Q2 2022 Maxeon Solar Technologies Ltd Earnings Call

August 18, 2022

Good day, and thank you for standing by.

To Maxion solar technologies second quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the Speakers' presentation, there would be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker, Mr. Robert Leahy of Maxion Solar technologies, Sir you may begin.

Thank you operator, good day everyone.

And welcome to <unk> second quarter 2022 earnings Conference call.

With us today are Chief Executive Officer, Jeff Waters, Chief Financial Officer, Guy drove back and Chief strategy Officer, Peter answer 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 <unk> website.

During today's call we will make forward looking statements that are subject to various risks and uncertainties that are described in the safe Harbor slide of today's presentation today's press release.

And other SEC filings please.

Please see those documents for additional information regarding those factors that may affect these forward looking statements.

Hence this call. We have also posted a supplemental slide deck on the 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 <unk> Investor Relations website.

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

Let me turn the call over to Maxion CEO , Jeff waters.

Thank you, Rob and good day everyone.

Today I'll provide a detailed update on maxion to ongoing transformation and our progress toward achievement of our long term financial model.

<unk> will review, our financial performance and outlook and will conclude with Q&A.

First though I'd like to acknowledge the recent passage of the inflation reduction Act and what it means from axiom.

We couldnt be more pleased with the result of this legislation after more than a year of consideration in Washington.

The investment tax credit extension or a new long term tailwind for both our utility scale and DG businesses.

As a reminder, we just re entered the U S utility scale business in 2021 and have only booked nearly three five gigawatts to date.

And on the DG side, we commenced shipping directly to commercial installer as last quarter and are launching our residential channel later this year.

We were also pleased to see increased support for electric vehicles, which should expand demand for more efficient and larger residential solar systems, a category, where maxion has been a leader for decades.

And last but not least our strong supporters of U S domestic manufacturing.

Thrilled to see inclusion of the key provisions previously proposed under the solar energy manufacturing for America Act known as FEMA.

We believe the direct pay incentives and potential for domestic content ITC bonuses provide a strong catalyst for U S solar manufacturing.

Maxion is very well positioned to implement the objectives of this legislation.

We spent over a year preparing for exactly this scenario and are well down the road with respect to site selection facility design and financing.

Our proposed three gigawatt facility has the potential to drive significant top and bottom line growth for maxion in 2025 and beyond.

We have reignited our project team to full Byrd and we'll share more details on this project at our upcoming analyst day.

Now, let's talk about Maxion second quarter. In addition to exceeding both volume and revenue guidance, we hit our adjusted EBITDA guidance range, reflecting what we believe will be the margin trough in our company transformation.

We also achieved several important strategic milestones.

First we began production on our second Maxion six production line in fab three largely completing the RBC technology refresh at that site and bringing our total IDC capacity to over one gigawatt for the first time in over a year.

This increased supply will allow us to better feed our DG channels in Europe , Australia, and the U S where demand and Asps for these products are very strong.

Secondly, we started volume shipments of our bifacial performance slide panels into the U S from our Mexicali Macau.

With a contracted backlog of over three gigawatt for deliveries extending out through 2024.

We're solidly booked out in our U S utility scale business and are looking at opportunities for locking in longer term supply contracts for 2025 and beyond.

Finally, we announced further details around our beyond the panel roadmap, including introduction of our reserve battery storage system, and our product roadmap, including our drive EV charger offering and the Sunpower one software platform.

And since the end of the quarter, we strengthened our balance sheet with a $207 million convertible bonds will allow maxion to pursue deployment of maxion seven in fab four and our Ensenada Mako.

As well as to make further investments into other products and offerings such as performance line and beyond the panel.

In short despite facing a challenging global environment over two years of operating in existence.

<unk> is delivering on the key elements of our transformation, while focusing on our healthy balance sheet.

We believe we are well positioned to grow revenue and expand margin with our sight set clearly on gross margin breakeven by the end of 2022 and achievement of our long term financial model within 2023.

Now lets cover some second quarter execution details through the lens of our three pillars of strategic growth beginning with the leading panel technology.

While we're best known for our RBC technology, Maxion, and our <unk> joint venture are also pioneers in the leading players in the shingled cell technology space a product we sell is our performance line.

<unk> produces and sells multiple gigawatts of these modules within China, while maxion focuses primarily on the global DG market, where we sell performance line panels in roughly similar volumes to our RBC panels.

And D. G. Both panel types are increasingly sold with integrated power electronics and soon with our newly introduced reserve battery storage product.

As with our RBC technology, we're continuously improving our single cell products and are in the process of introducing our sixth generation performance line panels to our residential and commercial channels.

<unk> panels deliver higher performance at lower cost and perhaps most importantly, with significantly increased supply capacity to address surging demand in Europe .

The increase supply of <unk> will allow us to reallocate some of our ABC supply toward higher ASP opportunities such as the residential and light commercial markets in the United States.

Speaking of RBC I'm happy to report that we have transitioned fully from axion <unk> maxion six with a total maxion six capacity of approximately 500 megawatts.

Our maxion seven pilot line has achieved its mission and with sufficient liquidity now in place we plan to begin the upgrade of SaaS for and our Internet of motto from Maxion <unk> Maxion seven in the near future.

Considering the favorable market conditions, and our strengthened liquidity position.

We are now also evaluating the option of moving to larger wafers. During the conversion project, who will provide further details during our analyst day.

Maxion, seven enhances and customer benefits and enables higher asps relative to maxion three.

Growing adoption of electric vehicles, and heat pumps is causing a fundamental change in household energy needs and with roof staying the same size the best way to add value to the homeowner is with more efficient panels and longer more reliable operation.

Moving to our differentiated DG channel 2022 is shaping up as a really strong year for demand in our DG business in.

In Europe , we posted our fifth consecutive record quarter for shipments with announced price increase is expected to materialize significantly in Q3 and Q4.

Supply timing and logistics remain a challenge at the moment.

Team is executing well hitting or exceeding delivery targets and end customer NPS scores.

In Australia. The team also exceeded sales targets and executed a very well attended and energizing installer roadshow focused around the launch of our battery storage and end customer software products.

AC module sales as a percentage of revenue climb to the mid 30% range in the second quarter in Australia behind only Netherlands, and France, where they now account for the majority.

We are seeing a clear preference by end customers for complete systems provided under Maxion Sunpower brand with over a decade of presence in most key markets and our long standing reputation for top quality and customer service.

We continue to see channel partner expansion in Mexico and are very pleased to report that with BBVA the largest lender in Mexico. Our installer partners are able to offer their customers financing terms unique to the maxion offerings.

We're also providing our partners with qualified lead opportunities from campaigns, the bbva's broad customer base.

We believe that financial products and lead generation will be an important part of our long term beyond the panel offerings.

Pulling back up a moment to the bigger picture in our DG business. We are now in our 17th year as the global Solar panel technology leader, we are the only solar panel manufacturer with a direct to installer model at scale.

We believe the combination of these two factors provide us with a solid economic moat.

Our differentiated products attract installers, who understand the benefits of selling a premium product under a strong brand.

Our channel provides us with a conduit to the end customer and the opportunity to influence how the product is sold and for how much.

As a result were somewhat isolated from short term solar market volatility and are well positioned to expand our beyond the panel offerings.

In 2023, our first full year with full maxion six production, we project that our DG business will contribute gross margins of more than 20% by year's end.

Keep in mind that 2023 will still include significant legacy maxion, three capacity and beyond the panel business in its early days.

Conversion of Max three to Max seven and continued expansion of our beyond the panel attach rates should provide further DG margin tailwind in the following years.

Our third strategic pillar is our focused utility scale effort. Our sales team here also continues to execute very well.

We signed two additional contracts for over one gigawatt of deliveries in 2020 for all.

All contracts include partial prepayments and we executed our first agreement using a new variable pricing structure designed to reduce our margin volatility.

While the near term ramp of performance continues to be affected by elevated supply chain costs and impact of Covid related zero tolerance measures on our equipment suppliers in China are.

Our long term prospects for the U S. Large scale business are strong with a total backlog now standing at three four gigawatts.

Right.

Since announcing this initiative in April of last year, we've been continuously increasing our bookings volume in a steadily improving asps.

After more than a year of Capex and Opex investment, we now expect to nearly double our revenue run rate between early 'twenty two in late 'twenty three.

In closing at the summary level Maxion is serving two distinct end markets each based on differentiated competitive advantages and with unique contributions toward increased shareholder value.

Our engagement in the utility scale market has the potential to grow our revenue to unprecedented levels, even counting our legacy Sunpower days.

And to do so with healthy margins and a modest opex structure that facilitates attractive EBITDA generation.

Our offerings for the DG markets are expected to generate 20% or higher gross margins. Thanks to our highly differentiated panel technology and direct to installer channel and it has the potential to evolve over time from our components business to our systems and platform model.

I look forward to sharing more of our vision for serving these two end markets at our upcoming analyst day.

With that I'll turn the call over to Kai.

Thank you, Jeff and Hello, everyone.

I will discuss the drivers in detail on last quarter's performance and then provide guidance for the current quarter.

Second quarter shipments were 521 megawatts exceeding our guidance range and growing 7% sequentially. Thanks to exceptional delivery efforts to European customers and the initial shipments into the U S utility scale market, which commenced commercial deliveries in late.

Okay.

The majority of our European shipments this quarter, where performance line products from our HPV joint venture.

We also saw an initial contribution from the new North American performance lines facility.

Total revenues exceeded our guidance range as well and were also up 7% on a sequential basis to $238 million.

Year on year, our top line grew by 35% mainly as a result of increased performance line volume.

Revenues benefited both sequentially and year over year from price increases in DG markets, including the United States, where this was the first full quarter of the new 2020 tools from our pricing.

Asps for DG grew slightly on module price increases in Europe , as well as a growing amount of non tangible revenue.

On a blended basis overall asps were flat sequentially due to a higher mix of performance line shipments in both DG and utility scale.

While <unk> volumes are expected to grow in the near term as the conversion to Mexico. Six is completed we expect to see a similar overall ASP trend going forward.

With price increases and a higher mix of non panel sales offset by a growing share of lower priced performance nine volume.

non-GAAP gross loss came in at $24 million.

Second quarter headwinds impacting gross loss included $14 million and ramp related capacity underutilization charges and $7 million in lower cost or market provisions for quarter end inventories of our performance line products for the U S market.

Our gross margins continue to be affected by elevated supply chain cost, which we estimate to have had an adverse impact of $40 million year over year.

These annual supply chain cost increases were partially offset by $30 million of price increases compared to the year ago quarter.

Also included in gross loss is $3 3 million charge for out of market polysilicon prices.

For several quarters now polysilicon prices in the market has gotten ever closer to the fixed prices underlying our long term take off take contracts.

And we expect that significant if any out of market charges in the remaining two quarter offset contract than what we have experienced in the past.

As at the end of the second quarter, our remaining obligations under that contract is stood at 33 million Boe.

For which we have made $12 9 million.

And prepayments already.

We also agreed to a $15 $2 million settlement of our previously disclosed contract dispute with our polysilicon supplier over the alleged trigger off and inflationary price escalation of results.

As a result, we will be making six equal monthly payments through January of 2020.

Second quarter GAAP gross loss, which includes a charge to cost of goods sold for this type of event.

$39 million.

non-GAAP operating expense came in at $30 million better than our guidance range.

This reflects continued austerity.

During our transformation.

GAAP operating expenses were $36 million.

And included restructuring charges of $1 8 million.

Primarily related to the shutdown of our remaining module manufacturing facility in France.

This is the final step in the post spin clean up all the manufacturing excellence.

Adjusted EBITDA was negative $37 million in line with our guidance.

Sequential decrease is attributable to the previously mentioned margin sector.

GAAP net loss for the second quarter was $88 million.

Moving to our balance sheet cash levels, including restricted cash decreased sequentially from $208 million to $180 million due to net loss capital expenditures in the quarter and increased inventory levels.

Operating cash flows were a negative $11 million with net loss and inventory increases offset partially by careful management of other working capital items.

Well as $54 million in prepayments from our recent utility scale bookings.

<unk> went from 92 days at the end of the first quarter to 89 days at the end of the second quarter.

Capital expenditures in the second quarter were $18 million.

Somewhat lower than our guidance range due to careful cash management.

As Jeff mentioned, we recently announced a $207 million private convertible bonds issue to our shareholder TVE.

The note pace at seven 5% coupon has a conversion price of 20 $313 per share at two year Hot non call provision and a five year maturity date.

This transaction provides the funding for all Nexium seven conversion project other ongoing and possible future capital investment projects working capital and general corporate purposes.

This transaction also highlights <unk> continued commitment to and confidence in maxion success.

Now, let's turn our attention to the outlook for the third quarter.

We expect that our P&L will improve sequentially as the balance of headwinds and tailwind is expected to return in all payroll, leaving the second quarter to be the margin trough as previously guided.

Q3 will be the first quarter, where we shipped significant volume to U S utility scale customer.

Albeit from cell and module capacities that are still in ramp mode.

The top line impact will be significant going forward, but the margin contribution will lag until 2023, when the factories are fully ramped and we complete deliveries on early 2021 bookings that were priced below current levels.

As Jeff mentioned, we successfully negotiated a variable pricing mackellar them on our most recent utility scaled booking and expect that this was derisked our utility scale margin projections in the future.

Positive contributions towards gross income in the third quarter will include higher ITC volumes from the Mexico, six brands and price increases on DG products in various EU countries.

We expect to deliver topline growth and margin expansion this quarter and projected trends largely continue towards achievement of our long term financial model within 2023.

With that in mind, our third quarter guidance is as follows.

Please also see a detailed guidance breakdown on slide nine in our supplemental earnings slides.

We project shipments in the range of 580 to 620 megawatts.

With sequential growth driven by an increase in both DG and utility scale shipment.

Revenue for the third quarter is expected to be in the range of $270 million to $290 million.

non-GAAP gross loss is projected to be in the range of $10 million to $20 million.

Which includes an approximately $1 million impact from out of market polysilicon contracts.

The sequential improvement is driven by a higher mix of Mexico takes further ASP increases in DG markets to offset historical unfavorable supply chain product development and improved output from the initial U S utility scale, although we expect to again incur incremental.

Provisions on all performance line inventories for the U S.

non-GAAP operating expenses.

<unk> to be $35 million.

Online is $1 million.

We will continue to manage our opex very carefully while investing in initiatives that will drive.

Significant long term value for the company.

As a percentage of revenue, we expect operating expenses to decrease considerably for the balance of 2022 and in 2023 extra capacity around and shipment volume increase.

Adjusted EBITDA is expected to be in the range of negative <unk> 27 to negative $37 million.

Third quarter capital expenditures are projected to be in the range of $21 million to $25 million.

A few final comments regarding our longer term outlook.

In our discussions people regularly asked us for details on the financial turnaround require for us to reach our stated target of 12% adjusted EBITDA within 2023.

We understand the interest given that implies a plan to go from negative to positive EBITDA and a year over year improvement of more than $100 million.

Let me shed some light on the topic.

<unk> Maxion, two and five at end of life. The DG business is gross margin positive today led by robust Mexico ASP.

We target a profitability of our DG business that we believe will drive maxion to an overall breakeven gross margin level by the fourth quarter of this year.

Further we expect margin expansion to occur in early 2023 with Mexico on statements fully ramp growth in beyond the panel and contributions from our new U S residents with channel.

In 2023, we expect our U S facility capacity to become fully utilized improving our cost levels.

In the back half of the year. This business is scheduled to start shipping the higher ASP bookings from 2022.

With that I'm trying to call back subject to summarize before we go through Q&A.

Thank you Kai next week Maxion will be celebrating its second birthday, and what an amazing two years its been.

Two years of continuous and significant investment for the future.

We've upgraded the majority of our products.

Those unprofitable plants ramping new capacity and progressing to fully utilized factories.

Within months about lasting a decade plus out of market polysilicon contract and we're doing all of this during a tumultuous industry environment.

We've been consistent over the last two years and saying that by mid 2022, we will have the majority of the foundation set for a financially successful maxion in 2023 one.

<unk> poised to reach our target model over 20% revenue growth with EBITDA margins of 12% or greater.

With a few more quarters to go in to turnaround our recently bolstered balance sheet and what the future can we expect to include U S manufacturing.

It continues to be an exciting time to be at maxion.

We appreciate you all joining us on this journey.

Now, let's go to the Q&A session. Operator. Please proceed.

Okay.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Star one to ask the question.

These standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of.

Julien Dumoulin Smith with Bank of America. Your line is open.

Hey, Tim it's Alex on for Julien Congrats on the quarter here.

Wanted to ask a little bit more and obviously I think one of the headlines people are watching closely here around this this expansion effort that you guys target in the U S. If you could give any clarity as far as the timing that you might expect.

As well as the credits that you would think that you're eligible for I know that theres a lot to unpack between some PTC as well as.

Possible itc's.

For some of these.

Solar panel manufacturing facilities. So if you could clarify on that timing as long as the credit availability. Thanks.

Sure. Thank you Alex this is Jeff So maybe just first to describe it at a higher level.

We feel we are in an excellent position to help drive the kind of the reemergence and resurgence of the U S solar supply chain.

We are right now as we speak cutting our teeth on the first scale up.

Close to two gigawatts of capacity.

Malaysia, and Mexicali, that's really giving our teams the learning curve and the capability to do the next generation of scale up for us, which we're expecting here to be in the U S market.

We've also through this process established early proven U S friendly supply chain, we're shipping dozens of of shipments a week.

The U S. So we feel real confident with that and we've also got tremendous demand because of who we are as a company in the supply chain.

So when we think about this next phase.

Part of this is the Doe application, we've got a real strong application that we feel fits the administration's goals for the program. So we have good confidence there.

Expect about six months for the loan guarantee to come through and then once that concludes about two years from that the first production. So you can think about kind of early 2025 for us to begin producing.

When we think about the credits I guess first our expectation would be that we would meet all the requirements for the.

Both the fab the cell fab credit.

<unk> per watt and also the motto credit of seven per watt.

And when it comes to other things around the ITC adder for domestic content.

Our expectation there is that we're kind of piecing. It through we will expect the details that gets finalized here over the coming months, but obviously our goal will be to do everything we can to meet those domestic requirements and help maximize the ITC adder.

Great.

And I think just my follow on if we can sort of I guess focus back a little bit to the near term as far as the margin guide for <unk>.

<unk> I know you mentioned $40 million of year over year headwinds as far as supply chain.

And I think you mentioned last quarter, you were trying to sort of reprice some of your contracts, particularly at the.

Utility scale level to account for some of that so I mean, if you can give us just little more color on what the moving pieces are there.

As far as how successful your efforts were on repricing, what the headwinds Youre seeing today are and then how we expect that to evolve in Q.

We ended the year in the EBITDA guide that you gave for 'twenty three.

Okay. So I'll speak first on some of the repricing efforts and then I'll hand, it over to Kai to provide some more details on some of the other contributors to margin improvement.

So first I would say that we've been very happy with the the customers that we've taken on with our utility scale business within the U S.

We have been able to secure a handful of very strong.

Professional just great companies with great leaders.

And really have built up some good collaborative relationships. We are working through some of the contracts I would say I'm optimistic we're not ready to guarantee anything or if we put any of that into the guidance but.

Im feeling optimistic that we are going to be able to restructure some of those contracts in a way that will be favorable to us.

I would say good progress there, but nothing yet to report.

Hi, do you want to expand on kind of more broadly on margin improvement.

Yeah, absolutely. Thank you, Jeff Hi, Alex in the Sky.

So in terms of the margin improvements, we put a few markets out there. Obviously, we said that on the DG side of the business. We are already gross margin positive today.

We also mentioned that we are targeting an overall gross margin breakeven fall maxion in the fourth quarter. So thats kind of the first mark in.

In the ground.

The third quarter margin guidance, Thats really kind of a way point to go there as we think about that improvement. That's further improvement on the DG side expected, we are expecting higher we have been increasing prices. So we.

And we are expecting higher prices to report next quarter on that side, we have higher volumes on maxion sakes, but also on the pulp side as we are ramping that facility, we expect reduced.

Idle cost.

We're expecting still some low of cost or market provisions because of the low prices at which we are currently shipping those products, but all those things should be improving over time and then as we're going into 2023, we see further tailwind there on the U S power plant side.

As we thought as we start shipping the higher price later bookings for that capacity as well as starting to fully utilize that capacity over time in 2023 and on the DG side of the business. We would expect more shipping also from <unk>.

<unk> series into the various DG markets, which are really really strong market right now and in the foreseeable future as you know and so we expect beyond the panel offering to take a bigger share of the of the DG.

Business and last but not least also our further entry into the <unk> space in the United States, which we are starting to gain a foothold there and expand from there.

Thanks, Tim I'll take the rest off line.

Yes.

Thank you.

Please standby for our next question.

Our next question comes from the line of.

Donovan Schafer with Northland capital markets. Your line is open.

Hi, guys. Thanks for taking the questions.

I just wanted to follow up I just wanted to follow up on Alex's question about.

You kind of renegotiating those contracts fixed price lines for the power plant pizza as modules.

So I guess I'm, just curious from a timeline standpoint.

When.

Okay.

Yes, there's always some concern and we just have to be prepared for it and aware of if you get caught in kind of a logo low gross margin or potentially the negative gross margin contracts. So hypothetically speaking if.

If that were to.

The contracts you've signed.

Not renegotiated.

A more favorable way how long with the impact persist I guess I'm sort of asking when would those contracts that maybe don't look quite as great right now.

How far would extend and then where they would roll off.

Any color there would be helpful.

Sure. Thanks Donovan.

As we've said in the past these were the very initial contracts that we took for the business. So these would have been priced back in early 2021, when it was a very different.

Supply chain market with different expectations for.

For 2022 and 'twenty three.

So.

The way you should think about them is that those kind of lower ASP contracts with.

It would be done within 2023.

And when you then because we have also been reporting I think since then we've been getting pricing that is more in line with where the market is today.

As well more recently, we've been doing contracts that are cost to indexed. So we've evolved and I think when you think about 2024 and beyond youll see much less.

Margin exposure than maybe we have with some of the very initial contracts that we did.

Okay.

Great.

And then I also.

So wanted to ask so for.

ASP uplift going from Maxion five to Max down six.

Is there any way you can kind of quantify.

What the the.

The incremental premium and maybe per what youre able to get or unimportant.

Unimportant part of these technologies is also lowering the costs associated with making.

What is still a premium product so.

Or and or sort of what the gross margin improvement would be maybe the incremental sort of margin per watt cents.

Or what you can get through.

Through this maxion five some axon flex and just for simplicity, yes, maybe just.

Because I know your mix is going from like 50% to 100%, but let's just focus on like panel the panel apples to apples. So for one one maxion five panel versus one kind of Max on fixed panel.

Sure.

Sure I think the way to think about maxion, five and Maxion, Texas, It's essentially it's the same technology.

<unk> technology. It was just a bump up in kind of a minor bump up in wafer size. It's essentially it's the same.

Technology. It was just a bump up in kind of a minor blip up in wafer size.

So the overall performance of the panels.

And the specs of the panels are very similar.

As you as you intimated, though it's really more around the cost reduction for Max five versus Max six.

So that's what we saw there and I would say, even even say the same really about maxion six to maxion three maxion three years.

So also a very good competitive technology that provides very good industry, leading efficiencies out in the marketplace.

But maxion six provides a cost reduction.

Relative to that.

When we think about maxion seven.

Really you have got a couple of pieces. There. The first instance of maxion seven is going to be.

Not really so much about cost reduction as it is going to be about a significant efficiency improvement.

But also around adding additional features like elimination of hotspots because of the architecture of the cell. So it's.

For us when we think competitively it's really it's not just about efficiency, it's about things like how long our panels.

Stay out in the marketplace with industry, leading 40 year warranties with a much lower degradation, what's occurring with them what the competition has but from generation to generation for Max three to five to six.

Even with the first instance of seven it's more around.

I would say the first three to six has been more around cost reductions are two to <unk> been more around cost reductions and seven is when you'll really see a performance bump.

Okay, and then actually on that topic.

You guys just talked about.

Kind of your best ever efficiencies coming off the pilot line for Max down seven.

And I know you mentioned Youre, maybe not at a point, where you're ready to quantify that insurers numbers with us.

I mean, if you are that that would be great.

Please do.

But I guess is there a sort of a timeline of when you may be you're waiting to get a third party certification or anything I'm just wondering.

Or if that's something maybe you guys plan on sharing with us during the analyst day, just kind of the timeline on when we could actually know what those efficiency improvements are.

Sure. So I think at analyst day, we will provide probably more insight into into maxion.

So you can expect to see that there is.

When it comes to.

When it comes to third party verification I think one of the things that certainly sets us apart is that when we talk about efficiencies that we're achieving.

It is on.

Cells that are going into hundreds of thousands of cells per day type volumes, it's not something that we're doing in the laboratory I think we've established established credibility over the decades.

In us being able to when we talk about our efficiencies and performance, we're achieving that it really is something that will be at the production level, what we've talked about and I'll. Just reiterate is that we continue to see in our labs.

And on our pilot line, which is a replica of what will happen in high volume production, but out of those lines. We are seeing record cell efficiencies and we're putting together panels that will create record panel efficiencies.

And so you can look at where we sit with our.

Maxion six panel as an example, and just know that we're going to do better.

How much better that will probably give more insight into our intuit into our analyst day that we have coming up.

And just on the production line question you said that you are hitting targets with the pilot line I'm. Just curious if you can tell us kind of what what attribute youre talking about there.

Running the pilot line at a faster speed than you were I know you were at half speed I think on the last call.

Is it increasing that speed and having a higher yield.

Panels.

Coming out or what are they attribute or metrics or youre, saying youre seeing you had targets there.

What I was referring to there was more around the efficiencies that we're producing so the actual outperformance from the.

Perspective that.

Okay being seeing record performance awesome, I guess I'll take the rest offline. Thank you guys.

Sure Okay. Thanks Tommy.

Thank you.

Please standby for our next question.

Our next question comes from the line of Philip Shen with Roth Capital Partners. Your line is open.

Hi, everyone. Thanks for taking my questions first one is a follow up on the.

The next leg of capacity expansion I think Jeff you mentioned that the three gigawatts of cell and module.

Come online early 2025, I just wanted to explore that a little bit more would it be possible that it could come online.

Fair amount sooner than that when we think about historically my lines take about a year to bring online and maybe six months, even six months of the year and then sell it might be about a year. So do you think it could actually be sooner and if so how much sooner and then as it relates to.

The next facility to what degree are you guys contemplating another three gigawatts of zoning laws passed now there's a very clear path of course, the ITC adder.

Domestic content out there is not as clear, but for an <unk> is very clear for us in incentive and so are you guys very much contemplating already that next three gigawatt or larger facilities.

Sure.

First I would say, we're not ready to commit to anything earlier than what we stated around early 25 at the beginning of production.

What I would add that what you said is that it really is us.

Leading to construct a new facility to house the cell fab in Moscow, and that's part of the.

What makes it not a one year turnaround if you look at the current one eight gigawatts that we have with the <unk> and Mexicali the fab in Malaysia.

That fits roughly what you were saying we were able to get those up and running and first production in about a year's time.

A little bit longer if the delay here, we'd be doing construction within the U S. How is that new facility.

So that would be the comment I'd have on that I think in terms of additional capacity certainly there is demand thats out there, let's say from where we sit today.

Not ready to announce doing more than what we've already stated.

But certainly we will continue to talk with customers take a look at our at our progress as it comes along with.

With this first capacity that we're going to be building out.

And we'll be ready to adapt and to proactively jump if we believe that more capacity beyond what we've talked about makes sense.

Thanks, Jeff shifting over to your DG business.

Yeah.

Partnership with <unk> recently, and so was wondering if you could remind us when you expect those volumes to ramp up I think it's back half this year more soon.

And then how much volume do you think <unk> could have in 2023 from a megawatt standpoint.

And then <unk>.

Additionally, when you think about.

The potential for another distributor.

Are you working through that now is is there.

Potential form.

Yes, more partners on near term as it relates to distribution.

Sure what I would say is first we are.

With <unk>, we start shipments in the beginning of 2000 22023.

So January of 2023, we will begin shipments to CD.

To answer I think your third question with with CD there the biggest in the U S. As I know Youre aware.

Very happy with that relationship we see them as a great partner. So our expectation is to really focus and be a great supplier to them along with continued to be a great supplier in the Sunpower, we really do see CDN sunpower as being very complementary and that sunpower with their unique channel model that understands our product knows how to sell.

Premium elements of our panels there'll continue to be a great customer for us. So we're very happy with that relationship CD really allows us to go after the other 90% of the market. That's out there that to date has been served by the likes of LG and Panasonic and there is a big chunk of the United States, That's really looking for maxion panels.

So we're excited to start that relationship.

In terms of the amount of volume that we could forecast that's not something that we are.

Going to be talking about publicly about the kind of volume we could free up what I will say is that we are looking at doing a variety of things.

To re.

Say kind of repartition or redistribute.

Supply that we have from maybe other markets that are less margin attractive at the funnel them into the U S. So we're trying to find I would say as many panels as we can out of our capacity to be able to supply. The U S market now that said we've got other great markets. We serve Europe is a phenomenal market Australia is a phenomenal market.

But there are some markets like.

It would take.

Some of the commercial markets outside of the U S.

It can be maybe a little more challenging from a margin perspective. So you could expect to see us shift more of the <unk> volume into U S. Resi.

Great. Thanks for that detail and then finally on liquidity.

You guys congrats on the really on the converts and the raise there.

What's your sense as to whether or not you might need more and if so would that be driven by the current three gigawatt.

Cell and module facilities decision or do you think.

You are sufficient.

Sufficient liquidity for that capacity and then.

A decision for the next three Gigawatts, that's really what would trigger.

The next leg of potential.

Potential capital and then.

As it relates to the.

Converts.

What percentage of that would you expect to pay in cash.

Every six months it seemed like there was some variability in the release.

K R. Six King do you expect to pay half of that seven 5% and cash or all of it or maybe none of it.

Okay I'll defer the majority of that answer over time, but first I would just say that we are obviously very happy with the $207 million.

Our convertible debt, we were able to do with with TCE at as we think it's a sign of the confidence that they have in the business and where the business is going ahead and the potential that we have but let me turn it over to Kyle to answer some of the more detailed questions you have.

Yes, Thank you, Jeff and Hi, Phil.

Hi.

So in terms of of course, you've seen the terms and conditions and we think they are they are very competitive.

Both of our balance sheet and gives us the ability to the <unk> III to make seven conversion in the Philippines and Ensenada as we previously said among other things.

So that's really really good news here to get that done in a timely manner for that and you have also seen that the market reaction has been very positive on that maybe take a let me take the question for US with regards to the interest yes. It's true it's three 5% of the coupon needs to be paid in cash and depth of our parcel.

Abilities to pay the remaining four percentage points.

We haven't really made up of <unk>.

And yet the first payment that six months out I guess, we make a decision on these things on a.

Payment to payment basis based on the circumstances at the time, but the overall coupon.

Seven.

5% and you can maybe just pencil in an assumption that it is.

Paid in cash, but we will make decisions as we go with regards to the funding how long that's all part of that take US we have said before that the.

Use of proceeds is going to be make seven in addition to put liquidity on the balance sheet that we can use for different things.

Will it be enough for the.

U S expansion likely not we need additional funding for that because that's a lot more than what we have raised and of course as you know we are.

<unk>, that's the vast majority of that funding would come from.

The Doa loan and auto arrangements with customers, which have very high demand for that kind of capacity. In addition to that we always are evaluating a range of options for these kind of growth investments. We are a growth company in a growth industry.

And there are always lots of opportunities and we also believe there are many.

Options at our disposal to execute at the right time, given circumstances and opportunities at that time.

Great. Thanks for the color tie and Geoff I'll pass it on.

Thank you Paul.

Yeah.

Please standby for our next question.

Our next.

Comes from the line of Brian Lee with Goldman Sachs. Your line is open.

Hi, Thanks for taking the question. This is Chris on for Brian I guess my first question just to follow up on the questions on margin.

All the color.

In the prepared remarks, and the Q&A I'm just trying to bridge the gap from like today's gross margin of negative 5% to the 15% gross margin target in 'twenty. Three I know you talked about like drivers like Max online and then also I would like to wrap up the U S utility scale shipments.

Just wondering if you can put some numbers around those drivers like how much how many basis points. It should I expect from like for example, like the.

<unk> also utility scale shipments in the U S and also like what kind of margin ramp should we expect in 'twenty three.

Cai, what I'll hand that over to you.

Sure.

Thank you Grace.

<unk>.

Overall I think.

We have our Jeff has said in his remarks that for the DG side of the business, we are expecting more than 20% margin as part of <unk>.

<unk>, 15% target and the way we're going to get there is with some of these items that I mentioned in the previous discussion here.

And then of course as the power plant side, which at the moment is negative gross margin and there's also lots of dynamics that I described before with regards to.

Quantifying all those.

We haven't really quantified them, yet we are planning to give more color on these different items and I would say their relative contribution to that development at the analyst day. So please bear with US until then but I think the the main points.

We have made altogether.

Okay understood and then on your capacity expansion plan I think besides those three gigawatts.

In the U S for performance line I think in the past you had talked about a potential that Q3 gigawatt.

The expansion for IPC line of course that was depending on.

Funding Optionality.

Now you got.

Sorry.

How is that going to change your capacity plans in terms of both timing and size. Thanks.

Just first in case, you cannot you can add more color, but I would say that.

Our first priority for Maxion seven is to do the conversion.

From Maxion three two maxion seven so you can think about that is the the capacity that we have in the Philippines fab our fab four.

And I would say for any additional capacity adds beyond that.

It really would come along with the.

<unk> proven that we've talked about maxion seven with the re architected mineralization backend of the product which will reduce.

Will reduce both the capex and the Cogs of that property product pretty significantly so that will really be what.

Really unleashes us moving into more capacity expansion I don't think were prepared today to talk about that in any detail but.

Hi than anything I've left out there that you'd want to add.

No nothing really to add.

Okay. Thank you.

Thank you Chris.

Thank you please standby for our next question.

Our next question comes from the line pay Vale Mcdonald with Raymond James Your line is open.

Thanks for taking the question you talked a lot about U S and European markets, Let me touch on Asia Pacific.

The only slight revenue mix, which was down a tiny bit in dollar terms versus a year ago.

That a lack of demand or are you deliberately reallocating volume too.

Two regions with even greater demand.

Yes, great question for Bell I'd say, its a bit of a mix of both I would say first as we said we are reallocating, our demand and particularly our ABC demand.

Two markets, where there is a higher margin potential and just with the surge of demand that we have in the European market.

Some reallocation.

But youre going to see I would say similarly in 2023, given the surge that we're going to have for the U S market to Youll see a more shifting of that.

The other piece, though with Asia Pacific is we do have.

A fairly lumpy a rest of world power plant business as we refer to it and that is taking the performance series product out of the joint venture that we have out of China.

And there I would say we are.

Following the same model that we've been talking about now I think for well over a year, which is that the output. There is no take or pay element to that joint venture or what comes out of that eight gigawatt factory and as long as there is a market in China that can command better Asps and what we can get outside of China will continue to pursue that.

So what you probably saw a year ago as we would have had some revenue from some of the Asian utility scale business. We have that we've not been refilling either to the same extent or at all.

And the most current quarter. So it ends up being a pretty small part of the business for us.

Right now.

With the U S utility scale, and then certain certainly Australia.

Sure.

Europe and U S D G taking up the lion's share of what we do as a company.

My follow up is on something you briefly touched on which is the Chinese joint venture.

I think it lasts.

Or your share of it was negative $4 million this quarter and it's been pretty consistently negative.

I know you don't guide to it but any sense of when.

It should get at least to breakeven.

Let's say the <unk>.

That business is in pretty significant scale up if you go back two three years ago.

2019.

Today, we've effectively scaled that up from zero to eight gigawatt. So it is very much in scale mode.

While you're ramping factories, you've even seen it with our own.

The factories that we've ramped up for the performance series product to the U S.

It does put an impact on profits in the near term, but because you are investing for the future and let's say as that business scales, it's getting more and more cost competitive because it's getting more economies of scale, but as that stabilizes. We expect it to hit profitability, we're not providing any forecast at that level for when we expect.

Is it to get the profitability, but right now, it's probably more of an emphasis on scale and growth than it is on near term profitability.

Fair enough. Thank you guys.

Thank you Bill.

Thank you please standby for our next question.

Our next question comes from the line of Kevin Pollack with Pickering Energy Partners. Your line is open.

Thank you just one last quick question for me with with Maxion seven funded an improvement up in the pilot and ready to scale can you give us a little bit more color on the timing of when exactly when that starts and how long it'll take to fully scale and I guess, what's what will be the ultimate.

Capacity.

Four.

Once that.

That transition has occurred.

Sure. Thanks, Kevin So so first the existing capacity for maxion three in the Philippines is about 550 megawatts a year.

So you can think about Max seven is providing an uptick to that because you are going to be getting higher efficiencies. So more.

More watts per panel than what you would get but.

So think of it as a small bump above the $5 50 that we currently do.

As for timing and as we said in the prepared remarks, we are.

Given the current market environment, given the new.

Capital that we have.

We are looking at doing an investigation of potentially going to a larger wafer.

We currently plan, which was a five inch wafer.

We'll make some decisions on that quickly, but that would have an impact on the exact timing of when Max seven would come from but you can think about it is it's kind of around the turn from 23% to 24, so around that time frame.

Okay. Thanks, and then.

Wanted to ask.

A little bit longer term question on the U S performance line business, so you've kind of talked about the DG margins being 20% plus going forward.

With the U S. P line, obviously negative right now with the startup and ramp costs.

The initial contracts, but what's the margin profile of that U S. <unk> business look like.

Once you kind of move to fully ramp and you're pretty much on full variable pricing contract.

Yeah, absolutely we've been from the get go we've been targeting and are still.

Committed to and forecasting a 15% gross margin kind of our long term.

Financial model target for the company. So you can think about it as a 15% gross margin.

Or potentially better, but that's that's where we've we've been forecasting.

Okay. Okay. So no change there okay. That's all for me guys. Thanks. Thank you again you may now disconnect.

Thank you.

As there are no further questions. We will now conclude the call. Thank you again you may now disconnect.

Oh.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Okay.

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Okay.

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Okay.

Yes.

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Good day and thank you for standing by welcome to Maxion Solar technologies second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker, Mr. Robert Leahy of Maxion Solar technologies, Sir you may begin.

Thank you operator, good day, everyone and welcome to <unk> second quarter 2022 earnings Conference call.

With us today are Chief Executive Officer, Jeff Waters, Chief Financial Officer, Guy drove back and Chief strategy Officer, Peter answer 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 <unk> website.

<unk> and other SEC filings.

Please see those documents for additional information regarding those factors that may affect these forward looking statements.

Hence this call. We have also posted a supplemental slide deck on the 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 <unk> Investor Relations Web site for a presentation of the most directly comparable GAAP measure as well as the relevant GAAP to non.

GAAP reconciliations.

Let me turn the call over to Maxion CEO , Jeff waters.

Thank you, Rob and good day everyone.

They will provide a detailed update on maxion to ongoing transformation and our progress toward achievement of our long term financial model.

I will review, our financial performance and outlook and will conclude with Q&A.

First though I'd like to acknowledge the recent passage of the inflation reduction Act and what it means from axiom.

Would it be more pleased with the result of this legislation after more than a year of consideration in Washington.

The investment tax credit extension or a new long term tailwind for both our utility scale and DG businesses.

As a reminder, we just re entered the U S utility scale business in 2021 and have only booked nearly three five gigawatts to date.

And on the DG side, we commenced shipping directly to commercial installer as last quarter and are launching our residential channel later this year.

And last but not least our strong supporters of U S. Domestic manufacturing we were thrilled to see inclusion of the key provisions previously proposed under the solar energy manufacturing for America Act known as FEMA.

We believe the direct pay incentives and potential for domestic content ITC bonuses provide a strong catalyst for U S solar manufacturing.

Maxion is very well positioned to implement the objectives of this legislation.

We've spent over a year preparing for exactly this scenario and are well down the road with respect to site selection facility design and financing.

Our proposed three gigawatt facility has the potential to drive significant top and bottom line growth for maxion in 2025 and beyond.

We have reignited our project team to full burn and we'll share more details on this project at our upcoming analyst day.

We also achieved several important strategic milestones.

First we began production on our second Maxion six production line in Fab III, largely completing the RBC technology refresh at that site and bringing our total IDC capacity to over one gigawatt for the first time in over a year.

This increased supply will allow us to better feed our DG channels in Europe , Australia, and the U S where demand and Asps for these products are very strong.

Secondly, we started volume shipments of our bifacial performance slide panels into the U S from our Mexicali Macau.

With a contracted backlog of over three gigawatt for deliveries extending out through 2024, we're solidly booked out in our U S utility scale business and are looking at opportunities for locking in longer term supply contracts for 2025 and beyond.

Okay.

Finally, we announced further details around our beyond the panel roadmap, including introduction of our reserve battery storage system, and a product roadmap, including our drive EV charger offering and the Sunpower one software platform.

And since the end of the quarter, we strengthened our balance sheet with a $207 million convertible bond that will allow maxion to pursue deployment of maxion seven in fab four and our <unk>.

As well as to make further investments into other products and offerings such as performance line and beyond the panel.

In short despite facing a challenging global environment over our two years of operating in existence.

<unk> is delivering on the key elements of our transformation, while focusing on our healthy balance sheet.

Now lets cover some second quarter execution details through the lens of our three pillars of strategic growth beginning with the leading panel technology.

While we're best known for our RBC technology, Maxion, and our <unk> joint venture are also pioneers in the leading players in the shingled cell technology space. The product we sell is our performance line.

And D. G. Both panel types are increasingly sold with integrated power electronics and soon with our newly introduced reserve battery storage product.

Piece ex panels deliver higher performance at lower cost and perhaps most importantly, with significantly increased supply capacity to address surging demand in Europe .

The increase supply of <unk> will allow us to reallocate some of our ABC supply toward higher ASP opportunities such as the residential and light commercial markets in the United States.

Speaking of RBC I'm happy to report that we have transitioned fully from axion <unk> maxion sex with a total maxion six capacity of approximately 500 megawatts.

Our maxion seven pilot line has achieved its mission and with sufficient liquidity now in place we plan to begin the upgrade of SaaS <unk> and our <unk> from Maxion <unk> Maxion seven in the near future.

Considering the favorable market conditions, and our strengthened liquidity position.

We are now also evaluating the option of moving to larger wafers. During the conversion project, who will provide further details during our analyst day.

Maxion, seven enhances and customer benefits and enables higher asps relative to maxion three.

Moving to our differentiated DG channel 2022 is shaping up as a really strong year for demand in our DG business in.

In Europe , we posted a fifth consecutive record quarter for shipments with announced price increase is expected to materialize significantly in Q3 and Q4.

Supply timing and logistics remain a challenge at the moment, but the team is executing well hitting or exceeding delivery targets and end customer NPS scores.