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spk08: Good day, and thank you for standing by. Welcome to Maxion Solar Technologies' second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Robert Leahy of Maxion Solar Technologies,
spk07: Sir, you may begin. Thank you, operator.
spk12: Good day, everyone, and welcome to Maxfield's second quarter 2022 earnings conference call. With us today are 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 MACAN'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 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.
spk11: Thank you, Rob, and good day, everyone. Today, I'll provide a detailed update on Maxion's ongoing transformation and our progress toward achievement of our long-term financial model. Then Kai will review our financial performance and outlook, and we'll conclude with Q&A. First, though, I'd like to acknowledge the recent passage of the Inflation Reduction Act and what it means for Maxion. We couldn't be more pleased with the result of this legislation after more than a year of consideration in Washington. The investment tax credit extensions are a new long-term tailwind for both our utility scale and DG businesses. As a reminder, we just reentered the U.S. utility scale business in 2021 and have already booked nearly three and a half gigawatts to date. And on the DG side, we commenced shipping directly to commercial installers last quarter, and are launching our residential channel later this year. We were also pleased to see increased support for electric vehicles, which should expand demand for more efficient and larger residential solar systems, a category where Maxion has been a leader for decades. And last but not least, as strong supporters of U.S. domestic manufacturing, we were thrilled to see inclusion of the key provisions previously proposed under the Solar Energy Manufacturing for America Act, known as SEMA. We believe the direct pay incentives and potential for domestic content ITC bonuses provide a strong catalyst for U.S. solar manufacturing. Maxion is very well positioned to implement the objectives of this legislation. We've spent over a year preparing for exactly this scenario and are well down the road with respect to site selection, facility design, and financing. Our proposed three gigawatt facility has the potential to drive significant top and bottom line growth for Maxion in 2025 and beyond. We have reignited our project team to full burn, and we'll share more details on this project at our upcoming analyst day. Now let's talk about Maxion's second quarter. In addition to exceeding both volume and revenue guidance, we hit our adjusted EBITDA guidance range, reflecting what we believe will be the margin trough in our company transformation. We also achieved several important strategic milestones. First, we began production on our second Maxion 6 production line in Fab 3, largely completing the IVC technology refresh at that site and bringing our total IVC capacity to over 1 gigawatt for the first time in over a year. This increased supply will allow us to better feed our DG channels in Europe, Australia, and the U.S., where demand and ASPs for these products are very strong. Secondly, we started volume shipments of our bifacial performance line panels into the US from our Mexicali ModCo. With a contracted backlog of over three gigawatt for deliveries extending out through 2024, we are solidly booked out in our US utility scale business and are looking at opportunities for locking in longer term supply contracts for 2025 and beyond. Finally, we announced further details around our beyond the panel roadmap including introduction of our reserve battery storage system and a product roadmap, including our drive EV charger offering and the SunPower One software platform. And since the end of the quarter, we strengthened our balance sheet with a $207 million convertible bond that will allow Maxion to pursue deployment of Maxion 7 and Fab 4 in our Ensenada Modco, as well as to make further investments into other products and offerings such as Performance Line and Beyond the Panel. In short, Despite facing a challenging global environment over our two years of operating existence, Maxion is delivering on the key elements of our transformation while focusing on a healthy balance sheet. We believe we are well-positioned to grow revenue and expand margin, with our sights set clearly on gross margin break-even by the end of 2022 and achievement of our long-term financial model within 2023. Now let's cover some second quarter execution details through the lens of our three pillars of strategic growth, beginning with the leading panel technology. While we're best known for our IBC technology, Maxion and our HSPV joint venture are also pioneers and the leading players in the shingled cell technology space, a product we sell as our performance line. HSPV produces and sells multiple gigawatts of these modules within China, while Maxion focuses primarily on the global DG market where we sell performance line panels in roughly similar volumes to our IBC panels. In DG, both panel types are increasingly sold with integrated power electronics and soon with our newly introduced reserve battery storage product. As with our IBC technology, we're continuously improving our shingled cell products and are in the process of introducing our sixth generation performance line panels to our residential and commercial channels. P6 panels deliver higher performance and lower cost, and perhaps most importantly, with significantly increased supply capacity to address surging demand in Europe. The increased supply of P6 will allow us to reallocate some of our IBC supply toward higher ASP opportunities, such as the residential and light commercial markets in the United States. Speaking of IBC, I'm happy to report that we've transitioned fully from Maxion 5 to Maxion 6. with a total Maxion 6 capacity of approximately 500 megawatts. Our Maxion 7 pilot line has achieved its mission, and with sufficient liquidity now in place, we plan to begin the upgrade of FAB 4 and our Ensenada ModCo from Maxion 3 to Maxion 7 in the near future. Considering the favorable market conditions and our strength and liquidity position, we are now also evaluating the option of moving to larger wafers during the conversion project. We'll provide further details during our analyst day. Maxion 7 enhances end customer benefits and enables higher ASPs relative to Maxion 3. Growing adoption of electric vehicles and heat pumps is causing a fundamental change in household energy needs. And with roofs staying the same size, the best way to add value to the homeowner is with more efficient panels and longer, more reliable operation. Moving to our differentiated DG channel, 2022 is shaping up as a really strong year for demand in our DG business. In Europe, we posted a fifth consecutive record quarter for shipments, with announced price increases expected to materialize significantly in Q3 and Q4. Supply timing and logistics remain a challenge at the moment, but the team is executing well, hitting or exceeding delivery targets and end customer MPS scores. In Australia, the team also exceeded sales targets and executed a very well-attended and energizing installer roadshow. focused around the launch of our battery storage and end customer software products. AC module sales as a percentage of revenue climbed to the mid-30% range in the second quarter in Australia, behind only Netherlands and France, where they now account for the majority. We are seeing a clear preference by end customers for complete systems provided under Maxion's SunPower brand, with over a decade of presence in most key markets and a longstanding reputation for top quality and customer service. We continue to see channel partner expansion in Mexico and are very pleased to report that with BBVA, the largest lender in Mexico, our installer partners are able to offer their customers financing terms unique to the Maxion offering. We're also providing our partners with qualified lead opportunities from campaigns to BBVA's broad customer base. We believe that financial products and lead generation will be an important part of our long-term Beyond the Panel offering. Pulling back up a moment to the bigger picture in our DG business, we are now in our 17th year as the global solar panel technology leader. We are the only solar panel manufacturer with a direct to installer model at scale. We believe the combination of these two factors provide us with a solid economic moat. Our differentiated products attract installers who understand the benefits of selling a premium product under a strong brand. Our channel provides us with a conduit to the end customer and the opportunity to influence how the product is sold and for how much. As a result, we're somewhat isolated from short-term solar market volatility and are well positioned to expand our beyond the panel offering. In 2023, our first full year with full Maxion 6 production, we project that our DG business will contribute gross margins of more than 20% by year's end. Keep in mind that 2023 will still include significant legacy Maxion 3 capacity and a beyond the panel business in its early days. Conversion of max three to max seven and continued expansion of our beyond the panel attach rates should provide further DG margin tailwinds in the following years. Our third strategic pillar is our focused utility scale effort. Our sales team here also continues to execute very well. We signed two additional contracts for over one gigawatt of deliveries in 2024. All contracts include partial prepayments and we executed our first agreement using a new variable pricing structure designed to reduce our margin volatility. While the near-term ramp of performance line continues to be affected by elevated supply chain costs and impact of COVID-related zero tolerance measures on our equipment suppliers in China, our long-term prospects for the U.S. large-scale business are strong, with the total backlog now standing at 3.4 gigawatts. Since announcing this initiative in April of last year, we've been continuously increasing our bookings volume at a steadily improving ASP. After more than a year of CapEx and OpEx investment, we now expect to nearly double our revenue run rate between early 22 and late 23. In closing, at the summary level, Maxion is serving two distinct end markets, each based on differentiated competitive advantages and with unique contributions toward increased shareholder value. Our engagement in the utility scale market has the potential to grow our revenue to unprecedented levels, even counting our legacy SunPower days, and to do so with healthy margins and a modest OPEX structure that facilitates attractive epithelial generation. Our offerings for the DG markets are expected to generate 20% or higher gross margins, thanks to our highly differentiated panel technology and direct-to-installer channel. And it has the potential to evolve over time from a components business to a systems and platform model. I look forward to sharing more of our vision for serving these two end markets at our upcoming analyst day. With that, I'll turn the call over to Kai.
spk04: Thank you, Jeff. And hello, everyone. I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter. Second quarter shipments were 521 megawatts. exceeding our guidance range and growing 7% sequentially, thanks to exceptional delivery efforts to European customers and the initial shipments into the U.S. utility scale market, which commenced commercial deliveries in late April. The majority of our European shipments this quarter were performance line products from our HSPV joint venture. We also saw an initial contribution from the new North American performance line facility. Total revenues exceeded our guidance range as well, and were also up 7% on a sequential basis to $238 million. Year on year, our top line grew by 35%, mainly as a result of increased performance line volume. Revenues benefited both sequentially and year over year from price increases in DG markets, including the United States, where this was the first full quarter of the new 2022 SunPower pricing. ASPs for DG grew slightly on module price increases in Europe, as well as a growing amount of non-panel revenue. On a blended basis, Overall ASPs were flat sequentially due to a higher mix of performance line shipments in both DG and utility scale. While IBC volumes are expected to grow in the near term as the conversion to Maxfield 6 is completed, we expect to see a similar overall ASP trend going forward with price increases and a higher mix of non-panel sales offset by a growing share of lower-priced performance line volumes. Non-GAAP gross loss came in at $24 million. Second-quarter headwinds impacting gross loss included $14 million in ramp-related capacity underutilization charges and $7 million in lower-of-cost-on-market provisions for quarter-end inventories of our performance line products for the U.S. market. Our gross margins continue to be affected by elevated supply chain costs, which we estimate to have had an adverse impact of $40 million year over year. Note, these annual supply chain cost increases were partially offset by $30 million of price increases compared to the year-ago quarter. Also included in gross loss is a $3.3 million charge for out-of-market polysilicon prices. For several quarters now, polysilicon prices in the market have gotten ever closer to the fixed prices underlying our long-term take-or-pay contract. and we expect less significant, if any, out-of-market charges in the remaining two quarters of that contract than what we have experienced in the past. As at the end of the second quarter, our remaining obligations under that contract stood at $33 million, for which we have made $12.9 million in prepayments already. We also agreed to a $15.2 million settlement of our previously disclosed contract dispute with our polysilicon supplier over the alleged trigger of an inflationary price escalation clause. As a result, we will be making six equal monthly payments through January of 2023. Second quarter gap cross loss, which includes the charge to cost of goods sold for this settlement, was $39 million. Non-gap operating expense came in at $30 million, better than our guidance range. This reflects continued austerity efforts during our transformation. Gap operating expenses were $36 million and included restructuring charges of $1.8 million, primarily related to the shutdown of our remaining module manufacturing facility in France. This is the final step in the post-spin cleanup of our manufacturing network. Adjusted EBITDA was negative $37 million, in line with our guidance. The sequential decrease is attributable to the previously mentioned margin factor. Gap net loss for the second quarter was $88 million. Moving to our balance sheet, cash levels including restricted cash decreased sequentially from $208 to $180 million due to net loss, capital expenditures in the quarter, and increased inventory levels. Operating cash flows were negative $11 million, with net loss and inventory increases offset partially by careful management of other working capital items, as well as $54 million in prepayments from our recent utility scale bookings. DIO went from 92 days at the end of the first quarter to 89 days at the end of the second quarter. Capital expenditures in the second quarter were $18 million, somewhat lower than our guidance range due to careful cash management. As Jeff mentioned, we recently announced a $207 million private convertible bond issue to our shareholder TVE. The note pays a 7.5% coupon, has a conversion price of $23.13 per share, a two-year hard non-call provision, and a five-year maturity date. This transaction provides the funding for our Maxion 7 conversion project, other ongoing and possible future capital investment projects, working capital, and general corporate purposes. This transaction also highlights TCE's continued commitment to and confidence in Maxion's success. Now let's turn our attention to the outlook for the third quarter. We expect that our P&L will improve sequentially as the balance of headwinds and tailwinds is expected to turn in our favor, leaving the second quarter to be the margin drop as previously guided. Q3 will be the first quarter where we shift significant volumes to US utility-scale customers, albeit from cell and module capacities that are still in ramp mode. The top line impact will be significant going forward, but the margin contribution will lag until 2023 when the factories are fully ramped and we complete deliveries on early 2021 bookings that were priced below current levels. As Jeff mentioned, We successfully negotiated a variable pricing mechanism on our most recent utility scale booking and expect that this will de-risk our utility scale margin projections in the future. Positive contributions towards gross income in the third quarter will include higher IVC volumes from the Maxion 6 RAM and price increases on DG products in various EU countries. We expect to deliver top-line growth and margin expansion this quarter and project this trend to largely continue toward achievement of our long-term financial model within 2023. With that in mind, our third quarter guidance is as follows. Please also see a detailed guidance breakdown on slide nine in our supplemental earnings slide. We project shipments in the range of 580 to 620 megawatts, with sequential growth driven by an increase in both DG and utility scale shipments. Revenue for the third quarter is expected to be in the range of 270 to 290 million dollars. Non-GAAP growth loss is projected to be in the range of 10 to 20 million dollars. which includes an approximately $1 million impact from our out-of-market polysilicon contract. The sequential improvement is driven by a higher mix of Maxion VI, further ASP increases in DG markets to offset historical unsavorable supply chain cost development, and improved output from the initial U.S. utility scale line. although we expect to again incur incremental provisions on our performance line inventories for the U.S. Non-GAAP operating expenses are expected to be $35 million, plus or minus $1 million. We will continue to manage our OPEX very carefully while investing in initiatives that will drive significant long-term value for the company. As a percentage of revenue, we expect operating expenses to decrease considerably for the balance of 2022 and in 2023 as capacity ramps and shipment volumes increase. Adjusted EBITDA is expected to be in the range of negative 27 to negative $37 million. Third quarter capital expenditures are projected to be in the range of 21 to $25 million. A few final comments regarding our longer-term outlook. In our discussions, people regularly ask us for details on the financial turnaround required for us to reach our stated target of 12% adjusted EBITDA within 2023. We understand the interest, given it implies a plan to go from negative to positive EBITDA and a year-over-year improvement of more than $100 million. Let me shed some light on the topic. With Maxion 2 and 5 at end of life, the DG business is gross margin positive today, led by a robust Maxion 6 ASP. We target a profitability of our DG business that we believe will drive Maxion to an overall break-even gross margin level by the fourth quarter of this year. Further, we expect Margin expansion to occur in early 2023 with Maxion 6 fully ramped, growth in beyond the panel and contributions from our new U.S. residential channel business. In 2023, we expect our U.S. utility scale capacity to become fully utilized, improving our cost levels. And in the back half of the year, this business is scheduled to start shipping the higher ASP bookings from 2022. With that, I'm trying to call back to Jeff to summarize before we go to Q&A.
spk11: Thank you, Kai. Next week, Maxion will be celebrating its second birthday, and what an amazing two years it's been. Two years of continuous and significant investment for the future. We've upgraded the majority of our products. We've closed unprofitable plants, ramping new capacity and progressing to fully utilized factories. We're within months of outlasting a decade-plus out-of-market polysilicon contract. And we're doing all of this during a tumultuous industry environment. We've been consistent over the last two years in saying that by mid-2022, we'll have the majority of the foundation set for a financially successful Maxion in 2023. One place to reach our target model of over 20% revenue growth with EBITDA margins of 12% or greater. With a few more quarters to go in the turnaround, a recently bolstered balance sheet, and with the future that we expect to include U.S. manufacturing, it continues to be an exciting time to be at Maxion. We appreciate you all joining us on this journey. Now let's go to the Q&A session. Operator, please proceed.
spk08: Thank you. As a reminder to ask the question, you will need to press star 11 on your telephone. That's star 1-1 to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Julianne Dumoulin-Smith with Bank of America. Your line is open.
spk10: Hey, team, it's Alex on for Julian. Congrats on the quarter here. Wanted to ask a little bit more, and obviously, you know, I think one of the headlines people are watching closely here around this expansion effort that you guys target in the U.S. If you could give any clarity as far as the timing that you might expect, as well as, you know, the credits that you would think that you're eligible for I know that there's a lot to unpack between some PTCs as well as possible ITCs for some of these solar panel manufacturing facilities. So if you could clarify on that timing as well as the credit availability. Thanks.
spk11: Sure. Thank you, Alex. This is Jeff. So maybe just first to describe it at a higher level, we feel we're in an excellent position to help drive the kind of reemergence and resurgence of the U.S. solar supply chain. We are right now, as we speak, cutting our teeth on the first scale-up of close to two gigawatts of capacity out of Malaysia and Mexicali. That's really giving our teams the learning curve and the capability to do the next generation of scale-up for us, which we're expecting here to be in the U.S. market. And we've also, through this process, established a really proven U.S.-friendly supply chain. We're shipping dozens of shipments a week into the U.S., so we feel real confident with that. And we've also got tremendous demand because of who we are as a company and the supply chain. So when we think about this next phase, part of this is the DOE application. We've got a real strong application that we feel fits the administration's goals for the program, so we have good confidence there. We expect about six months for the loan guarantee to come through. And then once that concludes, about two years from that, the first production. So you can think about kind of early 2025 for us to begin producing. When we think about the credits, I guess first, you know, our expectation would be that we would meet all the requirements for both the CELFAB credit of $0.04 per watt and also the Modco credit of $0.07 per watt. And, you know, when it comes to other things around the ITC adder for domestic content, you know, our expectation there is that we're kind of piecing it through. We will expect the details to get finalized here over the coming months. But obviously our goal will be to do everything we can to meet those domestic requirements and help maximize the ITC adder.
spk10: Right. And I think just my follow on, if we can sort of, you know, I guess focus back a little bit to the near term. As far as the margin guide for 3Q, I know you mentioned 40 million of year of your headwinds as far as supply chain. And I think you mentioned last quarter you were trying to sort of reprice some of your contracts, particularly at the utility scale level to account for some of that. So, I mean, if you can give us just a little more color of like what the moving pieces are there as far as, you know, how successful your efforts were. on repricing, what the headwinds you're seeing today are, and then how we expect that to evolve into the end of the year and the EBITDA guide that you gave for 23.
spk11: Okay, so I'll speak first on some of the repricing efforts, and then I'll hand it over to Kai to provide some more details on some of the other contributors to margin improvement. So first, I would say that we've been very happy with the customers that we've taken on with our utility-scale business within the U.S., You know, we have been able to secure a handful of very strong, professional, just great companies with great leaders and really have built up some good collaborative relationships. We are working through some of the contracts. I would say I'm optimistic. We're not ready to guarantee anything or if we put any of that into the guidance, but I'm feeling optimistic that we are going to be able to restructure some of those contracts in a way that will be favorable to us. So I would say good progress there, but nothing yet to report. Kai, do you want to expand on kind of more broadly on margin improvement?
spk04: Yeah, absolutely. Thank you, Jeff. Hi, Alex. This is Kai. So in terms of the margin improvements, we put a few markers out there. Obviously, we said that on the DG side of the business, we are already gross margin positive today. We also mentioned that we are targeting an overall gross margin break even for Maxion in the fourth quarter. So that's kind of the first marker in the ground. And the third quarter margin guidance is really kind of a waypoint to go there. As we think about that improvement, there's further improvement on the DG side expected. We are expecting higher – we have been increasing prices, so we are expecting higher prices to report next quarter. On that side, we have higher volumes on Maxion 6. But also on the power plant side, as we are ramping that facility, we expect reduced – uh idle cost we are expecting still some low of cost or market provisions because of the low prices at which we are currently shipping those products but all those things should be improving over time and then as we are going into 2023 we see further tailwinds there on the us power plant side as we start shipping the higher price later bookings for that capacity, as well as starting to fully utilize that capacity over time in 2023. And on the DG side of the business, we'll expect more shipping also from HSPVP series into the various DG markets, which are really, really strong markets right now and in the foreseeable future, as you know. And also we expect beyond the panel offerings to take a bigger share of the DG business.
spk03: And last but not least, also our further entry into the DG space in the United States, which we are starting to gain a foothold there and expand from there.
spk07: Thanks, Tim. I'll take the rest off alone. Thank you.
spk08: Please stand by for our next question. Our next question comes from the line of Donovan Shaper with Northland Capital Markets. The line is open.
spk13: Hi, guys. Thanks for taking the questions. I just want to follow up on Alex's question about um you know you're kind of renegotiating those contracts the fixed price ones for the power plant p series modules so um i guess i'm just curious from a timeline standpoint um you know how when because you know there's there's always some concern and we just have to be kind of prepared for it and aware of it if you get caught in kind of a logo low gross margin or or you know potentially the negative gross margin contracts so you know hypothetically speaking um if that were to uh the contracts you had signed were not renegotiated um into a more favorable way how long would the impact persist i guess they're asking when would those contracts that maybe don't look quite as great right now when would they how far would they extend and and then where they would roll off any color that would be helpful
spk11: Sure. Thanks, Donovan. As we've said in the past, these were the very initial contracts that we took for the business. So these would have been priced back in early 2021 when it was a very different supply chain market with different expectations for 2022 and 23. So the way you should think about them is that those lower ASP contracts would be done within 2023. And when you then, as we've also been reporting, I think since then, we've been getting pricing that is more in line with where the market is today. And as well, more recently, we've been doing contracts that are cost indexed. So we've evolved. And I think when you think about 2024 and beyond, you'll see much less margin exposure than maybe we had with some of the very initial contracts that we did.
spk13: Okay, that's great. And then I also want to ask, so for the ASP uplift, you know, going from Maxion 5 to Maxion 6, is there any way you can kind of quantify what the incremental, you know, premium and maybe cents per watt you're able to get? Or, you know, I know an important part of these technologies is also lowering the cost associated with making, you know, what is still a premium product. So, you know, and or sort of what their gross margin improvement would be, maybe the incremental sort of margin per watt, cents per watt you can get through this Maxion 5 to Maxion 6. And just for simplicity, you know, maybe just, you know, Cause I know you're the mix is going from like 50% to a hundred percent, but let's just focus on like, you know, panel to panel apples to apples. So, you know, for one, one Maxion five panel versus one, you know, kind of Maxion six panel.
spk11: Sure. Sure. I think, you know, the way to think about Maxion five and Maxion six is it's essentially, it's the same. technology it was just a bump up in kind of a minor up in wafer size it's essentially it's the same technology it was just a bump up in kind of a minor up in wafer size so the overall performance of the panels uh and the specs of the panels are very similar really as you as you intimated though it's really more around the cost production for max 5 versus max 6 So that's what we saw there. And I would say even you even say the same really about Maxion 6 to Maxion 3. You know, Maxion 3 is still also a very good competitive technology that provides very good, you know, industry leading efficiencies out in the marketplace. But Maxion 6 provides a cost reduction relative to that. When we think about Maxion 7, you know, really you've got a couple of pieces there. You know, the first instance of Maxion 7 is going to be not really so much about a cost reduction as it is going to be about a significant efficiency improvement, but also around adding additional features like elimination of hotspots because of the architecture of the cell. For us, when we think competitively, it's not just about efficiency. It's about things like how long our panels stay out in the marketplace with industry-leading 40-year warranties with a much lower degradation than what the competition has But from generation to generation, from max three to five to six, and even with the first instance of seven, it's more around, I would say the first three to six has been more around cost reductions, or two to six has been more around cost reductions, and seven is when you'll really see a performance bump.
spk13: Okay, well, and then actually, you know, on that topic, You guys have talked about, you know, the kind of your best ever efficiencies coming off the pilot line for Maxdown 7. And I know, you know, you're maybe not at a point where you're ready to quantify that and share those numbers with us. I mean, if you are, that would be great. You know, please do. But I guess is there sort of a timeline of when you, you know, maybe you're waiting to get a third-party solution certification or anything, I'm just wondering, um, you know, or if that's something maybe you guys plan on sharing with us during the, the analyst day, just kind of the timeline on when we could actually know what those, uh, the efficiency improvements are.
spk11: Sure. So, you know, I think at analyst day, we will provide probably more insight into, into Maxion. Uh, so you can expect to see that there. I would say when it comes to third-party verification, I think one of the things that certainly sets us apart is that when we talk about efficiencies that we're achieving, it is on cells that are going into hundreds of thousands of cells per day type volumes. It's not something that we're doing in the laboratory. I think we've established credibility over the decades. in us being able to, when we talk about our efficiencies and performance we're achieving, that it really is something that will be at the production level. What we've talked about, and I'll just reiterate, is that we continue to see in our labs and on our pilot line, which is a replica of what will happen in high volume production, but out of those lines, we are seeing record cell efficiencies and we're putting together panels that will create record panel efficiencies. And so you can look at where we sit, A, with you know, with our Maxion 6 panel as an example, and just know that we're going to do better than that. How much better, like I said, we'll probably give more insight into our, into it, into our analyst data that we have coming up.
spk13: And just on the production line question, you said that you are hitting targets at the pilot line. I'm just curious if you can tell us kind of what, what attribute you're talking about there. Is it running the pilot line at a faster speed? I know you were at half speed, I think, on the last call. Is it increasing that speed and having higher yield panels coming out? What are the attribute or metrics where you're saying you hit targets there?
spk11: What I was referring to there was more around the efficiencies that we're producing, so the actual cell performance perspective. Got it. That being record performance.
spk13: Awesome.
spk11: Okay, I'll take the rest offline. Thank you, guys. Sure. Okay, thanks, Donovan.
spk08: Thank you. Please stand by for our next question. Our next question comes from the line of Philip Sheen with Woff Capital Partners. Your line is open.
spk02: Hi, everyone. Thanks for taking my questions. First one is a follow-up on the um next leg of capacity expansion i think jeff you mentioned that the three gigawatts of cell and module could come online early 2025. i just wanted to explore that a little bit more uh would it be possible that it could come online a fair amount sooner than that you know when we think about and historically mod lines take about a year to bring online and you know maybe six months even uh six months a year and then cell might be about a year so uh do you think it could actually be sooner and if so how much sooner And then as it relates to the next facility, to what degree are you guys contemplating another three gigawatt facility? The law is passed now. There's a very clear path. Of course, the ITC adder, you know, domestic content adder is not as clear, but the four and seven cents is very clear as an incentive. And so are you guys very much contemplating already that next three gigawatt or larger facility? Thanks.
spk11: Sure, Phil. First, I would say we're not ready to commit to anything earlier than what we stated around early 25 at the beginning of production. What I would add, though, to what you said is that it really is us needing to construct a new facility to house the Celfab and Modco, and that's part of what makes it not a one-year turnaround. If you look at the current 1.8 gigawatt that we have with the Modco in Mexicali and the FAB in Malaysia. You know, that fits roughly what you were saying. We were able to get those up and running in first production in about a year's time. A little bit longer of the delay here would be doing construction within the U.S. to house that new facility. So that would be the comment I'd have on that. I think in terms of additional capacity, you know, certainly there is demand that's out there. Let's say for where we sit today, we're not ready to announce doing more than what we've already stated. but certainly we will continue to talk with customers, take a look at our progress as it comes along with this first capacity that we're going to be building out, and we'll be ready to adapt and to proactively jump if we believe that more capacity beyond what we've talked about makes sense.
spk02: Thanks, Jeff. Shifting over to your DG business, you announced the partnership with CED. recently and so was wondering if you could remind us when you expect those volumes to ramp up. I think it's back half this year, more soon. And then how much volume do you think CED could have in 2023 from a megawatt standpoint? And then additionally, when you think about the potential for another distributor, are you working through that now? Is there potential for yet more partners near term as it relates to distribution? Thanks.
spk11: Sure. You know, what I would say is first we are with CED, we start shipments in the beginning of 2020, 2023. So January of 2023, we will begin shipments to CED. To answer, I think, your third question, with CED, they're the biggest in the U.S., as I know you're aware. We're very happy with that relationship. We see them as a great partner. So our expectation is to really focus and be a great supplier to them, along with continuing to be a great supplier into SunPower. We really do see CED and SunPower as being very complementary in that SunPower, with their unique channel model that understands our product, knows how to sell the premium elements of our panels They'll continue to be a great customer for us. So we're very happy with that relationship. CED really allows us to go after the other 90% of the market that's out there that to date has been served by, you know, the likes of LG and Panasonic. And, you know, there is a big chunk of the United States that's really looking for Maxion panels. So we're excited to start that relationship. You know, in terms of the amount of volume that we could forecast, that's not something that we're going to be talking about publicly about the kind of volume we could free up. what I will say is that we are looking at doing a variety of things to, uh, re I would say kind of repartition or, or, or redistribute, uh, supply that we have from maybe other markets that are less margin attractive and to funnel them into the U S. So we're trying to find, I would say as many panels as we can out of our capacity to be able to supply the U S market. Now that said, We've got other great markets we serve. Europe is a phenomenal market. Australia is a phenomenal market. But there are some markets like some of the commercial markets outside of the US can be maybe a little more challenging from a margin perspective. So you could expect to see us shift more of the IBC volume into US resi.
spk02: Great. Thanks for that detail. And then finally, on liquidity, You guys, congrats on the convert and the raise there. What's your sense as to whether or not you might need more? And if so, would that be driven by the current 3 gigawatt cell and module facility decision, or do you think you have sufficient liquidity for that capacity? And then if it's a decision for the next 3 gigawatts, that's really what would trigger the next leg of – potential capital? And then as it relates to the converts, what percentage of that would you expect to pay in cash every six months? It seemed like there's some variability in the release or the 8K or 6K. Do you expect to pay half of that, 7.5% in cash or all of it or maybe none of it? Thanks.
spk11: I'll defer the majority of that answer over to Kai, but first I will just say that we are obviously very happy with the $207 million convertible that we were able to do with TZE. We think it's a sign of the confidence that they have in the business and where the business is going ahead and the potential that we have. Let me turn it over to Kai to answer some of the more detailed questions you had. Yeah, thank you, Jeff. And I saw this guy.
spk03: Um, so in terms of, um, of course, you know, you've seen the terms and conditions and we think they are, they are very competitive and it, uh, both of the balance sheet and, uh, gives us the, uh, ability to do the max three to make seven conversion in the Philippines and, and Sonata, as we previously said, among other things, um, So that's really, really good news here to get that done in a timely manner for that. And you have also seen that the market reaction has been very positive on that. Let me tackle the question first with regards to the interest. Yes, it's true. 3.5% of the coupon needs to be paid in cash. And there's other possibilities to pay the remaining four percentage points.
spk04: We haven't really made up our mind yet. The first payment is six months out.
spk03: I guess we'll make a decision on these things on a payment-to-payment basis based on the circumstances at the time, but the overall coupon is 7.5%, and you can maybe just pencil in as an assumption that it's paid in cash, but we'll make decisions as we go forward.
spk04: With regards to the funding, how far does that take us?
spk03: We have said before that the use of proceeds is going to be Mach 7. In addition, it puts liquidity on the balance sheet that we can use for different things.
spk04: Will it be enough for the U.S. expansion? Likely not. We need additional funding for that because that's a lot more than what we have raised.
spk03: And of course, as you know, we are expecting that the vast majority of that funding would come from the DOE loan and also arrangements with customers which have very high demands for that kind of In addition to that, we always are evaluating a range of options for these kind of growth investments. We are a growth company in a growth industry, and there's always lots of opportunities. And we also believe there are many options at our disposal to execute at the right time, given circumstances and opportunities at that time.
spk02: Great. Thanks for the color. Kai and Jeff, I'll pass it on.
spk08: Thank you, Phil. Thank you. Please stand by for our next question. Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is open. Hi.
spk00: Thanks for taking the questions. This is Grace on for Brian. I guess my first question, just to follow up on the questions on margins, I appreciate all the colors. in the prepared remark and the Q&A. I'm just trying to bridge the gap from today's gross margin of negative 5% to the 15% gross margin target in 2023. I know you talked about drivers like Maxi Online and then also the ramp-up of the U.S. utility-scale shipments. I just wonder if you can put some numbers around those drivers, like how many basis points should I expect from, for example, the ramp-up of the utility-scale shipments in the U.S. And also like what kind of margin ramp should we expect in 23? Thanks.
spk03: Kai, I'm going to hand that over to you.
spk04: Sure. And thank you, Grace. So overall, I think we have, or, you know, Jeff has said in his remarks that for the DG side of the business, we are expecting more than a 20% margin as part of those 15% target And the way we are going to get there is with some of these items that I mentioned in the previous discussion here.
spk03: And then, of course, there's the power plant side, which at the moment is negative gross margin. And there's also lots of dynamics that I described before.
spk04: With regards to quantifying all those, we haven't really quantified them yet. We are planning to give more color on these different items, and I would say their relative contribution to that development at the analyst stage.
spk03: So please bear with us until then, but I think the main points and dynamics we have laid out here.
spk00: Okay, understood. And then on your capacity expansion plan, I think besides those three gigawatts in the U.S. for your performance line, I think in the past you talked about a potential of two to three gigawatts of capacity expansion for your IBC line. Of course, that was depending on funding optionality, but now you've got IRA. How is that going to change your capacity plans in terms of both timing and size? Thanks.
spk11: Just first, and Kai, certainly you can add more color, but I would say that our first priority for Maxeon 7 is to do the conversion. from Maxion III to Maxion VII. So you can think about that as the capacity that we have in the Philippines FAB or FAB IV. And I would say, you know, for any additional capacity adds beyond that, it really would come along with the improvements that we've talked about with Maxion VII with the re-architected metalization back end of the product. which will reduce both the CAPEX and the COGS of that product pretty significantly. So that'll really be what really unleashes us moving into more capacity expansion. I don't think we're prepared today to talk about that in any detail, but Kai, anything I've left out there that you'd want to add? No, nothing really to add.
spk07: Okay, thank you.
spk11: Thank you, Grace.
spk07: Thank you. Please stand by for our next question.
spk08: Our next question comes from the line of Payville with Raymond James. Your line is open.
spk09: Thanks for taking the question. You talked a lot about US and European markets. Let me touch on Asia Pacific. The only slice of your revenue mix which was down tiny bit in dollar terms versus a year ago, is that a lack of demand or are you deliberately reallocating volume to regions with even greater demand?
spk11: Yeah, great question, Pavel. I would say it's a bit of a mix of both. I would say first, as we said, we are reallocating our demand and particularly our IBC demand to to markets where there is higher margin potential. And just with the surge of demand that we have in the European market, that's meant some reallocation. But you're going to see, I would say, similarly in 2023, given the surge that we're going to have for the U.S. market too, you'll see a more shifting of that. The other piece, though, with Asia Pacific is we do have a fairly lumpy rest of world power plant business, as we refer to it. And that is taking the performance series product out of the joint venture that we have out of China. And there, I would say, we're following the same model that we've been talking about now, I think, for well over a year, which is that the output, there is no take or pay element to that joint venture or what comes out of that eight gigawatt factory. And as long as there is a market in China that can command better ASPs than what we can get outside of China, we'll continue to pursue that. So what you probably saw a year ago is we would have had some revenue from some of the Asian utility-scale business we have that we've not been refilling either to the same extent or at all in the most current quarter. So it ends up being a pretty small part of the business for us right now with the U.S. utility scale and then certainly Australia refilling.
spk09: europe and and us dg making up the lion's share of what we do as a company my follow-up is on something you you briefly touched on which which is the chinese joint venture i think it lost or your share of it was negative four million dollars this quarter and and it's been pretty consistently negative i know you don't guide to it but any sense of when it should get at least a break even
spk11: I'd say that business is in pretty significant scale. If you go back to three years ago, even 2019 to today, we've effectively scaled that up from zero to eight gigawatt. So it's very much in scale mode. And while you're ramping factories, you've even seen it with our own, the factories that we've ramped up for the performance series product to the U.S., It does put an impact on profits in the near term, but it's because you're investing for the future. And I would say as that business scales, it's getting more and more cost competitive because it's getting more economies of scale. But as that stabilizes, we expect it to hit profitability. We're not providing any forecast at that level for when we expect it to get to profitability, but right now it's probably more of an emphasis on scale and growth than it is on near-term profitability. Fair enough. Thank you, guys. Thank you, Pavel.
spk08: Thank you. Please stand by for our next question. Our next question comes from the line of Kevin Pollard with Pickering Energy Partners. Your line is open.
spk12: Thank you. Just one last quick question for me. With Maxion 7 funded and kind of proven up in the pilot and ready to scale, can you give us a little bit more color on the timing of exactly when that starts and how long it'll take to fully scale. And I guess what will be the ultimate capacity of the Fab Four once that transition has occurred?
spk11: Sure. Thanks, Kevin. So first, the existing capacity for Maxion III in the Philippines is about 550 megawatts a year. So you can think about Mach 7 as providing an uptick to that because you are going to be getting higher efficiencies, so more watts per panel than what you would get. So think of it as a small bump above the 550 that we currently do. As for timing, as we said in the prepared remarks, we are, given the current market environment, given the new capital that we have, we are looking at doing an investigation of potentially going to a larger wafer than what we currently plan, which was a five-inch wafer. We'll make some decisions on that quickly, but that would have an impact on the exact timing of when MAC-7 would come. But you can think about it as kind of around the turn from 23 to 24, so around that timeframe. Okay, thanks.
spk12: And then I wanted to ask... a little bit longer term question on the U S performance line business. So you've, you've kind of talked about the DG margins being 20% plus, you know, going forward, uh, you know, with the, the USP line, uh, obviously negative right now with the startup and ramp costs and the, you know, the initial contract, but what's, what's the margin profile that USP line business look like once you kind of move, to fully ramped and you're, you're, you're pretty much on full variable pricing contract.
spk11: Yeah, absolutely. You know, we, we've been from the get go, we've been targeting and are still, uh, committed to and forecasting a 15% gross margin, kind of our longterm, um, financial model target for the company. So you can think about it as a 15% gross margin, um, you know, or potentially better, but that's, that's where we've, uh, we've been forecasting it. Okay.
spk12: Okay. Okay. That's all for me, guys. Thanks.
spk08: Thank you again. You may now disconnect. Thank you. As there are no further questions, we will now conclude the call. Thank you again. You may now disconnect.
spk07: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1-1.
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