Maxeon Solar Technologies Ltd [MAXN] Conference call transcript for 2022 q1
2022-05-27 00:22:09
Fiscal: 2022 q1
Operator: Good day, ladies and gentlemen, and welcome to the Maxeon Solar Technologies First Quarter 2022 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. I would now like to turn the conference over to our host, Mr. Robert Lahey of Maxeon Solar Technologies. Sir, you may begin.
Robert Lahey: Thank you, operator. Good day everyone and welcome to Maxeon's first quarter 2022 earnings conference call. With us today are Chief Executive Officer, Jeff Waters; Chief Financial Officer, Kai Strohbecke; and Chief Strategy Officer, Peter Aschenbrenner. Let me cover a few housekeeping items before I turn the call over to Jeff. As a reminder, a replay of this call will be available later today on the Investor Relations page of Maxeon's Web site. During today's call, we will make certain forward-looking statements that are subject to the various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, the 6-K 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 & Presentations page of Maxeon's Investor Relations Web site. 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 Maxeon's 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 Maxeon's CEO, Jeff Waters.
Jeff Waters: Thank you, Rob, and good day, everyone. I'll start with commentary on our DG channels and then touch on industry pricing trends, U.S. market dynamics, Maxeon 7 and our Beyond the Panel business model evolution. Then Kai will review our financial performance and outlook, and we'll conclude with Q&A. Our DG model is unique in the solar industry and based on a core observation that homeowners trust a strong global brand combined with local expert advice and support. We began our focus on the downstream channel in 2004, and now benefit from over 15 years of experience in the downstream market. This has created a tremendous foundation in terms of operational knowhow, and has allowed us to build deep relationships with our channel partners. In our largest markets, we sell via a direct-to-installer channel where we have active commercial relationships with over 1,700 installers employing tens of thousands of individual sales reps. This army of trained sales people ultimately decide which solar products to recommend and how to position them to end customers, typically in their homes, often at the kitchen table. We see no other major solar equipment company doing this, in part because it takes years to build the channel infrastructure and because the benefits are greatest when the model is married with a highly differentiated product like ours. Because we are one step farther downstream than our peers, we can collaborate closely with our installer network to implement a highly effective sales process built around the SunPower brand, manage key metrics such as end customer pricing and net promoter scores, secure warranty registrations, and introduce complementary offers such as storage and services. Strengthening this channel is a key element of our return to consistent top and bottom line growth as we continue the transformation of our company. Our channel today is strongest in Europe, but also strong in other international markets like Australia. We're seeing especially robust growth in the Netherlands where freights and their equivalent of net metering is waning, and across European countries in reaction to natural gas supply disruption. In Italy, our mature channel footprint enabled to increase our DG market share to over 25% in the first quarter of 2022, up from the low 20s in 2021 and high teens in 2019. Overall, our Q1 European DG sales volumes exceeded our U.S. DG volumes and revenue was up more than 75% year-on-year. We expect continued growth throughout 2022 driven by improving customer payback periods, potential new legislation supporting DG solar penetration and the exit of certain historical competitors in the premium market segment. While the demand tailwinds in Europe and Australia are arguably among the strongest in the world right now for the solar industry, we also have significant strategic growth initiatives underway in the Americas. In Latin America, a focus area for expansion of Maxeon's channel model, order count increased to approximately 50, up more than 50% year-on-year. And in April, we began shipping our first IBC modules to DG commercial customers in the United States and ASP is one of the highest we have yet seen as an independent company. This is an important strategic first step in the U.S. DG segment where dealers often serve both commercial and residential. In residential, we executed in agreement with CED Greentech, the nation's largest solar distributor. This partnership will enable and accelerate the launch of a new installer channel program in the U.S. under the Maxeon brand. We plan to commence residential channel bookings for IBC products in the fourth quarter of 2022, with shipments starting in the new year. Initial demand signals are very encouraging based on our products longstanding reputation in the market, North American manufacturing presence, EV adoption trends driving increased solar system sizes and the exit of LG from the U.S. market. Margins within the DG segment have been held back by the out-of-market polysilicon contract and two other elements. The first is the work in progress of transforming our factories and products, which has contributed to relatively low absorption of fixed costs. The good news here is that we are in the final stages of our transformation with both the U.S. P Series supply chain and Maxeon 6 ramps well underway, and our factory is getting closer to full utilization. We expect that by early 2023, both products will achieve our targeted volumes. The second element that has held back margins has been the ballooning supply chain costs and the lag between these cost increases and our ability to increase prices commensurately. Market pricing has lagged supply chain cost increases, given that most believe that the market would return to normal within a quarter or two. We attended the Intersolar trade show in Munich a few weeks back and the key takeaway was that the sharp increase in energy prices and the significant supply complications brought on by COVID in China has significantly elevated global demand. This has in turn created conditions that should support more significant price increases in the near term to more appreciably mitigate the increased supply chain costs. We have responded by increasing prices broadly in DG and expect to realize the margin benefits starting in the second half of this year. We're also seeing favorable pricing trends in the Utility-Scale segment. Fixed pricing for future deliveries has been an industry standard for decades. But in today's supply chain environment, many suppliers are walking away from underwater contracts and others, like us, are bidding such contracts very cautiously or not at all. As a result, we're hearing from credible global developers that they are now accepting cost index risk sharing on future contracts. This is a significant shift for a company like ours that honors its contracts. It has the potential to bring more predictability to our margins and the Utility Scale in 2024 and beyond. On a related topic, our competitive advantages in the U.S. continue to expand. I'll discuss this further in the context of our second strategic growth pillar, our focused Utility-Scale approach. Last quarter, we announced 700 megawatts of 2023 delivery bookings with favorable prepayment features. We believe our growing success in this market is due to Maxeon offering customers superior delivery security in a rapidly evolving regulatory environment. For example, subsequent to the 2021 signing of our first large U.S. supply contract, the industry was rocked by new traceability requirements from U.S. Customs and Border Patrol related to forced labor concerns. In contrast to some developers, our U.S. customers experienced zero disruptions. This past month, the industry was rocked by another U.S. policy event, an investigation by the U.S. Department of Commerce into the circumvention of tariffs targeting solar companies who allegedly moved selling module facilities from China to some Southeast Asian countries, including Malaysia, in order to avoid tariff 7:2012. Until the investigation is over, we'll refrain from providing commentary except to say that we believe we are in a fundamentally different position than most other solar companies active in Southeast Asia, because our activity is limited to solar cell production and has always had an unusually low reliance on physical inputs sourced from China. Our Malaysia fab built in 2010 also predates the existence of the specific tariffs that allegedly motivated competitors to enter Malaysia and other Southeast Asian countries. Our differentiated position in Southeast Asia is just one element in the broader theme of Maxeon as a reliable trusted business partner. With demand soaring current pricing structures that support our long-term gross margin targets, we're evaluating multiple options for expansion beyond our current 1.8 gigawatts of capacity. We're well advanced on a site for 3 gigawatts of incremental capacity in the southeastern U.S. and are in a position to move rapidly if the SEMA legislation passes. If it does not, we are preparing alternative expansion plans, likely closely mirroring our current operations in Malaysia, Mexico. Regardless of the near-term policy outcomes, we believe the last two years of supply chain disruptions have created a structural advantage for Maxeon in the U.S. power plant market. Bookings negotiations for 2024 deliveries are ongoing, and we expect to announce deals in the next month with some of the index-based pricing elements that I described earlier. Kai will provide more detail on this in his session. Last but not least, the first strategic pillar is our differentiated panel technology. No matter how far we expand downstream, our brand will always be anchored around a core of superior differentiated solar panels. Our panels are fundamentally different and better. They look better, perform better, last longer, and we believe provide unrivaled peace of mind. To put some facts behind this; in February, we announced what we call Solar for Life, a 40-year warranty on our IBC panels. This guarantees the product, service and output for our Maxeon family for four decades. We can do this confidently due to our proprietary technology. And based on our testing, no other products can come close. So, when we release our Maxeon 7 technology with what is likely to be another round of world record efficiencies for high volume production technology, you will hear us communicating the fact that great panels are about more than just high efficiency. Later this year, we'll share precise timing of the rollout. But we can share today that our pilot line has been consistently producing record efficiency cells at a medium level for several months now. And last month, we produced our first Maxeon 7 module that achieved the new Maxeon record result. Based on achievement of these milestones, we have begun placing purchase orders for long lead time tools in order to ensure the 2023 availability while we continue to pursue funding for this next generation expansion opportunity. We'll unveil more details around Maxeon 7 at Maxeon's first Analyst Day that we expect to hold in the third quarter. Moving to our Beyond the Panel technology. At this month's Intersolar conference in Munich, we made perhaps the most important announcement in our young company's history, the unveiling of Maxeon's SunPower One, an integrated home energy solution initially targeting launch in Australia in Q3, in Europe in Q4. As a reminder, Maxeon owns the SunPower brand outside of the U.S. and Canada. SunPower One is based on a flexible ecosystem of products and services, including Maxeon solar panels as well as battery storage and actionable household energy insights. Let me reinforce what makes a Maxeon solution in this space credible. It comes down to a combination of three of our unique assets. First, the most compelling customer door opener in the form of our industry leading solar panels. Second, an unrivaled customer intimacy through our global DG sales channel. And finally, an agile approach around working with an ecosystem of partners to deliver the best energy service products in the world. This effort is led by our Chief Product Officer, Ralf Elias, who spent his career at companies like Vodafone and Samsung, building consumer-oriented solutions through strong partner networks. SunPower One has an end customer app that goes well beyond the system monitoring software common in the United States. Our proprietary solution provides this baseline production information to homeowners, which helps secure initial engagement, and then will add a sophisticated view on consumption at the individual clients' level that includes intelligent and predictive energy saving recommendations. We expect that this will lead to greater customer engagement over time. SunPower One also has a channel facing element, which is a massive overhaul of our existing installer phasing software, combining it all in a single platform. With this new digital ecosystem, installers will have a substantially easier experience accessing Maxeon provided leads, digital sales tools, and managing the sale to electrification customer journey. It will include SunPower design, an exclusive offering to our channel partners meant to improve the installer experience measured by time from qualified lead intake to proposal as well as a redesign mix. Adding as a design tool to our installer facing software platform is also critical for Maxeon because third party designed tools do not fully quantify our technical performance advantages, including module conversion efficiency, unit 1 kilowatt hours per kilowatt, annual degradation, and useful life. We also made a significant addition to our Beyond the Panel product portfolio with the introduction of our first storage product, Maxeon's SunPower Reserve, which we expect to start shipping to Australia in Q3 and Europe in Q4. We believe our timing for market entry is perfect, with more options from established vendor partners and clear customer demand for a branded and integrated energy solution. SunPower Reserve is a fifth generation lithium-based solution using no cobalt that enables charging from both DC and AC panels, and is available today in a 10 kilowatt hour size and includes technology for simultaneous charging and MG dispatch. An additional smaller battery size option is in development. The next product we plan to announce this year will be an EV charging device called SunPower Drive. It's worth noting that the addition of storage alone has the potential to approximately double Maxeon's revenue from each customer that uses our storage. Now before I turn the call over to Kai, I'd like to provide some commentary on other critical areas of focus for the Maxeon management team; employee safety, the supply chain environment and our capacity transformation. I'm pleased to report that for the first time in recent memory, we had no major COVID impact to employee safety this quarter. While we performed well internally, the virus' spread in China disrupted the logistics environment already challenged by the war in Ukraine and various COVID-related events. Our strategy for managing this global crisis remains unchanged. We're focused on what we can control which includes price, location of our module facilities, and shipping container design. We raised price multiple times in multiple geographies this quarter, including to Europe DG customers, U.S. Utility-Scale customers and SunPower. We also successfully shipped our first performance line containers from Mexico to our customers' job site near Las Vegas with no regulatory or logistical disruptions. Despite the cumulative challenges posed by pandemic and geopolitical events, I'm pleased to report our capacity transformation is generally on track. On Slide 6, you'll see that we remain on schedule to exit 2022 with more than triple our third quarter '21 capacity of roughly 2.5 gigawatts capacity and nearly 3 gigawatts expected in early 2023 as the final lines of our 1.8 gigawatt performance line fab are ramped. We are squarely focused on execution. The transformed supply capacity nearing completion and robust demand for our products, we are confident in returning to profitability next year. With that as a segue, let me turn the call over to Kai to talk about our financials.
Kai Strohbecke: Thank you, Jeff, and hello, everyone. I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter. First quarter shipments were 488 megawatts, at the high end of our guidance range, as our supply chain team made great efforts to hit customer delivery expectations. Shipments increased by more than 25% year-over-year and were led by another record quarter in Europe. Sequentially, volume was down slightly, mainly because of the lumpiness in our power plant delivery schedules. We finished deliveries to the Ayana project in the fourth quarter and just started deliveries to the Gemini project in the U.S. in this current second quarter. Going forward, thanks to our new North American manufacturing capacity, our delivery schedule is projected to show more continuity quarter-over-quarter. Total revenues were slightly up on a sequential basis to $223 million. Year-on-year, our top line grew by more than 35%, mainly as a result of the before mentioned volume increase. Revenues also benefited from price increases in DG markets, including the United States, where our new contract with SunPower took effect on March 1. We are starting to see a material ASP uplift in some European countries where our modules with integrated power electronics accounted for more than 40% of our country-wide sales volumes. This is an exciting change for Maxeon as we begin shifting our DG top line from module components to more system sales. Gross loss came in at $13 million, at the high end of our guidance range, largely due to losses on opportunistic sales of our excess out-of-market take or pay polysilicon supply for the remainder of the year. This was beneficial to Maxeon from a cash perspective, given the prepayments that we had already made, but not from a P&L perspective due to the high fixed price from this legacy contract. Total out-of-market polysilicon charges were $16 million for the quarter, $8 million of which were due to the sales of ancillary silicon, leading to a $3 million higher loss than the upper end of our guidance range. As an update, at the end of the first quarter, our obligations for this contract stood at $94 million worth of polysilicon at the contracted prices to be purchased through the end of 2022, for which we have made $37 million in prepayments already. As disclosed in today's earnings release, we are currently engaged in commercial discussions with our supplier, exploring a mutually acceptable resolution to the question of whether the prices for 2022 deliveries are subject to inflationary price escalation clauses, specifically the silicon metal price index escalator. We do not believe that these inflationary price escalation clauses apply to our purchases of polysilicon for 2022 deliveries and we will update you as needed. We are energized to see the manufacturing ramp of new products as we complete our transformation. But as you know, these ramps and transitions lead to temporarily underutilized factories. Gross margin in the first quarter was impacted by $10 million for factory underutilization charges, mainly related to Maxeon 6 and the U.S. performance line production ramp. These capacity additions are best appreciated through the chart on Slide 6 of our supplementary presentation material that shows our quarter end cell capacity on track to more than double from the end of our first quarter to the final quarter of this year. Supply chain cost pressures remain significant, with polysilicon in China to Europe freight rates oscillating around the highest levels we have seen in years. On a year-over-year basis, total supply chain cost increases accounted for a $29 million addition to our first quarter COGS, $11 million of which was offset by year-over-year price increases. As supply chain costs plateau and further price increases in DG are taking hold, we expect this ratio to become more favorable in coming quarters. Non-GAAP operating expenses were $34 million, in line with our guidance range of $35 million plus or minus $1 million, and down $1 million year-over-year as austerity measures remain in effect during our transformation. As a reminder, non-GAAP operating expenses adjust our GAAP operating expenses for restructuring charges and fees and stock-based compensation. Adjusted EBITDA for the first quarter was negative $33.6 million, down slightly sequentially and at the low end of our guidance range, mainly due to charges for ancillary polysilicon sales which were elevated as a result of the previously mentioned opportunistic and cash accretive sales of all excess polysilicon remaining under this contract. GAAP net loss was $59 million. Moving on to our balance sheet. Cash levels, including restricted cash, increased sequentially to $208 million despite significant investment in our growth initiatives. Operating cash flows were positive $50 million with a $50 million inventory built up offset by $79 million in customer prepayment for contracts that we discussed on our fourth quarter earnings call. The increase in inventories is directly attributable to the ramp of our U.S. Utility-Scale business, which, as Jeff mentioned, delivered its first containers with module to the Gemini project in the second quarter. DIO went from 85 days at the end of the fourth quarter to 92 days at the end of the first quarter. Capital expenditures in the first quarter were $22 million, consistent with the low end of our guidance range. Now, let's turn our attention to the outlook for the second quarter. This will be the first quarter that includes revenue from our U.S. Utility-Scale business, a new market for Maxeon where we expect to achieve price premiums for the foreseeable future attributable to our technology, customer focus, and who we are as a company. At a stable state, those premiums are projected to facilitate gross margins of 50%, in line with our long-term financial model. Our ramp towards these targets will take as our 1.8 gigawatts of capacity at the module level will not be fully ramped until 2023. Also, deliveries in 2022 and the first part of 2023 were contracted in the first half of 2021 before the industry faced radical challenges in supply chain and logistics costs, as well as the regulatory environment. Prices are fixed at terms that are now well below market and below our costs. In response, we are approaching our customers to find mutually agreeable solutions to mitigate the situation. Throughout this year, we have significantly pushed upward our ASP for new contracts, reflecting the cost increases and the value for our certainty of supply. And, as Jeff described, we have started negotiating to include index-based parameters to our pricing of long-term contracts. With that in mind, our guidance is as follows. Please also see a detailed guidance breakdown on Slide 11 in our supplemental earnings slides. We project shipments in the range of 460 megawatts to 490 megawatts, a largely flat volume quarter as we see the first containers of U.S. Utility-Scale panels offsetting a slight sequential decline in IBC DG due in part to the end of life transition of Maxeon 5 to Maxeon 6. In the second half of 2022, we expect total Maxeon 6 capacity to exceed 500 megawatts, facilitating total IBC shipment run rates above 1 gigawatt by year end. The temporary plateau in DG sales in the second quarter can also be partially attributed to the lag induced by shipment times of delivering additional volumes to meet rising demand in Europe and elsewhere. Revenue for the second quarter is expected to be in the range of $215 million to $230 million, which includes an estimated mid-single-digit million dollar amount of negative foreign exchange impacts quarter-on-quarter. As implied by guidance midpoint, we project roughly flat ASP sequentially as rising ASPs in DG are offset by a higher mix of Utility-Scale shipments. Non-GAAP gross loss is projected to be in the range of $15 million to $25 million, driven by ramp costs of our new Utility-Scale capacity, which is expected to reach full capacity in early 2023 as well as costs related to the final transition from Maxeon 5 to Maxeon 6. Gross margin guidance also includes a charge we expect to take to write down the value of our U.S. Utility-Scale inventory at the end of the quarter, which is consistent with the accounting treatment for negative gross margin sales. We also saw increased market pricing on aluminum, glass and freight in the first quarter, which are becoming present in our financials this quarter. Out-of-market polysilicon charges are projected to be $3 million to $4 million in the second quarter, a significantly lower level as spot prices are now closer to the legacy contract terms and we see no further ancillary sales until the contract expires in the end of this year. Non-GAAP operating expenses are expected to be $36 million plus or minus $1 million. This slightly higher level sequentially includes additional investment in sales and marketing in select growth markets. We expect to keep operating expenses at these approximate levels, even as we see considerable revenue growth over the next several quarters. Adjusted EBITDA is expected to be in the range of negative $37 million to negative $47 million based on the factors impacting gross loss and operating expenses. Based on the various one-time effects that are expected to affect our second quarter results and our expectations for the business trajectory in the second half, we believe that the second quarter will be the trough in terms of profitability this year. Capital expenditures are expected to be in the range of $20 million to $24 million. $1 million to $2 million of this guidance is for long lead time tooling that will ensure timely availability for Maxeon 7. This spending falls within the $60 million to $80 million of additional capital expenditures in 2022 and 2023 for the conversion from Maxeon 3 to Maxeon 7 and is incremental to our previously stated 2022 annual guidance of $85 million to $90 million that did not include this conversion. This spend, as well as another $5 million added to our 2022 plan for long lead time Maxeon 7 tools, reflects our confidence in the progress of this Maxeon 7 development and its attractive ROI projections. We plan to update our annual CapEx guidance next quarter and also provide more transparency on our plans to finance Maxeon 7. We are currently considering a number of appropriate funding strategies and instruments and are making progress on several of those, but no decision has been made with regards to timing or amount. One final comment regarding our longer term outlook. In our discussions, one question people regularly ask us is whether our plan to reach 12% adjusted EBITDA in 2023 is dependent on supply chain cost normalization? It is important to bear in mind that our DG business today is gross margin positive, excluding our out-of-market polysilicon. With a tailwind in global DG markets, we have been raising prices for future deliveries and we are on track to be beta positive in DG as we exit 2022. And we have contracted ASPs in U.S. Utility-Scale changing in 2023 that we expect will be consistent with the achievement of our long-term financial model. Therefore, we believe that the majority of the elements required to meet our long-term financial model in 2023 are within our control. With that, I'll turn the call back to Jeff to summarize before we go to Q&A.
Jeff Waters: Thanks, Kai. I continue to be very proud of the progress we are making in our transformation of Maxeon, especially in an unprecedented supply chain environment. Although this transformation and input cost increases have a significant impact on our business, they are temporary. As our factories march toward full utilization with differentiated new products, we better monetize our channel and brand with the addition of Beyond the Panel products and our market pricing catches up with cost increases. We are building the foundation to emerge as a strong and resilient company reflected in financials that have us reaching our target growth and profitability model within 2023. Before we start taking questions, there's one more thing I'd like to highlight. Since we entered the DG segment in 2004, we've been measuring cumulative customers who are powered by Maxeon. In our journey to become a more customer-centric company, we are focusing equally on engagement with new and existing customers. Today, we're excited to announce that in the first quarter of 2022, our cumulative customer count crossed the 1 million mark. More than 1 million customers globally are enjoying the benefits of their superior Maxeon solar panel technology. We're thrilled to have achieved this milestone and look forward to powering positive change for million more customers. Now, let's go to the Q&A session. Operator, please proceed.
Operator: Thank you. . Our first question comes from the line of Alex Vrabel with Bank of America. Your line is open.
Alex Vrabel: Hi, guys. Thanks for taking the questions. My first question, we're seeing obviously a lot of sizable uptick in your revenues in your DG segment both for IBC and P Series. And obviously you guys become a little bit untethered, let's say, in the U.S. market in addition to the pricing power that you're flagging that you can show really around the world. Just curious, how do you think about I guess moving volumes into sort of those two buckets as you have a lot more freedom, let's say, going into 2023 and also noting the announcement with the distribution partner that you put out this morning? Thanks.
Jeff Waters: Thanks, Alex. Think about that in a few ways. The first is, with the existing capacity we have, we are, as you know, in the midst of scaling up our Maxeon 6 product. That's expected to reach a full 0.5 gigawatt by the end of the year. So we'll have additional volume that comes from Max 6. And combine that with Max 3 will be over 1 gigawatt compared to where we are today -- excuse me, over 1 gigawatt whereas today we're well under as we transition. The way we look at the opportunity in the U.S. is it's a great fit for our product. And certainly if you think about the exit of some of the competition there, it really does open the door for us to be able to sell very broadly also with a shift in our agreement with SunPower. So what we're likely going to be doing is looking at other parts of where we ship IBC into markets that have maybe lower ASPs than we can achieve within the U.S., which we expect to be very, very healthy. So you'll see a shift in product, in some cases, from lower cost geographies or lower price geographies, but also from commercial going into resi, just given the strong demand we see for resi.
Alex Vrabel: Got it. I appreciate that. And then just one more follow up just really on the policy side. I know many on this call are very closely watching this AD/CVD angle and sort of hoping potentially that there may be a little bit of a carrot and stick approach. You guys have obviously been watching the SEMA legislation for quite some time now and been gearing up in the event that that were to go through. What's your latest update, I guess, on what you're expecting there as far as timing and how are you thinking about positioning yourself whether for that in a U.S. manufacturing base, or in the downside case where you might have to shift operations elsewhere? And I'll pass it on. Thanks.
Jeff Waters: Sure. Let me cover the first element of that, then Peter can add to that as well as the AD/CVD discussions. First, we are obviously very closely watching activity in DC and still very hopeful that we see a passage of SEMA incentives in one form or another. We are, I would say, ready to go. We have site selected and we're ready to close and start running as we hope that happens. In the event it doesn't, we also have a plan at the ready to look at expansion, as I alluded to, in the prepared notes, something that would probably leverage the positions that we have within Mexico and Malaysia. Now certainly, we're still hopeful that something happens in the U.S., we think there will be a great fit and certainly a great way to help build up the supply chain in the U.S. and also bring jobs to a lot of Americans. Peter, you want to pick it up from there?
Peter Aschenbrenner: Sure. So what we're hearing with respect to SEMA legislation specifically is that there is activity going on, on the Hill and with the White House to identify a framework for a reconciliation bill that could pass. We think that that needs to happen sometime this summer. There are potential fallback scenarios that are starting to get some airtime that in the case that that doesn't happen that would require more of a bipartisan effort around something similar to what is being done for the fab, so for fab legislation. But we're still hearing cautious optimism about the reconciliation path in the next couple of months.
Jeff Waters: And I would just add that we're highly motivated to expand capacity both for IBC and for Performance Series. We've seen just such incredible demand on the Utility-Scale side for the U.S. market, so more capacity there is just a great opportunity for us. On the DG side, within Europe, we're at Intersolar a few weeks back and at Intersolar just the overwhelming demand within Europe for premium panels was just so pervasive. Then you couple with that the exposure we're now getting to the U.S. market. We announced the deal with CED from a distribution perspective that there is just such a driving demand within the U.S. for premium panels as well that we're highly motivated to make capacity additions happen.
Alex Vrabel: Thanks, guys. I'll pass it on.
Jeff Waters: Thank you, Alex.
Operator: Thank you. The next question comes from the line of Philip Shen with ROTH Capital. Your line is open.
Philip Shen: Hi, everyone. Thanks for taking my questions. I wanted to talk through your margin outlook beyond Q2. I know you haven't provided official guidance. But in the past, you've talked about the first half of the year being weaker and then the back half of this year being stronger with expectations to get back to 15% in '23. Do you still consider that the path? What do you think you could do in Q4? Could you get to double digit margins you think? Thanks.
Jeff Waters: Thanks, Phil. Let me talk first about some of the factors that are driving that, and then I'll hand it over to Kai to speak maybe specifically on the -- or answer at least specifically to the numbers. First, I think over the year and a half plus that we've been around as a company, our story has really stayed the same, despite all this going on in the world. And it really is a story of some pretty dramatic transformation for us as a company that was really going to play out over the course of 2021 and 2022, so that as we got to the second half of '22 you would start to see the beginnings of the fruits of all that labor. And the way to think about it, and this then trails into 2023, is you're seeing the transition from what was Maxeon 2 now to Maxeon 5 and now Maxeon 6. So you'll see that hit full-bore by the time we get to the end of 2022. So that contributes. We've also got price increases that I talked about within the prepared remarks. I think you're going to see that also tick up and better close the gap between supply chain cost increases and our pricing. North America residential is also going to help with margins. And then you also add the AC panels and storage that we're bringing in. So there's just really a lot on the DG side that's going to be giving that margin uplift. On the Utility-Scale side, the real big story there I think is we needed that factory just to continue to ramp and we are in the early stages of that ramp. So we expect that to be full capacity as we get into 2023. And that will help give us lower costs and good margin going into the UPP market especially as we go into '23 and even beyond that. So, I'd say all of that, those basic fundamentals, are the same ones we've been talking about for many quarters. And as Kai mentioned in the prepared remarks, we're expecting that Q2 is the trough in what much as we predicted a while ago, and that you're going to see as we get into the second half more of the transformation start to translate into financial benefits for the company. Kai, let me hand it over to you from there.
Kai Strohbecke: Yes, I would just add to that that, as we speak, we are already gross margin positive on the DG space and we see the possibility and expect even positive EBITDA in the fourth quarter of '22 on the DG space. In DG, one of the things that we are also taking out is the losses on the ancillary polysilicon sales. So we moved and pulled forward all the ancillary polysilicon deliveries from our supplier into the first and the second quarter and we have taken the loss on these as we described in the first quarter. And that was margin accretive because we have made prepayments and the outstanding payments that we had to make to our suppliers who are lower than the market prices we got for those. So on a cash basis, we got additional money for that. And then together with all the other factors we believe that in the second half of this year, we are going to climb out of this second quarter where quite a lot of things are coming together and really coming to a head with regards to our transformation.
Jeff Waters: We really are taking a lot of this tough medicine right now. That's a part of that transformation. And certainly the ramp of the Performance Series U.S. product is a great example where the financial output from that in this quarter and in Q2 is pretty rough, just as you're ramping up that factory, but this is what's going to pay dividends for us as we get into the back half of '22 and then into '23 and beyond.
Philip Shen: Okay. Thank you both for that. And then talking about the contracts you've been signing, the price increases, can you talk through the structure of those contracts? Specifically, how are you structuring price? Are you taking fixed pricing or are you pricing in with variable pricing based on some indices, whether it's freight or containers or poly pricing, et cetera? And do you see the potential for that pricing ultimately to -- you mentioned, Jeff, this is a key driver of margin expansion. Given how strong the market is, I would see this as a nice opportunity for you guys to really expand margins. So I know we talked to the margin content there a bit, but maybe help us understand the structure and how good you feel on the downside protection there? Thanks.
Jeff Waters: Sure. Thanks, Phil. And you know what I'd say it's really over the last few weeks that we've gotten engaging in detail in those conversations with customers. And you're right. There is a lot of demand. And really what we're doing probably it's along the lines of what you might expect, which is looking at, take 2024 as an example and negotiating a price that really is capitalizing on the current supply situation that exists in the U.S., but then putting in indices. And you can envision it being a blend of the handful of indices that cover the majority of our costs. And we see this as a way to really help us and our customers, right, our partners' customers to really kind of share a little bit of the risk reward that comes along with that, that allows us to provide more stability. Again, as a company that doesn't walk away from contracts, this is really a big for us, because it allows us to keep those great customer relationships, but allows us also to help hedge better what goes on with the pricing on the Utility-Scale market for the U.S., along with what we've already done with some of the key input costs. This allows us to add an additional hedge.
Philip Shen: Great. Thanks, Jeff. You talked about '23 being booked up already. I think even on the Q4 call that was the case. How much of '24 has been booked versus available capacity that you expect? Are we talking about 25% or something closer to 50%?
Jeff Waters: I would say -- I don't want to give a precise number, but I would say it's less than 50%. So we're still in active negotiations, I would say, for the majority of the '24 volume.
Philip Shen: Great. One last question for me, Jeff. On the CED contract, congrats on that.
Jeff Waters: Thank you.
Philip Shen: What's your sense for what the megawatt volume could be for CED in '23? Historically, you've sold and supplied SunPower everything that they -- and they were the primary customer. Now that you're diversifying, CED is a very large player with a lot of volume and demand. Could you see a substantial shift of volume to that distributor?
Jeff Waters: I won't give you a specific number, but what I would say I think what the goal is that you've got the stickiness of the panels that we have that go through the SunPower channel in the U.S., right, where so much of that channel is architected around benefits of our panels. And then really you'd see CED helping us go after the rest of the market, looking at installers that traditionally have used LG or maybe Panasonic for their premium panels. So we see a lot of upside there. I think in terms of how we view it, again, it's really going to be looking at the opportunities that we have there with pricing and really trying to divert volume from other areas where we've got lower ASPs. That will be something that will grow. I don't want to hang a number out there today, but it's something that we expect to see good growth from over the course of '23 and beyond.
Philip Shen: And just to ask a follow up there. Is the volume, like what are the key drivers of the volume that they get? Is it based on price or is it based on price relative to the lower ASP areas if you can make that decision or are there other factors? And if so, anything you might be able to share there?
Jeff Waters: Sure. I think the volume that they will drive will be based predominantly on the panels that we have. And I think, as you know, right, we have the highest efficiency, best looking, longest lasting, lowest degrading panels in the market. And there's an immense amount of demand out there for that. It will be priced in a way that captures that value with customers. I think initial indications are very positive with what we're seeing. So it will be priced in a way for us to capture very high APSs we think with good volumes, and we'll balance that as the relationship develops.
Philip Shen: Okay. Thanks for all the detail. I'll pass it on, Jeff.
Operator: Thank you. The next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.
Unidentified Analyst: Hi. Thanks for taking the questions. This is Grace on for Brian. I guess first question is on your 2Q guide. I just wonder if you can quantify the impact of those three factors you talked about; the ramp up cost, the inventory write down and the higher aluminum cost. And then follow up to Phil's questions earlier, I just wonder if you can talk about the margins by segment moving through the second half? It seems like IBC you're getting positive margins today. So what kind of margin should we expect exiting 2022? And then on P Series, any chance we can see positive margins in the second half this year? Thanks. And I have a follow up.
Jeff Waters: Okay. Thank you, Grace. I'm going to hand that question over to Kai.
Kai Strohbecke: Okay. Thank you for the question, Grace. So in terms of the quantification of the 2022 second quarter guide, so in terms of the ramp up cost and the underutilization, we said that in the first quarter, we've had about 10 million of unabsorbed fixed costs. This we expect to go up by a few million quarter-on-quarter. There is going to be more than that also in addition for general ramp up costs where we are still going to have higher general product cost for the U.S. P Series above our current prices that we are getting for that particular product. In terms of aluminum, it's probably -- and other supply chain costs that have been going up, that would also bring the cost up by a few million on a quarter-on-quarter basis. There was a third item that you mentioned.
Unidentified Analyst: I think my question was on the margin moving through the second half by segment for P Series.
Kai Strohbecke: Okay. I would say on DG, as we said, we are gross profit positive in the first quarter without the OOM charges already and we expect that to increase, to get better. And by the exit rate in the fourth quarter, we expect to be also positive on an EBITDA level also taking the OpEx and the depreciation into account. And then on the P Series, as we are moving through the second half, we are having that contract that still uses legacy prices on our U.S. P Series and a big part of the shipments in the second half and currently is going to be that contract. So we're not really making margin projections for the P Series. And a lot also depends on where supply chain costs are going in the second half.
Jeff Waters: Grace, maybe what I would add to that is other pieces on the margins as we go into the second half, as we've talked about, we are implementing more significant price increases into DG and we think that's something that will also give some margin uplift as we get into the second half. And as well as Kai highlighted, Maxeon 6, which is one of the dominant products going into DG, as that scales up, the economies of scale kicks in and the prices go down. So that's also going to help with margins.
Unidentified Analyst: Okay, got it. Thanks for the details. And then on your deal with CED, I just wonder if you can give a bit more color on pricing. I think you talked about gross margin target of 20% plus for IBC lines. So are you selling those volumes at 20% plus margins? Thanks.
Jeff Waters: Yes. So typically when we talk about margins for IBC, we usually say is when we launch a new product like Max 6, that you see margins that are the 20s. And I'd say that that, especially when you look as we get into the second half and as Max 6 scales, that I think you would see numbers in line with that. One of the other pieces that also adds to this is the addition of the AC panels. So this is the micro-inverters being attached to our panels. That also brings good margin on a percentage basis. But it also adds about 50% revenue and effectively 50% margin per customer installation that we do. So it's another nice adder to margins. And we continue to grow the penetration of AC panels, which also is a good harbinger of the future that that we're going to have as we introduce storage into that space.
Unidentified Analyst: Okay. Thank you. I'll pass it on.
Operator: Thank you. Our next question comes from the line of Pavel with Raymond James. Your line is open.
Pavel Molchanov: Thanks for taking the questions. Let me zoom in on Europe, 43% of your revenue this quarter. The mix within Europe in terms of specific countries, sources of demand, has that changed at all since the war started?
Jeff Waters: Not really. I would say that the demand in the channel base that have on a percentage basis, we've seen demand just grow overall. So if you look at a market like Italy where we've got greater than 25% market share, that has surged. But as of other markets where we're, I would say, a lower share, like Spain for example, we've also seen a surge in demand. We're taking care of those markets, prioritizing where we need to, right, to make sure we get panels to where they're not only most needed, but where we have the most dedicated partners, where we have the better margins. But I'd say just demand overall across all of Europe has just surged.
Pavel Molchanov: Okay. On AD/CVD, one thing we've been observing is suppliers from Southeast Asia are reluctant to sell and perhaps customers are reluctant to buy until there is clarity at least on the question of whether tariffs might be retroactive to the beginning of this year. Have you had any customers that are, in the U.S. that is, which are reluctant to take product because of concerns about whether tariffs might be retroactive?
Jeff Waters: No, we've not. If anything, I think we've seen probably a heightened level of demand because of the trust and faith that goes into us as a supplier. But Peter, do you want to add a little more color perhaps?
Peter Aschenbrenner: Sure. Pavel, we haven't had any customers reserve or ask us to reserve for future tariffs. I think in my broadly speaking, the allegations of anti-circumvention are really targeting a China-centric business model that does not resemble our company. And I think we're confident that we will not be exposed to tariffs on that basis.
Pavel Molchanov: Okay. And speaking of China, what's the latest on the profitability of the joint venture? And maybe just more broadly some context on the domestic level of demand in the Chinese market for the JV?
Jeff Waters: So we are still seeing it strongly tilted toward domestic demand in China. That's still tending to be the place where we are seeing the best pricing globally for that product. We are beginning to take a look now that increasingly developers are looking at some index costs, hedging and other elements that can make some of those deals more palatable to us. We are going back and looking at our strategy with that. Probably too early to say if that's going to translate into more rest of the world Utility-Scale business for us outside of China, but I would say today it's still dominated by business within China.
Pavel Molchanov: All right. Thank you very much, guys.
Jeff Waters: Great. Thank you, Pavel.
Operator: Thank you. . Our next question comes from the line of Kevin Pollard with Pickering. Your line is open.
Kevin Pollard: Thank you. I have a couple of questions on the U.S. Utility business. I guess the first one is could you kind of give us a roadmap for the production ramp now that it's up and running and you're delivering product over the next couple of quarters? Or maybe asked another way, when will you kind of be at the 1.8 gigawatt run rate of shipments?
Jeff Waters: Yes. So we are in the process of ramping, as we speak, as you know. And our projection is that by the time we get in to 2023, by early 2023, you'll see us ramp up to full capacity on that 1.8 gigawatt.
Kevin Pollard: Okay. And then, I guess talking about the margins. With the charge you're taking here in the current quarter to write down the initial sales, is the implication of that that those just run through with a zero margin at this point? You won't book any further losses since you're taking the charge in Q2.
Jeff Waters: I'll ask Kai to weigh in on that question.
Kai Strohbecke: So, Kevin, we take a charge on the inventory that we expect to have on hand at the end of the second quarter. So as we move on, we're going to do this test at the end of every quarter and we will test whether gross margins are positive or negative. And if we are having inventory valuation that's higher than the prices that we can get in the market, we got to write the inventory down. So it's not a charge that we are taking for all future quarters, but just something that pertains to the inventory at the end of the second quarter. And as we ramp up, we expect, of course, cost to come down of this product as we start ramping, as we get into scale. When exactly things are going to cross over, we are not projecting at the moment.
Kevin Pollard: Okay, that's helpful. And then last question, you'd reference you expect to start booking sales for 2024. I guess in the current quarter with some of the index protections, do those -- would you expect that those also come with the favorable prepayment terms that you saw in some of the more recent bookings that were very helpful to the cash flow situation?
Jeff Waters: Yes. So I would expect that they would. I think that's something that is -- it's a good healthy part of that business, especially given the demand. And the prepayments have come to us I think in a very favorable way. So it's something that we're engaged. It might vary from a deal-to-deal basis, but by and large, we would be looking at prepayments.
Kevin Pollard: Okay. That's all for me. Thanks.
Jeff Waters: Great. Thank you, Kevin.
Operator: Thank you. We have a follow up from the line of Alex Vrabel with Bank of America. Your line is open.
Alex Vrabel: Thanks, guys. I just wanted to hop in for one more here, if I may, and I don't know if you've actually touched on this too much. But as far as the SunPower One I guess rollout, if you will, pretty exciting. It sounds like there's a lot of sort of optionality here, which I know many in this space are targeting but you guys are obviously kind of throwing your hat in the mix. I'm curious though, I mean, if you can speak to kind of the economics of this platform or what it does for you from an economic lens? I know you sort of talked about sort of streamlining the channel for your dealer partners and what have you, but curious like how you talk about that, how this could actually flow through and how you plan to communicate its impact to the market, if you can speak to that at all? Thanks.
Jeff Waters: Sure. Thanks, Alex. I think what makes our approach into this space a little different is that we're really coming from the standpoint of the strong channel and brand that we have. It all starts with the best panels for residential that we have, the positioning that we have, the closest of the channel. And so when we -- then the other piece I would say that makes us a little different is that we really are about partnering with other kind of best-in-class product suppliers globally. So, for example, as we were looking for storage for Australia, in Europe, AlphaESS who has a really strong footprint, fifth generation product, very strongly reliable, they were a great partner for us. And working with them, the benefit we get from them is their product, we're able to white label it, make it kind of a combined offering from us. The benefit they get is they effectively get access to our channel through us. And so we're able to monetize that in a way that has attractive margins. We saw the same thing happen with AC panels. We have a unique way of selling that and educating customers. We've got EV chargers that we've talked about that we expect to be announcing in the second half of the year. So it's really going to be broadening and growing quickly that Beyond the Panel offering, which again it has this wrapper of the SunPower One software kind of ecosystem and app around it. But it really rides on the back of us just doing a better job of monetizing that customer engagement and all that goes into that customer engagement, including the relationship with the channel. I would expect as it grows, over time you would probably start to look at us potentially calling that out separately when the time is right. So we will probably give you more transparency into how those numbers are growing. Premature to do that now, but certainly something that I think we'll be looking at in the future, given the growth expectations that we have. Just one comment I would add to that. As I mentioned earlier, if you have a DC panel, if you go to the AC panel that adds about 50% more revenue on a deal we would close with a customer, then you add storage that adds -- basically it doubles the DC panel revenue. So you really look at very significant revenue and margin added for us, again, going back to the channel that we have with the panel that sits at the foundation of it.
Alex Vrabel: Thanks, guys. I'll take the rest offline.
Jeff Waters: Great. Thanks, Alex.
Operator: Thank you. As there are no further questions, we will now conclude the call. Thank you all, again. You may now disconnect.
