Q3 2023 Maxeon Solar Technologies Ltd Earnings Call
Okay.
Good day, ladies and gentlemen, walking through Maxion solar technologies third quarter 2023 earnings call.
Currently all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded.
Now I would like to turn the call over one moment.
Okay.
Thank you operator, good day, everyone and welcome to Mac here on third quarter 2023 earnings Conference call.
Today, our Chief Executive Officer, John Mulligan, Chief Financial Officer costs drove back.
<unk> strategy officer, Peter actually better.
Let me cover a few housekeeping items before I turn the call over to Bill.
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, the 6K and other SEC filings.
Please see those documents for additional information regarding those factors that may occur.
These forward looking statements.
To enhance this call. We have also posted a supplemental slide deck in the events and presentations page of Maxion 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 I'm Baek Young Investor Relations Web site.
For a presentation of the most directly comparable GAAP measure as well as the relevant GAAP to non-GAAP reconciliations.
With that let me turn the call over to Mexico, and CEO Don Mulligan.
Thanks, Rob.
Maxion experience dramatically different trajectories in our two businesses during the third quarter.
Our U S utility scale revenue was up 10% versus the previous quarter and we are on track to exit the year with fully ramped manufacturing facilities are sold out backlog at higher prices that we expect to make material margin contribution for 2024, and the achievement of important milestones with respect to our <unk>.
U S factory.
In our DG business, we faced significant demand challenges caused by the suspension of shipments to sunpower and the effects of a broad market dislocation in Europe.
I'll spend a few minutes now detailing these different market environments and the respective applications for Mastercard.
I will then review our Q3 financial performance and provide guidance for the rest of the year and then we'll conclude with Q&A.
The U S utility scale market is a key focus for us and our primary growth driver.
With our existing North America.
Utility scale supply chain, reaching important operating efficiency and profitability milestones and our planned new Mexico factory entering the engineering and design stage.
We believe that maxion is positioned to be a leader in helping Richard advanced solar cell and panel manufacturing to the United States at meaningful scale.
Towards this end we are working intensively with the U S Department of Energy loan program office to finance at three five gigawatt solar cell and panel factory in Albuquerque.
This capacity represents an increase of 500 megawatts compared with our original design.
With site Preconstruction work well underway, we've hired a general manager for the facility secured options on adjacent parcels to allow for future capacity expansion.
In order to accelerate and de risk the ramp up of our U S factory, we plan to install a top con pilot line in our existing fab three in Malaysia, and expect this line to be up and running next year well ahead of the anticipated factory ramp in Albuquerque.
We expect this pilot will provide valuable process development experience and serve as a training platform for copy exact technology transfer to our U S factor.
Finally, we are advancing Huawei negotiations for multiple off take agreements, which we plan to execute prior to the closing of the deal.
Q3 shipments in our utility scale business, where at an annual run rate of over one three gigawatts with 100% of this volume shipped into the United States.
Pricing increased from the first half of the year and we expect pricing to further increase in 2024 as we transition to shipments for orders booked during 2022.
Note that Asps will fluctuate from 'twenty to 'twenty four onwards, as we transitioned to index pricing structures tied to certain cost inputs.
Contracted backlog now stands at three three gigawatts for delivery through 2025, plus an additional 500 megawatts of supply allocated in each of 2025, 2026 and 2020 salad.
Let's now turn my attention to our DG business.
Since June of this year conditions have deteriorated rapidly due to an oversupply of Chinese commodity modules in Europe in Sunpower falling short of their contractual purchase obligations.
However, we continue to be bullish regarding the importance of this sector in the mid to long term.
This view is supported by increasing global retail electric prices the integration of battery storage to create smart and dispatch of both systems and the avoidance of grid congestion as a potential barrier to continued renewable energy penetration.
The DG sector is currently experiencing headwinds associated with high interest rates policy disruption as well as excess supply and inventory.
None of these challenges are unique our unprecedented but in combination they produce what is a very challenging industry environment. We.
We are confident however that the DG sector will continue to be a vital part of the solar industry in the long run.
We remain focused on our <unk> strategy, namely developing manufacturing and selling the world's best solar panels through a differentiated direct to a dollar sales channel with increasing attachment beyond the panel hardware and software that enables homeowners to control their energy usage.
As many of you know our recent financial performance and D. G has been severely hampered by a dispute with Sunpower that led us to suspend shipments from July through the end of Q3.
I am pleased to announce that we have reached a settlement with Sunpower earlier this week that enables us to resume shipments.
The settlement calls for the parties to transact on 85 megawatts of ABC panels through February 2024 at previously contracted prices and resolved outstanding claims and contract breaches.
Parties have also agreed to and other contractual supply obligations by the end of this quarter.
Including purchase obligations by Sunpower beyond the 85 megawatts.
<unk> maxion product sales to Sunpower installers.
Offering panels directly to installers will eliminate the markup sunpower has historically added to our products, allowing us to deliver the world's best panels to customers at more competitive pricing.
This will enable our plans to aggressively ramp our sales in the U S market leveraging.
Leveraging our recent flurry acquisition, which nearly doubled the number of dealers actively buying our product to over 170.
The Solaris transaction also accelerated the development of our channel sales and marketing infrastructure with the addition of key talent, including because decide a former president Celeriac, who is now our North America General manager.
Because it was the original architect of Sunpower Installer channel and successfully grew that business to over $1 billion run rate in just five years.
He will be focused on replicating that success here at maxion.
We currently expect a year over year decline in the U S residential market demand in the first half of next year.
California being the key variable, we expect that demand will recover by the time, we began sizable shipments of our new <unk> maxion seven panels, starting in mid 2024.
Turning to Europe, our shipments were down 37% sequentially due to elevated industry wide module inventories.
And most key European markets Maxing out jobs, primarily directly to installers, which has allowed us to successfully maintain healthy AFC is in positive gross margin.
With reduced volume.
Our Sunpower reserve battery product is now widely available to our dealers in Belgium, France, Italy, Spain, and Australia, and we have received excellent customer feedback regarding product quality and ease of installation.
As we mentioned in our last call we increased our sales focus into the commercial and industrial segment and we are pleased to announce an early win as module supplier for Italy's Turin Airport.
As well as a growing pipeline of similar high profile projects in the region.
Let me now say a few words about our ABC solar panel technology.
Our sixth generation panels, where a big step forward compared with the second generation products. They were placed and have been a critical contributor to our DG business, particularly in the U S.
With near term U S. G G volume expected to decrease due to the discontinuation of the Sunpower offtake, we have made the decision to phase out our maxion six technology and focus on maxion, seven and future generations.
We now plan to bring <unk> to market a full quarter earlier than previously planned and we will reserve fab five for future Maxion eight capacity.
We will pre manufacture sufficient maxion fixed volume to ensure a smooth product transition to maxion, seven and all of our key markets and plan to utilize the space freed up in fab three to install the top comp pilot Mike mentioned previously.
We are very excited about our seventh generation <unk> platform, which is the first IDC technology developed and commercialized by maxion since the spin.
Maxion seven delivers increased efficiency and other performance attributes that will extend our technology leadership and allows homeowners to generate even more power from their limited roof space, thereby maximizing bill offset in this era of electric vehicle adoption.
Since enroll efficiently crowd maxion seven is the worlds most efficient solar panel back in January or early stage production runs have continued to improve with nearly half of our module output currently exceeding 24% efficiency.
However, as we'd like to remind people, it's not just about efficiency Maxion Seven's architecture achieved these record performance levels, while simultaneously controlling hotspots and other degradation issues that are common challenges for high performance solar technologies.
And which we observed with regularity in our competitors' products.
We expect to start shipping maxion seven panels from next summer, which corresponds with the peak selling season in the U S residential market.
Finally, I want to say a few words about intellectual property.
With Maxion seven we are taking another major step forward with respect to I B C architecture, and we are adding to our considerable IP moat in this field.
As our competitors attempt to close the performance gap to our products. They are finding it increasingly difficult to navigate around the IP portfolio that we have developed over the last several decades earlier.
Earlier this year, we filed a patent infringement action against <unk> and <unk>.
Cease and desist letters to several European distributors related to our single cell panel technology.
Yesterday, we filed a patent infringement action against Iqos solar and European distributors related to our <unk> solar cell architecture.
With over 1600 granted patents and 360 pending patent applications across 30 countries Maxion has a formidable portfolio addressing fundamental enabling elements for creating high performance solar cell and panel architectures, we plan to continue to defend our IP aggressively.
In summary, our U S utility scale business is on track to deliver increasing margins as we prepared to deploy our next major capacity increment in new Mexico.
Although we and many others were surprised by the speed and magnitude of the changes in the <unk> industry. This year, we are well positioned with our technology and channel initiatives and expect our D. G margins to recover in the back half of 2024 as <unk> introduced with that turn it over to Colin.
Thank you Bill.
I will discuss the drivers and details of last quarter's performance and then provide.
The guidance for the full year.
Total shipments for the third quarter were 628 megawatts and for the first time in <unk> history. The majority of shipments went to utility scale customers.
We expect this to be our new normal for the foreseeable future, though with the continued sizable DG market share in the highest ASP geographies.
Also for the first time in <unk> history.
Our utility scale shipments went entirely to customers in the United States.
Total shipments were consistent with our updated guidance range and down 22% sequentially largely due to the dispute with Sunpower, which also resulted in a significant inventory buildup.
Shipments were also impacted by the industry wide supply demand imbalance in Europe, which caused our European volumes to decline more than 30% year on year.
Revenues for the third quarter were 228 million and included a 10% sequential increase in U S utility scale revenues attributable to higher volumes.
On a blended basis asps declined sequentially due to a lower mix of <unk> sales.
Our ASP in U S. D. G was largely flat sequentially at a bus 70 cents per watt with only limited shipments to sunpower early in the quarter.
Asp's for our performance series in the global DG market were down 13% sequentially, partially offset by cost reductions.
Gross profit in the third quarter was $3 million or 1% of revenues.
Significant sequential decline was driven by the dispute with Sun power Europe D G oversupply condition and inventory write downs.
GAAP operating expenses were $67 million.
And included restructuring charges of $24 million.
Primarily in connection with the cancellation of purchase orders for the previously planned capacity expansion of Nextgen seven at our fab five in the Philippines.
As announced in early October our decision to convert existing Mexico, and three manufacturing capacities to make sense, even at our fab four instead of expanding <unk>. Five is expected to result in net capex savings of approximately $100 million.
After accounting for the cancellation charges and allows us to accelerate the introduction of maxion.
non-GAAP operating expenses were $38 million in the third quarter.
Below our guidance range of $43 million, plus or minus $2 million due to austerity measures that we've put in place.
The decline does not include any impact from our announced reduction in force, which I will discuss in the context of our fourth quarter outlook.
Adjusted EBITDA in the third quarter was negative $20 million.
Consistent with our October a pre announcement.
Net loss attributable to stockholders that came in at 108 million comp.
Compared to 2 million in the previous quarter.
The sequential decline was primarily driven by lower gross profit combined with the $24 million in restructuring charges and $37 million attributable to the remeasurement loss on our prepaid forward.
Moving onto the balance sheet, we closed the third quarter with cash cash equivalents restricted cash and short term investments of 277 million.
Compared to $456 million at the end of the second quarter.
Total inventory levels increased sequentially from $349 million to $386 million.
Due in part to suspended shipments to Sunpower.
Cash levels were also impacted by lower shipments and margin dollars from our global DG business the reduction of contract liabilities related to our U S utility scale business capital expenditures during the quarter restructuring expenses and a reduction in short term debt.
Kevin expenditures came in at $15 million for the third quarter below the low end of our guidance range as we took actions to execute the lower Capex plan associated with the introduction of Maxion seven.
Going into the fourth quarter, we expect the distinct dynamic that has been unfolding in our utility scale and distributed generation businesses to largely continue.
Volume shipment and ASP and our utility scale business for the United States have been contractually locked in and are increasing over time and manufacturing costs are tracking favorably.
By comparison, the DG business outlook has more uncertainties due to the industry headwinds in Europe and elsewhere.
Given the velocity of those headwinds that have developed over the course of only a few short months, we have taken decisive action to quickly pivot our manufacturing capacity, while maintaining strict austerity measures to ensure a healthy liquidity and safeguard our ability to invest in <unk>.
Alrighty.
Notably <unk> seven as well as the preparations for our manufacturing project in the United States.
Cash and working capital management have always been a high priority will make some final organization and we are redoubling our efforts in this area.
We have reduced raw material orders and a modulating our RBC manufacturing volumes in line with inventory on hand, and existing autos why right sizing, our manufacturing footprint and related resources.
As a resides we expect significantly reduced inventory levels as we exit the year.
We have also negotiated more favorable payment terms with many of our suppliers.
And as mentioned our Capex plan is substantially reduced by our pivot of the Mexico seven ramp.
On the sales side, we are focusing on a narrow set of DG growth initiatives.
First expansion of our Maxion branded U S residential channel and leveraging the Solaris acquisition.
Second.
Further penetration of the commercial and industrial segment of the DG market in Europe, and the United States.
Third scaling of our beyond the panel offerings.
And finally market introduction of Mexico, and seven in mid of next year.
With this context in mind I will now turn to our guidance for the fourth quarter and its implications on the full year guidance.
We project fourth quarter shipments of between $610 and 650 megawatts.
This includes shipments to Sunpower as contractually agreed under the settlement agreement.
Alright, so the midpoint of this guidance includes continued growth in our U S utility scale volume, while Europe is projected to be relatively flat sequentially with growth in C&I offset by a decline in residential.
We project fourth quarter revenues of $220 million to $260 million.
A slight sequential increase at the midpoint, mainly due to higher shipments to sunpower.
Incremental sales, resulting from our <unk> acquisition, which starts having a net positive impact on sequential revenue, but carry a lower ASP than our previous ABC OLED pricing in the United States.
non-GAAP gross loss is expected to be in the range of five to 15 million.
Which include certain either charges and excess parts related to our IDC capacity pivot.
Retention liquidated damages because of delivery delays in U S utility scale as well as the risk of further inventory write downs.
Adding up to approximately 25 million combined.
GAAP operating expenses are expected to be $113 million plus.
Plus or minus $4 million.
These include restructuring expenses totaling approximately $70 million.
For the write down and the accelerated depreciation of certain maxion six manufacturing assets.
<unk> four maxion seven related purchase order canceled in the beginning of the fourth quarter as well as severance costs for our previously announced reduction in force.
We originally expected that 15% of our global workforce would be affected but.
With the decision to entirely phased out makes unsafe as well as other operational realignments, we now expect that number to be approximately 22%.
non-GAAP operating expenses are expected to be $38 million plus.
Plus or minus $2 million.
As an increase in U S sales and marketing head count is offset by austerity measures.
Note that the vast majority of the reduction in force initiated during the quarter impacts our manufacturing operation and therefore will have a disproportionate impact on Cogs versus opex.
Adjusted EBITDA in the fourth quarter is expected to be between negative, 27% and $37 million.
The expected sequential decline is attributable to lower gross income on largely unchanged non-GAAP opex levels.
Fourth quarter capital expenditures are projected to be in the range of $10 million to $20 million.
And majority of which is planned for our Mexico, seven Ram and initially preparatory spending for our Albuquerque site.
Why does this initial capex for the U S facility may be bridged by our balance sheet. The expectation is that we will secure the majority of capital needed to build the facility in the months ahead from the Doj and customer co investments.
As implied by our Threet <unk> resides in <unk> guidance, we update our 2023 revenue guidance to 1.114 to 1.154 billion, our adjusted EBITDA guidance to 4% to 14 million.
And our annual Capex guidance $2 $66 million to $76 million.
With that I'll turn the call back to Bill to summarize before we go to Q&A.
Thanks Ty.
Reducing our head count this quarter was a painful but necessary decisions in response to a suddenly decreased DG demand profile.
I am pleased by the professionalism displayed by maxing out his leadership team and the speed of our response.
Acceleration of Maxion, seven right sizing, our IDC capacity settling our sunpower dispute and related channel expansion initiatives should get <unk> back on track by the second half of next year.
<unk> team are laser focused on cash management and our operations group continues to grind out cost reduction and yield improvements.
We expect success on these fronts will get us back to adjusted EBITDA profitability within 2024.
As we work toward deploying our Albuquerque solid module factory.
We appreciate your support.
Now, let's go to Q&A operator. Please proceed.
Thank you.
Ladies and gentlemen to ask a question. Please press star one on your telephone and then wait to hear your name announced.
To withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, guys its actually Alex we're able on for Julien.
Maybe if I may I mean, you guys have made a lot of adjustments I think to kind.
What's your manufacturing footprint was versus what it will look like in 2024, obviously, some one time items, causing the gross loss, which were alluded to previously.
It sounds like the adjusted EBITDA losses might continue into the first half I am wondering if you can kind of just help us of the cadence that you guys are putting out there.
How big is this top timeline for example, what's the phase down of Max six look like as far as revenue contribution and when do you expect to kind of be able to get back on track from an adjusted EBITDA lines in 2024 with all these moving pieces.
Yes, hi, Alex them all again.
Yes, thanks for the question.
I think.
Incredibly strong demand in the first half of this year and.
What.
The silver lining of this downturn is it's given us an opportunity to have.
Quickly to our new next generation Maxion, seven technology, and we're going to do so in a much more cost effective manner than what we had previously planned.
I always think it's important to respond to an industry downturn like this very aggressive way.
Our outlook for Europe.
Next year is it's fairly sober so we.
We decided to bring me the capacity down to what we view is.
More balanced structure looking forward.
All of these actions together, we're doing a good job of keeping inventory in line absent the sunpower dislocation, we actually would have reduced our inventory this quarter.
We are ahead of us we're trying to get out in front of it.
Take a little time to recover but I think by the next half.
The second half of next year, we should be.
Returning to profitability.
Yes, maybe if this is kai Alex I would maybe add for the for the inventories you've seen kind of a record high number at the end of the third quarter that as Bill mentioned was mostly because of the build up of inventories.
Well San Paulo, and also some other DG markets, but mostly sunpower really.
Because we suspended shipments now as you've seen we've.
Come to a settlement with Sunpower or we're going to ship them 85 megawatts through February timeframe, and frankly, all that stuff is in inventory as we speak. So there's also from a cash standpoint, not much more cash that we need to put into working capital, it's all going to come out and turn into cash.
So thats kind of where we are where we are turning.
Part of the machine around.
And in terms of the mix sakes phased out that we alluded to we are running at about half capacity right now.
Using up the remaining materials.
Putting those into inventory and think that we're going to have enough <unk> six inventory to bridge the transition to Mexico and then from the mid of next year.
Got it.
Maybe just a follow up as you guys think about.
Looking at your exposures is the way I'll frame it on Max seven.
Mid 'twenty four I think is when you sort of talked about unveiling that product to the market what I mean with the breakage with Sunpower, what's sort of your sales strategy going forward. Obviously, you guys have the slurry channel, which seems like one opportunity the green tax channel is already existed.
How are you thinking about sort of bringing that into market.
Relative to kind of what your brand has been associated or associated with you in the past versus what it will be going forward.
Thanks.
Yes, yes. Thanks.
RBC products are still absolutely the best panel on the market and Max seven just really helps take that to a next level and there is a large base of folks in the United States that that know that and believe that and want that product and so on.
There is latent demand for this product out there I think this transition from from Sunpower allows us to control our own destiny.
As we mentioned in the prepared remarks, adding <unk> Desai on missile area team.
<unk> is a big plus for us, it's really jumpstarting, our buildout of our own channel here.
So we're really optimistic about that bringing in a great product with a rebuilt team to a market that knows this products and appreciates this product.
And has historically very strong asps so.
We felt we felt good about it it's going to take a little while to rebuild and but like I said by the back half of next year, we should be matched.
Much stronger positions.
Often just a quick clarification, if I may just on the Sunpower megawatts was there any sort of cadence commentary you can give us otherwise I'll take the rest offline.
I would say all of the 85 the majority of the 85 I think we have disclosed is going to run through February. The majority is going to be in in this current fourth quarter.
Awesome, Thanks, guys I'll take the rest offline.
Thank you.
Please standby for our next question.
Our next question comes from the line of Brian Lee with Goldman Sachs <unk> Company. Your line is open.
Hey, guys. Good afternoon, thanks for taking the questions I have several.
Maybe just to start off I wanted to understand.
The evolution of the Sunpower dispute resolution here.
So they got.
Hi megawatts volume committed high school fix that's the original terms.
But effectively at least it sounds like youre, allowing them to.
Terminate the prior contracts that you had.
For 'twenty four 'twenty five.
I guess I don't I don't really hear what you guys are getting in exchange for letting them out of those contracts because they effectively I don't think they are fulfilling volume commitments under the <unk> three deal.
And then 2425 are going away so.
Alright, I guess I'm struggling to understand.
I know you wanted to dispute behind you and you can move forward and strategically. This gives you better clarity heading into the next few years, but.
Is there anything I'm missing just feels like there is this was a one way a bit of a one sided resolution.
Yes, yes, thanks, Brian.
Well the settlement does include.
Warrants for us so that's part of the upside for us.
I come back to though that the primary reason west for us to be able to go out directly to these installers really cutting out the middleman with Sunpower and a challenged market like this there is really not a lot of room for stacked margins. So we're going to be able to offer installers better pricing and also with <unk>.
Higher asps are ourselves five.
Eliminating that.
Mark up that Sunpower has historically applied to our products.
That is really our view is we wanted to be able to.
Get out of this exclusive relationship diversified our customer base. So it was really a strategic move.
And we felt.
This was the right time to do so.
Okay.
Thanks.
I guess as a follow up to that.
It's going to take a little bit of time to recover if you will.
In the medium term it sounds like this is a.
Good transition for you Bill as you mentioned youre going to get higher ESP the middleman out.
Presumably higher ASP.
Assume that means.
Higher margins for you as well so in the interim it does sound like margins are going to be pretty negatively impacted by underutilization.
IDC relative to performance.
When do you think we've seen.
Any kind of margin.
Get back to a point, where you are significantly higher on IV <unk> versus <unk>.
Performance like we were probably seen in the first half of this year. When you were doing consolidated mid to high teens gross margins.
Yes.
Yes.
Yes.
We're absolutely excited about this for the long term right.
Just taking control of our destiny in the U S market, which is becoming increasingly important to us with.
With the world's best product, we think we're well positioned for long haul you are right that.
Theres, a little bit about <unk>.
Between here and there.
It's the reason, we're taking pretty dramatic action on Reese bright sizing our capacity because we don't want underutilized capacity right. So.
We're dealing with that now so that we can work through the problems quickly.
And so I think we.
Sort of struck the right balance there between.
Patsy for growth and maintaining profitability and positive cash flow in the near term to the extent possible. So that were strong coming in out of the second half next year.
Yes, I would I would.
Ed that talking about the second half of next year, if you think about it.
We're going to have a completely revamped product portfolio for the DG markets in Europe, you're going to introduce performance series seven so the latest incarnation of that product.
The sales team is really excited about and also we're going to have 100% of our IBD production on maxion seven on the very latest technology. So all of these moves are designed to bring us back to these margin profiles that we have that we have.
Joined in the past and in the United States, We obviously want to deploy maxion seven and then we will also have the new scenario suite of products.
We are importing into the United States. In addition to that we have.
Ramping up beyond the panel complementary offerings to really have.
Our full suite of products or DG AUM on us So thats, our strategy and we think thats going to play out successfully after the transition in the first half and then coming to fluid swing in the second half of next year.
Okay, Great. That's helpful. One last one from me and I'll pass it on.
I think you mentioned during your prepared remarks, you alluded to.
Some customer co investments as it relates to the new Mexico facility can you maybe elaborate a little bit on that what kind of discussions are you, having what sort of magnitude you could potentially expect if you see those come to fruition in that timeline.
Go right ahead of construction or what sort of what should we be thinking about it.
Look to that potentially being a cash in source.
Yes, it's something Brian that we have talked about pretty consistently actually as the two main pillars of our financing of that U S manufacturing site, which are the Doe loan and customer co investment customers are very very excited about that new facility.
And.
We've been in touch with them and discussing all of these things that you just mentioned around volumes pricing timing terms and conditions and so on we are not in a position right now where we would disclose the details, but I think suffice it to say that.
These.
Things have to come together, the Doe loan and the customer co investment that's the two main pillars of that.
That financing and both of these items are on track.
Okay. Thanks, guys I appreciate all the color.
Thanks, Brian.
Please standby for our next question.
Our next question comes from the line of <unk> with Raymond James Your line is open.
Yes, thanks for taking my question.
Let me shift gears and ask about Europe.
Given that all the changes.
Surrounding sunpower is it fair to say that Europe will be.
More than half potentially a.
A lot more than half of your sales.
Yes.
First half of 'twenty, four or even all of 'twenty four.
No I mean keep in mind the other huge segment for US is the U S utility scale market and right now thats.
Becoming the major part of our shipments.
So that's going to be growing very nicely right now.
Moving into double digit gross margins next year or so that is our primary growth for us Europe is still going to be very important.
And.
We expect that market is sort of flattish low for this year and next year we.
We hope to expand.
Expand share in various segments of that market. We always plan. The premium segments are introducing are complete beyond the panel solution now with integrated storage and EV charging and panels and software and control software. So we think that product is exciting and getting some traction so.
But I think overall given the very high levels of inventory in the European channel right now we have to be.
Somewhat conservative on what the outlook is there.
There is a lot of inventory in the channel so.
Europe's going to continue to be very important but.
The U S.
It continues to be our strongest market and I think very quickly, we'll recover and U S. D. G to the point, where it's going to be.
Comparable size or even bigger than Europe.
Okay.
China will be by far the largest market of 23.
Indeed, probably the only market where.
Newbuild estimates have actually increased since the year started.
What's the latest on.
The JV in China, how how is it benefiting from the domestic installation boom.
Yes.
Our JV partners.
Our driving their own domestic consumption, we use the JV, primarily or exclusively for off take in our international markets.
So I don't really want to comment too much on the domestic Chinese market is extremely competitive, let's just say right now.
There's just not enough homes for all these panels worldwide based on that massive amount of production capacity that's out there for us. The JV has been very successful because we're able to take off a residential format panel that has been a great product for us in Europe.
We're just introducing our our seventh generation performance line panel, that's a top client based panel.
Really state of the art and we expect that to have.
Really.
Strong competitiveness in Europe, so that's going to be one of our major growth products for Europe. So we're benefiting from the joint venture in that regard.
You are right the majority of the volume from the joint venture does goes into the domestic.
Chinese market that helps us from a standpoint that they have scale in a very attractive cost structure, what we benefit for our foreign offtake.
Last question deliberately zooming assuming out here.
Module pricing when we look at the benchmarks is down 30% over the last six months steepest drops since the global financial crisis.
Do we have evidence to suggest whether this magnitude of price decline is starting to stimulate.
On the demand side.
Sure Econ 101 would suggest to be the case.
Hey, <unk> this is Peter.
I would say not yet.
There've been a few folks talking about that possibility keep in mind that module pricing.
Particularly in the DG segment is.
Fraction of the total installed cost to the homeowner.
And.
In.
And both in the Europe and the U S.
Higher interest rates.
Kind of working against.
Where module prices in terms of.
And use your payback periods.
So I would say.
We haven't seen that I don't believe we're seeing that yet on the utility scale side Theres a lag of course due to project cycle times and PPA cycle time so.
Maybe we'll see that.
And the rest of World power plant business first.
In the U S. I think we're also seeing the effects of higher interest rates being a counterbalance to potentially lower module costs.
On the spot market here in the near term.
Alright, Thank you guys.
<unk> no not yet.
Yes.
I appreciate it.
Thanks, Kevin.
Please standby for our next question.
Our next question comes from the line of Philip Shen with Roth <unk>. Your line is open.
Alright, thanks for taking the questions first one is on.
Margins I know you are not.
Regarding guidance for 'twenty four.
You did make a commentary that you.
Do you expect margins to recover until back half of 2024.
So I was wondering if you might be able to quantify in any way.
And what margins might look like in Q1 and two.
Should we expect it to be similar to current levels.
Or a modest recovery in Q1, and two and then.
Stronger performance in the back half of 2004.
Yes, thanks for the question.
Yes.
We're not we're not giving guidance yet.
As you said we entered two.
Margin and EBITDA recovery in the second half which is of course.
On the new introductions that we're going to have.
Seventh generation performance serious.
<unk> seven.
Further progress also on our U S utility scale I think we had something in the order of prepared remarks, where we said that we expect further cost reductions efficiency improvements and <unk>.
Asps.
The increases which.
We should.
These get these margins up potentially into the into the double digits. So that's going to be that's going to be.
Positive thing of course.
Working through inventories of course of some.
Maxion, three and maxion six inventory still in the first half of the year and probably also a little bit of a tail in the second half.
I would say in terms of the fourth quarter and how things are going to develop from there you have seen in my prepared remarks that.
I was lifting some nonrecurring items that are going to affect margins in the fourth quarter guidance.
We expect those to be nonrecurring and we are still working on some of those so we also expect that these things are going to get better as we reengineer, our overall manufacturing footprint and take cost out right size things and then.
Go into 2024 with better spring.
Okay. Thanks, Scott.
On the flip side, let's talk about pricing again, if we can for RBC.
You are you are going to be controlling your own destiny Bill as you mentioned earlier, a number of times and so that happens in March.
And.
Heading into March I can imagine youre working on deals to try to secure agreements with different players.
So I was wondering if you could share how those conversations might be going now is it a little bit premature to get a feel for how close you are in locking locking down volume and pricing and then.
Some of our checks suggest module is in the U S. E channel may not clear until after Q2 of next year.
So high efficiency module pricing has already come down dramatically since the summer.
What kind of pricing can you guys secure.
Hey.
Sunpower relationship with your benchmark well you guys are typically of a benchmark, but as you think of.
Other peers that are trying to do what you guys do and their pricing is I don't know maybe 40.
50 cents.
For lower volume, but maybe 40.
Plus that level for higher volume.
Or are we going to need to see you guys price in that.
Kind of 50% range.
Range.
Think about <unk>.
Modeling asps for RBC volume in 2024.
Right. Thanks, Phil.
Yes, I think.
First of all I wanted to just.
Clarify that.
We're actually.
Free to approach Sunpower dealer starting January one.
We have exclusivity on the maxion six product through the end of Q1, but we are able to sell maxion, three and maxion seven starting the first of the year.
It is a little early to see how that's going we obviously have been very careful not to approach them power dealers, while the contract is still in place.
And that remains to be the case.
For a number of dealers not all of the dealers, but a number of the dealers through the end of the year right. We're just six weeks away or so three of those weeks or holiday week. So.
January one is going to be here very quickly.
We will engage.
Super quickly at that point in time.
With regards to Asps.
We're still actually running quite healthy asps in Europe.
<unk>.
Made the choice not to chase asps to the bottom.
He's had a premium product with clean a premium segment.
We sort of feel like it's a fool's errand to just race to the bottom. So we prefer to take a little bit lower volume and maintain our pricing we've done very well with that in Europe to state.
In the U S is actually.
Still today fairly substantially higher than what it is in Europe, even though it's lower than it has been for sure but again with.
Eliminating the markup that sunpower puts on our panels and being able to access. These dealers directly we think we've got headroom there to to really be competitive in the market and then in the current situation.
A lot of it is being able to sell the premium.
The premium product story I'm Super excited that <unk> and I worked together from 2005 to 2010. He was the architect of this he knows how to tell the story, we've got the best panels in the World. We just got to get out there and tell that story and it's very effective if you do it right.
And we're going to be doing that and again I think we've got headroom.
We feel good about our pricing, it's going to be higher than what the numbers you were throwing out for sure substantially higher.
Great Okay. Thanks.
A couple more here and then I'll pass it on.
In the Sunpower 8-K.
There was some mention of the fact of components and some quantity.
Some sharing are split between you and sunpower on the cost of those effective components can you provide a little bit more color on what that is.
And maybe quantify what it might.
What it might be and what the split might be between the two companies and then shifting over I think in your release you guys gave some detail on.
Some.
$30 million payment security bond.
Tom Paris put up can you provide a little bit of detail on the mechanics of that and how that might work.
Sure sure.
So the issue Youre alluding to is a warranty issue that has a long standing warranty issue that goes back to the time of the spin I think.
Its certainly beneficial for both parties to get that.
Behind us.
So I think it's.
Is that on the on the payment bond, maybe you could give some color on that.
So.
Phil It's just basically a payment.
Security of course, we have experienced a time, where sunpower has not paid out at the very beginning of this dispute that we have now settled.
I think both parties have an interest that we don't get into such a situation again so.
Payment bonds is there to secure our deliveries because they are all payment terms and thats just the security for making sure that we collect the money.
Got it okay. Thanks, very much guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jonathan Schaffer with Northland Capital markets. Your line is open.
Hey, guys. Thanks for taking my questions.
First wanted to ask about an article that was in the.
The Albuquerque Journal.
Reporting. It says you you made a request to the city council for a $2 $4 billion revenue bond.
According to the article.
Revenue by itself, it's really about.
Property tax abatement.
This $2 4 billion magnitude.
Decided as a reference to.
Per the requests are filings that the idea is that that is the dollar amount or the estimated dollar amount you'd be investing.
And within the city limits or whatever the city council's jurisdictions.
So the question is.
Is $2 4 billion.
Is that a.
Is that are.
Not a useful does that a utility as a reference point or touch point in terms of.
Expected cost.
Or is there something about it that would sort of lead us Australia, whether it's <unk>.
There are only certain there's a subset of cost let's say.
You're allowed to include in your estimate or something like that anything where it would be meaningfully misleading to us and also is that do you know if that's tied to the three gigawatt initial.
Capacity or the three five gigawatt.
Jonathan This is Peter.
Not a useful reference point, we're not planning to invest.
Anywhere close to that amount of money as we've said pretty consistently.
The other thing we have said in our prepared remarks today was that we have settled on the three five gigawatt capacity for the project.
Okay.
Thank you for clarifying.
For the.
So the timeline so in the release you guys gave.
For the Doe loan guarantee and the off take agreements Bang your target is to have updates on both before the fourth quarter call.
Does that imply an interplay between this where maybe.
Better than expected.
Outcomes in the off take agreements could mean, a lesser need on the Doe loan guarantee or vice versa or is it just the cowen or is the timing of updates on both fronts just a coincidence in this case.
Don on this Peter again, the latter the timing of the closure of the daily loan NFC going effective of the.
Customer co investment agreements would be.
Contemporaneous.
Okay.
And then my last question.
As you know.
When you talked about Maxion seven you talked about.
It's not just the efficiency, but there is also <unk>.
Positive attributes on hotspots degradation improvements.
So do you anticipate.
Maybe it's too soon to say, but do you see yourselves.
Extending the 40 year warranty.
That I think offer on Max down six now to maxion, Kevin could that potentially end up being.
Warranty that goes beyond 40 years, or some or would it be maybe less than that.
And since it came up the warranty dispute the split between you guys and Sunpower.
And so in response to Phil's question.
Can you talk if any of that has to do with having such a long warranty.
It's related in anyway to providing warranties that go out for decades.
Yes, the warranties length is something we always look at but I would say at the moment, we're pretty happy with the 40 year warranty.
Haven't seen a lot of customer demand for anything more than that I think we always look at.
What we're reserving for warranty and as we have hired an ROI of.
Higher reliability products, there may be things, we can do there.
Yes, I don't see any any big changes in the warranty this is more of a.
Competitive attributes right many of our competitors products.
<unk> with things like hotspots.
And that and.
<unk> over time.
Technology like H J T that some of our competitors are pursuing.
It's fundamentally kind of an unstable compound thats very sensitive to moisture degradation. We see that we have a lot of field experiment experienced with all of these different products. So again, we're always we make the world's best panel and the.
The attributes of that are really important it's not just about efficiency. So we saw that and that we do but the warranty is one piece of the equation.
I think theres a lot of juice in particular two to extend that.
We talk about it.
Who knows what the future holds we'll we'll do what the market needs.
This is Peter just to your last question about the.
Warranty dispute that had nothing to do with the solar panel itself.
Oh very helpful. Very helpful. Okay, great. Thanks, guys I'll take the rest of my questions offline.
Thank you.
Please standby for our next question.
Our next question comes from the line of William Griffin with UBS. Your line is open.
Great. Thanks for the opportunity and good to speak with you all here.
My first question was just.
You talked earlier in the call about getting out there and telling a story on the modules and.
Sure.
The premium position that you kind of hold in the market.
Could you address maybe what youre thinking in terms of costs for ramping your DG customer base or investments that might be needed to do that and kind of backfill the lost sunpower demand.
Yes, hi, well yeah.
We're trying to do it.
With.
Yeah.
A light touch approach.
This is not an area, where we felt like we have to make a huge amount of additional.
Investment.
We have the model working today in Europe.
Basic plan is to replicate that model back here in the U S and again, we have a lot of people at this company that have a lot of experience in developing and operating this kind of a channel. So we know how to do it efficiently and that's our goal.
Yes, the only thing I would say our if you look at our historical Opex.
Yes.
I think it's fair to say the cost of running a channel.
Yes.
Sales organization as you know single digit.
Gross margin percentages.
It is not.
It's not a tremendously expensive thing to do number one number two these are people that we already have on staff now.
Largely as a result of our solar acquisition.
So in terms of incremental spend there is some there is some marketing expenses, but for the most part I think we are there to do it we need to do in 2024.
Got it I appreciate that and just the last one here on the production changes.
Talked in the pre announcement about replacing maxion three capacity with Max around 7% now.
You are talking about running down maxion six so just as you transition here.
Is there going to be a gap in your DG module production as a result of the shift just really trying to understand the cadence and timing of these changes.
Yes, well, what we mentioned in the remarks weird.
We are going to pre build.
Some maxion six technology to bridge us through.
The transition and.
Again. This is an opportunistic time, given what demand down to make a change like this and do a transition.
Because you obviously can't continue to manufacture at 100%, while you are making a transition so we're going to pre build some inventory.
Manage a fairly rapid transition then ramp back up and that's our bridging strategy.
And I just wanted to add in.
In spite of <unk>.
Pre building that inventory, we still expect inventories to go down from here with the expected shipments to Sunpower and also further shipments into DG channel. So we are kind of modulating it in a way that we continue to sell more than we are.
Making all the time being in order to get closer to an equilibrium.
You're perfectly anticipated my follow up thank you that's all I had.
Thanks Luke.
Please standby for our next question.
Our next question comes from the line of Andrew <unk> with Morgan Stanley. Your line is open.
Great. Thanks, so much for taking the question and maybe this is a follow up so I'll ask it.
As we just think about moving into next year, obviously, you're highlighting margin pressure could continue into early next year.
How are you thinking about the cadence of free cash flow and at what point would you consider the need to raise additional capital or are there any liquidity thresholds or balance sheet metrics that youre, hoping hoping to maintain ish.
I'll go through this transition period.
Yes. Thank you Andrew So I think it has of course, a lot to do with the things that we have been.
<unk> seen the negative cash flow in in this quarter, which had a lot to do with the growing imbalance between our manufacturing operations and sales.
That has developed during the third quarter and Thats of course, then reflected in changes in working capital. We have taken all of these decisive actions on the working capital side on the side of our manufacturing footprint and so on.
And modulating the capacities in order to address especially that so we think that with the current cash balance that we have.
And all of these measures that we talked about during the call and in the prepared remarks.
We are in a good position to generate sufficient cash and maintain sufficient cash levels for our existing business.
Great. That's super helpful. The rest of my questions have been answered so I'll take the rest offline. Thank you.
Thanks, Andrew.
Yeah.
Ladies and gentlemen, I'm showing no further questions in the queue.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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