Q3 2021 Maxeon Solar Technologies Ltd Earnings Call

Good day, ladies and gentlemen, welcome to the Maxion filler technologies third quarter 2021 earnings call. Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded I would now like to turn the conference over to our host Mr. Robert Lee of Maxion Solar technologies, Sir you may begin.

Thank you operator.

Hey, everyone and welcome to Maxion third quarter 2021 earnings Conference call.

With us today are Chief Executive Officer, Jeff Waters, Chief Financial Officer costs drove back and Chief strategy Officer, Peter asking Brenner, let.

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 <unk> 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.

6K, and other SEC filings please.

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 in the events and presentations page of <unk> Investor Relations website.

Also.

We will reference certain non-GAAP measures during today's call. Please.

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 Investor Relations Web site for.

For a presentation of the most directly comparable GAAP measure as well as the relevant GAAP to non-GAAP reconciliations.

Finally, we want to point out that comparisons to the third quarter of 2020 reflect a carve out of <unk> results for a portion of the quarter. While it was still part of Sunpower last year.

We began operating as an independent company on August 27 2020.

With that let me turn the call over to Maxion CEO, Jeff waters.

Thank you, Rob and good day everyone.

I'll start by giving a business overview and covering recent accomplishments.

Guy will then review our financial performance and outlook and will conclude with Q&A.

I'm proud of how the maxion team performed in the third quarter in the face of unprecedented upstream supply chain headwinds.

We navigated increased materials cost and logistics set another record in European DG sales that.

And are on track for our key strategic initiatives, including our North American performance line capacity.

Amp of Maxion sex and our beyond the panel strategy.

These strategic initiatives are coming at just the right time as the March toward a global low carbon economy is accelerating evidenced most recently by the momentum for solar manufacturing incentives in the U S.

The World has an insatiable appetite for solar and.

Maxion has the panel technology global channels and reputation to be a leader in making that happen.

So while the supply disruption occupies much of our focus currently were.

We're building for the more permanent disruption brought by the move from fossil fuels to renewables.

This is what gets maxion employees out of bed in the morning and drives the enormous upside potential for our business.

So let's discuss the business results I want to provide an update on our employee safety.

August group of employees at our Malaysia facility tested positive for COVID-19 virus.

We responded with an aggressive mitigation effort shutting down the facility for 15 days and reopening in a structured process as the majority of our employees became fully vaccinated.

By October 1st 99% of our employees in Malaysia were fully vaccinated.

The local government in Malaysia supported our overall response to the situation and we're very pleased that our employees are safe and the facility is fully reopened.

And our other major factories more than 75% of our Mexico employees are vaccinated and close to 60% of our Philippines employees are vaccinated, which is three times the national average.

Now turning to our Q3 results, let's start with the upstream source supply chain.

We took a number of actions to mitigate the impact of steep cost increases in certain materials and logistics step to enable maxion to maintain financial stability and to stay on track toward our 2023 transformation.

As we mentioned in our second second quarter earnings call prices for freight poly silicon copper glass, Eva Encapsulant and aluminum all increased materially from 2020 levels.

So these costs, including freight unexpectedly spikes, even further in the third quarter.

Our highest exposure to supply chain inflation. This quarter was on outbound Asia freight pricing.

We responded by reinventing our module packaging designed to increased packing density by 5% and by switching to airfreight for some of our solar cell shipments to Mexico, which helped maxion prefer preserve our reputation for excellent on time delivery.

Shipping cells by air directly to our <unk> in Mexico allowed us to avoid the ports of southern California.

Our outbound supply chain in Europe is even more challenging, but we were still able to set another sales record in the quarter for our European DG business.

Mitigate potentially continuing effects of logistics constraints.

We took the initiative in the third quarter, two established outbound Asia rail transport capabilities, which have a significant speed advantage that gives us more options to maintain delivery commitments in Europe.

As well ramping up our IDC modular Malaysia is allowing us to save significant shipping cost to Asia, and Europe as compared to shipping from Mexico. This was done previously.

Looking to 2022, we have further mitigation efforts on the horizon.

<unk> maxion pick modules will have a more than 20% packing density advantage compared to the maxion to capacity they replaced.

Second our performance line monitoring Mexicali will radically increase our supply chain proximity to the U S market and it will benefit from supply chain assurance as we ramp up our captive cell production in Malaysia.

And third as we scale our beyond the panel business our supply chain will further diversify.

Looking into 2023 and beyond we expect more potential for logistics leverage first with our new thin lightweight maxion air products.

With the introduction of Maxion, seven and its higher efficiencies and whilst per panel and most significantly with our opportunity to establish solar cell and module production in the United States.

In summary, we are facing difficult upstream supply chain industry conditions, but our operations team has managed to keep our employees safe, while delivering products to our customers on time and managing costs with both the short and long term focus.

Now I'd like to report on our three strategic pillars for profitable growth that are transforming maxion.

Execution over the next five quarters on these pillars will enable us to achieve our target target business model in 2023 of at least 20% revenue growth greater than 15% gross margin and greater than 12% adjusted EBITDA margin.

First our leading panel innovation.

I'm pleased to report that our teams in Malaysia, and Mexico are on track to ramp an incremental 250 megawatts of maxion sex.

And one eight gigawatts of performance line in 2022.

Together these two initiatives will more than triple maxion in house capacity compared with third quarter levels and will do so with enhanced gross margins.

I appreciate the volume impact of these initiatives see slide four in our supplemental earnings deck.

Our first maxion six module shipped in October and we are on schedule to have more than 200 megawatts of capacity online this quarter growing to over 500 megawatts in 2022.

As a reminder, we're installing maxion six in the fab, where our legacy maxion to production had been since 2010.

We expect that the performance increase and higher Asps Maxion, <unk> will enable us to deliver gross margins over 20 points higher than maxion too.

When fully ramped maxion six will further build on our legacy of leading technology.

In the third quarter, our Maxion seven pilot line went live and consistently produced cells that were at the highest efficiency ever recorded for our IDC technology.

We're excited about the future of maxion, seven and the potential of this latest architecture to deliver yet higher levels of performance and durability with disruptive process simplification and cost savings.

And the focused utility scale pillar, we continue to increase our attention on the United States, where policy <unk> and strong customer demand offer significant opportunity from axiom.

We recently made our first GE 12 format solar cells in fab three.

And we are on track to begin performance line module shipments from our Mexicali module in the second quarter of 2022.

Our sales efforts for the utility scale market are in full swing with a primary focus on 2020 for delivery.

U S customers appreciate that maxion is a U S publicly listed company with superior technology.

North American manufacturing and a culture that deeply values ESG themes and the sanctity of contracts.

We previously announced our gigawatt scale supply contract to provide panels for primary <unk> Gemini project near Las Vegas.

Today, we are happy to announce that we've reached an agreement with our partner and shareholder total energies to supply up to approximately 400 megawatts of panels for one of their major projects in the U S.

The majority of those deliveries will be made in 2023.

In connection with that contract, we expect to receive a prepayment in excess of $50 million by the first quarter of 2022.

This transaction is another strong testament to the attractiveness of our performance line supply chain for the U S market as well as the support and confidence from our strategic partners.

We continue to selectively address the rest of world utility scale markets.

We booked our first major project in India. This year with nearly 200 megawatts to be shipped between Q3 and Q4.

Our rest of world utility scale pipeline is still multiple gigawatts. However, the impact of China's new energy rationing policies, that's kept us largely on the sidelines in terms of closing bookings in the near term.

Fortunately, our JV model allows us to respond to such events.

And in the near term, we will continue to leverage our JV partner's ability to deploy product in the domestic China market, where PPA prices are more correlated with upstream spot prices.

Last but certainly not least a few words on our differentiated DG channel, which posted several notable achievements in the third quarter.

Overall volume in Europe was record breaking with robust growth led by Italy, The Netherlands and Germany.

In Latin America, we have several countries now among our fastest growing markets globally with our initial quick with heaviest in Mexico and Brazil.

In the third quarter, our Mexico team increased the size of our installer partner network by approximately 40%.

Now working to rollout of consumer financing product offerings Nexium first in the region.

We anticipate that this program will be available to consumers beginning in the first quarter of 2022.

We see consumer finance as a significant value add to our DG channel similar to the traction demonstrated for such offers in the U S market.

Our AC panel volume outside the U S increased 50% sequentially in Q3.

<unk> to increase more than 50% sequentially in Q4.

Italy, Maxion stronghold did not secure micro inverter product certification until September.

It is now ramping quickly with a full suite of Maxion AC panel options in both IPC and performance line.

The top European markets, France, the UK and the Netherlands, we are on track to have AC panels be more than 20% of sales as we exit the year.

And in Australia, we're on track to exceed 30%.

As we look to 2022, we expect beyond the panel revenue to grow rapidly driven by ongoing overall module volume growth.

Increases in patch right.

And introduction of other adjacent hardware in particular battery storage.

Going forward, we believe non panel revenue will be the most appropriate metric to measure the success of our beyond the pennant strategy and we will provide guidance for this metric in our 2022 analyst day.

Before I turn the call over to Kai I'd like to provide an update on our plans for manufacturing in the United States.

On our last call. We stated our intent to move forward with a three gigawatt cell and module facility on U S soil pending successful negotiation of a doe loan guarantee and the passage of enabling legislation, including the solar energy manufacturing for America Act also known as CMO.

Since then the Doe invited us to proceed to the second phase of their process.

This is the next of several steps in the process, which could ultimately result in a conditional commitment and a final loan agreement from the Doe.

Additionally, the most recently negotiated draft of Congresses build back better framework also known as the reconciliation Bill.

<unk> emerged with a modified version of Sema, plus additional incentives for our downstream customers.

We are strong supporters of this transformational legislation if it passes maxion isn't a great position to ramp capacity can be a key contributor to establishing a domestic U S solar supply chain.

With that I will turn the call over to Kyle to review our financial performance.

Thank you Jeff.

Hello, everyone.

Let's turn to our financial results I will discuss the drivers and details of our third quarter performance and then provide guidance.

Total revenue for the third quarter came in at $220 million.

At the low end of our guidance range of $220 million to $240 million.

Our revenue was up 25% sequentially.

Which we attribute to growth in our utility scale business and another record quarter as set by our European DG channel.

U S shipments were also up materially from the second quarter levels.

Total shipments for <unk> were 566 megawatts.

Which represents 30% sequential growth.

But which was also somewhat below the low end of our guidance range of $580 to 640 megawatts.

The shortfall is attributed to our exposure to the global shipping large churn that escalated considerably from September.

For example.

At the end of our third quarter, we had 201 megawatts.

36% of quarterly shipment physically in cargo containers at sea or waiting to be picked up and loaded on vessels.

This compares to 118 megawatts or 27% of our second quarter shipments at the end of the second quarter.

As Jeff mentioned, we took various actions that will enable us to reduce our exposure to turbulence in our supply chain going forward.

But they were not yet realized in time for us to achieve the third quarter shipment target.

The sales team did an excellent job of exceeding plan on Asps.

Which allowed our revenue to come within guidance.

Also mix was stronger than expected due to strong sales into our DG channels, where prices are materially higher than utility scale.

On IDC shipments Asps increased more than 1000 sequentially to 52 cents per watt in the third quarter.

Blended asps were 39 cents per watt in the third quarter down 2% from 41 in the second quarter on a higher mix of revenue from our utility scale business.

Gross loss came in at $16 7 million.

Or negative seven 6% of sales.

Which is inside our guidance range of $10 million to $20 million loss.

Included in our cost of goods sold is a $19 million impact or eight 6% of sales from our out of market polysilicon contract.

$7 4 million of which was a loss from the sale of ancillary polysilicon in the market.

And $11 5 million was for polysilicon consumed in our production of IBP panel.

Note that computation for these charges is based on the market price of the polysilicon at the beginning of each quarter and thus is not impacted by intra quarter swings in polysilicon spot price.

Our gross margin was also impacted by planned under utilization costs associated with our retrofitting of legacy production lines to Mexico, and fixed technology and other activities related to the transformation of our manufacturing network.

You can see on slide four in our supplementary earnings presentation, how our temporary to reduce capacity in the third quarter compared to previous and future quarters.

Cost associated with the technology transition came in line with plan, but our COVID-19 shutdown and subsequent reopening process in Malaysia, where employees' safety was decided to prioritize resulted in incremental charges.

The largest part of which was included in our guidance.

Altogether under utilization charge.