Q1 2022 Maxeon Solar Technologies Ltd Earnings Call
Yeah.
Good day, ladies and gentlemen, and welcome to the Maxion Solar technologies first quarter 2022 earnings call.
Currently all participants are in a listen only mode.
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 Leahy Maxion.
Axion solar technology.
You may begin.
Thank you operator.
Welcome to Mexico in its first quarter 2022 earnings conference call.
With us today are Chief Executive Officer, Jeff waters.
Financial officer costs drove back and Chief strategy Officer, Peter actually 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 certain forward looking statements that are subject to various risks and uncertainties that are described in the safe Harbor slide of today's presentation. Today's press release, the 6K and other SEC filings. Please see those documents for additional information regarding those factors that may affect these forward looking statements.
To enhance this call. We've also posted a supplemental slide deck on the events and presentations page of Maxion Investor Relations website.
So 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 Mac Jones Investor Relations Web site 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 with commentary.
Commentary on our DG channels, and then touch on industry pricing trends U S market dynamics Maxion, seven and all beyond the panel business model evolution.
And Kai will review, our financial performance and outlook and will conclude with Q&A.
Our D. G model is unique in the solar industry and based on our core observation that homeowners Trust a strong global brand combined with local expert advice and support.
We began our focus on the downstream channel in 2004, and now benefit from over 15 years of experience in the downstream market.
This has created a tremendous foundation in terms of operational Knowhow. It has allowed us to build deep relationships with our channel partners.
In our largest markets, we sell via a direct to installer channel, where we have active commercial relationships with over 1700 installers employing tens of thousands of individual sales reps.
This army of trained salespeople, ultimately decide which solar products to recommend and how to position that the end customers typically in their homes offered at the kitchen table.
We see no other major solar equipment company doing this in part because it takes years to build the channel infrastructure because the benefits are greatest when the model is married with a highly differentiated product like ours.
Because we are one step farther downstream than our peers. We can collaborate closely with our installer network to implement a highly effective sales process built around the Sunpower brand.
Manage key metrics, such as end customer pricing and net promoter scores.
Secure warranty registrations and introduce complementary offers such as storage and services.
Strengthening this channel is a key element of our return to consistent top and bottom line growth as we continue the transformation of our company.
Our channel today is strongest in Europe , but also strong in other international markets like Australia.
We're seeing especially robust growth in the Netherlands were a threat to their equivalent of net metering is waning and across European countries in reaction to natural gas supply disruption.
In Italy, our mature channel footprint enabled an increase in our DG market share to over 25% in the first quarter of 2022 up from the low twenty's in 2021 and high teens in 2019.
Overall, our Q1 European D. G sales volumes exceeded our U S. D G volumes and revenue was up more than 75% year on year.
We expect continued growth throughout 2022, driven by improving customer payback periods potential new legislation supporting D. G solar penetration and the exit of certain historical competitors in the premium market segment.
Well the demand tailwind in Europe , and Australia are arguably among the strongest in the world right now for the solar industry.
We also have significant strategic growth initiatives underway in the Americas.
The Latin America, a focus area for expansion of Maxion channel model.
Her count increased to approximately 50 up more than 50% year on year.
And in April we began shipping our first IDC modules that D. G commercial customers in the United States. It is piece that are the highest we have yet seen as an independent company.
This is an important strategic first step in the U S. D. G segment, where dealers often serve both commercial and residential.
Residential we executed an agreement with C E D greentech, the nation's largest solar distributor.
This partnership will enable and accelerate the launch of a new installer channel program in the U S under the Maxion brand.
We plan to commence residential channel bookings for I B C products in the fourth quarter of 2022 with shipments starting in the new year.
Initial demand signals are very encouraging based on our products long standing reputation in the market North American manufacturing presence.
The adoption trends driving increased solar system sizes.
The exit of Belge from the U S market.
Margins within the DG segment had been held back by the out of market polysilicon contract and two other elements.
The first is the work in progress of transforming our factories in products, which has contributed to relatively low absorption of fixed costs.
The good news here is that we are in the final stages of our transformation with both the U S. P series supply chain and maxion, six ramps well underway, but our factory is getting closer to full utilization.
We expect that by early 2023, both products will achieve our targeted volumes.
The second element that has held back margins has been the ballooning supply chain costs and the lag between these cost increases and our ability to increase prices commensurately.
Market pricing has lagged supply chain cost increases given that most believe that the market would return to normal within a quarter in jail.
We tend to be interest over trade show in Munich, a few weeks back and the key takeaway was that the sharp increase in energy prices and a significant supply complications brought on by Covid in China have significantly elevated global demand.
This has in turn created conditions that should support more significant price increases in the near term to more appreciably mitigate the increased supply chain costs.
We have responded by increasing prices broadly and D. G and expect to realize a margin benefit starting in the second half of this year.
We're also seeing favorable pricing trends in the utility scale segment.
Fixed pricing for future deliveries has been an industry standard for decades.
Today's supply chain environment, many suppliers are walking away from underwater contracts and others like us are bidding such contracts very cautiously or not at all.
As a result, we're hearing from credible global developers that they are now accepting cost indexed risk sharing on future contracts.
This is a significant shift for a company like ours that honors its contracts.
It has the potential to bring more predictability to our margins in utility scale in 2024 and beyond.
On a related topic, our competitive advantages in the U S continues to expand.
I'll discuss this further in the context of our second strategic growth pillar, our focused utility scale approach.
Last quarter, we announced 700 megawatts of 2023 delivery bookings with favorable prepayments features.
We believe our growing success in this market due to maxion offering customers superior deliberately security in a rapidly evolving regulatory environment for.
For example, subsequent to the 2021 signing of our first large U S supply contracts. The industry was walked by new traceability requirements from U S customs and border patrol related to forced labor concerns.
In contrast to some developers all U S customers experienced zero disruptions.
This past month, the industry was rocked by another U S policy event.
An investigation by the U S Department of Commerce into the circumvention of tariffs targeting solar companies, who allegedly cell and module facilities from China, There's some southeast Asian countries, including Malaysia in order to avoid tariffs set in 2012.
Until the investigation is over.
Refrained from providing commentary except to say that we believe we are in a fundamentally different position than most other solar companies active in southeast Asia, because our activity is limited the solar cell production and has always had an unusually low reliance on physical components sourced from China.
Our Malaysia Fab built in 2010 also predates the existence of the specific tariffs that are allegedly motivated competitors central Malaysia, and other southeast Asian countries.
Our differentiated position in southeast Asia is just one element of the broader theme of Maxion has a reliable trusted business partner.
With demand soaring current pricing structures that support our long term gross margin targets we.
We're evaluating multiple options for expansion beyond our current one eight gigawatts of capacity.
We're well advanced on our site for three gigawatts of incremental capacity in the south Eastern U S.
And there are in a position to move rapidly at the female legislation passes.
If it does not we are preparing alternative expansion plans likely closely mirroring our current operations in Malaysia and Mexico.
Regardless of the near term policy outcomes. We believe the last two years of supply chain disruptions have created a structural advantage for maxion in the U S power plant market.
Bookings negotiations for 2024 deliveries are ongoing and we expect to announce deals in the next months with some of the index based pricing elements that I described earlier.
Kyle will provide more detail on this in his section.
Last but not least the first strategic pillar is our differentiated panel technology.
No matter, how far we expand downstream our brand will always be anchored around a core of superior differentiated solar panels.
Our panels are fundamentally different and better look better perform better last longer we believe provide unrivaled peace of mind.
Put some facts behind this in February we announced what we call solar for life and <unk>.
40 year warranty on our I D C panels.
This guarantees the product service and output for our maxion family for four decades.
We can do this constantly do our proprietary technology and based on our testing no other products can come close.
So when we release, our maxion seven technology with what is likely to be another round of world record efficiencies for high volume production technology, you'll hear us communicating the fact, the great panels are about more than just high efficiency.
Later this year, we'll share precise timing of the rollout, but we can share today that our pilot line has been consistently producing record efficiency cells at a median level for several months now and last month, we produced our first maxion seven module that achieve that new maxion record results.
Based on achievement of these milestones we've begun placing purchase orders for long lead time tools in order to ensure that 2023 availability, while we continue to pursue funding for this next generation expansion opportunity.
We will unveil more details around maxion seven maxion. His first analyst day that we expect to hold in the third quarter.
Moving to our beyond the panel technology at this month's <unk> conference in Munich, We may perhaps the most important announcement in our young company's history.
The unveiling of Maxion sunpower her one.
Great at home energy solution initially targeting launch in Australia in Q3 in Europe in Q4.
As a reminder, maxion owns the Sunpower brand outside of the U S and Canada.
So power one is based on a flexible ecosystem of products and services, including Mac.
Her panels as well as battery storage and actionable household energy insights.
Let me reinforce what makes a maxion solution this space credible.
It comes down to a combination of three of our unique assets.
First the most compelling customer door opener in the form of our industry, leading solar panels.
Second an unrivalled customer intimacy through our global DG sales channel.
And finally, an agile approach around working with an ecosystem of partners to deliver the best energy service products in the world.
This effort is led by our Chief products Officer, Ralph Elias who has spent his career at companies like Vodafone and Samsung building consumer oriented solutions through strong partner networks.
Sunpower one has an end customer app it goes well beyond the system monitoring software common in the United States.
Our proprietary solution provides this baseline production information to homeowners, which helped secure initial engagement and then we'll add a sophisticated view on consumption at the individual appliance level that includes intelligent and predictive energy saving recommendations.
We expect that this will lead to greater customer engagement over time.
Somehow were one also as a channel facing element, which is a massive overhaul of our existing installed base and software.
Binding at all in a single platform.
And this new digital ecosystem.
We'll have a substantially easier experience accessing maxion provided leads digital sales tools and managing the sale to electrification customer journey.
It will include somehow design and exclusive offerings to our channel partners meant to improve the in store experience measured by time from qualified lead intake to proposal as well as our redesigned next.
Adding as a design tool to our installer facing software platform is also critical for Maxion, because third party design tools not fully quantify our technical performance advantages, including module conversion efficiency year, one kilowatt hours per kilowatt annual degradation and useful life.
We also made a significant addition to our beyond the panel product portfolio with the introduction of our first storage product Maxion, Sunpower reserve, which we expect to start shipping to Australia in Q3 in Europe in Q4.
We believe our timing for market entry is perfect with more options from established vendor partners and clear customer demand for our branded and integrated energy solutions.
So power reserve is a fifth generation lithium based solution using no cobalt that enables charging product from both D C and AC panels and is available today and a 10 kilowatt hour size and includes technology for simultaneous charging and energy dispatch.
An additional smaller battery size options in development.
X product we plan to announce this year will be an EV charging device called Sunpower drive.
It's worth noting that the addition of storage alone has the potential to approximately double maxion revenue from each customer that uses our storage.
Now before I turn the call over to Kai I'd like to provide some commentary on other critical areas of focus for the vaccine on management team.
Employee safety to supply chain environment, and our capacity transformation.
I'm pleased to report for the first time in recent memory, we had no major COVID-19 impact to employee safety this quarter.
While we performed well internally the virus's spread in China disrupted the logistics environment already challenged by the warrant Ukraine, various COVID-19 related events.
Our strategy for managing this global crisis remains unchanged.
On what we can control, which includes price location of our module facilities and shipping container design.
We raised price multiple times in multiple geographies this quarter, including two Europe D. G customers U S utility scale customers and Sunpower.
We also successfully shipped our first performance line containers from Mexico to our customers' job site in your Las Vegas, with no regulatory or logistical disruptions.
Despite the cumulative challenges posed by pandemic and geopolitical events.
I'm pleased to report our capacity transformation is generally on track.
On slide six you'll see that we remain on schedule to exit 2022 with more than triple our third quarter 'twenty, one capacity, but roughly two five gigawatts of capacity and nearly three gigawatts expected in early 2023 is the final lines of our one eight gigawatt performance lifestyle are ramped.
We are squarely focused on execution.
With transform supply capacity nearing completion and robust demand for our products. We are confident in returning to profitability next year.
With that as a segue, let me turn the call over to Todd to talk about our financials.
Thank you, Jeff and Hello, everyone.
I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter.
First quarter shipments were 488 megawatts at the high end of our guidance range as our supply chain team made great efforts to hit customer delivery expectations.
Shipments increased by more than 25% year over year and were led.
Led by another record quarter in Europe .
Sequentially volume was down slightly mainly because of the lumpiness in our power plant delivery schedules.
We finished deliveries to the Ghana project in the fourth quarter and just started deliveries to the Gemini project in the U S. In this current second quarter.
Going forward, thanks to all our new North America manufacturing capacity, our delivery schedule is projected to show more continue achieve quarter over quarter.
Total revenues were slightly up on a sequential basis to $223 million.
Year on year, our top line grew by more than 35%, mainly as a reside off the before mentioned volume increase.
Revenues also benefited from price increases in DG markets, including the United States, where all our new contract with Sunpower took effect on March 1st.
We are starting to see a material ASP uplift in some European countries, where all our modules with integrated power electronics accounted for more than 40% of our country wide sales volumes.
This is an exciting change from ex U S. We begin shifting or D. G topline from module component to more system sales.
Gross loss came in at $13 million at the high end of our guidance range largely due to losses on opportunistic sales of all access out of market take or pay polysilicon supply for the remainder of the year.
This was beneficial to maxion from a cash perspective, given the prepayments that we had already made but not from a P&L perspective due to the high fixed price from this legacy contract.
Total out of market polysilicon charges were $16 million for the quarter 8 million of which were due to the sale of ancillary silicon leading to a 3 million higher loss than the upper end of our guidance range.
As an update at the end of the first quarter our obligations for this contract stood at $94 million worth of polysilicon at the contracted prices to be purchased through the end of 2022 for which we have made $37 million in prepayments already.
As disclosed in today's earnings release, we are currently engaged in commercial discussions with our supplier.
Barring a mutually acceptable resolution to the question of whether the prices for 2022 deliveries are subject to inflationary price escalation clauses.
Typically the silicon metal price index escalator we.
We do not believe that these inflationary price escalation clauses apply to all purchases of polysilicon for 2022 deliveries and we will update you as needed.
We are energized to see the manufacturing ramp of new products as we complete our transformation, but as you know these ramps and transitions lead to temporarily under utilized factories.
Gross margin in the first quarter was impacted by $10 million for factory under utilization charges, mainly related to Mexico and six in the U S performance line production ramp.
These capacity additions are best appreciated through the chart on slide six of our supplementary presentation material that shows our quarter end cell capacity on track to more than double from the end of all first quarter to the final quarter of this year.
Supply chain cost pressure remains significant with polysilicon in China to Europe trade rate oscillating around the highest levels, we have seen in years.
On a year over year basis total supply chain cost increases accounted for $29 million addition to our first quarter Cogs 11 million of which was offset by year over year price increases.
Supply chain cost plateau, and further price increases and D. G are taking hold and we expect this ratio to become more favorable in coming quarters.
non-GAAP operating expenses were $34 million in line with our guidance range of $35 million, plus or minus 1 million.
And down $1 million year over year as austerity measures remain in effect during our transformation.
As a reminder, non-GAAP operating expenses adjusted our GAAP operating expenses for restructuring charges and fees and stock based compensation.
Adjusted EBITDA for the first quarter was negative $33 6 million.
Down slightly sequentially and at the low end of our guidance range, mainly due to charges for ancillary polysilicon sales, which were elevated as a reside off the previously mentioned opportunistic and cash accretive sales of all excess polysilicon remaining under this contract.
Correct.
GAAP net loss was $59 million.
Moving on to our balance sheet cash levels, including restricted cash increased sequentially to $208 million despite significant investment in our growth initiatives.
Operating cash flows were a positive $15 million with a $50 million.
Inventory build up offset by $79 million in customer prepayments for contracts that we discussed on all fourth quarter earnings call.
The increase in inventories is directly attributable to the ramp of our U S utility scale business, which as Jeff mentioned deliver its first contain us with module to the Gemini project in the second quarter.
D. I O went from 85 days at the end of the fourth quarter to 92 days at the end of the first quarter.
Capital expenditures in the first quarter were $22 million consistent with the low end of our guidance range.
Now, let's turn our attention to the outlook for the second quarter.
This will be the first quarter that includes revenue from our U S utility scale business and new market from Axion, where we expect to achieve price premiums for the foreseeable future attributable to all technology customer focus and who we are as a company.
And a stable state those premiums are projected to facilitate gross margins of 15% in line with our long term financial model.
Our ramp to what these targets will take multiple quarters. So it's all one eight gigawatts of capacity at the module level will not be fully ramped until 2023.
Also deliveries in 2022 and the first part of 2023 were contracted in the first half of 2021 before the industry faced radical challenges in supply chain and logistics costs as well as the regulatory environment.
Prices are fixed at terms that are now well below market and below all costs.
In response, we are approaching our customers to find mutually agreeable solutions to mitigate the situation.
Throughout this year, we have significantly pushed up what our asp's for new contract, reflecting the cost increases and the value for all our certainty of supply.
And as Jeff described we have started negotiating to include index based pyrometer us to all pricing of long term contracts.
With that in mind, our guidance is as follows.
Please also see a detailed guidance breakdown on slide 11 in our supplemental earnings slides.
We project shipments in the range of 460 to 490 megawatts are largely flat volume quarter as we see the first containers of U S utility scaled panels offsetting a slight sequential decline in I B C. D. G. Due in part to the end of life transit.
Of Maxion five two makes it six.
In the second half of 2022, we expect total Mexico six capacity to exceed 500 megawatts facilitate a total of I B C shipment run rates above one gigawatts by year end.
The temporary plateau and D. G sales in the second quarter can also be partially.
I attribute it to the leg induced by shipment times of delivering additional volumes to meet rising demand in Europe and elsewhere.
Revenue for the second quarter is expected to be in the range of $215 million to $230 million, which includes an estimated mid single digit million dollar amount of negative foreign exchange impact quarter on quarter.
As implied by guidance midpoint, we project roughly flat asps sequentially that's rising.
Asps and D. G are offset by a higher mix of utility scale shipments.
Yeah.
non-GAAP gross loss is projected to be in the range of $15 million to $25 million.
Driven by ramp costs of all the new utility scale capacity, which is expected to reach full capacity in early 2023.
Well as costs related to the final transition from Axion five to makes you unsafe.
Gross margin guidance also includes a charge, we expect to take to write down the value of our U S utility scale inventory at the end of the quarter, which is consistent with the accounting treatment for negative gross margins here.
We also saw increased market pricing on aluminum glass and freight in the first quarter, which are becoming present in all financial this quarter.
Out of market polysilicon charges are projected to be $3 million to $4 million in the second quarter and significantly lower level.
But prices are now closer to the legacy contract terms entry. If you will know for the ancillary sales until the contract expires at the end of this year.
non-GAAP operating expenses are expected to be $36 million, plus or minus $1 million. This slightly higher level sequentially include additional investments in sales and marketing and select growth markets.
We expect to keep operating expenses at these approximate levels, even as we see considerable revenue growth over the next several quarters.
Adjusted EBITDA is expected to be in the range of negative 37 to a negative $47 million based on the factors impacting gross loss and operating expenses.
Just on the various one time effects that I expect it to affect our second quarter reside and all expectations for the business trajectory in the second half we believe that the second quarter will be the trough in terms of profitability. This year.
Capital expenditures are expected to be in the range of $20 million to $24 million $1 million to $2 million of this guidance is for long lead time tooling that will ensure timely availability for makes you're on seven.
This spending falls within the $60 million to $80 million of additional capital expenditures in 2022, and 2023 for the conversion from Mexico and three to make sunset.
And is incremental to our previously stated 2020 to annual guidance of $85 million to $90 million that did not include this conversion.
This spend as well as another $5 million added to our 2022 plant for long lead time, Mexico uncertainty towards reflect our confidence in the progress of this Mexican uncertain development and its attractive ROI projections.
We plan to update our annual Capex guidance next quarter and also provide more transparency on our plans to finance, Mexico I'm sorry.
We are currently considering a number of appropriate funding strategies in instruments and are making progress on several of those but no decision has been made with regards to timing for them all.
One final comment regarding our longer term outlook.
All discussions one question Pete are regularly asked is whether our plan to reach 12% adjusted EBITA in 2023 is dependent on supply chain cost normalization.
It is important to bear in mind that our D. G business today is gross margin positive excluding auto market polysilicon.
With a tailwind and global DG market, we have been raising prices for future deliveries and we are on track to be at beta positive N D. G. As we exit 2022.
And we have contracted Asp's and U S utility scale changing in 2023 that we expect will be consistent with the achievement of our long term financial model.
Therefore, we believe that the majority of the elements required to meet our long term financial model in 2023 are within our control.
With that I turn the call back to Jeff to summarize before we go to Q&A.
Thanks Cai.
I continue to be very proud of the progress, we're making in our transformation of maxion, especially in an unprecedented supply chain environment.
Although this transformation and input cost increases have a significant impact on our business. They are temporary as our factories March towards full utilization with differentiated new products.
We better monetize our channel brand with the addition of beyond the panel products.
And our market pricing catches up with cost increases.
We're building the foundation to emerge as a strong and resilient company reflected in financials that have us, reaching our target growth in profitability model within 2023.
Before we start taking questions. There's one more thing I'd like to highlight.
Since we entered the DG segment in 2000 and for them, we've been measuring cumulative customers who are powered by maxion.
And our journey to become a more customer centric company, we are focusing equally on engagement with new and existing customers.
Today, we're excited to announce that in the first quarter of 2022, our cumulative customer count crossed the 1 million Mark.
More than 1 million customers globally are enjoying the benefits of their superior Maxion solar panel technology.
We're thrilled to have achieved this milestone and look forward to powering positive change for millions more customers.
Now, let's go to the Q&A session. Operator. Please proceed.
Thank you.
Ladies and gentlemen.
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.
Yeah.
Our first question comes from the line of Alex <unk> with Bank of America. Your line is open.
Hey, guys. Thanks for thanks for taking the question my.
My first question right, we're seeing obviously a lot of of a sizable uptick in your revenues in your in your D. G segment, both for I B C and P series, and obviously you guys become a little bit on tethered, let's say in the U S. Market. In addition to you know the pricing power that you flagged that you can you can show really around the world.
Just curious I mean, how do you think about I guess moving volumes into sort of those two buckets. As you know you have a lot more freedom, let's say going into 2023 and also noting the you know the announcement with the distribution partner that you put out this morning.
Yeah. Thanks, Alex.
Yeah, I would think about that in a few ways first as you know with the existing capacity. We have we are because you know in the midst of scaling up our maxion six product that is expected to reach a full half gigawatt by the end of the year. So we'll have additional volume that comes from back six when you combine that with Max three will be over over a gigawatt compared to where we are today.
Or excuse me over a gigawatt, whereas today, we are a well lenders we transition.
The way, we look at the opportunity the U S is it a go.
Great fit for our product.
<unk>.
You know certainly if you think about the exit of some of the competition. There. It really does open the door for us.
To be able to sell a very broadly also with a shift in our agreement with Sunpower.
So what were likely going to be doing is looking at other parts of where we ship a b C into our.
Markets that have maybe lower asps than we could achieve within the U S, which we expect to be very very healthy. So you'll see a shifting product some cases from lower cost geographies, a little price geographies, but also from commercial going into <unk>, just given the strong demand we see for Ravi.
Got it I appreciate that and then and then just one more follow up you know just really on the on the policy side you know I know many on this call are very closely watching this this 80 CVD angle.
And sort of hoping potentially that there may be a little bit of a carrot and stick approach you guys have obviously been watching the sema legislation you know for quite some time now we've been gearing up in the event that that were to go through I mean, what's your latest update I guess on what you're expecting there as far as timing and how are you thinking about positioning.
Yourself, you know weather for that.
In the U S manufacturing base.
Or or in the downside case, where you might have to shift our operations elsewhere.
Pass it on thanks.
Sure I mean, let me cover the first element of Badman, Peter can add color to that as well as the ADC BD discussions yes.
First we are obviously very closely watching activity in D C and still very hopeful that we see a passage of sema incentives in one form or another we are I would say ready to go we have sites selected and we're ready to close and start running.
As that is we hope that happens in the event that it doesn't.
We also have a plan at the ready to look at expansion as I alluded to.
The prepared notes something that would probably leverage the positions that we have within Mexico, and Malaysia now certainly we're still hopeful that something happens in the U S. We think that'll be a great fit and certainly a great way to help build up the supply chain in the U S and also bring jobs to go up.
Oregon's Peter pick it up from there.
Sure. So what we're hearing with respect to sema legislation specifically.
Is that.
There is activity going on.
On the hill and with.
With the White house to identify a framework for a reconciliation bill that.
Could pass.
Thanks Ted.
That needs to happen sometime this summer.
There are potential fall back scenarios.
Starting to get some airtime.
Uh huh.
The cases that doesn't happen that would.
It would require more of a bipartisan effort around.
Something similar to what is being done for the.
The fab fab, so called tabs legislation.
But we're still hearing a cautious optimism about the reconciliation path in.
In the next couple of months.
Yeah, I would just add that we're we're highly motivated to expand capacity. Both slide you see Ann for her performance series, we've seen just such a incredible demand.
On the utility scale side for the U S market.
So more capacity there as well.
Just a great opportunity for us and then Tim on the DG side within Europe .
So a few weeks back and resource just the overwhelming demand within Europe for premium panels.
I was just so pervasive then you couple with that the exposure, we're now getting to the U S market.
We announced the deal with with C. E D from a distribution perspective, but there is just such a driving driving demand within the U S for premium panels as well that we're highly motivated to make capacity addition to happen.
Thanks, guys I'll pass it on.
Thank you Alex.
Thank you.
Question comes from the line fill.
Philip Shen with Roth Capital Your line is open.
Hi, everyone. Thanks for taking my questions wanted to talk through your margin outlook beyond Q2, I know you haven't provided official guidance.
But in the past you've talked about the first half of the year being weaker than the back half of this year being stronger with expectations to get back to 15% and 23.
Are you still can consider that the path.
What do you think you could do in Q4 could.
Could you get to double digit margins you think thanks.
Thanks, Colby, let me talk first about some of the factors that are driving that and then I'll hand, it over to Kai to speak maybe specifically on the ramps or at least specific to the numbers.
First I think over the.
The year and a half plus that we've been around as a company. Our story has really stayed the same.
Despite all that's been going on in the world.
And it really is a story of some pretty dramatic transformation for us as a company that was really going to play out over the course of 2021 and 2022 and then as we got to the second half of 2022 you would start to see the beginnings of the fruits of all that labor.
And the way to think about it and this then trails into 2023 is youre seeing the transition from what was maxion to now to Maxion five and then no maxion six tools.
So you'll see that hit full bore by the time, we get to the end of 2022, so that contributes.
<unk> also got price increases that I talked about within the within the prepared remarks, I think youre going to see that also tick up in better close the gap between supply chain cost increases.
<unk>.
North American residential is also going to help.
With margins and then you also add the AC panels in stores that we're bringing in so there is just really a lot on the DG side, that's going to be giving that margin uplift.
On the utility scale side, you know the real Big story, there I think as we need that factory just to continue to ramp and we are in the early stages of that ramp, but we expect that to be full capacity as we get into 2023 and that will help give us little cost and and good margin going into the U P. P market, especially as we go into 'twenty three.
And even beyond that.
So you know I'd say all of that those basic fundamentals are the same ones, we've been talking about for many quarters.
As you know Cai mentioned in the prepared remarks, we're expecting that Q2 is the trough.
Much as we predicted a while ago that youre going to see because we get into the second half more of the transformation started to translate into financial benefits for the company.
Cai, let me hand, it over to you from there.
Yeah I would just.
And two that are that are as we speak we are already gross margin positive on the D. G space and we see the.
Possibility and expect are even in positive EBIDTA in the in the first and the fourth quarter on a 22 on the D G space.
N D. G. One of the things that are we are also taking out the losses on the ancillary polysilicon sales. So we moved and pulled forward all the ancillary polysilicon deliveries from our supplier into the first and the <unk>.
Second quarter, and we have taken the loss on these as we described in the first quarter.
And that was margin accretive because we hadn't made prepayments and the outstanding payments that we had to make for this to all our suppliers who are lower than the prices the market prices. We got for that so on a cash basis, we got a we got money.
Some of the money for that and then together with all the other affect US we believe that.
In the second half of this year, we are going to climb out of this second quarter. We are quite a lot of things are coming together and really coming to a head with regards to all of our transformation.
And we really are taking a lot of the tough medicine right now that's a part of that transformation you know and certainly the ramp of the performing series U S product is a great example, where.
The financial output from that in this quarter as in Q2, it's pretty rough just as you're ramping up that factory, but this is what is going to pay dividends for us as we get into the back half of 'twenty, two and then into 'twenty three and beyond.
Okay. Thank you both for that and then talking about.
The contracts you've been signing the price increases can you talk through the structure of those contracts specifically.
How are you structuring price are you taking fixed pricing or are you pricing in with a variable.
Pricing based on some indices, you know, whether it's sprayed or containers.
Hum.
Or no poly pricing et cetera. So.
And do you see the potential for.
That pricing ultimately to I mean, you mentioned that Jeff. This is a key driver of our margin expansion.
Given how strongly the strong the market is.
I would see this as a nice opportunity for you guys to really expand margins. So I know, we talked through the margin content, there a bit but maybe help us understand the structure and how good you feel on the downside protection that thanks.
Sure. Thanks, Phil when I, you know what I'd say, it's really over the last few weeks that we've gone into engaging in detail in those conversations with customers and Youre right. There is a lot of demand.
And really what we're doing probably it's along the lines of what you might expect which is looking at.
It will take 2024 as an example.
And.
Negotiating a price that really really is capitalizing on the current supply situations that exist in the U S.
But then putting in.
Indices, and you can envision it being a blend of the handful of indices that cover the majority of our cost and we see this as a way to really help us and our customers and our partners our customers to really kind of share a little bit of a risk reward that comes along with that that allows us to provide.
More stability.
Again as a company that doesn't walk away from contracts. This is is really a big for us because it allows us to keep those great customer relationships and but allows us also to help hedge better.
What goes on with the pricing on the utility scale market for the U S. Along with what we've already done this with some of the key input costs. This allows us to add additional hedge.
Great. Thanks, Jeff.
You talked about 23 being booked up already I think you've been on the Q4 call that was the case how much of 24 has been booked versus available capacity.
You expect or are we talking about 25% or something closer to 50.
I would say.
I don't want to give a precise number but I would say, it's it's less than 50. So we're still in active negotiations I would say for the majority of the 24 volume.
Great. One last question for me just on the C D contracts congrats on that.
What's your sense for what the megawatt volume could be for C. D. In 'twenty three.
You know historically, you've sold and supplied somehow everything.
And they were there the primary customer now that you're diversifying C. D is a very large play.
Player and with a lot of volume and demand.
Could you see a substantial shift of volume to that distributor.
I won't give you a specific number but what I would say I think you know what the goal is that you've got the stickiness of the panels that we have would go through the Sunpower channel in the U S right, where so much of.
That channel is architected around benefits of our panels, and then really you'd see C. E D. Helping US go after the rest of the market.
Looking at.
You know.
Installers that traditionally have used LG or maybe panasonic for their premium panels.
So we see a lot of upside there.
I think in terms of how we do it again, it's really going to be looking at the opportunities that we have there the pricing and really trying to divert volume from other areas, where we've got lower asp's.
That will be something that will grow I don't want to hang a number out there today, but it's something that we expect to see good growth from over the course of 'twenty three and beyond.
Yeah, and just to ask a follow up there is the <unk>.
Volume like what are the key drivers of the volume that they get is it based on price or is it based on.
You know because the price relative to the lower ASP areas.
You can make that decision or are there other factors and if so anything.
He might be able to share there.
Sure I think the the volume that they will drive will be based predominantly on the panels that we have.
I think as you know right we have the highest efficiency.
First looking longest lasting lowest degrading panels in the market and there is an immense amount of demand out there.
Before that it will be priced at a in a way to capture that value with customers.
I think initial indications are very positive with what we're seeing.
So it'll be priced in a way for us to capture very.
Very highest piece, we think with good volumes in mobile balance that as well as the relationship develops.
Okay. Thanks for all the detail I'll pass it on here.
Yeah.
Thank you.
Question comes from the line of Brian Lee with Goldman Sachs. Your line is open.
Hi, Thanks for taking our questions. This is grace on for Brian I guess first question's on your <unk> Guide.
I was just wondering if you can quantify the impact of those three factors you talked about the ramp up cost the.
Inventory write down and the higher aluminum cost and then follow up to Phil's question earlier I. Just wondering if you can talk about the margins by segment moving through the second half.
It seems like I B C, you're getting positive margins today.
So what kind of margin.
The margin should we expect exiting 2022, and then on P series.
Any chance, we can see positive margins in the second half this year, thanks, and I have a follow up.
Okay. Thank you, Chris I'm going to hand that question over to Kai.
Okay. Thank you. Thank you for the question Grace So in terms of the quantification of the.
2022 second quarter guide so in terms of the.
The ramp up costs and the under utilization, we said that in the first quarter. We've had about 10 million of Unabsorbed fixed costs. This we expect to go up by a few million a quarter on quarter there.
There is going to be more than that also in addition for general ramp up costs that we are still going to have higher general product cost for the U S. P theory is above all a current prices that we are getting for that particular product in terms of.
Aluminum, it's probably and other supply chain costs that have been going up that would also bring the cost up by by a few million dollars on a quarter on quarter basis. There was a third item that you mentioned.
Okay.
I think.
My question was on the margin moving to the second half by segment.
For T C Yep.
Okay, I would say you know on D. G. As he said we are gross profit positive in the first quarter with all T. O M charges already and we expect that to increase to get better and by the exit rate in the fourth quarter.
We expect to be also positive funding a beta level. It's also taking the the opex and the depreciation into account.
And then on the P series as we are moving through the second half.
We are having that a contract that still uses legacy prices on all of our U S. P series and a big part of the shipments in the second half and currently is going to be that contract. So we're not really making margin projections for the P series and a lot also depends on where.
Supply chain costs by going into the second half.
Hey, Grace, maybe what I would add to that as you know other pieces on the margins as we go into the second half.
Talked about we are implementing a more significant price increases at the D. G.
We think that's something that will also give some some margin uplift as we get into the second half.
And as well as kind of highlighted.
Axiom, six which is one of the dominant products going into D. G.
Scales up the economies of scale kicked in then the prices go down. So that's also going to help us with margins.
Okay got it thanks for the details and then.
On your deal with C. D. I just wonder if you can give a bit more color on pricing.
I think you talked about gross margin target of 20 plus percent for RBC lines, though.
Are you starting dose volume at 20, plus 20 plus percent margins. Thanks.
Yeah. So typically when we talk about the margins for I B C. We usually say is when we launch a new product like Max six.
Do you see margins that are in the twenties.
And you know I'd say that that especially when you look as we get into the second half and as Mac said scales that are I think you would see numbers in line with that.
One of the other pieces that that also adds to this is the addition of the AC panels. So this is the micro inverters being attached to our panels that also brings good good.
Good margin on a percentage basis, but it also adds about 50% revenue effectively 50% margin per.
Customer installation that we do so it's another nice matter at her two to margins and we continue to grow the penetration of AC panels, which also has a good harbinger of.
The future of that so we're going to have as we introduce storage into that space.
Okay. Thank you I'll pass it on.
Yeah.
Thank you.
Our next question comes from the line of Fayetteville with Raymond James Your line is open.
Thanks for taking the question.
Let me zoom in on on Europe , 43% of your revenue.
This quarter.
The mix within Europe in terms of a.
Specific country sources of demand has that changed at all since the war started.
So not really I would say that the demand in the channel base that we have.
On a percentage basis, we've seen demand just grow overall.
You look at a market like Italy, where we've got greater than 25% market share.
That has surged, but as have other markets, where we're I would say a lower share like in Spain. For example, we've also seen a surge in demand.
Taking care of those markets.
Prioritizing, where we need to right to make sure we get panels to where they're not only most needed, but where we have the most dedicated partners, where we have the better margins.
But I would say just demand overall across all of Europe is just Serge.
Okay.
On E D. C V D. One thing we've we've been observing is.
Suppliers from South East Asia.
Are reluctant to sell and perhaps customers reluctant to buy.
Until there is clarity at least on.
The question of whether tariff might be retroactive.
Two the beginning of this year.
Have you had any any customers that are in the U S that is which are reluctant to take product.
Because of concerns about.
Whether it's tariffs might be retroactive.
No we've not if anything I think we've seen probably a heightened level of demand because of the trust and faith that goes into us as a supplier.
Peter.
More color perhaps.
Sure.
Right.
Although we haven't had any customers.
Reserve.
Or ask us to reserve for future tariffs.
I think.
Well my broadly speaking.
The.
The <unk>.
Allegations.
Oh, the anti circumvention.
I really targeting in China centric business model that.
It does not resemble our company.
And I think we're confident that.
We will not.
Being exposed to tariffs on that basis.
Okay, and speaking of China, what's the latest on the profitability of the joint venture.
And maybe just more broadly some context on the domestic.
Level of demand in the Chinese market for the JV.
So I'd say, we are still seeing it.
Strongly tilted towards domestic demand in China, that's still pending to be the place where we are seeing the best pricing globally.
For that product.
We are beginning to take a look now that increasingly developers are looking at some.
Index costs hedging and other elements that can make some of those deals more palatable to us we are going back and looking at our strategy with that probably too early to say, if that's going to translate into more rest of world utility scale.
Business for us outside of China.
Say today, it's still dominated by business within China.
Alright, Thank you very much guys.
Great. Thank you Pablo.
Okay.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line with cabin Ponant with Macquarie. Your line is now open.
Thank you I have a couple of questions on the utility on the U S utility business I guess the first one is could you kind of give us a roadmap for the production ramp now that it's up and running you know and you're delivering product.
Over the next couple of quarters or maybe asked another way when were you kind of be at the one eight gigawatt run rate.
You know of shipments.
Okay.
Yes, so we are in the process of ramping.
As we speak as you know and our.
<unk> is that by the time, we get into 2023 by early 2023, you'll see us ramped up to full capacity on that 1.8 gigawatt.
Yes.
Okay, and then I guess.
Talking about the the margins with the charge you're taking here in the current quarter to write down. The initial sale is the implication of that those just run through with with a zero margin at this point you won't brocade further losses since you're taking a charge in Q2.
Yeah, and that's kind of weighing on that question.
So.
Kevin So.
So we take we take a charge on the inventory that we expect to have on hand at the end of the second quarter. So as we move on we are going to do this test at the end of every quarter and field tests are where the gross margins are positive or negative and.
If we are having.
Having inventory evaluation, that's higher than the prices that we can get into the market. We got a we got it right the inventory down so its not the charges that we're taking for all in future quarters, such as something that pertains to the inventory in the at the end of the second quarter.
And as we ramp also we expect of course cost to come down off this office product as we start ramping as we get into scale when.
When exactly are things that are going to cross over.
We're not projecting at the moment.
Okay. That's helpful and then last question.
The you'd referenced you expect to start booking sales for 2024.
In the current quarter. It was with some of the index protections do those would you expect that those will also come with the favorable prepayment terms that you saw.
And some of the more recent bookings that were very helpful to the cash flow situation.
Yeah, So I would expect that they would like that's something that is.
It's a good healthy part of that business, especially given the demand and the.
The prepayments have come.
To us so they get a very favorable way. So it's something that we're engaged it might vary from a from a deal to deal basis, but by and large.
We would be looking at prepayments.
Okay. That's all for me thanks.
Great. Thank you Kevin.
Thank you.
We have a follow up from the line of Alex <unk> with Bank of America. Your line is open.
Thanks, guys I just wanted to hop in for one more here if I may.
We've actually touched on this too much but as far as the Sunpower one.
Guess rollout if you will you know pretty exciting and it sounds like there's a lot of.
Sort of Optionality here, which I know many many in this space are targeting but you know you guys are obviously kind of throwing your your hat in the mix I was curious, though I mean, if you can speak to kind of the economics.
Of this platform and what it does for you from a from an economic lens I know you sort of talked about certain streamlining.
Channel for your for your dealer partners and what have you, but I'm curious like how you talk about that how this could actually flow through and how you plan to communicate its impact to the market.
If you can speak to that at all thanks.
Sure. Thanks, Alex.
No I think what what makes our approach into this space a little different is that really coming from it from the standpoint of the strong channel and brands that we have it all starts with best panels.
For residential that we have the positioning that we have the closest to the channel.
And so when we and then the other piece I would say that makes it a little different is that we really are about partnering with other kind of best in class product suppliers globally. So.
For example, as we were looking for storage for Australia, and Europe LTE.
I don't think Esf's, who has a really strong footprint you know a fifth generation product very strongly reliable they were a great partner for us and.
And working with them.
The benefit we get from them is their product.
The white label it make it a kind of a combined offering from us the benefit they get as they effectively get access to our channel through us and so we're able to monetize that in a way that has attractive margins.
We saw the same thing happened with with AC panels, we have a unique way of selling that and educating customers.
Got EV Chargers that we've talked about that we expect to be announcing in the second half of the year.
So, it's really going to be broadening and growing quickly that beyond the panel offering which again. It has this wrapper of a sunpower one.
Software.
Ecosystem and app around it but.
But it really rides on the back of the bus just doing a better job of monetizing that customer engagement and all that goes into that customer engagement, including the relationship with the channel.
I would expect as it grows in time, you would probably start to look at us.
Pension, calling that out separately when the time was right and so we will probably give you more transparency into how those numbers are growing.
Premature to do that now but.
Certainly something that.
But I think we'll be looking at in the future given the growth expectations that we have.
One comment I would add to that as I mentioned earlier, if you have a D C panels.
If you go to the AC panels that adds about 50% more revenue.
When a deal we would close without really customer and then you add storage that ads are basically it doubles. The D. C panel revenue. So you really look at a very significant revenue and margin adder for us again going back to the channel that we have with the panel that sits at the foundation of it.
Thanks, guys I'll take the rest offline.
Great. Thanks, Alex.
Thank you.
As there are no further questions. We will now conclude the call. Thank you. All again you may now disconnect.
Yeah.
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