Q3 2022 Maxeon Solar Technologies Ltd Earnings Call

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

[music].

Okay.

Good day, ladies and gentlemen, welcome.

Welcome to the Maxion solar technologies third quarter 2022 earnings call.

Currently all participants are in listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host Mr. Robert Lee of Maxion Solar technologies, Sir you may begin.

Yeah.

Thank you operator.

Hey, everyone and welcome to <unk> third quarter 2022 earnings conference call with.

With us today, our interim Chief Executive Officer, Mark Babcock, Chief Financial Officer, <unk>, <unk>, and Chief strategy Officer, Peter Asher Brenner.

Let me cover a few housekeeping items before I turn the call over to Mark.

As a reminder, a replay of this call will be available later today on the Investor Relations page of <unk> website.

During today's call we will make forward looking statements that are subject to various risks and uncertainties that are described in the safe Harbor slide of today's presentation. Today's press release 6K, and other SEC filings.

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

To enhance this call. We have also posted a supplemental slide deck on the events and presentations page 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.

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 Mark Babcock.

Thank you Rob and good day, everyone I was appointed interim CEO Maxion in September when our board and Jeff waters made a mutual decision to transition to new leadership.

We are very thankful for Jeff's nearly four years of service to the company during which we successfully spun out of Sunpower refresh the majority of our manufacturing fleet.

<unk> launched our beyond the panel initiatives and commenced shipping our first performance line products into the United States.

As we look forward to the next four years, we expect our focus to be primarily on panel manufacturing capacity growth.

<unk> of our footprint in the U S market and increasingly material contributions from our beyond the payment initiatives.

The board search for a new CEO is well underway in the meantime, it's a privilege for me to serve the company during the transition.

With that said I'll now provide a detailed update on <unk> key transformation initiatives and progress toward achievement of our long term financial model.

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

Now, let's talk about progress of our business starting with distributed generation, we were thrilled to formally launch our U S channel expansion initiatives at the <unk> Conference in September .

Our largest DG customers Sunpower had a significant presence there and expressed strong interest in our products for 2023 and beyond.

This partnership has evolved since the spin out their relationship remains mutually beneficial and we look forward to continuing to be a key supplier to sunpower well into the future.

We also began booking our first sales of maxion branded products destined for the DG market through a new partnership with Green Tech renewable <unk>.

See newness CEB Green Tech.

This new channel is busy selling systems for delivery starting in January feedback.

Feedback from new installer customers with excellent with many noting the value and differentiation of our 40 year warranty.

As demand for premium solar products increases in the number of alternative suppliers decreases we believe this new partnership should deliver material market share expansion in 2023 and beyond.

Nexium will also cultivate touch points with installers and customers via our new channel program.

Now moving closer to end customers in the U S. We expect to drive ASP expansion beyond our current global average.

Asp's are also increasing materially in core EU markets, like France, and the Netherlands, where modules integrated with power electronics accounted for more than 60% of sales in the third quarter.

Beyond the payroll revenue also grew sequentially in Belgium, Germany.

Italy, the UK and Australia.

Our channel partners, who are preparing to integrate storage would start shipping next quarter as well as our new EV charging products.

We're making our installers lives easier by shipping pre integrated systems from a single source and providing a point of differentiation for their sales professionals to increase close rates at the kitchen table.

We believe maxion is uniquely positioned for success in this portion of the downstream value chain by virtue of our channel structure respected brand and unique and differentiated solar panel.

The initial results are very encouraging and we believe we are just starting to scratch the surface of this opportunity.

Overall DG sales in Q3 were up 25% year over year as we benefited from additional price increases and a higher mix of our maxion six product, which is now replaced all of our previous Nexium five capacity.

Europe set new volume and revenue records for the sixth consecutive quarter.

We were particularly pleased with our business results in France, where we cross the 60% threshold for AC module mix and increased our residential market share to north of 20% in the third quarter up from mid teens in 2021.

Beyond the handle contributions were also strong in Australia, where AC module mix increased to approximately 40% and wherever we began booking orders for storage product sales with delivery scheduled for Q1.

We continue to maximize global DG profits by leveraging supply of our performance bond products in certain markets and redirecting IDC volume to our highest ASP segment, such as the residential markets in the U S and European Union.

We plan to continue this margin optimization strategy in 2023, and expect to liberate a significant amount of maxion three supply to support sales into our new U S residential channel.

The strength of demand in both the U S and EU has led us to reassess the deployment plan for Maxion seven.

Our seventh generation RBC technology is based on a novel cell architecture that we expect will yield roughly 100 basis points higher efficiency compared with our current RBC technology as.

As well as other unique and important performance attributes.

This translates to a 25% energy yield advantage compared to standard efficiency modules in the first year and has amplified over time due to slower degradation in longer warrant that lifetime.

We believe this product is ideal for the U S and EU residential markets, we are increasing electricity demand from EV and heat pump adoption is constrained by limited roof spaces.

Given the unique value proposition of maxion, seven and the exceptional demand environment, we are evaluating strategies to expand nexium seven capacity instead of retrofitting existing lines.

This approach will maintain full out from her maxion three production to meet the high levels of anticipated demand in 2023.

Detailed engineering studies are ongoing and we will provide capex and ramp timing information at a later date.

In our utility scale business, we've ramped our performance line capacity to just over one gigawatt and are on track to achieve the full one eight gigawatts of capacity in 2023.

The ramping of our U S focused capacity of timely with extremely high appetite for solar panels from U S utility scale customers our.

Our discussions at the <unk> conference validated what we have heard from several third party sources.

Around an approximate doubling of U S utility scale demand over the next few years due to the impact of the recent extension and enhancement of the investment tax credits.

With a multi gigawatt pipeline fully allocated through 2025, our sales team is now in active discussions for supply agreements with delivery dates into 2028.

As we assess our opportunities in the U S utility scale business. We are highly focused on maximizing the advantage of our unique market position.

With that in mind I'd like to share an update on our plans for domestic manufacturing.

Developments in the macro geopolitical landscape and recent passage of the inflation reduction act have put in place conditions that support exciting growth prospects from axiom.

We plan to capitalize on this opportunity with a new three gigawatts solar cell and module factory located in the southeastern United States.

Our unique technology and tailored supply chain is in high demand with customers and were moving rapidly to secure long term supply arrangements to ensure healthy margins for maxion, while providing certainty of supply for our customers.

We anticipate ramping in 2025 subject to the completion of financing through the department of energy loan guarantee program.

The next step in this process and invitation to due diligence and the negotiation of term sheet, which if successful would lead to a conditional commitment.

We continue working closely with the team to move the process forward and expect an invitation soon.

With a total projected investment of over $1 billion. This factory is currently plans to generate over 2000 manufacturing jobs and enable long term predictable supply of locally produced solar panels to our customers.

It's an exciting time at maxion, we've done some heavy lifting during the past two years ramping nexsan six developing vaccine on seven launching beyond the panels and expanding into U S utility scale. These.

These efforts are finally, starting to show the expected results as we improved from our second quarter 2022 margin trough toward achievement of our long term financial model next year.

While we are now accelerating our 2024 to 2026 growth initiatives, we're still laser focused on executing the final steps in our transformation to profitability in 2023.

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

Thank you Mark and Hello, everyone.

He will discuss the drivers and details of last quarter performance and then provide guidance for the current quarter.

Total shipments for the third quarter were 605 megawatts consistent with our guidance range of $580 to 620 megawatts.

This represents a 16% sequential increase attributable largely to our first full quarter of U S utility scale shipments from our North American coal that is still ramping up capacity.

D. G volumes were also up sequentially led by increased volumes of Maxion from recently converted capacity and Pepe III.

Revenues for the third quarter were $275 million.

Also consistent with our guidance range and representing a 16% sequential increase.

D G asps.

We're up in many geographies due to a combination of price increases and a higher mix of beyond the panel revenue.

However, total blended ASP was diluted by a higher mix of utility scale volume as well as some opportunistic sales sales.

non-GAAP gross income in the third quarter was negative $16 million.

In line with our guidance of negative 10% to $20 million and an improvement of $8 million from our second quarter results, which we have earlier identified as the trough in our multiyear transformation.

The sequential improvement reflects the higher mix of our flagship <unk> six panel a higher mix of beyond the panel product and geographic optimization strategies in DG.

Third quarter cost of goods sold includes $1 million.

Out of market polysilicon charges related to our legacy supply contracts.

This figure is now significantly smaller than historical levels as polysilicon prices in the market have come very close to our fixed contracts product.

The year over year impact of supply chain cost inflation on our cost of goods sold was $17 million.

This was more than offset by $26 million of ASP increases.

As previously protected supply chain cost increases have been slowing down or even started reversing in some cases, while we continued to increase our prices in <unk> markets based on the strong demand.

As a reside our DG business was meaningfully gross margin positive in the third quarter.

Our gross loss is attributable to our new U S utility scale business, where we are still seeing underutilization in our positive rent facilities and other startup expenses that impact comp.

Well as below market Asps.

From our first half 2021 bookings.

Manufacturing volume of our Malaysia performance line sales fab and North American multiple increased materially during the quarter.

We're both still well below the target capacity that we plan to reach in 2023.

This contributed the majority of the overall maxion level underutilization charges totaling $10 million in the quarter.

In the third quarter, we also recognized $16 8 million in additional lower cost of market right Downs on performance line inventory.

non-GAAP operating expenses were $35 million in the third quarter in line with our guidance.

Adjusted EBITDA in the third quarter was negative $35 million.

Which is improved from the second quarter and within our guidance range GAAP.

GAAP net loss came in at $45 million.

On peer to $88 million in the previous quarter.

Moving onto the balance sheet.

We closed the third quarter with cash cash equivalents with strict cash and short term investments of $314 million.

Compared to $180 million at the end of the second quarter.

The sequential increase was driven by our 207 million.

Convertible bond issuance.

Partially offset by Capex spending operating losses, and higher inventories as we ramp deliveries into our end markets for further growth.

<unk> increased sequentially from 89 days to 91 days.

Capital expenditures in the third quarter was $16 million.

Which was below our guidance range of 21% to $25 million as we maintained payment discipline, while continuing to spend our earmark capex on Nexium and performance line capacity for the U S.

Overall, we are pleased to have executed in the third quarter in line with our plan improved our financial performance from our margin trough in the second quarter and positioned the company to deliver positive gross margin in the fourth quarter.

This performance was the result of previous investments in D. C that are now starting to show tangible results.

And still reflects the burden of a ramping U S utility scale business with legacy Asps.

We expect to see sequentially, improving quarterly performance over the course of the next year, leading up to the achievement of our long term financial model with gross margins of at least 15% before the end of 2023.

We expect to achieve the financial turnaround based partly on the already contracted utility scale prices in the second half of 2023 utility scale cost reduction at our factories become fully ramped strong DG pricing in the U S and EU and an increased mix.

Beyond the panel revenue.

With these points in mind, I'll now turn to our expectations for the fourth quarter of 2022.

We project fourth quarter shipment of between 680 and 720 megawatts the.

The midpoint of this guidance represents a 16% sequential volume growth.

The largest growth driver will be U S utility scale volume, which we expect to continue in 2023 until our facilities reach full ramp.

We project revenue of $290 to $330 million.

The midpoint of these numbers and of our shipment guidance imply a slight ASP decreased sequentially, which is attributable to a higher mix of utility scale shipments.

D. G. Asps are expected to increase slightly on higher panel prices and the greater mix of beyond dependent revenue.

non-GAAP gross profit is expected to be in the range of breakeven to $10 million.

The largest contributor and expected sequential improvement in unit cost reduction on performance line as we ramp capacity.

Included in gross margin guidance is a $1 million charge for out of market polysilicon.

This contract is expiring soon but the P&L impact will continue into early 2023, as we sell products that incorporate this raw material.

non-GAAP operating expenses in the fourth quarter are projected to be 36 million.

Plus or minus 2 million slightly up from third quarter levels.

However, as a percentage of revenue Opex is expected to become more efficient both in the fourth quarter and into 2023.

It's just one example, our sales of power electronic storage in EV Chargers will be executed largely by the same DTC at the logistics team that handled all panel sales.

non-GAAP EBITDA is projected to be in the range of negative <unk> 17 to a negative $27 million.

Demonstrating sequential improvement in line with gross income.

Capital expenditures are projected to be in the range of $16 million to $20 million. The majority of this spend is for our performance line ramp in.

In 2023, we will continue to spend capex for completing the ramp up of our performance line capacity for the U S market, we intend to finance this capex from our recent $207 million convert issuance.

As Mark discussed we are working on a plan for Mexico on seven capacity expansion and because of that our previous capex indication for retrofitting Nexium three production lines is no longer relevant.

Furthermore, we anticipate that spending for our proposed three gigawatt facility in the U S may commence in 2023.

Our financing plan remains contingent on a successful reputation with the U S Department of energy loan guarantee program for a majority of the Capex further.

The remaining funds required we will consider our options, including customer co investment strategic partnership company EBITDA generation and the capital market.

Interest in this project remains very high from a variety of different stakeholders.

We will finalize a financing strategy over the next several months that we believe will be in the best interest of Mexican shareholder.

With that I'll turn the call back to Mark to summarize before we go to Q&A.

Thank you Kai.

We're primarily focused on three critical projects first completion of our capacity transformation, which is a key element of achieving our long term financial model.

Second we're leaning into demand opportunities with planned manufacturing capacity expansion.

And third we're scaling in expanding beyond the panel product sales to become material and transformative portion of our DG business.

Now, let's get to Q&A operator. Please proceed.

Thank you.

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

Please standby one compile the Q&A roster.

Our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is now open.

Hi, good afternoon. Thank you very much for the time congratulations on the results here.

If I may just a follow up on the positive margin commentary here can you talk a little bit more about the ramp through 'twenty. Two here just as you see those legacy Asp's rolling off that you alluded to in your prepared remarks, as well as the ramp here as well as some of the bed.

Underutilization you've commented in the remarks about.

And all the way up through 28 versus Underutilization is still in a real time way can you talk about sort of the ability to fill volume and then also ultimately some of those other considerations here into the back half.

Yes, so I'll start and then.

Todd finish up there but.

In general as we.

We said, we see demand in that U S utility space being very strong and we are booking.

Looking out several years in advance and in active discussions with folks for <unk>.

For volumes out there in the short term, it's really a matter of as we ramp up the facilities were not utilizing all of the all of the capacity yet.

But if we look through into next year, there's three big components.

How we get to the long term financial model one of those is moving through and pass the lower contracted prices.

That we have from sort of the earlier signed contracts where contracts for delivery in the second half of next year all right.

Significantly higher asps than those for delivery this year and it started next year.

The second piece is the.

Cogs.

The Cogs.

<unk> in terms of both an improvement in overall.

Cogs for that.

That space as well as the Underutilization basically disappearing as we move into much closer to full full capacity production.

And the last piece is a combination of.

Other things, including optimization of Asps.

<unk> space.

And some other some other areas there so I think the.

The other the other thing I think that will come in next year as we expect a real contribution from our additional beyond the paywall products, we've talked a little bit here about the contribution from the micro inverter products.

But we will begin shipping the storage product in Australia in Q1 were already taking orders for that.

We should start shipping the storage product in Q2 in Europe .

And thats going to provide some significant uplift there so it's really a combination of those.

Those things that gets us on that trajectory elegant cottage everything yes, yes, just wanted to fill in a few things hi, Julien with regards to the under utilization. So as Mark mentioned, the under utilization is purely operational and not due to lack of demand.

Needless suffering from a lack of demand.

Underutilization charges have peaked in the second quarter at around $14 million, we just reported about $10 million.

For this quarter and then we expect it to go further down from here over the coming quarters and the nature of that is just that we have.

Fixed costs for building clean room facilities.

Some equipment that we have already installed and where we are ramping the additional capacity into into these additional volumes into this capacity. So this is how as we're ramping that underutilization gets less and less over time.

Got it excellent if I could just clarify here if you permit presumably see some more drag from those out of market utility scale contract really 'twenty three how.

How should we think about the cadence of margins you talked about positive here does that look like ABC price increases have hit just yet and as you say the other panelists still ramping how do we pair those two trends rate higher DG, especially the asps with Green Tech, presumably more utility scale drag at least in the first half.

We can try to be more specific if you don't mind.

So I think we will start selling to Greentech in January so I think thats something that kicks in.

Almost immediately or the volumes will not be <unk>.

That throughout the year there'll be ramping ramping during the year as we build that business. So the contribution from those.

Asps would also build during the year.

As I think I said earlier the.

The contracts for the first half of the year or not at.

Exceptionally favorable asps in the utility space, but those get significantly better in the second half of the year. So.

It won't be exactly linear ramp, but it will be a ramp through the year.

We're as we said during 2023, we expect to get to our long term financial model.

Yes, as you Julian as you draw a line between the fourth quarter of 2022, we are where we are targeting to be gross margin breakeven to <unk> <unk>.

15% gross margin in 2023 in accordance with our long term financial model, we still have some.

Runway in DG as Mark said from already in the third quarter meaningfully positive gross margin, but I would say the majority of that improvement will come from the improvements in the U S performance series that Mark talked about.

Yes, so still on track of that accelerated to 12% adjusted EBIT margin.

Yes. That's also in line with our long term financial model. So we take the 15% gross margin.

Proxy for the more long term financial model, which also includes 12% adjusted EBITDA margin.

Okay. Thank you guys I appreciate it.

Thanks Julien.

Thank you.

Our next question comes from the line of Donovan Schafer with Northland Capital markets. Your line is now open.

Hey, guys. Thanks for taking my questions.

My first question actually I'm curious just kind of track and follow all the news and sometimes there is kind of.

Press releases that might be more promotional from a company than necessarily means something super material, but I've noticed some some RBC related announcements from other companies. So.

There is a German company called ISC.

<unk> stands.

Okay.

<unk> and I think there is also maybe a Chinese company.

Blanking on the name.

It's a little bit.

Cloud in my mind, but I felt like there were some other ones I saw talking specifically about either Ibs C or maybe some some other sort of form of back contact.

And of course, I know Panasonic and LG.

Lastly, the IDC market or walked away from their offerings because of the patents you guys have.

How they have to do additional process steps and everything that basically made it an economic for them.

With some of these other.

<unk> releases or announcements or interviews or whatever it is.

King.

Can you give us sort of an update on kind of the IPC market and technology more generally and I guess, maybe your patents when any of that expires sort of what geographies, maybe this German company, who is doing it because.

Yes.

They're in a better patent position in that geography, but maybe not the U S.

Just kind of those sort of.

Specifics around technology patents.

Trend of that versus popcorn and other architectures any updates there would just be really helpful. Because I know you have an advantage there and you've got good patents, but again like I said I think it's sort of.

Qualitatively feel like I saw a little bit of an uptake and just some other name, saying Hey, we're going to do an ABC thing.

Okay and I don't if this is Peter aschenbrenner, so I'll try to.

Pretty pretty sourcing so we feel extremely good about our patent protection we've been.

Innovating and building our IP.

Portfolio.

For 35 years, we continue to not only file patents on fundamental innovations.

Some of the architecture.

Around our Max seven sell but also some really disruptive amortization ideas.

And so it's not really a question of things Rolling off I think it's a question of ongoing innovation. So a strong IP still in place.

We tend to file.

In markets, where we are going to cover the vast majority of our sales so EU U S China Okay.

Some countries in southeast Asia, So we feel good about our patent protection.

There are always folks.

I would say sort of getting in and getting out of IPC you mentioned a few of them.

The Institute and Constance is an R&D outfit.

One of the.

One of the institutes that's been looking at RBC for a long period of time or back contact I should say, it's important to note that the.

We do back contact cells with the Interdigitated metallization on the back which is hard to call at IPC.

Is.

One of the things that we have very good patent protection on most other people that have done back contact sellers have used different types of mineralization.

Which is a little more cumbersome.

So.

I would say there is an ongoing.

Level of interest in this structure, we believe it's as we've said consistently over the past 15 years, we think it's kind of the entitled form of <unk>.

Crystal and Silicon solar cell.

We're still working towards that and we're starting to see other people get interested as well, particularly as they start to get some experience on Pennsylvania contacts.

Which really are something we've been doing again for 35 years.

And they are getting that experience through their top con technology. So.

I would say stay tuned we feel good about <unk>, we have I think we'll continue to see some folks.

Developed products that are.

Kind of.

Maybe adjacent to our approach.

But certainly not as mature.

So I guess, the kind of that raises the flip side of it.

I think.

Some of that like.

Constanze than the other.

The answer is that may be more indicative.

Are you seeing any kind of a trend or.

Just saying being re entitled form that maybe some other companies are coming around.

So this idea that Ivy.

<unk> is actually a more optimal or idea.

There's a bunch of our architecture is kind of out there competing in tandem layering in.

All of those stops and so is it reflective of kind of more of a trend there or is it just more of these ebbs and flows that you talked about.

It is kind of just come and go from RBC and you're the one that kind of tends to stick around.

I think it's too early to call it a trend.

But.

I think there is a clear trend right now is towards top con in terms of the mainstream market.

I think there has.

Distantly been and remains interest in ABC is a longer term.

Main stream technology.

But right now most of the action is and popcorn.

Okay Industrywide.

Okay, and then if I can get another one and I wanted to ask about the weaker first Labor Prevention Act.

Apologize if you did cover any of that kind of jumping between one.

On another call but.

I know you guys have been able to the P series those out of Mexico.

Our panel is actually.

So there's something there and those last I checked there is.

No issue.

Every day, you have trucks basically we've gone back and forth between the U S Mexico border.

And so yes.

Absolutely no issues again last time I checked it Amy you asked so just want to make sure that thats still the case.

And then.

Clearly if you said you are talking about conversations bookings at some point in 'twenty eight.

There may not be room to cause you to kind of cash and on an incremental interest, but maybe that ties into expansion.

Just curious if that.

That ability to have truck trucks coming back and forth across the border every day.

Customers look at that and say, okay. They can get really comfortable behind these panels.

That increases our interests that increase was these conversations.

And then kind of the same thing on the IPC side, because I know this is a technology exemption.

But I don't think that would apply to <unk>.

The weaker forced labor you get the poly from hemlock, but also that you know thats going away just curious on the forced labor prevention stuff is getting product in the U S. I mean kind of updates developments there.

Sure.

So on the.

Well I think with respect to issues around forced labor.

<unk>.

Blockages at the border.

I think we are.

Our customers feel comfortable with the supply chain, we have in place now and as you said, where we're shipping.

Hundreds of shipments a month and have been.

It's a very different type of supply chain from what most companies are delivering here into the U S.

And so we think.

That is solid.

We will look to continue that and potentially expand it.

With respect to manufacturing in the U S debt.

Kind of as it takes most of those issues off the table by definition on the ABC front. The exclusion is a section 201 exclusion, which is slated to go away.

A few years so.

We don't anticipate any issues.

Related to our RBC product being shipped into the U S in the future either.

Okay, great. Thanks, that's helpful.

Paula.

Ill take the rest of my questions offline. Thanks, guys. Thank you.

Thank you.

Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Okay.

Hey, guys. Good afternoon, thanks for taking the questions.

Try to keep them quick I just had two more numbers related.

On the $1 billion of Capex can.

Can you give us a sense of how thats going to be phased in over the next couple of years, how much we should be thinking in 'twenty three and then in 'twenty four.

And then.

On the Doe loan guarantee just I. Thank you.

Quantified it in the past for us, but can you give us a sense of how much.

You are reasonably anticipating to get from from the Doe and then what would be your kind of net net burden.

Sure. Brian This is Peter I'll take those first of all of the roughly $1 billion.

<unk>.

Disclosed today is a total project investment that's not.

The Capex per Se Capex of course is an important part of that.

But that includes facility contingency.

Lease lease costs over the period of the project et cetera.

And it's the way that the Doe sort of calculates.

The total project cost.

We haven't disclosed.

Specific timing.

For this project.

You could assume that.

That's coming on line in mid 2025 year assume that.

A lot of that Capex is spent prior to that.

And with respect to the percentage.

We haven't mentioned a specific percentage yet.

Of course, we would like that percentage to be that's a negotiated number we'd like it to be as high as possible.

There are some precedents out there that you can look at.

And what we have said is that we expect the vast majority of of investment in this project to come from a combination of the daily and from.

Customer co investment.

Okay. That's great I appreciate that additional color and then just.

A follow up from me on.

I think we saw a filing from one of your largest shareholders as well as maybe you guys put something out this evening as well.

Can you can you speak to.

Total selling their stake it seems like over the next 12 months.

I know they've been a strategic investor slash partner for a number of years, even back to the Sunpower days anything to read into that just may be give us a little bit more background on what's going on there. Thank you.

Yeah. So we obviously can't speak for total however, if you observe their actions over the past years, they have become significantly more active in the.

Large scale.

Generation asset ownership space.

And that really appears to be there their focus there so.

Not especially surprising that since we are much more upstream on the large scale side would.

Would you have obviously the downstream.

So we'll get downstream exposure in DG.

But that.

We understand why it would potentially not fit with their with their current investment objectives.

No.

We don't.

Not especially surprising given.

We're totally focus appears to be but if you really want to get the story on what they are doing you'd obviously have to ask them.

Alright fair enough I appreciate it thanks guys.

Thanks.

Thank you.

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

Hey, guys. Thanks for the questions.

Wanted to follow up on some of Brian's questions on the deal.

And.

The three gigawatt facility.

The $1 billion.

The total investment can you share what the Capex is and if so what is.

Well actually regardless of whether or not you can or can't can you talk about what you expect your capex in 'twenty three to be thanks.

Hey, Phil this is Ty.

We're not in a position right now to further breakdown the capex there.

<unk> gives and takes and decisions.

To be made and what's technically kind of.

Will qualify.

Capex.

Putting that number out there that the total investment.

<unk> roughly right now thats all that.

Closing at this point.

With regards to 2023.

Capex also here.

We are not giving capex guidance right now for 2023.

We will do that in the next earnings call in early 2023, there will be some.

Still over from some of the Capex that we originally had in our guidance for this year you will have seen that.

We spend about $56 million of Capex.

Until the end of the September quarter, we are now guiding at the midpoint for about another $18 million.

That puts you into the $74 million range. We had guided originally 85 to 90, so thats going to be some spillover that some finishing up some of the existing.

Project, some milestone payments for equipment that has already been installed and is reaching a specification.

But beyond that we are not giving further capex guidance for 2023 at this point.

Okay. Thanks, Scott.

In terms of.

The customer co investment you guys talked about that.

Hi.

A meaningful source of funds.

Can you talk through how that might be structured.

Would they invested in an equity piece of the three gigawatt facility or would it be.

Just some large deposits that they give for.

For a long term maybe three year contract.

What are the different scenarios that you guys are playing with and then also can you talk about.

The risk that the facility could be delayed beyond 2025, we are hearing that transformers. So just a couple of months ago. They were two years out in terms of lead time and now they may be as much as three years out in terms of lead time given.

Yes, chip spill in and then the Iran.

A lot of people are trying to access transformers now so what are your thoughts on that.

The risk around.

25 number as well or timing thanks.

So two questions first question is on the form of customer co investment.

The second question on schedule risks.

This is Peter.

So with respect to customer co investment we're still.

Evaluating a couple of different models.

I would say the.

The plan a model would be.

Prepayment or alone.

There'll be repayable at some point.

Into the project offtake.

There are there is interest in other forms of investment also and I think as we get further into the diligence process Thats, probably make final decisions on.

Cocoa investment structure with respect to.

<unk> schedule risk.

I think you make a good point.

We're not the only ones trying to build a facility like this in the U S.

Having said that we've been at this now for about a year in terms of planning and detailed engineering.

And so I think we have a pretty good handle I feel like we have a pretty good handle on.

Key equipment delivery and a lot of that is somewhat site dependent as well.

So.

I think we're confident in our.

And our ramp time currently.

Thanks for the color.

Shifting gears to your relationship with Sunpower.

So think about how much you might end up supplying to sunpower in 2022.

Do you think.

Youre megawatts in 2022, sorry in 2023.

It might be up.

Or down versus what you shipped to them in 2022.

Okay.

I think that would probably be.

Slightly down, but not significantly down in 2023, then that would again be part of the margin optimization that we spoke about earlier, but we have.

A good relationship with Sunpower, we've been working with them for a long time, they've been selling our product for a long time.

And so it's really a matter of.

Discussions ongoing with them for I think they mentioned on their call. We lead actually supplied more than contracted in 2022, there is some potential to supply more in 2023.

But it's.

Yes.

There is a lot of demand out there and sunpower.

A great partner.

And it wouldn't be.

Significant reduction if there is a reduction.

Really appreciate that color Mark and then finally in terms of the CEO process Mark.

From the.

The shift or change it was a bit of a surprise I think for everyone.

Where are we in the process when do you think what's the.

<unk> in terms of finalizing.

Our new CEO and.

Do you have your.

Name and hat.

So.

I don't think we have a specific.

A specific timeline set that we're that we're disclosing the process is ongoing.

And we are engaged with.

Recruiting headhunter to.

To work on that obviously thats something thats going on at the board level.

But it's it's.

Yes, yes, I'm here for as long as as I need to be here I feel like we're making good progress.

Until such time as we do have a permanent CEO and so it's actually not I think the main concern at least with the management team in terms of how we execute our 2023.

Great. Thanks, again, Mark I'll pass it on.

Thank you our next.

Next question comes from the line of Pavel <unk> with Raymond James Your line is now open.

Thanks for taking the question.

You mentioned on pricing.

Back.

Uptick in Q4.

When we look at the <unk>.

PV insight benchmark.

Down pretty much every week now think forward 10th straight weeks.

<unk> down about 10%.

Over that period.

Are you seeing a different dynamic in your <unk>.

Pricing structure.

So I think if you look at the PV instant insights numbers Youre basically looking at product leaving.

Our factory not product being sold to <unk>.

Customer two to an installer and distributor.

And so that's where we play a little bit different space. We are continuing to see strong demand both for our RBC product and our performance series product.

And we've got.

Backlogs that will carry us through.

Q4, and beyond which is what's giving us the confidence in the ASP uptick that we that we mentioned we're seeing pricing.

Pricing.

Not necessarily starting to drift down yet, especially for premium product.

And we obviously will try to maximize that as long as we can.

Okay.

Yes.

Clearly some module supply constraints in the U S because of the.

Issues that you touched on earlier.

Where are those module is going the ones that are being stopped at the border by customs are they being essentially dumped into the domestic Chinese market or are there other international markets, where they're being reallocated.

I can't I can't answer where everybody else is putting those excess modules.

What youre seeing is im assuming utility scale very large format bifacial modules that are getting turned away.

Outside the U S. We're much more active in the <unk> space and.

And so we're not seeing that same <unk>.

<unk> overlap into those areas.

There is generally more.

Module availability in the rest of the world than there is in the U S. But again, we play in a very premium space.

Both with the ABC product as well as our performance series product and so far we're not seeing any sort of slot of product that's not getting into the U S affecting the DG markets internationally.

Okay, and then lastly.

Our region.

50% of your revenue this past quarter I think that's an all time high.

Any pillar hotspot to highlight.

Well I think we mentioned, France, where we're moving over 20%.

20% market share we continue to be strong in Italy really all of the DG focused markets in Europe , we're doing quite well there.

Combination of our RBC product at the top end with our.

Performance series product in the mid range is really.

Having great effect there.

We are doing quite well with the AC products.

The ace.

<unk> modules there as we mentioned some of the penetration rates earlier, so it's great to be selling more complete systems and as I said in Q2 of next year, we expect to be shipping our.

Our storage product and.

<unk> Europe will already be shipping it into Australia in Q1.

And so.

Overall, we feel like that's one of our big Differentiators is our exposure to the important DG markets around the world. The U S is important but the but the.

New EMEA markets are also.

Significant.

Alright, Thank you very much guys.

Thank you.

As a reminder to ask a question at this time, Please press star one one oriented tone telephone.

Yeah.

Our next question is.

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

Hey can you hear me.

Yes, we got you.

Okay. Thank you very much appreciate the time here can we talk.

Good morning.

You talked about.

Okay.

Right.

You are breaking up so much joining us gets one.

We can't understand the question.

Alright.

Okay.

Great.

Good morning.

Great. Thank you guys.

Some comments.

In your prepared remarks, you talked about the next wave of RBC technology that you are correct.

Could you talk a little bit about the side.

Okay.

Alright.

Align with the 28 deliveries in demand that you otherwise described in your remarks.

So.

I understood that you are asking about next generation performance technology that we will be delivering in 2028 is that correct.

Yeah, I just wanted to talk about.

Go for it.

Alright, Julian the first time you went through your question, we got about 40% of the words you are breaking up you are now much more clear when you decide to do a super quick recap of your question.

Yes, sorry, I apologize I don't know whats going on.

With respect to the next iteration of RBC you alluded to in your remarks about an acceleration on timeline as well as.

Just the relative demand for the product through that period. If you can talk about how big and how quickly you can scale.

Yes, so I don't think we talked about an acceleration of timeline, although we're obviously trying to accelerate the timeline as much as possible given the window of.

Demand opportunity there so I mean, we're really focused on.

On how we bring to market. This next generation <unk> technology, we talked about the benefits and efficiency, it's got additional benefits.

In other performance factors energy yield et cetera.

And we are trying to bring that to market.

Really as soon as we can but doing so on a bye bye being additive to the to the volumes.

Not really in a position to talk about exactly how much or exactly on what timeline at this point, but those discussions are ongoing and we certainly recognize the demand is out there and we want to.

<unk> finalized plans.

Soon as we're capable of doing that.

Yeah.

Alright fair enough guys. Thank you very much have a great day. Thank.

Thank you thank you Julian.

Thank you.

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

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

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Okay.

Yeah.

Yes.

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Okay.

Okay.

[music].

Yeah.

[music].

Yes.

Yes.

[music].

Okay.

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[music].

Good day, ladies and gentlemen, welcome.

Welcome to the Maxion solar technologies third quarter 2022 earnings call.

Currently all participants are in listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host Mr. Robert Lee of Maxion Solar technologies, Sir you may begin.

Yeah.

Thank you operator.

Hey, everyone and welcome to Maximo <unk> third quarter 2022 earnings conference call with.

With us today, our interim Chief Executive Officer, Mark Babcock Chief Financial Officer types drove back and Chief strategy Officer, Peter Asher Brenner.

Let me cover a few housekeeping items before I turn the call over to Mark.

As a reminder, a replay of this call will be available later today on the Investor Relations page of <unk> website.

During today's call we will make forward looking statements that are subject to various risks and uncertainties that are described in the safe Harbor slide of today's presentation. Today's press release 6K, and other SEC filings.

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

To enhance this call. We have also posted a supplemental slide deck on the events and presentations page 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.

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 Mark Babcock.

Thank you Rob and good day, everyone I was appointed interim CEO Maxion in September when our board and Jeff waters made the mutual decision to transition to new leadership we.

We're very thankful for Jeff's nearly four years of service to the company during which we successfully spun out of Sunpower refresh the majority of our manufacturing fleet.

<unk> launched our beyond the panel initiatives and commenced shipping our first performance line products into the United States.

As we look forward to the next four years, we expect our focus to be primarily on panel manufacturing capacity growth.

<unk> of our footprint in the U S market and increasingly material contributions from our beyond the panel initiatives.

The board search for a new CEO is well underway in the meantime, it's a privilege for me to serve the company during the transition.

With that said I'll now provide a detailed update on <unk> key transformation initiatives and progress toward achievement of our long term financial model.

Then Todd will review, our financial performance outlook, and we will conclude with Q&A.

Now, let's talk about the progress of our business starting with distributed generation, we were thrilled to formally launch our U S channel expansion initiatives at the <unk> Conference in September .

Our largest DG customers Sunpower had a significant presence there and expressed strong interest in our products for 2023 and beyond.

This partnership has evolved since the spin out their relationship remains mutually beneficial and we look forward to continuing to be a key supplier to sunpower well into the future.

We also began booking our first sales of maxion branded products destined for the DG market through a new partnership with Greentech renewable.

So newness CEB Green Tech.

This new channel is busy selling systems for delivery starting in January feedback.

Feedback from new and sell our customers with excellence, but many noting the value and differentiation of our 40 year warranty.

As demand for premium solar products increases in the number of alternative suppliers decreases.

We believe this new partnership should deliver material market share expansion in 2023 and beyond.

Nexium will also cultivate touch points with installers and customers via our new channel program.

Moving closer to end customers in the U S. We expect to drive ASP expansion beyond our current global average.

Asp's are also increasing materially in core EU markets, like France, and the Netherlands, where modules integrated with power electronics accounted for more than 60% of sales in the third quarter.

Beyond the payroll revenue also grew sequentially in Belgium, Germany, Italy, the UK and Australia.

Our channel partners at preparing to integrate storage, which start shipping next quarter as well as our new EV charging products were.

We're making our installers lives easier by shipping pre integrated systems from a single source and providing a point of differentiation for their sales professionals to increase close rates at the kitchen table.

We believe maxion is uniquely positioned for success in this portion of the downstream value chain by virtue of our channel structure respected brand and unique and differentiated solar panel.

The initial results are very encouraging and we believe we are just starting to scratch the surface of this opportunity.

Overall <unk> sales in Q3 were up 25% year over year as we benefited from additional price increases and a higher mix of our maxion six product, which is now replaced all of our previous Nexium five capacity.

Europe set new volume and revenue records for the sixth consecutive quarter.

We were particularly pleased with our business results in France, where we cross the 60% threshold for AC module mix and increased our residential market share to north of 20% in the third quarter up from mid teens in 2021.

Beyond the handle contributions were also strong in Australia, where AC module mix increased to approximately 40% and wherever we began booking orders for storage product sales with delivery scheduled for Q1.

We continue to maximize global DG profits by leveraging supply of our performance bond products in certain markets and redirecting IDC volume to our highest ASP segment, such as the residential markets in the U S and European Union.

We plan to continue this margin optimization strategy in 2023, and expect to liberate a significant amount of maxion three supply and support sales into our new U S residential channel.

The strength of demand in both the U S and EU has led us to reassess the deployment plan for Maxion seven.

Our seventh generation <unk> technology is based on a novel cell architecture that we expect will yield roughly 100 basis points higher efficiency compared with our current RBC technology as.

As well as other unique and important performance attributes.

This translates to a 25% energy yield advantage compared to standard efficiency modules in the first year and has amplified over time due to slower degradation in longer warrant that lifetime.

We believe this product is ideal for the U S and EU residential markets, we are increasing electricity demand from EV and heat pump adoption is constrained by limited roof spaces.

Given the unique value proposition of maxion, seven and the exceptional demand environment. We are evaluating strategies to expand next year on seven capacity instead of retrofitting existing lines.

This approach will maintain full out the Meramec theone three production to meet the high levels of anticipated demand in 2023.

Detailed engineering studies are ongoing and we will provide capex and ramp timing information at a later date.

In our utility scale business, we've ramped our performance line capacity to just over one gigawatt and are on track to achieve the full one eight gigawatts of capacity in 2023.

The ramping of our U S focused capacity of timely with extremely high appetite for solar panels from U S utility scale customers our.

Our discussions at the <unk> conference validated what we have heard from several third party sources around an approximate doubling of U S utility scale demand over the next few years due to the impact of the recent extension and enhancement of the investment tax credits.

With a multi gigawatt pipeline fully allocated through 2025, our sales team is now in active discussions for supply agreements with delivery dates into 2028 as.

As we assess our opportunities in the U S utility scale business. We are highly focused on maximizing the advantage of our unique market position.

With that in mind I'd like to share an update on our plans for domestic manufacturing.

Developments in the macro geopolitical landscape and recent passage of the inflation reduction act have put in place conditions that support exciting growth prospects from axiom.

We plan to capitalize on this opportunity with a new three gigawatts solar cell and module factory located in the southeastern United States.

Our unique technology and tailored supply chain is in high demand with customers and were moving rapidly to secure long term supply arrangements to ensure healthy margins for maxion, while providing certainty of supply for our customers.

We anticipate ramping in 2025 subject to the completion of financing through the department of energy loan guarantee program.

The next step in this process and an invitation to due diligence and negotiation of term sheet, which if successful would lead to a conditional commitment.

We continue working closely with the team to move the process forward and expect an invitation soon.

With a total projected investment of over $1 billion. This factory is currently plans to generate over 2000 manufacturing jobs and enable long term predictable supply of locally produced solar panels to our customers.

It's an exciting time at maxion, we've done some heavy lifting during the past two years ramping the axion six developing nicely seven launching beyond the panels and expanding into U S utility scale.

These efforts are finally, starting to show the expected results as we improved from our second quarter 2022 margin trough toward achievement of our long term financial model next year.

While we are now accelerating our 2024 to 2026 growth initiatives, we're still laser focused on executing the final steps in our transformation to profitability in 2023.

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

Thank you Mark and Hello, everyone I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter.

Total shipments for the third quarter were 605 megawatts.

With our guidance range of $580 to 620 megawatts.

This represents a 16% sequential increase attributable largely to all first full quarter of U S utility scale shipments from our North American mop coal that is still ramping up its capacity.

DG volumes were also up sequentially led by increased volumes of <unk> six from recently converted capacity in <unk> III.

Revenues for the third quarter were $275 million.

Also consistent with our guidance range and representing a 16% sequential increase.

D G asps.

We're up in many geographies due to a combination of price increases and a higher mix of beyond the panel revenue.

However, total blended ASP was diluted by a higher mix of utility scale volume as well as some opportunistic sales sales.

non-GAAP gross income in the third quarter was negative $16 million.

In line with our guidance of negative 10% to $20 million and an improvement of $8 million from our second quarter results, which we have earlier identified as the trough in our multiyear transformation.

The sequential improvement reflects the higher mix of our flagship Mexico six panel a higher mix of beyond the panel product and geographic optimization strategies in EG.

Third quarter cost of goods solid includes $1 million.

Of all those market polysilicon charges related to our legacy supply contracts.

This figure is now significantly smaller than historical levels as polysilicon prices in the market have come very close to our peak contract products.

The year over year impact of supply chain cost inflation on our cost of goods sold was $17 million.

This was more than offset by $26 million of ASP increases.

As previously projected.

<unk> cost increases have been slowing down or even started reversing in some cases, while we continued to increase our prices in beauty markets based on the strong demand.

As a reside our DG business was meaningfully gross margin positive in the third quarter.

Our growth loss is attributable to our new U S utility scale business, where we are still seeing underutilization in our positive rent facilities and other startup expenses that impact cost as well as below market ASP.

Our first half 2021 bookings.

Manufacturing volume of our Malaysian performance line sales fab and North American multiple increased materially during the quarter, but we're both still well below the target capacity that we plan to reach in 2023.

This contributed the majority of the overall maxion level underutilization charges totaling $10 million in the quarter.

In the third quarter, we also recognized $16 8 million in additional lower cost of market write downs on performance line inventory.

non-GAAP operating expenses were $35 million in the third quarter in line with all guidance.

Adjusted EBITDA in the third quarter was negative $35 million, which.

Which is improved from the second quarter and within our guidance range GAAP.

GAAP net loss came in at $45 million.

<unk> to $88 million in the previous quarter.

Moving on to the balance sheet.

We closed the third quarter with cash cash equivalents with terrific cash and short term investment of $314 million.

Compared to $180 million at the end of the second quarter.

The sequential increase was driven by our $207 million.

Convertible bond issuance, partially offset by Capex spending operating losses, and higher inventories as we ramped delivery into our end markets for further growth.

<unk> increased sequentially from 89 days to 91 days.

Capital expenditures in the third quarter was $16 million.

Which was below our guidance range of 21% to $25 million as we maintained payment discipline, while continuing to spend our earmarked capex on Nexium and performance line capacity for the U S.

Overall, we are pleased to have executed in the third quarter in line with our plan improved our financial performance from our margin trough in the second quarter and positioned the company to deliver positive gross margin in the fourth quarter.

This performance was the result of previous investments in D. C that are now starting to show tangible results.

And still reflect the burden of a ramping U S utility scale business with legacy ASP.

We expect to see sequentially, improving quarterly performance over the course of the next year.

Adding up to the achievement of our long term financial model with gross margins of at least 15% before the end of 2023.

We expect to achieve the financial turnaround based partly on the already contracted utility scale prices in the second half of 2023 utility scale cost reduction at our factories.

<unk> become fully ran strong DDG pricing in the U S and EU and an increased mix of beyond the panel revenue.

With these points in mind, I'll now turn to our expectations for the fourth quarter of 2022.

We project fourth quarter shipments of between 680 and 720 megawatts.

The midpoint of this guidance represents a 16% sequential volume growth.

The largest growth driver will be U S utility scale volume, which we expect to continue in 2023 until our facilities reach full ramp.

We project revenue of $290 million to $330 million.

The midpoint of these numbers and of our shipment guidance imply a slight ASP decreased sequentially, which is attributable to a higher mix of utility scale shipments.

D. G. Asps are expected to increase slightly on higher panel prices and the greater mix of beyond dependent revenue.

non-GAAP gross profit is expected to be in the range of breakeven to $10 million.

The largest contributor and expected sequential improvement as unit cost reduction on performance line as we ramp capacity.

Included in gross margin guidance is a $1 million charge for auto market polysilicon.

This contract is expiring soon but the P&L impact will continue into early 2023, as we sell products that incorporate this raw material.

non-GAAP operating expenses in the fourth quarter are projected to be $36 million.

Plus or minus $2 million slightly up from third quarter levels.

However, as a percentage of revenue our opex is expected to become more efficient both in the fourth quarter and into 2023.

As just one example, our sales of power electronics storage in EV Chargers will be executed largely by the same DTC and logistics team that tender of annual sales.

non-GAAP EBITDA is projected to be in the range of negative <unk> 17 to a negative $27 million.

Demonstrating sequential improvement in line with gross income.

Capital expenditures are projected to be in the range of $16 million to $20 million.

The majority of this spend is fall performance line ramp.

In 2023, we will continue to spend capex for completing the ramp up of our performance line capacity for the U S market, we intend to finance this capex from our recent $207 million convert issuance.

As Mark discussed we are working on a plan for Mexico, seven capacity expansion and because of that our previous capex indication for retrofitting Nexium three production lines is no longer relevant.

Furthermore, we anticipate that spending for our proposed three gigawatt facility in the U S may commence in 2023.

Our financing plan remains contingent on a successful application with the U S Department of energy loan guarantee program for a majority of the Capex.

The remaining funds required we will consider our options, including customer co investment strategic partnership company EBITDA generation and the capital market.

Interest in this project remains very high from a variety of different stakeholders.

We will finalize a financing strategy over the next several months that we believe will be in the best interest of maxion shareholder.

With that I'll turn the call back to Mark to summarize before we go to Q&A.

Thank you Kai.

We're primarily focused on three critical projects first completion of our capacity transformation, which is a key element of achieving our long term financial model.

Second we're leaning into demand opportunities with planned manufacturing capacity expansion.

And third we're scaling in expanding beyond the panel product sales to become material and transformative portion of our DG business.

Now, let's get to Q&A operator. Please proceed.

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

Please standby, we compile the Q&A roster.

Our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is now open.

Hi, good afternoon. Thank you very much for the time congratulations for the results here.

If I may just a follow up on the positive margin commentary here can you talk a little bit more about the ramp through 'twenty two year, just as you see those legacy Asp's rolling off that you alluded to in your prepared remarks, as well as the ramp here as well as some of the bed.

Underutilization you've commented in the remarks about <unk>.

<unk> all the way out through 2008 versus Underutilization is still in a real time way can you talk about sort of the ability to fill volume and then also.

Ultimately some of those other considerations here into the back half.

Yes, so I'll start and then.

Catherine it's out there but.

In general.

We said, we see demand in that U S utility space being very strong we are booking.

Looking out several years in advance and in active discussions with folks for.

For volumes out there in the short term, it's really a matter of as we ramp up the <unk>.

<unk>, we are not utilizing all of the all of the capacity yet.

But if we look through into next year, there is three big components.

How we get to the long term financial model one of those is moving through and pass the lower contracted.

<unk> that.

That we have from sort of the earlier signed contracts where contracts for delivery in the second half of next year right.

Significantly higher asps than those for delivery this year, which started next year.

The second piece is the.

Cogs.

The Cogs assumptions in terms of those and improvement in overall.

Cogs for that for that.

That space as well as the Underutilization basically disappearing as we move into much closer to full full capacity production.

And then the last piece is a combination of.

The other things, including optimization of Asp's in DG space.

And some other some other areas there so I think the.

Okay.

The other the other thing I think that will come in next year is we expect a real contribution from our additional beyond the payroll products, we've talked a little bit here about the contribution from the micro inverter products.

But we will begin shipping the storage product in Australia in Q1 were already taking orders for that.

We should start shipping the storage product in Q2 in Europe .

And thats going to provide some significant uplift there so it's really a combination of those.

Those things that gets us on that trajectory element cottage everything yes, yes, just wanted to fill in a few things hi, Julien with regards to the under utilization. So as Mark mentioned, the under utilization is purely operational and not due to lack of demand.

Needless suffering from a lack of demand.

On the utilization charges have peaked in the second quarter at around $14 million, we just reported about $10 million.

For this quarter and then we expect it to go further down from here over the coming quarter and the nature of that is just that we have.

Fixed costs.

Building clean room facilities.

Some equipment that we have already installed and where we are ramping the additional capacity into into these additional volumes into this capacity. So this is how as we're ramping that underutilization get less and less over time.

Got it excellent if I could just clarify here as you permit presumably see some more drag from those out of market utility scale contract.

How should we think about the cadence of margins you've talked about positive here does that look like ABC price increases have hit just yet and as you say the other panel is still ramping how do we pair those two trends right higher DG, especially the asp's with greentech, presumably more utility scale drag at least in the first half.

We can try to be more specific if you don't mind.

So I think we will start selling to Greentech in January so I think thats something that kicks in.

Almost immediately or the volumes will not be <unk>.

That throughout the year there'll be ramping ramping during the year as we build that business. So the contribution from those.

Asps would also build during the year.

As I think I said earlier the.

The contracts for the first half of the year or not at.

Exceptionally favorable asp's in the utility space, but those get significantly better in the second half of the year. So.

Will it be exactly linear ramp, but it will be a ramp through the year.

We're as we said during 2023, we expect to get to our long term financial model yes.

And as you do again as you draw a line between the fourth quarter of 2022, we are where we are targeting to be gross margin breakeven too.

15% gross margin in 2023 in accordance with our long term financial model, we still have some <unk>.

<unk> way in DG as Mark said from already in the third quarter meaningfully positive gross margin, but I would say the majority of that.

<unk> will come from the improvements in the U S performance series that Mark talked about.

Yes, so still on track of that accelerated to 12% adjusted EBIT margin.

Yes. That's also in line with our long term financial model. So we take the 15% gross margin.

Roxy for the long term financial model, which also includes 12% adjusted EBITDA margin.

Okay. Thank you guys appreciate it.

Thanks Julien.

Thank you.

Our next question comes from the line of Donovan Schafer with Northland Capital markets. Your line is now open.

Hey, guys. Thanks for taking my questions.

My first question actually I'm curious just kind of track and follow all the news and sometimes those kind of.

Press releases that might be more promotional from a company than necessarily means something super material, but I've noticed some some IV C related announcements from other companies. So.

There is a German company called ISC.

<unk> stands.

Forward.

Ken Xie.

<unk> and I think there is also maybe a Chinese company.

Blanking on the name.

It's a little bit.

Cloud in my mind, but I felt like there were some other ones I saw talking specifically about either Ibs C or maybe some some other sort of form of back contact.

And of course, I know Panasonic and LG.

I left the IDC market or walked away from their offerings because of the patents that you guys have.

How they have to do additional process steps and everything that basically made it an economic for them.

With some of these other.

Press releases or announcements or interviews or whatever it is.

Thing.

Can you give us sort of an update on kind of the IPC market and technology more generally and I guess, maybe your patents when any of that expires sort of what geographies, maybe this German companies doing it because.

Yes.

They're in a better position in that geography, but maybe not the U S.

Just kind of those sort of.

Specifics around technology patents.

Trend of that versus popcorn and other architectures any updates there would just be really helpful. Because I know you have an advantage there and you've got good patents, but again like I said I think.

Qualitatively feel like I saw a little bit of an uptake and just some other named saying Hey, we're going to do an ABC thing.

Okay. This is Peter Ash and Brenner, so I'll try to.

Pretty pretty saying, so we feel extremely good about our patent protection we've been.

Innovating and building our IP.

Portfolio.

For 35 years, we continue to not only file patents on fundamental innovations.

Some of the architecture.

Around our Max seven sell but also some really disruptive amortization ideas.

And so it's not really a question of things Rolling off I think it's a question of ongoing innovation. So a strong IP still in place and.

We tend to file.

In markets, where we are going to cover the vast majority of our sales so EU U S China Okay.

Countries in Southeast Asia, So we feel good about our patent protection.

There are always folks.

I would say sort of getting in and getting out of RBC you mentioned a few of them.

The Institute and Constance is an R&D outfit.

One of the.

One of the institutes that's been looking at <unk> for a long period of time or back contact I should say, it's important to note that.

The way, we do back contact cells with the Interdigitated metallization on the back.

Try to call at IPC.

One of the things that we have very good patent protection on most other people that have done back contact sellers have used different types of mineralization.

Which is a little more cumbersome.

So I would say there is an ongoing.

Level of interest in this structure.

We believe it's as we've said consistently over the past 15 years, we think it is kind of the entitled form of crystalline silicon solar cell.

We're still working towards that and we're starting to see other people get interested as well, particularly as they start to get some experience on passivate contacts.

<unk> really are something we've been doing again for 35 years.

And they're getting that experience through their top con technology. So.

I would say stay tuned we feel good about <unk>, we have I think we'll continue to see some folks.

Develop products that are.

Kind of maybe adjacent to our approach.

But certainly not as mature.

So I guess, the kind of that raises the flip side of it.

You think.

Some of that like.

Constanze.

The answer is that may be more indicative, but are you seeing any kind of a trend or just saying being entitled form that maybe some other companies that are coming around.

That.

<unk> is actually some.

More optimal or idea.

<unk>.

There's a bunch of architecture is kind of out there competing in tandem layering in all of this stuff and so is it reflective of kind of more of a trend there or is it just more of these ebbs and flows that you talked about where the company is kind of just coming to go from RBC and you're the one that kind of attempt to stick around.

I think it's too early to call it a trend.

But.

I think this is a clear trend right now is towards top con in terms of the mainstream market.

I think there has consistently been and remains interest in ABC is a longer term.

Mainstream technology.

But.

Right now most of the action is and popcorn.

Okay Industrywide.

Okay, and then if I can get another one and I wanted to ask about the weaker first Labor Prevention Act.

I apologize if you did cover any of that kind of jump in between.

Other call but.

I know you guys have been able to the P series those out of Mexico.

Panels actually.

They're assembling there and those last I checked there was no issue every day you have trucks basically we've gone back and forth between the U S and Mexico border.

And so absolutely no issues again last time I checked that Amy you asked so just want to make sure that that's still the case.

And then.

Clearly if you said youre talking about conversations bookings at some point in 'twenty eight.

There may not be room to cause you to kind of cash and on an incremental interest.

Maybe that ties into expansion, it's like just curious.

That ability to have truck trucks coming back and forth across the border every day.

If customers look at that and say, okay. They can get really comfortable behind these panels.

That increases our interests that increases these conversations.

And then kind of the same thing on the IPC side, because I know this is a technology exemption.

But I don't think that would apply to <unk>.

So with the weaker forced labor.

Poly from Hemlock, but also that you know thats going away just curious on the forced labor prevention stuff is good.

Product in the U S. I mean kind of updates developments there.

Sure.

So on the.

Well I think with respect to issues around forced labor.

Blockages at the border.

I think we.

Our customers feel comfortable with the supply chain, we have in place now and as you said, where we're shipping.

Hundreds of shipments a month and have been.

It's a very different type of supply chain from what most companies are delivering here into the U S.

And so we think.

That is solid.

We will look to continue that and potentially expand it.

With respect to manufacturing in the U S that.

Kind of as it takes most of those issues off the table by definition on the ABC front. The exclusion is a section 201 exclusion, which is slated to go away.

Two years so.

We are anticipate any issues.

Related to our RBC product being shipped into the U S in the future either.

Okay, great. Thanks, that's helpful.

Ill take the rest of my questions offline. Thanks, guys. Thank you.

Thank you.

Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Okay.

Hey, guys. Good afternoon, thanks for taking the questions.

Try to keep them quick I just had two more numbers related.

On the $1 billion of Capex.

Can you give us a sense of how thats going to be phased in over the next couple of years, how much we should be thinking in 'twenty three and then in 'twenty four and then.

On the Doe loan guarantee just I. Thank you.

Quantified it in the past for us, but can you.

Sense of how much.

You are reasonably anticipating to get from from the Doe and then what would be your kind of net net burden.

Sure. Brian This is Peter I'll take those first of all the roughly $1 billion.

Number.

Disclosed today is a total project investment that's not.

The Capex per Se Capex of course is an important part of that.

But that includes facility contingency.

These risk costs over the period of the project et cetera.

And it's the way that the do we sort of calculate.

The total project cost.

Haven't disclosed.

Specific timing.

For this project.

I think you'd assume that.

The plants coming online in mid.

Mid 2025 years show that.

A lot of that Capex is spent prior to that.

And with respect to the percentage.

We haven't mentioned a specific percentage yet.

Of course, we would like that percentage to be that's a negotiated number we'd like it to be as high as possible.

There are some precedents out there that you can look at.

And what we have said is that we expect the vast majority of of investment in this project to come from combination of the daily and from customer co investment.

Okay. That's great I appreciate that additional color and then just.

Follow up for me on.

I think we saw a filing from one of your largest shareholders as well as maybe you guys put something out this evening as well.

Can you speak to total selling their stake it seems like over the next 12 months.

I know they've been a strategic investor slash partner for a number of years, even back to the Sunpower days.

The thing to read into that just may be give us a little bit more background on what's going on there. Thank you.

Yes.

We obviously can't speak for hotel. However, if you observe their actions.

Over the past years.

They have become significantly more active in the.

Large scale generation asset ownership space.

And that really appears to be there their focus there so.

Not especially surprising that since we are much more upstream on the large scale side would.

Would you have obviously the downstream.

So we get downstream exposure in DG.

But that.

We understand why it would potentially not fit with their with their current investment objectives.

No.

We don't.

Not especially surprising given where.

Our total focus appears to be but if you really want to get the story on what they are doing you'd obviously have to ask them.

Alright fair enough I appreciate it thanks guys.

Thanks.

Thank you.

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

Hey, guys. Thanks for the questions.

I wanted to follow up on some of Brian's questions on the deal.

And.

Three gigawatt facility.

The $1 billion is the total investment can you share what the Capex is and if so what is.

Actually regardless of whether or not you can or can't can you talk about what you expect your capex in 'twenty three to be thanks.

Hello, Hey, Hey, Phil This is Ty.

We're not in a position right now to further breakdown the capex there.

<unk> gives and takes and decisions.

To be made and what's technically kind of.

Will qualify us.

Capex.

Putting that number out there that the total investment.

Off a $1 billion roughly right now and that's all that we had.

Closing at this point.

With regards to 2023 Capex also here.

We are not giving capex guidance right now for 2023.

We will do that in the next earnings call in early 2023, there will be some.

Still over from some of the Capex that we originally had in our guidance for this year you will have seen that.

We spend about $56 million of Capex.

Until the end of the September quarter, we are now guiding at the midpoint for about another $18 million.

That puts you into the $74 million range. We had guided originally 85 to 90, so thats going to be some spill over some finishing up some of the existing.

Project, some milestone payments for equipment that has already been installed and is reaching a specification.

But beyond that we are not giving further capex guidance for 2023 at this point.

Okay. Thanks, Scott.

In terms of.

The customer co investment you guys talked about that.

As a meaningful source of funds.

Can you talk through how that might be structured.

They invested in equity piece of the three gigawatt facility or would it be.

Large deposits that they give for a long term maybe three year contract.

What are the different scenarios that you guys are playing with and then also can you talk about.

The risk that the facility could be delayed beyond 2025, we are hearing that transformers. So just a couple of months ago. They were two years out in terms of lead time and now they may be as much as three years out in terms of lead time given the.

Chip spill.

And then the Iran.

A lot of people are trying to access transformers now so what are your thoughts on.

The risks around that 25 number as well or timing. Thanks.

Okay.

So the two questions first question is on the form of customer co investment and the second question on schedule risks.

This is Peter Phil.

So with respect to customer co investment.

Phil.

Evaluating a couple of different models I.

I would say the.

The plan a model would be.

Prepayment or alone.

There'll be repayable at some point.

Into the project offtake.

There are there is interest in other forms of investment also and I think as we get further into the diligence process Thats, probably make final decisions on.

Cocoa investment structure with respect to.

Hub facility schedule risk.

I think you make a good point.

We're not the only ones trying to build a facility like this in the U S.

Having said that we've been at this now for about a year in terms of planning and detailed engineering.

And so I think we have a pretty good handle I feel like we have a pretty good handle on.

Key equipment delivery and a lot of that is somewhat site dependent as well.

So.

I think we are confident in our.

And our ramp time currently.

Thanks for the color.

Shifting gears to your relationship with Sunpower.

So think about how much you might end up supplying to sunpower in 2022.

Do you think.

Youre megawatts in 2022, sorry in 2023.

It might be up.

Or down versus what you shipped to them in 2022.

Okay.

I think that would probably be.

Slightly down, but not significantly down in 2023 and that would again be part of the margin optimization that we spoke about earlier, but we have.

A good relationship with Sunpower, we've been working with them for a long time, they've been selling our product for a long time.

And so it's really a matter of.

Discussions ongoing with them for us I think they mentioned on their call we'd actually supplied more than contracted in 2022, there is some potential to supply more in 2023.

Budgets.

Yes.

There is a lot of demand out there and sunpower.

Our great partners.

And it wouldn't be.

Significant reduction if there is a reduction.

Really appreciate that color Mark and then finally in terms of the CEO process Mark.

<unk>.

The shift or change was a bit of a surprise I think for everyone.

What where are we in the process. When do you think we what's the timing in terms of finalizing.

Our new CEO and and.

Do you have your.

Name and hat.

So.

I don't think we have a specific.

A specific timeline set that we're that we're disclosing the process is ongoing.

We are engaged with.

Recruiting has one or two.

To work on that obviously thats something thats going on at the board level.

But it's it's.

Yes, yes.

Here for as long as as I need to be here I feel like we're making good progress.

Until such time as we do have a permanent CEO and so it's actually not I think the main concern at least with the management team in terms of how we execute our 2023.

Great. Thanks, again, Mark I'll pass it on.

Thank you.

Next question comes from the line of Paul <unk> with Raymond James Your line is now open.

Thanks for taking the question.

You mentioned on pricing.

An uptick in Q4, when we look at the.

PV insight benchmark.

It's down pretty much every week now think forward 10th straight weeks.

<unk> down about 10% over that period.

Are you seeing a different dynamic in your.

Pricing structure.

So I think if you look at the PV instant insights numbers Youre basically looking at product leaving.

Our factory not product being sold to.

Customer two to an installer and distributor.

And so that's where we played a little bit different.

Base, we are continuing to see strong demand both for our RBC product and our performance series product.

And we've got.

Backlogs that will carry us through.

Q4, and beyond which is what's giving us the confidence in the ASP uptick that we that we mentioned we're seeing.

Pricing.

Not necessarily starting to drift down yet, especially for premium product.

And we obviously will try to maximize that as long as we can.

Okay.

<unk>.

Clearly some module supply constraints in the U S because of the.

Issues that you touched on earlier.

Where are those module is going the ones that are being stopped at the border by customs are they being essentially dumped into the domestic Chinese market or are there other international markets, where they're being reallocated.

I can't answer where everybody else is putting those excess modules.

What youre seeing is im assuming utility scale very large format bifacial modules that are getting turned away.

Outside the U S. We are much more active in the <unk> space.

And so we're not seeing that same <unk>.

<unk> overlap into those areas.

There is generally more.

Module availability in the rest of the world than there is in the U S. But again, we play in a very.

Premium space.

Both with the <unk> product as well as our performance series product and so far we're not seeing any sort of flood of product that's not getting into the U S. Effecting the DG markets internationally.

Okay, and then lastly, EMEA region.

The percent of your revenue this past quarter I think that's an all time high.

Any pillar hotspot to highlight.

Well I think we mentioned, France, where we're moving over 20%.

20% market share we continue to be strong in Italy, really all of the DG focused markets.

Europe , we are doing quite well there.

Combination of our RBC product at the top end with our.

Performance series product in the mid range has really.

Great effect there.

We are doing quite well with the AC products with the.

AC modules there as we mentioned some of the penetration rates earlier, so it's great to be selling more complete systems and then as I said in Q2 of next year, we expect to be shipping our.

Our storage product.

Europe will already be shipping it into Australia in Q1.

And so.

Overall, we feel like that's one of our big Differentiators is our exposure to the important DG markets around the world. The U S is important but the but the EU EMEA markets are also.

Significant.

Alright, Thank you very much guys.

Thank you.

As a reminder to ask a question at this time, Please press star one one or your Touchtone telephone.

Sure.

Our next question.

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

Hey can you hear me.

Yes, we got you.

Okay. Thank you very much appreciate the time here can we talk.

Tomorrow.

Yeah.

Okay.

Right.

Youre breaking up so let me get one.

We can't understand the question.

Hi.

Okay.

Great.

Okay.

Great.

Some comments.

In your prepared remarks, you talked about the next wave of RBC technology that you are correct.

Can you talk a little bit about the side.

Okay.

All right.

Aligned with the 28 deliveries in demand that you otherwise described in your remarks.

So I think I understood that you are asking about next generation performance technology that we will be delivering in 2028 is that correct.

Yeah, I just wanted to talk about.

Go for it.

Alright, Julian the first time you went through your question, we got about 40% of the words you are breaking up you are now much more clear could you just do a super quick recap of your question.

Yes, sorry, I apologize I don't know whats going on.

With respect to the.

The next iteration of RBC, you alluded to in your remarks about an acceleration on timeline as well as.

The relative demand for the product through that period. If you can talk about how big and how quickly you can scale.

Yes, so I don't think we talked about an accelerated timeline.

Timeline, although we're obviously trying to accelerate the timeline as much as possible given the window of Av.

Demand opportunity there so I mean, we're really focused on.

On.

How we bring to market. This next generation of RBC technology, we talked about the benefits and efficiency, it's got additional benefits in.

In other performance factors energy on et cetera.

And we are trying to bring that to market.

Really as soon as we can but doing so on a bye bye being additive to the to the volumes.

Not really in a position to talk about exactly how much or exactly on what timeline at this point, but those discussions are ongoing and we certainly recognize the demand is out there and we want to.

Finalized plans at <unk>.

Soon as we're capable of doing that.

Yeah.

Alright fair enough guys. Thank you very much have a great day. Thank.

Thank you. Thank you Julian thank you.

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