Q4 2022 Maxeon Solar Technologies Ltd Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Maxim Solar technologies fourth 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 is being recorded.
I would now like to turn the conference over to your host for today, Mr. Robert Lao head of mix of Maxime Solum technology, Sir you may begin.
Thank you operator.
To everyone and welcome to Mcdonalds fourth 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 asked them better.
Let me cover a few housekeeping items before I turn the call over to Jeff.
As a reminder, a replay of this call will be available later today on the Investor Relations page of Maxion 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.
Press release, the 20-F 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.
Events and presentations page of <unk> 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 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.
Thank you, Rob and good day, everyone I'll start by giving a business overview covering recent accomplishments.
I'll, then review, our financial performance and outlook and will conclude with Q&A.
Last quarter, we challenged our team to maintain our strategic transformation roadmap in the face of prolonged supply chain headwinds and they rose to the occasion.
In spite of continued supply chain and logistics price pressure extended lead times and new challenges from omicron.
Our teams executed to plan in line with fourth quarter top and bottom line guidance and hit key milestones in our transformation roadmap.
We completed our upgrade from axiom to to Maxion six.
Our first volume shipments.
You're now also upgrading the maxion sidelines, the maxion sex and plan to complete the full conversion by mid year.
Our first mono PERC cell lines in Malaysia are up and running and our new performance line module in Mexico commenced mass production in late February .
Customer demand for this capacity is very high and we have recently announced over 700 megawatts of incremental orders with other with over $70 million of prepayments.
In our DG business, the European sales team posted yet another record quarter, while achieving an AC module mix of more than 25% and four of our largest markets.
And finally negotiations with Sunpower culminated last month, and a new supply contract, which not only reset pricing for our products to current market levels, but also enhanced and accelerated our ability to more broadly address the U S market.
The foundation of a transformed maxion is nearly in place we're on schedule to complete this transformation just as our legacy poly silicon contract approaches exploration.
Industry wide supply chain headwinds, including recent war in Ukraine that has disrupted global trade represent an unwelcome challenge for our transformation process.
But the presence of strong macro demand growth in ESG tailwind reinforces our resolve and belief in the value we are creating as we execute our remaining transformation milestones.
With that said I'll start by discussing our highest priority employee health and safety.
In Asia, and the Americas, well micron's ability to spread quickly took maxion in the world by surprise in December , but our employees vaccination programs helped mitigate the impact with vaccination rates at 99% in Malaysia, 96% in the Philippines and 75% in Mexico.
Before omicron impacted the Philippines, we supplemented vaccination initiatives with an aggressive testing program and hotel capacity for increased 14 resources.
We also designed is sophisticated chips system to help contain the virus and permits at any material production impact in the fourth quarter.
Thus far in the first quarter of 2022, we have seen a material uptick in cases with our employees and our Malaysia facilities.
We are executing similar actions to what we developed for our facilities last year with employee safety being decidedly our highest priority.
<unk> also had a broader impact on the supply chain environment in the fourth quarter and we continue to experience global supply chain disruptions with the war in Ukraine, and the ongoing COVID-19 pandemic.
The solar industry has not been shielded from these highly elevated cost and extended delivery times.
Our approach the situation is unchanged from last quarter identify and mitigate any costs, we have the ability to influence and execute on our long term transformation initiatives, which will reduce our exposure going forward.
One example is the introduction of Maxion, six which combined with a redesigned packaging system improved packing density by more than 25% compared to the same shipments of maxion too earlier in 2020 one.
We also ramped I B C module lines in Malaysia, now shipped product to Asia customers in less than four weeks compared to our previous reliance in Mexico, which took more than 10 weeks for delivery.
In North America, our newly ramp performance line capacity in Mexico can deliver product to U S customers via truck in one to two days compared to most solar companies, taking at least 10 week shipping on the water from Asia.
On a more tactical level, we're also renegotiating contracts with shipping partners in Asia, concentrating more volume and fewer partners to secure better pricing.
Although we don't have line of sight to any relief for supply chain spot prices. This year, we are addressing increased raw material costs by bringing on additional commodity suppliers, which will help us mitigate a portion of glass and aluminum price increases.
In summary, we're using this current challenging environment to make maxion, a stronger company and we're pleased with the results of the progress that will help mitigate the impact in the near term and position us for success when the environment normalizes.
Now, let me spend a few minutes on the three pillars of our growth strategy.
First leading panel innovation.
At the beginning of 2021 approximately 40% of our IV seat capacity was 2010 vintage maxion to technology.
While this product performed better than the vast majority of competing technologies. It was time for an upgrade.
<unk> 2021 with more than 140 megawatts of new Maxion, six cell capacity, which will increase to approximately 250 megawatts by mid year. When this part of the technology refreshes complete.
This is a critical project for our gross margin turnaround, providing more than 20 points of margin improvement over maxion too.
We will see further margin upside in 2022, as we convert our maxion five capacity to an additional 250 megawatts of maxion six by mid year.
As additional evidence regarding the superiority of our technology, we recently increased our IV see module warranty to an unprecedented 14 years.
This decision was not taken lightly as maxion and our customers both treat our industry, leading warranty terms, that's sacrosanct and a key differentiator versus our competition.
Fortunately, we have access to comprehensive field degradation studies dating back over 15 years.
Rigorous measurement of actual warranty claims on our product shifts since 2004.
And proprietary physics of failure models to correlate and extrapolate this historical field performance with predicted longer term degradation rates.
This data gathered by third party experts ultimately met our high standards for increased warranty coverage.
We are thrilled to be in a position to offer extended peace of mind to our customers.
A strongly positive response from installers and customers, especially in the residential segment.
Now a few words on maxion seven.
The excitement among our staff for pilot line engineers and technicians is increasing as they consistently produce our highest efficiency ever for I B C solar cells and we're on track to produce our first module is next quarter.
We expected maxion seven will further distance our product performance from the competition and enhance our pricing power in the market, particularly in conjunction with our recently announced 40 year warranty.
As development progresses, we're continuing to review options and the timeline to fund the maxion seven production ramp.
Now, let's move onto our focused utility scale strategy, where we are ramping our U S focused supply chain and experiencing increased market traction.
We started initial mass production in Mexico, our single Bifacial modules in February .
And the first customer shipments are scheduled for April .
Covid related travel restrictions and inbound components shipment delays represent a headwind for the speed of our full manufacturing ramp.
Our operations teams are highly focused on the task at hand, particularly considering the strength of demand for this product.
Since our last earnings call, we executed contracts with two customers to supply over 700 megawatts of eye of our bifacial performance line panels through 'twenty 'twenty, four bringing our contracted backlog to over two gigawatts.
These contracts include prepayments of over $70 million.
Coincident with these orders we executed price collars on a significant portion of our Bom costs.
With demand for our utility scale product in the U S far outpacing supply.
We're investigating options to expand capacity beyond our current 1.8, gigawatts either in Mexico, or the United States, depending on legislated events over the next few months.
Outside of the U S. Our utility scale sales team provided a meaningful contribution to our fourth quarter revenue as we recorded the final shipments to our project in India.
However, we remain selective on our rest of world power plant business.
Now to our differentiated D G channel we.
We closed 2021 with another record quarter of EMEA region volumes.
D. G group in Europe is off to a very fast start in 2020 to the.
The combination of megawatt shipments to date and backlog for the first half of the year at this point in the first quarter are almost double where we were at the same time in the first quarter last year.
We expect continued strong demand in our European business and are actively pursuing tactics for debottlenecking, our factories, we're reallocating supply from lower margin regions.
This achievement is due to the combination of a truly differentiated product married with a robust direct to installer channel model. It has been cultivated for more than a decade.
This channel platform allowed us to ramp AC module sales from zero at the beginning of the year to over 25% of total volume in the fourth quarter in France, The Netherlands, Australia, and the U K.
Other regions, including Italy, Austria, and Scandinavia, some of which launched later in 2021 saw similar similar initial growth trajectories, which are continuing in 2022.
Customer feedback on the value proposition of our factory integrated product has been decidedly positive and supports our plans to launch storage sales in 2022.
The success of our channel model in Europe , and Australia is a strong motivator for geographic expansion, particularly in the Americas.
We have several exciting initiatives progressing in Latin America.
Now increasingly focused on growing our direct presence in the United States.
Well sunpower sells our product with great success in key markets, such as California, and the northeast U S.
What do we look at the U S market as a whole we see significant opportunity for volume and margin expansion by leveraging our deep expertise and channel sales, particularly to a large number of local installers across the U S who have historically had no access to our market leading products.
With demand for high efficiency solar products, increasing due to competitor exits and strong EV adoption.
Very excited to be engaging more directly in the U S DG market.
Our revised supply contract with somehow provides us with the opportunity to launch our own U S. D. G channel starting with commercial this year, including residential next year.
We have a lot of exciting initiatives coming together in 2022 weeks.
We plan to complete the multiyear transformation of our core module business to achieve our target financial model in 2023.
And we're launching new initiatives, including beyond the panels that have the potential to propel us beyond these targets.
Look forward to sharing our progress with all of you as we continue to execute in 2022.
With that I will turn the call over to Kyle to review our financial performance.
Thank you, Jeff and Hello, everyone.
Let's turn to our financial results I will discuss the drive out some details of last quarter's performance and then provide guidance for the current quarter.
Fourth quarter shipments were 577 megawatts above our guidance range of 540 to 570 megawatts on record European D. G volumes and the final deliveries for the <unk> hundred 92 megawatt <unk> project in India.
We are especially pleased with this performance given the headwinds caused by supply chains and the global shipping industry.
Total revenue for the fourth quarter was $221 million.
Inside our guidance range of $215 million to $235 million.
Slightly above our third quarter 2021 revenue of $220 million Rev.
Revenue in the fourth quarter was impacted by sequentially lower North American DG volumes.
Gross loss came in at four 8% of sales or $10 million at the midpoint of our $5 million to $15 million guidance range.
Included in our cost of goods sold is a $14 million impact or six 4% of sales related to our out of market polysilicon contract, which was in line with our guidance range of $13 million to $17 million.
Three out of the $14 million was attributable to ancillary polysilicon sales with the reminder, going towards polysilicon that was consumed for cell manufacturing.
As an update at the end of the fourth quarter without giving effect to any potential inflationary price escalation clauses all obligations for this contract stood at $126 million worth of polysilicon at contracted prices to be purchased through the end of 2022 four.
Which we have made $49 million in prepayments already.
Gross margin was also impacted by about $6 9 million in under utilization charges that were mainly driven by our capacity transformation initiatives of ramping maxion steaks and all our internal performance line.
As you can see on slide four in our supplementary earnings presentation, we made meaningful progress in the fourth quarter.
Once all the facilities are fully ramped we expect to enjoy near full utilization based on all of our utility scale backlog and bookings run rate from D. G customers.
Supply chain costs, including logistics and raw materials remained at highly elevated levels compared to historical standards and.
In the fourth quarter supply chain costs were an estimated $46 million higher than during the same quarter last year equivalent to 21% of fourth quarter revenue.
The sales team passed on some of these costs were contractually possible. All of these developments were a challenge to manage but things to extraordinary athletes by all the teams we secured outcomes in line with our projections.
non-GAAP operating expenses came in at $33 million.
Generally consistent with our guidance range.
As a reminder, non-GAAP operating expenses adjust our GAAP operating expenses for restructuring charges and stock based compensation.
Adjusted EBITDA for the fourth quarter was negative $39 million within our guidance range of negative $30 million to $42 million.
GAAP net loss was $73 million compared to $65 million in the third quarter of 2021.
A large part of the sequential decline was attributable to a $5 million of noncash impairment charges related to equipment in our H S. P V joint venture.
Moving on to our balance sheet. We are pleased to have closed the year with $192 million of cash and restricted cash down only slightly from $203 million at the end of the third quarter of 2021, despite significant capex during the quarter and negative EBITDA.
We were able to maintain a healthy cash balance due to continued operating expense austerity measures disciplined management of working capital and a $43 million cash prepayment from total energies for the utility scale project in the U S that we announced in our previous earnings call.
This amount represents the lion's share of the contractual prepayment for that project, but further prepayments I expected in connection with that project in the first half of this year.
Inventories at the end of 2021 were $213 million down from $220 million in the prior quarter as we complete the deliveries for the idea on a project.
D. I O went from 83 days at the end of third quarter to 85 days at the end of the fourth quarter.
Fourth quarter capital expenditures totaled $37 million below our guidance range of $45 million to $50 million due to our strong focus on cash management and payments.
Total capital expenditures for 2021 amounted to $154 million.
That is lower than our previous guidance of $170 million for the year, mainly due to a focus on the optimum timing off the spent.
Our philosophy for new Capex continues to stress maximum capital efficiency without sacrificing speed of getting Maxion six North America performance line and makes you on seven into the market.
Now I'd like to turn everyone's attention to our outlook for the first quarter of 2022.
We started 2022 with a clear line of sight to a transformed maxiell, but we still have a few quarters of transformation execution in front of us as well as the final year of our legacy polysilicon contract.
Our focus is unchanged from Q4, hyper disciplined cash management and efficient execution of our Mexico unsafe and performance line ramps.
Since the majority of the quarter is behind US some of our guidance ranges are narrower than in previous quarters.
With that in mind, our guidance is as follows.
<unk> also see a detailed guidance breakdown in our supplemental earnings slides.
We project shipments in the range of 475 to 495 megawatts.
The midpoint of this forecast represents a 16% sequential decline due mainly to the lumpiness of our utility scale projects.
Specifically, our fourth quarter 2021 included the final shipments for the Guyana project.
And our next major project approximately one gigawatt to Gemini will not stop shipments until the second quarter of 2022.
<unk> volumes are also forecasted to decline sequentially in Q1 in certain markets, mainly due to typical seasonality.
First quarter revenue is projected to be $210 million to $220 million European DG demand is expected to remain strong and offset some seasonal soft.
In other regions, including North America.
Landed asp's are forecast to grow from 38 cents per watt in the fourth quarter of 2021 to approximately 44 cents per watt in the first quarter of this year as calculated using the midpoint guidance of revenue and shipments.
This pricing increase is driven in part by a higher mix of D. G volumes, but also with a D. G specific ASP increase attributable to March deliveries being governed by the new Sunpower and supply contracts non.
non-GAAP gross loss is expected to be in the range of $7 million to $13 million.
At the midpoint of the range. This is flat sequentially due to a more favorable product mix combined with strong demand in our core markets and offset by increases in supply chain costs and higher underutilization charges in our park factories in Malaysia, and Mexico commenced volume production.
Sure.
We expect charges related to our legacy out of market polysilicon contract in the range of $11 million to $13 million, which are included in our guidance for non-GAAP gross loss.
non-GAAP operating expenses are expected to be $35 million.
Plus or minus $1 million adjusted EBITDA is expected to be in the range of negative $28 million to $34 million.
Note that starting from 2022, we will report adjusted EBITDA, excluding the equity in income or losses of our unconsolidated Investees H S. P D, which is a noncash item.
This way adjusted EBITA is more representative of Nexium and operational performance.
Our capital expenditures are expected to be in the range of $22 million to $26 million for the first quarter.
One from $37 million in the previous quarter, and reflecting the reality that our large transformation projects currently underway and nearing completion.
For the year 2022, we are expecting overall capital expenditures in the range of $85 million to $90 million, primarily to complete the one eight gigawatts of performance line cell and module capacity and to finish the conversion of all of I B C salad capacity at fab three in Malaysia too.
Axion six.
Plus some R&D and corporate Capex.
That capex number is slightly higher compared to what we indicated last time, mainly due to the shift of some capex payments from 2021 into 2022.
Also please note that this number does not include any capex for the production ramp up of Mexico and seven in the Philippines as mentioned last quarter. This ramp is expected to require capex in the range of $60 million to $80 million.
Less than half of this may be spent in 2022 with the remainder in 2023, we continue to evaluate the exact timing and the funding options require to support this capex spend as well as other growth opportunities available to us.
Also not included in our current Capex projection, our capital expenditures for moving forward with a new U S Y expanded north American manufacturing footprint.
We remain laser focused on our liquidity to ensure we are able to fund high priority and high ROI initiatives.
In addition to the increase in cost of materials in trade working capital has been a challenge and will likely remain one due to the lengthening of supply chains, which lead to increased buffer stock levels and elevated levels of material and product in transit.
As well as our need for new supply chains to fuel the growth of the company.
We have put in place and are continuing to evaluate many structural and tactical initiatives like for example, securing prepayments from all customers to compensate for these headwinds.
The tragic events in Ukraine has brought about new and unprecedented levels of disruption in global trade and have sent energy logistics and commodity costs skyrocketing at.
At the same time clean and sustainable energy from solar panels has never looked more attractive to many potential customers.
We are determined to complete the transformation of our company that we started over one and a half years ago and emerge from it with an overhaul of technology and product portfolio and with legacy contracts like our out of market take or pay polysilicon agreement behind us with that I'll turn the call it back to Jeff to summarize.
Before we go to Q&A.
Thank you Kai.
In summary, maxion is on track to hit our long term financial targets and I believe we are now well past the halfway point of the transformation.
Because of continued supply chain headwinds and the recent war in Ukraine, but has increased the financial challenge of this transformation.
Navigating the current situation with heightened intensity and focus.
We are convinced more than ever that maxion technology channel expertise in ESG values are winning combination that will drive long term success.
Now, let's go to the Q&A session. Operator. Please proceed.
Thank you.
Ladies and gentlemen to ask a question you will need to press Star then one on your telephone.
To withdraw your question press the pound key.
Again, Thats star one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Julianna Tamale with Bank of America. Your line is open.
Hey, guys its Alex on on for Julien.
Just a quick one for me just to kick off I mean, when you think about capacity expansion.
Whether in the U S or Mexico, I mean, what are you looking there I get something from I guess, a geography standpoint, whether around you know policies or incentives that you might be able to get and then what what might be the timing on that sort of expansion.
Well thank you Alex.
So when we think about the expansion I think one of the things that we are driving towards.
Getting a little bit more localized in our manufacturing strategy. So that's why when you look at our.
Our U S market approach.
Your first foray there was with Mexicali.
And you're seeing a similar thing as we ramped up our motto in Asia to support our Asian customers.
And this is the kind of move that especially with freight cost being where they are these days. It shows you just how important that can be.
As we think more broadly and longer term.
It's really around looking at the specific markets and as you said monitoring what's going on with various trade policies. We feel we're in a good position now we've got a great and growing infrastructure, both to serve Asia and Europe and also to serve the.
The U S. We will continually be on the look when we look out we are a go.
<unk> growth oriented company and as new opportunities in new markets prevailing selves and as trade policies dictate that we will continue to look to respond quickly.
Got it.
Sure.
Sorry, It was it's Julian here I just wanted to chime in if I can I'm sorry about earlier.
If I can just clarify your comments about the EU and opportunity. There can you just define a little bit more about what kind of accelerating phenomenon you have there I know you addressed it in part in the commentary and obviously some records there, but as you think about sort of the balance of this year here in the acceleration I mean, you're even seeing some of your peers in the manufacturing.
Space kind of lean in capital raises to address almost proactively the expanded opportunity set how do you think about kind of.
You know right sizing your your capabilities against the emerging opportunity in Europe , and ultimately how do you perceive that for yourselves right just against the competitive backdrop at the same time.
Sure I think first and foremost when we think about Europe , we think about the dealer channel because we have there it's very pervasive very deep gives us a very unique approach to go.
Direct through local dealer partners that go direct to customers. So we've got a great foundation, there that allows us not only to sell our panels kind of premium but its also move beyond the panels, we've talked about in previous calls adding things like.
Micro inverters to moving forward here with storage in the near future.
So as we look at Europe grow we feel like we've already got a great Foundation there.
One of the moves that we made at least initially was to move our module capacity that served Europe from Mexico to Malaysia. So it does get us closer and there's always a bit of a balance here between wanting your factories to be somewhat close to where the raw materials are coming but then also have them close enough to the markets they serve us.
Well right.
Right now we feel good about that I think in the future.
We're two makes sense for us to look at adding manufacturing capacity to Europe much as we would any of the markets. We would always take a take a quick look at that.
And move as quickly as we needed to whether it be module capacity for ABC or even looking at.
Putting in more deliberate production from our performance series products. So again, we've got a really good footprint in Europe , that's been built up over the last decade.
And all of the growth that Youre seeing in Europe right now we're benefiting from.
As we reflected in the calls just with the bookings that we're seeing to date to X where they were last year.
And just the excitement for the growth that we have there.
So if I can expand or in one of the things.
Sorry go ahead sorry.
I'm, sorry, Julian I, just wanted to expand on one of the things, Jeff just said about the performance here as capacity. So as you know on the I B C, which is very successful in Europe , we've been busy too.
Convert all our capacities over to make six of course, we're trying to maximize whatever capacity, we have in place and get a module as quickly as possible into those markets.
And the unique position that we have that <unk> joint venture, where we have headroom in terms of off take and are taking additional performance panels from there which is also a really really good option in those markets.
Carbon can you show very strong demand so in terms of our capital light model.
That's always a channel that we can.
Ramp up as we need it.
Thank you.
Thank you.
Our next question comes from the line of prevail with Raymond James Your line is open.
Yeah. Thanks for taking the question and let me also start with Europe .
I'm curious just in the last four weeks during the war.
Has there been any noticeable.
No.
Coal volume.
Sales quotes.
Particularly from the frontline countries, basically, Germany, and everything to the to the east of Germany has there been.
Noticeable push.
Two.
Accelerate energy transition as per a lot of the political rhetoric.
Okay.
Yeah.
Yes. Thanks.
You know I would say our demand in Europe has been so strong quarter on quarter.
Just continue to see quarter on quarter growth in D. G I mean.
In some cases, almost defying a little bit the traditional seasonality that we've seen so although bookings have been strong over the course of the last four weeks for us its not like a step function increase I would say, it's just more of a of an adder to the growth that we've already seen.
Sure Peter.
Yes.
So as Jeff said there is no question that we're seeing increased interest and demand from end customers.
On top of what we would normally see at this part of the season anyway.
I would say the broader political response.
I know, there's a lot of them.
Discussion and interest I think.
Figure out ways to move more quickly.
I feel like it hasnt gelled, yet completely and so I think we will expect to see that continue to evolve over the next weeks and months.
But customer interest is for sure Sean.
Okay.
That's very helpful.
In the.
In China, I remember a year ago, and even even in 2020.
You mentioned that pricing domestically in the Chinese market was so strong that the joint venture.
Had no export capacity everything was going for them.
Domestic sales can you get in latest on that.
We're still seeing essentially the same dynamic.
As you see elevated supply chain costs.
The response.
Supply chain cost increases from China happens much more quickly than you see it overseas.
Overseas lag still persistent.
Although we are we do continue to look for opportunities we do have a long.
A long pipeline of opportunities to go after.
Overseas and we did speak about the one deal we had within India.
We'll continue to look for those but I would say at least here for the near term until we get past this big supply chain.
Risks that we're in now that you would expect to see it more towards China.
And what I would add to that Peter that.
I think your comment was specifically more.
I took it to the vet specifically more about the power plants.
Large scale business.
We are selling an increasing.
The amount of product from that joint venture into the DG business globally.
And as you'll see from the slides that we.
We posted.
Significant fraction of our AG businesses.
Using product from HSBC.
Okay and lastly.
Fair to say that plans to build.
Many factoring footprint in the U S.
Still on hold pending clarity on.
Washington.
Correct.
That is correct I would add a little bit of color in that the demand is that we continue to see for a product based on who we are as a company, but also the differentiated nature of our product is very strong.
And although we are still hopeful and very engaged in pursuing a U S options assuming it seem it comes through.
Our loan guarantee comes through as well, we're still but still.
Optimistic on that in the event. It doesn't we are also looking at expansion in Mexicali.
Think it's important for us to expand because there is a very strong appetite for our market, especially in a market that is willing to pay for the value that we bring as a supplier.
Yeah.
Got it thank you very much.
Thank you.
Thank you.
Our next question comes from Illinois, I'm, Philip Shen with Roth Capital Partners. Your line is open.
Hi, everyone. Thanks for taking my questions. Congrats on all the recent contract wins in your prepayments.
Jeff I think you were just talking about.
Expansion in Mexicali and.
Based on some of the checks we've done it sounds like you might be sold out in 'twenty, two and 'twenty three.
So I was wondering if you can comment on that.
<unk> is there available product for customers and then from a pricing standpoint, I was wondering if you might be able to share.
Bit of the terms.
<unk>.
You are pricing at a premium.
Two.
Southeast Asia suppliers or do you think your pricing at a discount.
The benefits of.
Much more.
Clear.
Freight cost cuts and it's from Mexico and <unk>.
A number of other advantages. So I was wondering if you are charging a premium for that and if you're not then why aren't you.
Sure. Thanks, Phil Yeah, It's fair to say that we are.
Not completely but essentially sold out for 2023 and 2022, we are already beginning to take orders for 2024.
From a pricing perspective, I'd say, we most certainly get a premium from what we're seeing out in the market and.
Lot of that comes from.
<unk>, who we are as a company from a product technology and also where we sit with the factory in Mexicali.
What we've been doing to really help.
Kind of shore up our margin projections in that part of the business. The first is to secure business at very healthy pricing.
So even when we look at.
Where we see the potential for the market and applying some risk on supply chain. We still have good business that we're booking when we get out into 'twenty three 'twenty four we also where we aren't where we can we are trying to put in some.
Some controls around cost so working with key suppliers on some of the bigger parts of the.
Bill of materials costs for us and help lock those in for a minimum help tie them back to market indices. So.
We feel good about that part of the business.
And.
Like I said it is the kind of thing that happens is bullish in the future on adding more capacity.
What could the timing of that be what else would you need to see to get confidence around that I mean, you already sold out for 'twenty, two and three and so are you.
Just about there and.
And what kind of a how much more expansion could be.
Well I think we feel like we're on the cusp maybe here within the next.
Two to four months really understanding what's going on with FEMA.
So to an extent, we're really looking at it.
Hard out at Sema, we are.
We're going through and basically preparing for sema to pass and for us to get the loan guarantee we are.
Already down into final site selection for the plants.
So we're gearing up so that once we get a green light on CMO, we would move quickly into building that U S factory.
I'd say once we get some clarity around that that would then dictate for us how we would think about expansion whether it be in the U S where we've seen it doesn't happen we will be strongly considering mexicali.
Right. So basically the expansion Mexicali is predicated on what happens with FEMA and the U S is that fair.
It is fair and I would think about it too that were I think one of the things that we've learned as a company is is it's important to especially in the utility scale space for cost.
To be cost competitive it's really important for you to go out and build the right scale. So we're not talking about <unk>.
Small hundreds of megawatts facilities.
Our multiple gigawatt facilities, when we look when we look at adding the capacity.
So.
Yes, it's fair to say that.
The way to what we hear from Cmos menu, you'll see us move forward or pivot as appropriate.
Got it.
As it relates to.
Your pricing it looks like it may have moved up from 39 cents.
In Q4 to 44 cents.
In Q1.
On the midpoint of the guide.
But that's only one month of benefit from the new Sunpower contract.
Can you break out the Q1.
Margin uplift from the Sunpower contract.
Could we see possibly 50.
From an ASP in Q2.
And should we.
See further sequential increase in margins in Q2.
Yeah, maybe I'll give a comment and then tie she'd like to add some color. Please do I'd say that.
First what youre talking about the ASP increase that as a blended ASP increase.
So.
Certainly the prices that we get on our IDC product in DG.
Our demonstrably higher than what we get in the in the utility scale space, even though we are seeing let's say very good pricing for our performance through channels and utility scale within the U S.
I really wouldn't want to go into any more detail around our pricing.
Especially as it relates to.
So sunpower.
What I would say is that that agreement that we did with Sunpower I think it was really good for both companies.
For us.
It did allow us to get our with the renegotiation of our pricing up to more market rates for.
For 2022 at least for the last three quarters of 2022.
And it also gives us the opportunity beginning in 2023 to address the U S market.
And in there.
Do you think about Sunpower, a big player in the U S. But there is still a good 90% of that market that they don't address and when you think about some of the competitors in the premium space that have dropped out we see expansion in the U S as being a great growth motivator for us in 2023. So we're really excited about that and certainly that would also help.
A positive impact on Asps when you look at it at the corporate level.
Yeah.
So just a just technically.
Just to add to your this is kai.
You are right that includes.
A.
March.
The first quarter number include the new contract starting from March and that gives a bit of an uplift, but also as Jeff mentioned they are the effect of that also going on the general product mix, because we have less power plant in the first quarter and more.
<unk> in general.
And.
Then it's also true that then in the second quarter, we should see the full quarter impact of that but you know what.
Any specifics on that.
Okay. Thanks.
And then as it relates to the margins on the Mexicali facility I was wondering if you could share I mean, Jeff you've talked about a premium and pricing can you share roughly what the margins look like they're I mean.
What the corporate margins are but are you double digits.
Percentage margins, there potentially or how does that look.
Well the way to the way to think about our margins on that business, we've talked about how when we see that business scaled up the factory scaled up that we will be achieving.
Our corporate target margin or greater so think 15% in that range or better now.
Now over the course of 2022, we are scaling up factories. So you've got a lot of employees operators on board.
Our working through the scale up of the factory. So you are not producing at full capacity so costs are at their highest.
Especially in the first few quarters.
So we're.
We're not going to get to 15% on day, one I wish that were the case, but.
Everything that we're seeing with our cost projections going forward still tell us that.
The pricing we have that this is a good business that fits the vision, we have which is a 50% plus gross margin business.
And a lot to the top and bottom line for us as a company.
Great. Thanks, and one last one as it relates to anti circumvention it looks like the case.
<unk> should be decided tomorrow I mean, there's a small there's a chance that it gets punting but.
What I recall as you guys or not.
Grouped into that risk.
Just I think it might be useful for everybody to hear.
You guys are are or are not implicated if the anti circumvention case gets taken on by the PUC.
So wanted to just you know I'll turn it back to you guys, but it.
It would be helpful for everybody here. Thanks.
Okay. Peter once you comment on that yes.
We're not named.
In.
And the circumvention.
Plane.
Yes.
And.
We think it's extremely difficult to make a case.
An anti circumvention case.
Around some kind of a match on you know we've been in the same spot there in Malaysia for over a decade, so we haven't gone anywhere or.
Changed our operations so.
We'll see how that goes but.
We don't think were in the center of the target, let's say.
I'd just add to that that I would say no one has ever accuse us of.
Selling panel low markets were dumping in the markets, we definitely play at a very high premium relative to the competition.
Right so between the premium and the length of time, you've been there you really shouldn't be a party to the case that says the case would be country wide and so ultimately if this does get taken on by the D C.
And they render a decision then it would be up to you guys to make sure that you were carved out of the whatever the final decision is about the D. C is that the right course of.
Bright path of events.
Yes, I think.
We'll have to again, we'll have to wait and see how this investigation goes.
I would not expect us to be.
A major.
<unk> of that going forward.
Great. Thanks for taking all my questions and I'll pass it on.
Thank you Phil.
Thank you.
Our next question comes from Milan, and Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Good afternoon, thanks for taking the questions.
Most of mine have been covered but maybe just a quick housekeeping one to start off on the.
The Doe loan guarantee can you kind of provided us an update on where that stands maybe next next steps in the process any kind of expectations around timing.
Yes.
Brian This is Peter we are in the process.
The next steps are detailed diligence.
And negotiation of the loan guarantee itself.
We expect that process to be multiple months.
And so we're continuing to work through it.
Okay Fair enough and then multiple months in terms of expecting a final decision, yes, yes, snow or multiple months to kind of get to the next step in the process.
Multiple months before the end of the process, which is a determination on them.
On the loan guarantee or the loan itself.
And the signature of an agreed.
Agreement.
Okay Fair enough and then maybe just on that topic.
Outside of the loan guarantee.
How are you guys thinking about liquidity needs here I know the capex budget for 'twenty two is not that robust.
And a lot of the capacity expansion is sort of TBD based on sema in the loan guarantee but just as you think about.
The margins here as well as some of the working capital commentary you made.
Is there.
Any update you can provide around how you're thinking about liquidity just what sources outside of some of the prepayment strategy you mentioned anything else, you're considering from a financing standpoint.
Hi, I want to take that one.
Yeah. Thank you I, certainly think hey, Brian Yeah, I think from a from a liquidity standpoint as you've seen we are pretty pleased with the cash balance at which we ended the year that is already in a lot of the.
Capex that was.
Needed for our current transformation, we spend about $154 million in Capex in 2021. So the heavy lifting is really behind us and you have seen that the baseline capex budget to get all this done in 2022 is a pretty moderate of 85 to 90.
Yeah.
But you know as you.
Point out are there other growth initiatives that we have in mind the most.
Maybe concrete one and that is really in our control is snack seven and makes sense and it's making really really good progress both in the pilot line in the Philippines as well as in RMB. So we have yet to decide on the funding for that particular <unk>.
And there is of course a.
Variety and range of options out there that we continue assessing and I would say in general the same is true for any other growth initiatives that we that.
That we see out there, including the the U S footprint.
Which would come to a large part with the.
Loan guarantee if our application is successful from the deal.
But also some more financing possibilities that you'd probably have to put in the mix there.
Okay Fair enough I appreciate that and last one for me.
Just.
I appreciate the color, Jeff around being sold out effectively for 'twenty, two and 'twenty three.
Your pricing strategy sounds like in real time Youre getting.
More aggressive slash proactive but.
As the cost environment has continued to escalate.
Like aluminum and logistics, we heard from some of your peers starting to.
Pinch margins here in the near to medium term, what what are you able to do to kind of mitigate that.
On existing bookings not necessarily the ones you just reported today and the ones that you've been seeing better pricing on them, but the ones, where you're you're allocated to deliver the next.
612, 18 months and cost has moved up quite a bit are you going back and actually renegotiating pricing are you did you have contingencies in place on some of the cost where you can you can do that or what's sort of the strategy on some of the backlog here.
Yes. Thank you Brian I would say if it were there are there is flexibility in our contracts to adjust pricing, we would have those conversations and that's true in the DG space as well as utility scale I think as you know typically within utility scale because of the nature of the the end customer is.
It's tough to have that kind of flexibility in there. So what we've done in addition to getting.
I would say very.
Good price premiums.
Really work more on the supply chain.
I'm really trying to target the more significant pieces.
The cost structure to put in some.
Put in some contracts so that we can lock in pricing better. So if you look at our input costs and you know one thing I would say around that is even if you look at it from a freight perspective.
Is.
Just by having our factory like Mexicali, so much closer to where customers are not really helps mitigate some of the freight concerns that we have but there are other significant input cost that we've been able to work with suppliers in more of a strategic way.
And come up with some collars around the.
The costs.
Give us.
The ability to standby the pricing that we negotiated and to live up to our contract like we always do as a company.
Okay.
Yeah.
Okay. Thanks, a lot guys I'll pass it on.
Thank you.
As a reminder, ladies and gentlemen that star one to ask a question.
Well I have a follow up question comes from the line of Julien with Bank of America. Your line is open.
Hey, guys, sorry, just to clarify that.
We're talking about being sold out here can you talk about the P series.
If you don't mind in terms of just kind of leaning into that opportunity here, especially as the world looks set to really need some of this incremental capacity is.
Over maybe not just this year, but leaning into next how are you thinking about kind of leveraging that overtime here.
You kind of alluded to a broadly earlier, if you don't mind.
You can elaborate.
Sure I would think about it in two ways first the joint venture that we have.
With with.
PV joint venture we have with Tcs.
Is great in that we've got access to a lot of capacity out there so as the market.
Demand grows and as pricing begins to equilibrate.
Think that opens up a lot of opportunity for us and the capacity on the JV I would say just continues to grow so a lot of flexibility there and again, it's you know it's not take or pay so it's good business isn't there we don't have to get ourselves in trouble.
The other piece is on the U S side, because they just PV producing in China serves pretty much everywhere, except for except for the U S market.
For the U S.
It is the first foray into this really was our <unk>.
Converting a good portion of our Malaysia fab over to mono PERC cell production.
Which did a bunch of things first it gave us a good reliable non China supply of cells.
The other positive though is it filled up that factory and that's a factory that has long been under underutilized and as you know that just adds to costs. So a great win for us there.
We then opened up the we then converted our motto in Mexicali over to performance series and again the benefit there was twofold. The first was that it allowed us to now take the capacity the module capacity. There there was going to customers in Europe , and Asia and to actually move that capacity over to.
Asia.
<unk> helps with trade in a variety of other of other pieces.
But right now we've got that well at full scale be 120 gigawatt with that would that Malaysia Mexicali combination.
We see a lot of opportunity to grow.
But our intention to add three gigawatts of capacity.
We I would say that the thought process has been that if we could do that in the United States. We think that'll be a really nice strategic add or to what we do as a company.
To do that as you can imagine there is a significant cost in price increase to produce in the United States. So we need sema.
And again, we're hopeful with Cmos. It does have just fundamentally it has good bipartisan support it is as you know bundled in with a lot of other things that are a little bit more contentious across the aisle.
As soon as we hear a positive on seamount, winning a closure on the Doe loan guarantee and we're ready to roll with U S production.
In the event that doesn't happen we're in a really good space and that we've got a knowledgeable footprint in Mexicali, we've got room for expansion. There. So we would look to scale up there.
Pretty quickly and you know another benefit there is that we've done that scale up in Mexicali already so adding the additional capacity is now going into a group of hands that are much more experience than they were the first time.
Peter do you want to add.
Joanna just to add one thing about the joint venture and the rest of world demand.
As you might imagine.
Big increments of capacity that's been brought online there recently.
Ben using the large 12 wafer format that Tcs really pioneered a couple of years ago.
We're in the process of transitioning our DG product offer to them.
That new larger capacity.
The increments larger capacity increments based on the <unk> 12 wafer format.
So that's going to unlock.
Bigger chunks of available capacity for us to deploy into the DG market in the near future.
Got it but with respect to the JV not not meaningfully ready to talk about ability to market rest of the world as you said.
I'm sorry could you repeat the question Yeah, just just the expectations on rest of world demand Peter as you were alluding to a moment ago just on on the just the leading into the demand on that front. It doesn't sound like you're ready to kind of commit to any kind of level of utilization. Despite the expansion of the capacity.
Are you quite yet.
Yeah, that's a fair comment.
As you know, it's very dynamic and especially the overseas utility scale business.
Margins are leaner than they are in the United States. So that that margin buffer is much more sensitive to two costs.
And I would say right now given the volatility that we see in that market. It's.
We're better deploying those panels into China.
Through the JV and we're better of course still continuing to grow our D. G growth with performance series given that theres much more of a margin buffer.
There as well.
Yep. Thank you guys best of luck you said, great. Thank you Julien.
Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Yeah.
Okay.
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Yes.
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