margins on that business, you know, we've talked about how when we see that business scaled up, the factory scaled up, that we will be achieving our corporate target margin or greater. So I think 15% in that range or better. Now, over the course of 2022, we are scaling up the factory. So you've got a lot of employees, operators on board. You are working through the scale-up of the factory, so you're not producing at full capacity. So costs are at their highest, especially in the first few quarters. So, you know, we're not going to get to 15% on day one. I wish that were the case. But everything that we're seeing with our cost projections going forward still tell us that with the pricing we have, that this is a good business that fits the vision we have, which is a 15% plus gross margin business that will add a lot to the top and bottom line for us as a company.
spk03: Great, thanks. And one last one. As it relates to anti-circumvention, it looks like the case should be decided tomorrow. I mean, there's a small – there's a chance that it gets punted. But what I recall is you guys are not – roped into that risk. I think it might be useful for everybody to hear how you guys are or are not implicated if the Anti-Circumvention II case gets taken on by the DOC. I'll turn it back to you guys, but it'd be helpful for everybody to hear it. Thanks.
spk08: Peter, why don't you comment on that?
spk06: Yeah, Phil, we're not named in the Anti-Circumvention complaint request. And we think it's extremely difficult to make a case, an anti-circumvention case around SunPower and Maxion. You know, we've been in the same spot there in Malaysia for over a decade. So we haven't gone anywhere or changed our operations. So we'll have to see how that goes. But we don't think we're in the center of the target, let's say.
spk08: Yeah, I would just add to that that I would say no one has ever accused us of selling panels below markets or dumping into markets. We definitely play at a very high premium relative to the competition.
spk03: Right, so between the premium and the length of time you've been there, you really shouldn't be a party to the case. That said, the case would be countrywide, and so ultimately if this does get taken on by the DOC and they – render a decision, then it would be up to you guys to make sure that you're carved out of whatever the final decision is by the DOC. Is that the right path of events?
spk06: Yeah, I think we'll have to, again, we'll have to wait and see how this investigation goes. I would not expect us to be a major component of that going forward.
spk03: Great. Thanks for taking all my questions, and I'll pass it on to you. Thank you, Phil.
spk01: Thank you. Our next question comes from the line of Bryant Lee with Goldman Sachs. Your line is open.
spk00: Hey, guys. Good afternoon. Thanks for taking the questions. Most of mine have been covered, but maybe just a quick housekeeping one to start off on the – The DOE loan guarantee, can you kind of provide us an update on where that stands, maybe next steps in the process, any kind of expectations around timing?
spk06: Yeah, Brian, this is Peter. We are in the process. The next steps are detailed diligence and negotiation of the loan guarantee itself. We expect that process to be multiple months, and so we're continuing to work through it.
spk00: Okay, fair enough. And multiple months in terms of expecting a final decision, yes, yes, no, or multiple months just to kind of get to the next step in the process?
spk06: No, multiple months before the end of the process, which is a determination on the extension of the loan guarantee or the loan itself and the signature of an agreement.
spk00: Okay, fair enough. Maybe just on that topic, outside of the loan guarantee, how are you guys thinking about liquidity needs here? I know the CapEx budget for 22 is not that robust, and a lot of the capacity expansion is sort of TBD based on SEMA and the loan guarantee, but just as you think about... you know, the margins here as well as some of the working capital commentary you made. Is there any updates you can provide around how you're thinking about liquidity, just what sources outside of some of the prepayment strategy you mentioned, anything else you're considering from a financing standpoint?
spk10: Hi, why don't you take that one? Yeah, thank you. Certainly. Thank you, Brian. Yeah, I think from a liquidity standpoint, as you have seen, we are pretty pleased with the cash balance at which we ended the year. That has already in there a lot of the capex that was needed for our current transformation. We spent about $154 million in capex in 2021. So the heavy lift is really behind us. And you have seen that the baseline capex budget to get all this done in 2022 is pretty moderate of 85 to 90 million. But, you know, as you point out, there are other growth initiatives that we have in mind the most maybe concrete one and that is really in our control is MAC-7 and MAC-7 is making really really good progress both in the pilot line in the Philippines as well as in R&D so we have yet to decide on the funding for that particular initiative and there's of course a variety and range of options out there that we continue assessing and I would say in general the same is true for any other growth initiatives that we that we see out there including the the US footprint which would come to a large part with the loan guarantee if our application is successful from the DOE, but also some more financing possibilities that we probably have to put in the mix there.
spk00: Okay. Fair enough. Appreciate that. Last one from me. Just, you know, I appreciate the color, Jeff, around, you know, being sold out effectively for 22 and 23. And, you know, your pricing strategy sounds like in real time you're getting more aggressive slash proactive. But as the cost environment has continued to escalate, you know, things like aluminum and logistics, we've heard from some of your peers starting to, you know, pinch margins here in the near to medium term. What are you able to do to kind of mitigate that on existing bookings? You know, not necessarily the ones you just reported today and the ones that you've, you know, been seeing better pricing on, but the ones where, you know, you're allocated to deliver the next, you know, six, 12, 18 months, and costs have moved up quite a bit. Are you going back and actually renegotiating pricing? Did you have contingencies in place on some of the costs where you can do that, or what's sort of the strategy on some of the backlog here?
spk08: Yeah, thank you, Brian. I would say if and where there is flexibility in our contracts to adjust pricing, we would have those conversations, and that's true in the DG space as well as utility scale. I think, as you know, typically within utility scale, because of the nature of the end customer, it's tough to have that kind of flexibility in there. So what we've done, in addition to getting, I would say, very good price premiums, is we've really worked more on the supply chain and really tried to target the more significant pieces of the cost structure to put in some contracts so that we can lock in pricing better. So if you look at our input costs, And one thing I would say around that is even if you look at it from a freight perspective, it is just by having our factory like Mexicali so much closer to where customers are, that really helps mitigate some of the freight concerns that we have. But there are other significant input costs that we've been able to work with suppliers in more of a strategic way and come up with some collars around the costs that give us the ability to stand by the pricing that we negotiated, and to live up to our contracts like we always do as a company.
spk00: Okay. Thanks a lot, guys. I'll pass it on.
spk01: Thank you.
spk00: Thank you, Brett.
spk01: As a reminder, ladies and gentlemen, that's star one to ask the question. We have a follow-up question coming from the line of Julian with Bank of America. Your line is open.
spk05: Hey, guys, sorry, just to clarify this. Since we're talking about being sold out here, can you talk about the P series, if you don't mind, in terms of just kind of leaning into that opportunity here, especially as the world looks set to really need some of this incremental capacity over maybe not just this year but leading into next. How are you thinking about kind of leveraging that over time here? You kind of alluded to it broadly earlier, if you don't mind, if you can elaborate. Okay.
spk08: Sure. We think about it in two ways. First, you know, the joint venture that we have with the HSPV joint venture we have with TZS is great in that, you know, we've got access to a lot of capacity out there. So as the market demand grows and as pricing begins to equilibrate, we think that opens up a lot of opportunity for us. And the capacity in the JV, I would say, just continues to grow. So a lot of flexibility there. And again, it's, you know, it's not take or pay. So if good business isn't there, we don't have to get ourselves in trouble. The other piece is on the U.S. side, because HSPV producing in China serves pretty much everywhere except for the U.S. market. So for the U.S., it is, you know, the first foray into this really was our converting a good portion of our Malaysia fab over to monoperk cell production. which did a bunch of things. First, it gave us a good, reliable, non-China supply of cells. The other positive, though, is it filled up that factory. And that's a factory that has long been underutilized. And as you know, that just adds to costs. So a great win for us there. We then converted our Modco in Mexicali over to Performance Series. And Again, the benefit there was twofold. The first was that it allowed us to now take the capacity, the Modco capacity there that was going to customers in Europe and Asia and to actually move that capacity over to Asia. So it helps with freight and a variety of other pieces. But right now we've got that what will at full scale be 1.8 gigawatt with that Malaysia-Mexicali combination. We see a lot of opportunity to grow more. We talked about our intention to add three gigawatts of capacity. You know, I would say that the thought process has been that if we could do that in the United States, we think that would be a really nice strategic adder to what we do as a company. To do that, as you can imagine, there's a significant cost and price increase to produce in the United States, so we need SEMA. And, again, we're hopeful. You know, with SEMA, it does have – just fundamentally, it has good bipartisan support. It is, as you know, bundled in with a lot of other things that are a little bit more contentious across the aisle. But as soon as we hear a positive on SEMA, we may get closure on the DOE loan guarantee, and we're ready to roll with U.S. production. In the event that doesn't happen, we're in a really good space in that we've got a knowledgeable – footprint in Mexicali. We've got room for expansion there. So we would look to scale up there pretty quickly. And, you know, another benefit there is that we've done that scale up in Mexicali already. So adding the additional capacity is now going into a group of hands that are much more experienced than they were the first time. Peter, do you want to add?
spk06: Yeah. Julian, let me just add one thing about the joint venture and the rest of world demand. As you might imagine, the big increments of capacity that have been brought online there recently have been using the large G12 wafer format that TZS really pioneered a couple years ago. We're in the process of transitioning our DG product offer to that new larger capacity, those increments, large capacity increments based on the G12 wafer format. So that's going to unlock bigger chunks of available capacity for us to deploy into the DG market in the near future.
spk05: Yeah, but with respect to the JV, not meaningfully ready to talk about ability to market the rest of the world, as you said.
spk08: I'm sorry, Julian. Could you repeat the question?
spk05: Just the expectations on rest-of-world demand, Peter, as you were alluding to a moment ago, just the leaning into the demand on that front, it doesn't sound like you're ready to kind of commit to any kind of level of utilization despite the expansion of the capacity quite yet.
spk08: Yeah, that's a fair comment. As you know, it's very dynamic, and especially the overseas utility-scale business the margins are leaner than they are in the United States. So that margin buffer is much more sensitive to costs. And I would say right now, given the volatility that we see in that market, we're better deploying those panels into China through the JV, and we're better, of course, still continuing to grow our DG growth with performance series, given that there's much more of a margin buffer there as well. Yep. Thank you, guys. Best of luck. See you soon. Great. Thank you, Julian.
spk01: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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