Q3 2020 Maxeon Solar Technologies Ltd Earnings Call
Good day, ladies and walks in and I see on solar to knowledge and per quarter 2020 on the call.
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[music].
Thank you operator, good day, everyone and welcome to Maxi on third quarter 2020 earnings Conference call.
Today is chief Executive Officer, Jeff Waters, Chief Financial Officer, Joanne Solomon also available for questions. During the Q anyone's Chief strategy Officer, Peter asking about.
We cover a few housekeeping items before I turn the call over to Joe.
As a reminder, a replay of this call will be available later today on the Investor Relations page from vaccines 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.
We 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 Maxi on to Investor Relations website <unk>.
Finally, we want to point out that results reflect a full three months period through August 26, we are part of Sun balance. Since then we have operated as an independent company with that let me turn the call over them actually on CEO, Jeff waters Joe.
Thank you Gary and good day everyone.
I'm delighted to be addressing you today as the CEO Maxi on solar technologies, and our first earnings call as an independent company.
I'd like to start by thanking the team that maxion at Sunpower as well as our strategic shareholders Tcfs until channel.
It was the collective hard work and collaboration of these teams that made possible our spin off on August 26.
We're energized and optimistic as we start this new chapter as Recapitalized independent company with leading technology brands and global downstream channel.
This first quarter as an independent maxion was a good one.
The recovery on our business continued with solid sequential growth in shipments and revenue and improve margins.
Growth was balanced across all geographies.
On primarily by the strong channels, we felt in the distributed generation DG segment.
Joanne will cover those financial details shortly now I'll review developments in our two businesses EG in large scale power plant.
First IGI, which we expect to continue as the near term driver of our business.
DG was strong around the world with sequential revenue growth of 35%.
Yeah, we all regions grew sequentially as markets continue to recover from the cobot induced disruption.
We believe that the DG opportunity outside the U.S. is promising.
For example, let's look more closely on Europe, which was especially strong this quarter.
In Q3, we shipped 106 megawatt into the European DG market almost equal to the 110 megawatt that went in to the U.S. to our partner Sunpower.
We expect continued DG growth in Europe to three primary factors first demands on our core markets, such as Italy, catalogs, France, and Germany continues to growth driven by the increasingly attractive economics of self consumption and strong government support measures.
Second we continue to build market share having your we've doubled our share of European DG market in the past two years.
Finally, we're expanding our footprint into incremental markets, such as Greece, Hungary, Cypress, Bulgaria endless weighted.
To further accelerate growth in October we initiated an incentive program person installers that by through our official distributors.
This program is intended to strengthen our distribution network like giving its dollars the tools to both create and rapidly fulfill demand.
We introduced the program in five European countries, we expect to roll it out across Europe.
In 2021.
In parallel to.
Expanding our geographic footprint, we are driving product innovation.
Why we made the first concrete step toward implementing or beyond the panel strategy, when we announced our AC module product line.
We are already taking orders in certain European markets and expect to make our first AC module shipments within the next few weeks.
Our inverter integrated AC panels offer several compelling benefits.
Installers benefit with access to highly differentiated best in class products in a simplified sales design and installation process.
The factory integrated untested panel enables fewer parts from installation stops on a single skew simplifies inventory management.
As well the stars can capture more revenue because the system is easily expanded with incremental panels.
Yeah, and installers and customers get more peace of mind from a high performance reliable product that will produce more energy over the life of the system.
On top of the increased reliability and performance and customers also benefit from an industry, leading 25 year product warranty.
And with the monitory out the displays real time and historical performance data.
Customers can confidently monitor performance system performance in house anytime anywhere.
We expect sales of AC modules to ramp throughout 2021, as we expand it to other geographies and as Weve corporate Microinverters and to our performance product line.
Now I'll turn to on large scale business.
This business is driven by our performance series panels, which deliver differentiated value to our patented shingle link technology selling it to power plants and other large scale opportunities.
We expect this end market to drive growth for us over time with the business showing solid growth in third quarter with revenue up 7% sequentially.
As we look out over the coming year. There are two factors that we expect moderate near term revenue growth on a large scale business.
The first factor is strong projected demand within China at high risk piece on are available in most other global markets.
Second the China upstream supply chain is experiencing a series of disruptions in terms of limited availability price increases for key materials, such as poly silicon in glass.
Global logistics costs have also increased mainly due to covert are weighted factors.
Oh this is pressuring the near term price competitiveness of our P series.
Products outside of China.
For these reasons, we have agreed with our Hs PV joint venture to significantly shipped volume allocation to the Chinese market through mid 2021.
As a reminder, performance series sales to China or made by each SPD not maxion.
That said, we're confident that shifting volume to China is clearly the right call for Hs PD and from Maxion as a joint venture partner since the profit from sales in China will allow each SPD to improve its financial performance and to drive scale on cost down more rapidly.
This ability to flex our volume allocation enables maxion to have a capital efficient approach.
The large scale market.
Partnering with Tcs to create DHS PV joint venture enabled maxion to avoid a high fixed cost base, while serving large scale market.
The ramp of Hsp. These first new three gigawatt smart fab continues with full operation expected by the on to the quarter.
Demand is high in China from the new bi facial p. five panels, and we're working hard with Hs PV on further single cell technology innovations to drive continued performance increases and cost reductions.
From actually on we therefore expect recovery in our large scale shipment volume to happen later in 2021.
We believe that the upstream supply chain should return to more balance situation over the next few quarters.
We also expect logistics costs, which had been impacted by cobot to decrease over that period as additional shipping capacity is released.
Our supply chain costs normalized and as each as PV drive scale through sales in China and implements further technology improvements we've.
We expect maxi on large scale business to return to growth mode and be an important contributor to overall company profitability.
Let me now touch on progress with our IVC technology refresh on Fabs free.
We plan to install the first Mac six line by Q4 2021 inclined to have converted the existing Max five wind Macsec Spike like early 2022.
Our RBC technology continues to lead the industry in terms of performance and actual here shortly from July on commands a premium S.P.s.
Replacement of our 10 year old Max to technology, with new leading edge Mac six capacity is expected to further increase our differentiation versus the competition and to support gross margin expansion.
To summarize Maxi on is now positioned to grow as an independent Recapitalized company were.
We're focused on building our DG business around the world further enhancing the value of our panels by incorporating AC functionality and expanding our industry, leading E. G sat channel footprint into new markets.
We are proceeding with our fab three technology refresh to upgrade our entire IVC manufacturing sleep at the highest levels of industry industry performance leadership and premium value.
Meanwhile, we're being patient and disciplined in pursuing a large scale opportunity, which we expect to be sizable over time.
Now I will turn the call over to Joanne to review our financial performance Joanne.
Thank you, Jeff and Hello, everyone I.
I will discuss the drivers and details of our third quarter performance and provide forward looking information.
Overall revenue grew 25% sequentially, driven by particularly strong demand recovery and our DG business, where revenue was up 35% sequentially and comprised 71% of our total revenue.
Quarter on quarter revenue growth in our large scale business with a solid 7%.
Geographic revenue mix for Q3 was well balanced.
Approximately 30% from the Asia Pacific region, 40% from Europe, and the Middle East and 30% from the Americas.
We saw significant sequential revenue growth in North America offset by a decline in revenue in South America, you did the completion of a power plant project in key channel.
RBC product revenue increased from 59% to 57% of total revenue growth.
And by strong DG market demand and recovery from coated.
Performing series revenue with essentially in line with the prior quarter as growth in the DG market was offset by timing of shipments for power plant project.
About 70% of gross RBC and preferred series shipments went into our D. keep it.
Revenue per watt in or RBC product line was stable versus the previous quarter at just over 50 cents.
Performance series revenue per watt decreased by 9% to 26 on on the completion of two higher price legacy contract.
Q3 revenues were down 33 per cent compared with the previous year.
With our DG business down due to covert disruption and customers tightly managing inventory.
Large scale business was down to the completion of contracts in Asia and South America.
With respect to RBC manufacturing or latest smacks five line has ramped nicely in Malaysia and is now at a run rate of around 240 megawatts per year, if it's enabled us to double Max five shipments sequentially.
With the planned Max six expansion, we expect to end 2021 with a little over one gigawatt total IVC capacity split evenly between your Fabs in Malaysia, and the Philippines.
Moving down the piano.
Our gross profit was a loss of $12 million for Q3 or 6% of revenue.
As a reminder, we have a long term supply contract for poly silicon price is significantly above prevailing market rates.
Our Q3 results include losses of $40 million attributable to that contract without those losses gross profit would have been $29 per 13%.
This demonstrates an otherwise meaningful improvement.
Sequentially and reflects the strength of our DG business.
Next on facts.
Operating expenses increased to $27 million with the reversal of a few temporary colgate cost reduction efforts.
For Q4, we expect operating expenses of around $33 million due in part to incremental costs related to the separation from sunpower.
Our Q3 EBITDA adjusted solely for stock based compensation was a loss of $39 million.
As described in our earnings release, and 6K, three items adversely impacted our adjusted EBITDA.
First the 40 million of losses associated with the above market poly silicon contracts.
Second a $6 million accommodation fee associated with an ending net contract and third $6 million a remeasurement losses on the borrowing facilities associated with our convertible notes.
Now, let us turn to liquidity and capital investment.
We ended the quarter with $310 million of cash we expect our year on cash balance will be around 200 million after making payments under the long term probably silicon contract. The final installment of $30 million to 80, well related to acquisition of their legacy interest and our Malaysia factory.
And $20 million to $35 million of planned capital investment.
Total capital investment plan for 2020 is 35 million to $50 million down from prior expectations largely due to timing of those investments.
Most of that capital investment will be from Max fixed manufacturing line and R&D.
Per 2021, we're planning capital investments between $75 million and $150 million, depending on demand trends are.
Surgeons income bed or delays in ramping our large scale business and preferred series offering.
Finally, let's turn to your Q4 outlook.
For Q4, we are expecting mid teens sequential increases in shipments by megawatts and revenue.
The shipment guidance reflects strong demand into DG end market, especially in Europe and the U.S.
As mentioned earlier our performance here is gross margin will be under pressure from price increases for key materials, such as poly silicon glass on logistics cost.
The adjusted EBITDA guidance reflects those gross margin headwind on higher Opex.
With that well move to the queue in his section on.
Operator. Please proceed.
Thank you ladies it sounds like that's his lessons from facade and one on your thoughts on telephone.
Our work force it from from wildly of Goldman Sachs. Your line is open.
Hey, everyone. Thanks for taking the questions.
Could you again, we appreciate all the disclosures on the breakouts on the mix that's super helpful.
Can you give us a sense of what the mix is going to look like here for the performance line versus IVC in Q4.
And then I know you made some comments about you know pushing some of that into China and also maybe delaying it sounds like the performance line volume.
How should we be thinking about maybe the first half of 21 in terms of mix as well.
Okay, Hey, Brian because Jeff waters I'll take the first I'll take the second part of the question around China, and then I'll go to Jim way on to speak more to a Q.
Q4 mixed between P. NBC.
So first on the on the China side as we said in the prepared remarks.
We are with the current increases in supply chain costs that we're seeing are we are seeing our off take for the rest of world business be pretty minimal through the first half of 2021, we are expecting that to improve the DG side of the business will still proceed as we would expect where as you know the performance series.
But it's also going to be GE as well as the power plant side.
We're still seeing great growth on the on the DG side, we expect that says to keep progressing into 2021, So I would say largely what you'll see is a heavy mix of DG.
As we get in here for the next few quarters, but then we would expect by the time, we get to the second how you'll see more of the power plant markets start to come back for us.
Okay Joanne handed off to you.
Absolutely.
So for Q3 2020, our mix wise.
He was 67% and P series for 33% and our expectation would be that it would be very similar for Q4.
Okay, Great that's helpful.
And Ah, Yes, I guess I don't Wanna get too far ahead, but as we think about the mix impacts near term as you sort of throttle back performance due to.
Some of the input cost increases you're seeing you a fair to assume that you know volume.
Volume overall is gonna be lighter in the first half then you're you would have originally been thinking heading into 21 are you able to allocate enough over to you know I B C and the DG side debt, maybe make up for some of the debt.
Performance line, you know throttling back if I'm characterizing that correctly.
Yeah, I really think about it in turns less about P series vs IVC and more around BG BG versus the the power plant side.
And I would expect our Q1 and Q2 to be as expected if anything you know hopefully a little bit better, but but certainly all indications are that BG will be strong continued the continued strong into 2021 on the power plant side, Yeah, we would expect it to be less than what we were we may have been originally thinking let's say back three months ago.
Before we started to see the supply chain costs on increase.
Increase.
That's sad.
With the way things. So you know, we do expect the supply chain costs to be temporary in nature.
And as those start to recover which we have full pooled trust day, well, we expect that our Q3 Q4 business and power plant will pick back up again.
Okay, Great and then maybe just.
One last one and I'll pass it on with respect to the rising input costs. It seems like you know different players on some of your peers are our senior debt in different periods, given [noise] inventory management, and just you know sort of how there.
Exposed to two different yeah.
No different costs, whether poly on glass are you guys seeing that.
No more acutely in Q4 or would you say that you actually.
Based on what you have already built up an inventory on raw materials and that's something we would see further pressure on Q1.
You know I would expect from now we're seeing it more crude acutely in Q4, I think Q1 still remains to be seen as you know there is a lot of movement going on within supply chain now. It's certainly our teams are actively working.
The situation.
So I think we're hopeful on Q1, we can only speak with clarity on Q4.
Okay, Great that's super helpful. I'll pass it on thanks, guys.
Thank you. Thank you bring on assessing zone.
People most of them.
Raymond James Your line is open.
Thanks for taking the questions I you referenced theme.
Particular strength of Europe in the third quarter and now of course Europe is the absolute epicenter of the cobot second wave and were seeing locked down for about 400 million people across the continent, particularly for.
Ah you know for the rooftop business.
What's been the impact on anything you've noticed just in the last 30 day.
You know I would say as it relates to the cold in particular within Europe, you know certainly Europe for US was theory. There was hit first if you go back to our our calendar Q2 on where we're still part of Sunpower.
And I think what's happened with that experience is there has been a bit of a resilience. Its been built up in terms of not only selling into the DG channels, but but also still doing installations doing them safely. So.
It would be able to to still drive those markets. Despite the fact that there are per sheltering in place going on in the various degrees from the different marketplaces. So.
So I think we're we're.
Hopeful and I think we're expecting and we're even seeing now that there is resilience when it comes to you know getting panels on it in the marketplace and still driving that demand.
Yeah, we are closely watching this across all the various markets that we serve you know we do sell to over 100 countries. We sell into two obviously, though the majority of them in Europe outward.
We're seeing I would say some obviously some some things that are going on around more restrictions for the broader public but to date weve really not seen any kind of a drop off in terms of orders on.
So we'll keep monitoring it closely but I would say today things are still moving in a strong way for us in Europe.
Good day here.
Turning to the U.S., obviously, we've had the election two weeks ago and yeah.
Who knows what will happen with the tax credit.
On the lame duck session or or maybe the next Congress, but suppose one thing that it's status quo and arrays and expiration at the end of 21.
How much of a demand pull in.
Hi towards the end of 21 would you expect free every U.S. sales.
Yeah, right now, we're not seeing a dramatic Poland four per sales towards the end of the quarter I won't give any specific numbers since as you know were fairly targeted who we sell to within the U.S. side to side of our business.
Oh, but I'd say, we're still seeing out we're still expecting some per one per safe harbor toward the end of the year, but.
But what I would say something thats manageable for us it's not a I would say a substantial portion of our overall volume expected for 2021.
Thank you lastly can you just.
Give us.
<unk> total outstanding contract value for the above market component I think it was 200 million.
On a quarter ago, something like that.
One of my hand that question on the Joanne.
Yep Yep.
So the net amount or the remaining contract total was $165 million that reflect the day remaining amounts of debt prepaid cash balance as well of that 165.
You can think about 125 million of that eight out of market component with the 40 million being the end market from Corning.
Thank you very much.
Thank you Paul.
Hey.
Next question comes from Phillip Phillips from a wall.
Your line is open.
Hi, everyone. Thank you for taking my questions.
So following up on one of the questions on Brian asked.
No I guess approach this from a from a different angle, but do you think and expect that your margin performance from for Q4.
We will likely be the trough margins as it relates to.
The supply chain pricing challenges with glass, meaning no in other words do you expect.
Reasonable scenario, where Q1 margins are better than Q4.
And Q2 GAAP in Q1, and when do you expect to maybe.
Maybe get Oh, what you could consider a normalized for.
Normalized margin so.
To the degree that you can comment on on the.
The outlook in cadence of margins that as we get through 21, I think that might be on quite helpful.
Yeah, I'll give some for his comments on the Joanne have something to add she can she can chime in.
As it relates to glass from into the various supply chain challenges that are currently going on in China, I think our our belief is that here over the next.
Likely few quarters, we will see those start to stabilize there's certainly a lot of activity going on on the supply chain.
I think you know, we're we're expecting that let's say by the time, we get to the end of Q2 worst case, we'll see we'll see things settle.
So you know we are seeing a short term impact here in Q4 and potentially into Q1 little too early to tell on how big of an impact that will happen in 2021, joann and any additional color you'd like that.
Yeah, I think the only other color that I would add just as it is that the on we are very seasonal weakness from the manufacturing side said their second half is stronger than the first half on so our margins tend to be lower in the first half than the second half.
Okay. Thanks.
As it relates to you know when you talk about D. G. Clearly that there is a sub segment or segmentation you can have.
Between resi and commercial resi.
Reggie is has been quite strong I think on both in Europe and here in the U.S.
But my our senses, especially with a solar just recently reported that commercial busy.
Business in Europe, as well as the U.S. is not as strong.
And and the key driver it appears is coated and and.
Are you seeing the same thing in your commercial DG business and if not why not two or so you know what do you.
How much longer would you expect the weakness in that subs sub segments to continue.
Okay. So far we're not I would say seeing any specific weakness that's going on within commercial.
And frankly, it could be a matter of of the relationships that we have a we do track obviously to see if there is going to be any impact from a corporate perspective.
But from where we sit now we're not seeing anything unexpected on the commercial side on versus what we were expecting going into the quarter.
Great.
And then as it relates to your cost structure, just or a quick analysis here.
After adjusting out the poly contract impacts suggest I think Q3 blended cost per watt fell on the call. It 34 cents per watt from about 39 cents in the prior quarter. What was the key driver of that decline and how do you expect that to continue.
Into next year.
Okay, Joanne who try to respond to that question.
Yeah, I can I can certainly get things going on so so oh.
Certainly benefited from higher output.
The megawatts have you experienced in Q3, so we really got the benefit of scale that's largely.
Largely drove down the on the.
Cost per watt, it's while it's just there on going cost savings.
On initiatives as well that continues to drive down costs.
Right going forward, you know as part of our investments in modernizing our Malaysian factory share net technology from Max to connect six we would expect to see improvement and cost per watt.
And then because this is a blended corporate rate. This does include a <unk> performance series panels as well and now we do have some of those headwinds that we're digesting in the near term relating to the higher costs.
Okay. Thank you.
Ill ask one more on I'll pass it on Oh. This is more of a housekeeping question, but how much of your 2020 on Capex is for P series.
Joanne you're doing to answer yeah sure. Yes. So we have a very wide range on our Capex right now so 75 million to 150, a day the vast majority of our cash back isn't supported by ITC.
Specifically the math six investments and then followed by vast me, saying that in Mac SAP, and then bringing up the Singapore last.
Any investments we make in kit P series would be on through our joint venture partner HSDD.
And.
Yeah that would be reflected I would I was suggesting that within the high end of that range.
Yeah, and I would again I would I would point out that that is not really so much a capex investment as it is an equity investment and that's something where we just have an ongoing dialogue with.
With Hs PV and with a with Tcs in terms of those investments.
Okay. Thank you both I'll pass it on.
Great. Thanks on.
Our next question.
Non.
Right.
Okay.
[noise], Yeah, I think for operating and again I just to clarify the sales in China.
For the first half of 21 that you you allocated those volume where is that going to show up on the income statement.
Yeah. Thanks for the questions about so the sales in China from the joint venture show up as revenue for the joint venture.
So for matching on all all of our sales are for outside of China.
And then from a where that shows up John.
[laughter], sorry, Jeff we would pick up our 20 per cent ownership share as low as an equity pickup I saw on their profits not up there right.
Right. So that's it on non controlling interest yep.
It is that.
Non controlling interest.
It's in other income and expense.
Got it okay.
And.
Operating expense.
For 21, I mean, obviously youre not explicitly guiding to 21 today, but recalling some numbers you gave from from the original analyst meeting how should we think about that presumably the Q4 number of 32 million. You said there were some one time.
Nonrecurring cost in that correct.
And Joanne on which take on.
Yeah. Its so Oh first let me let me clean up my prior answer to you about they specifically the line item on the income statement is the equity in losses on consolidated Betsy is where we would be picking up a.
Our share of HPV profit on your on your question on Opex.
As he said our Q4 Opex is that we had indicated that it would be around $33 million, which includes an incremental one time costs.
We are shifting our overhead function from the U.S. and becoming more agent centric.
And so we do expect to get savings as we do that I'm actually going up headcount in Singapore, Philippines, and Malaysia, and look to eliminate head count price, we make a shaft and Walmart guiding 2021.
I would say that Opex will stay around this level or directionally.
As we look to take advantage of the opportunities we see in the DG channel to leverage our technology on brand advantage James.
We expect to have some incremental headcount on sales and R&D and expand our on our marketing efforts will which will more than offset some of that incremental cost.
Yeah, and I would just add to that that there was also a in a day.
Moving to the DG investment there were also expecting some.
Additions on the power plant side as we begin to increasingly scale up that organization they will handle on demand creation.
Got it thanks very much.
Thank you.
Thank you again, ladies and gentlemen, who like to ask a question.
Then one on your pet sounds telephone.
Our next question comes from John segments on Maam. Your line is on.
Hi, guys I, just wanted to come back a little bit to the China change with your joint venture. So just to clarify we're really just talking about the performance series part of the large scale Powerpoint Division, which was about $20 million of revenue in the last quarter that really what's being affected next.
Yes.
That's correct.
Okay. So the performance series going into DG should continue to be there. It's just the other piece is going to get diverted.
Yes, exactly and the that reported series is you know, it's the kind of the better best situation, we have with the IVC something on it yet.
Higher premiums with higher performance and we haven't performance series, which competes with the more commodity solar that's out there that side of the business is continuing a robustly.
On and we will expect that could do that really what we're talking about as you said is the power plants on.
Okay, and and again Youve now brought up another line of I.B. C. Max five just remind us mxnfive I guess is the highest margin products that you have on the business.
It is an actually there's an additional nuance to it so Max five is the product that we ramp over the course of last year and that's running at about 240 megawatts a year today.
We are bringing up a line of Max six which is a slightly larger wafer format, which brings us.
On the cost benefits bring some some.
Additional efficiency benefits as well so Max six is what we're ramping that will.
Be centrally a fully ramped in Q4.
And then what will then begin to do over a period of time is convert that Mac sidelined a max six it's much more of a minor adjustment, it's not the kind of on more of a whole scale replacement like we had with.
Max to the Max five so.
So you'll see a little bit of a tweak on mac's five converting into Mexico.
Okay, and that's this fourth quarter.
Oh 2021 is the things that went on that when the new line of Mac six will come on line.
Perfect. Okay. Thanks, guys.
Great. Thanks on.
Thank you again like zone. This was our first lesson from.
For Star then one.
One moment please.
I'm showing no further questions at this time I'd like to turn the call back on to Jeff Warren for any closing remarks.
Great. Thank you so I'll make some closing remarks and on have Gary review, some upcoming investor events.
So we are very excited to be an independent company we.
We believe there are significant growth opportunities on or DG business around the world and we intend to build our distribution channels and product offering to fully capture that great opportunity.
Well the growing demand, we anticipate we've already embarked on refreshing our RBC manufacturing base on which will upgrade our entire IVC manufacturing suite at the highest levels of industry performance leadership and premium value I.
Well with respect to the large market as we've been discussing bark scale market. We are convinced that market growth combined with our differentiated technology I will create profitable opportunities in the years ahead.
And now before we close on Gary will note on upcoming Investor event for Maxion Gary.
Thanks, Jeff Maxion will present and host one on one meetings with the bank of America renewable symposium on December 3rd on the symposium will be held virtually to private event. So please contact your B a day representative director. Thank you. All again. This concludes the call and you may now disconnect.
[music].