Good day, ladies and gentlemen, and welcome to the Maxeon Solar Technologies Fourth Quarter 2021 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 is being recorded. I would now like to turn the conference over to your host for today, Mr. Robert Lahey of Maxeon Solar Technologies. Sir, you may begin.

Thank you, operator. Good day, everyone, and welcome to Maxeon's fourth quarter 2021 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 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 20-F and other SEC filings. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a supplemental slide deck on the Events and Presentations page of Maxeon's Investor Relations website. Also, we will reference certain non-GAAP measures during today's call. Please refer to the appendix of our supplemental slide deck as well as today's earnings press release, both of which are available on Maxeon's Investor Relations website, 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.

Thank you, Rob, and good day, everyone. I'll start by giving a business overview and covering recent accomplishments. Kai will then review our financial performance and outlook, and we'll conclude with Q&A. Last quarter, we challenged our team to maintain our strategic transformation road map in the face of prolonged supply chain headwinds, and they rose to the occasion. In spite of continued supply chain and logistics price pressure, extended lead times and new challenges from Omicron, our teams executed to plan in line with fourth quarter top and bottom line guidance and hit key milestones on our transformation road map. We completed our upgrade from Maxeon 2 to Maxeon 6 and made our first volume shipments. We're now also upgrading the Maxeon 5 lines to Maxeon 6 and plan to complete the full conversion by midyear. Our first mono PERC cell lines in Malaysia are up and running, and our new performance line Modco in Mexico commenced mass production in late February. Customer demand for this capacity is very high, and we recently announced over 700 megawatts of incremental orders with over $70 million of prepayments. In our DG business, the European sales team posted yet another record quarter while achieving an AC module mix of more than 25% in four of our largest markets. And finally, negotiations with SunPower culminated last month in a new supply contract, which not only reset pricing for our products to current market levels, but also enhanced and accelerated our ability to more broadly address the U.S. market. The foundation of a transformed Maxeon is nearly in place, and we are on schedule to complete this transformation just as our legacy polysilicon contract approaches expiration. Industry-wide supply chain headwinds, including the recent war in Ukraine that has disrupted global trade, represent an unwelcome…

Thank you, Jeff, and hello, everyone. Let's turn to our financial results. I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter. Fourth quarter shipments were 577 megawatts, above our guidance range of 540 to 570 megawatts, on record European DG volumes and the final deliveries for the 192-megawatt Ayana project in India. We are especially pleased with this performance given the headwinds posed by supply chains and the global shipping industry. Total revenue for the fourth quarter was $221 million, inside our guidance range of $215 million to $235 million. And slightly above our third quarter 2021 revenue of $220 million. Revenue in the fourth quarter was impacted by sequentially lower North American DG volumes. Gross loss came in at 4.8% of sales or $10 million at the midpoint of our $5 million to $15 million guidance range. Included in our cost of goods sold is a $14 million impact or 6.4% of sales related to our out-of-market polysilicon contract, which was in line with our guidance range of $13 million to $17 million. Out of the $14 million was attributable to ancillary polysilicon sales with the remainder going towards polysilicon that was consumed for cell manufacturing. As an update, at the end of the fourth quarter, without giving effect to any potential inflationary price escalation clauses, our obligations for this contract stood at $126 million worth of polysilicon at the contracted prices to be purchased through the end of 2022, for which we estimated $49 in prepayments already. Gross margin was also impacted by about $6.9 million in underutilization charges that were mainly driven by our capacity transformation initiatives of ramping Maxeon 6 and our internal performance line. As you can see on Slide 4, in our supplementary earnings…

Thank you, Kai. In summary, Maxeon is on track to hit our long-term financial targets, and I believe we are now well past the halfway point of the transformation. Because of continued supply chain headwinds in the recent war in Ukraine that has increased the financial challenge of this transformation, we are navigating the current situation with heightened intensity and focus. We are convinced more than ever that Maxeon's technology, channel expertise and ESG values are a winning combination that will drive long-term success. Now let's go to the Q&A session. Operator, please proceed.

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

It's Alex on for Julien. Just a quick one for me to kick off. I mean when you think about capacity expansion, whether in the U.S. or Mexico, I mean, what are you looking there, I guess, from, I guess, a geography standpoint, whether around policies or incentives that you might be able to get? And then what would be the timing on that sort of expansion?

Well, thank you, Alex. So when we think about the expansion, I think one of the things that we are driving to order, getting a little bit more localized in our manufacturing strategy. So that's when we look at our U.S. market approach. Our first foray there was with Mexicali. And you're seeing a similar thing as we ramped up our Modco in Asia to support our Asian customers. And this is the kind of move that, especially with freight costs being where they are these days, it shows you just how important that can be. As we think more broadly and longer term, is really around looking at the specific markets. And as you said, monitoring what's going on with various trade policies. We feel we're in a good position now. We've got a great and growing infrastructure, both to serve Asia and Europe and also to serve U.S. We'll continually be on a look -- I mean look out. We are a very growth-oriented company. And as new opportunities in new markets prevail themselves and as trade policies dictate that, we'll continue to look to respond quickly.

Sorry, it's Julian here. I just wanted to chime in if I can. Sorry about earlier. If I can just clarify your comments about the EU and opportunity there, can you just define a little bit more about what kind of accelerating phenomenon you have there? I know you addressed it in part in the commentary. And obviously, some records there. But as you think about sort of the balance of this year here and the acceleration, I mean, you're even seeing some of your peers in the manufacturing space kind of lean in capital raises to address almost proactively the expanded opportunity set, how do you think about kind of rightsizing your capabilities against the emerging opportunity in Europe? And ultimately, how do you perceive that for yourselves, right, just against the competitive backdrop at the same time?

Sure. I think and foremost, when we think about Europe, we think about the dealer channel that we have there. It's very pervasive, very deep, gives us a very unique approach to go direct through local dealer partners that go direct to customers. So we've got a great foundation there that allows us not only to sell our panels at a premium, but to also move Beyond the Panel, as we've talked about in the previous calls, adding things like microinverters to moving forward here with storage in the near future. So as we look at Europe grow, we feel like we've already got a great foundation there. One of the moves that we made, at least initially, was to move our Modco capacity that served Europe from Mexico to Malaysia. So it does get us closer. There's always a bit of a balance here between one of your factories to be somewhat close to where the raw materials are coming, but then also have them close enough to the markets they serve as well. Right now, we feel good about that. I think if in the future, it were to make sense for us to look at adding manufacturing capacity to Europe, much as we would in any of the markets, we would always take a quick look at that and move as quickly as we needed to, whether it be Modco capacity for IBC or even looking at putting in more deliberate production for our Performance Series products. So again, we've got a really good footprint in Europe that's been built up over the last decade. And all the growth that you're seeing in Europe right now, we're benefiting from, as we reflected in the calls just with the bookings that we're seeing to date, 2x where they were last year and just the excitement for the growth that we have there.

So if I can expand on one of the things.

Sorry, go ahead.

Sorry, Julien, I just wanted to expand on one of the things Jeff just said about the Performance Series capacity. So as you know, on IBC, which is very successful in Europe, we've been busy to convert our capacities over to make six. Of course, we're trying to maximize whatever capacity we have in place and get modules as quickly as possible into those markets. But we are also in the unique position that we have that HSPV joint venture where we have headroom in terms of our off-take and taking additional performance panels from there, which is also a really, really good option in those markets that currently show very strong demand. So in terms of our capital light model there, that's always a channel that we can ramp up as we need it.

Our next question comes from the line of Pavel with Raymond James. Your line is open.

Let me also start with Europe. I'm curious if just in the last four weeks during the war, have there been any noticeable in call volume, sales quotes, particularly from the frontline countries, basically Germany and everything to the to the east of Germany? Has there been this kind of noticeable push to accelerate energy transition as per a lot of the political rhetoric?

Yes. Thanks, Pavel. I would say our demand in Europe has been so strong quarter-on-quarter, we just continue to see quarter-on-quarter growth in DG. I mean some cases, almost defying a little bit the traditional seasonality that we've seen. So although bookings have been strong over the course of the last four weeks, for us, it's not like a step function increase. I would say it's just more of an adder to the growth that we've already seen. Sure. Peter, Peter will go ahead.

Yes, Pavel. So as Jeff said, there's no question that we're seeing increased interest and demand from end customers that -- on top of what we would normally see at this part of the season anyway. I would say the broader political response, while there's a lot of discussion and interest, I think, in figuring out ways to move more quickly. I feel like it hasn't jelled yet completely. And so I think we'll expect to see that continue to evolve over the next weeks and months, but customer interest is, for sure, strong.

Okay. That's very helpful. In the -- in China, I remember a year ago and I think even in 2020, you mentioned that pricing domestically in the Chinese market was so strong that the joint venture had no export capacity, everything was going for domestic sales. Can we get an latest sum up?

We're still seeing essentially the same dynamic. As you see elevated supply chain costs, the response to supply chain cost increases from China happens much more quickly than you see it overseas. So that overseas lag still persists. And although we are -- we do continue to look for opportunities, we do have a long a long pipeline of opportunities to go after overseas, and we did speak about the one deal we had within India. We'll continue to look for those. But I would say, at least here for the near term, until we get past this big supply chain risks that we're in now that you would expect to see it more towards China.

And what I would add to that -- this is Peter that I think your comment was based specifically -- or I took it to be specifically more about the power plant, the large-scale business. We are selling an increasing amount of product from that joint venture into the DG business globally. And as you'll see from the slides that we are -- we posted a significant fraction of our DG businesses is using product from HSPV.

Okay. And lastly, fair to say that plans to build manufacturing footprint in the U.S. still on hold pending clarity on Washington, correct?

That is correct. I would add a little bit of color in that the demand that we continue to see for our product based on who we are as a company, but also the differentiated nature of our product is very strong. And although we are still hopeful and very engaged in pursuing a U.S. option, assuming that SEMA comes through, and our loan guarantee comes through as well. We're still -- I would still say optimistic on that. In the event it doesn't, we are also looking at expansion in Mexicali. We think it's important for us to expand because there is a very strong appetite for our market, and especially in a market that's willing to pay for the value that we bring as a supplier.

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

Congrats on all the recent contract wins and your prepayments. And Jeff, I think you were just talking about expansion in Mexicali. And based on some of the checks we've done, it sounds like you might be sold out in '22 and '23. So I was wondering if you can comment on that, is there available product for customers? And then from a pricing standpoint, I was wondering if you might be able to share a bit of the terms. Do you think you're pricing at a premium to the Southeast Asia suppliers? Or do you think you're pricing at a discount? I mean, you have the benefits of much more clear freight cost cuts, and it's from Mexico. And there are a number of other advantages. So I was wondering if you're charging a premium for that? And if you're not, then why aren't you?

Sure. Thanks, Phil. And yes, it's fair to say that we are not completely but essentially sold out for 2023 in 2022. We are already beginning to take orders for 2024. From a pricing perspective, I'd say we must certainly get a premium from what we're seeing out in the market. And a lot of that comes from -- again, from who we are as a company, from our product technology and also where we sit with the factory in Mexicali. What we've been doing to really to help kind of shore up our margin projections in that part of the business. The first is to secure business at very healthy pricing. So even when we look at where we see the potential for the market and applying some risk on supply chain, we still have good business that we're booking when we get out into '23 and '24. We're also, where we can, we are trying to put in some controls around cost, so working with key suppliers on some of the bigger parts of the bill of materials costs for us and help lock those in or a minimum help tie them back to market indices. So, we feel good about that part of the business. And like I said, it is the kind of thing that has us bullish in the future on adding more capacity.

Yes. What could the timing of that be? What else would you need to see to get confidence around that? I mean you already sold out for '22 and '23. And so are you just about there? And what kind of -- how much more expansion could be?

Well, I think we feel like we're on the cusp, maybe here within the next two to four months of really understanding what's going on with SEMA. So to an extent, we're really looking at -- hard at SEMA. We're going through and basically preparing for a semi pass and for us to get the loan guarantee. We are already down into final site selection for plants. So we're gearing up so that once we get a green light on SEMA, we would move quickly into building that U.S. factory. I'd say once we get some clarity around that, that would then dictate for us how we would think about expansion, whether it be in the U.S. or if SEMA doesn't happen, we would be strongly considering Mexicali.

Right. So basically, the expansion of Mexicali is predicated on what happens with SEMA and the U.S. bill. Is that fair?

It is fair. And I would think about it, too, that we're -- I think one of the things that we've learned as a company is it's important to -- especially in the utility scale space for cost to be cost competitive. It's really important for you to go out and build the right scale. So we're not talking about small hundreds of megawatts facilities. These are multiple gigawatt facilities when we look at adding the capacity. So yes, fair to say that we'll wait until what we hear from SEMA. And then you'll see us move forward or pivot as appropriate.

Got it. As it relates to your pricing, it looks like it may have moved up from $0.39 in Q4 to $0.44 a watt in Q1 based on the midpoint of the guide. But that's only one month of benefit from the new SunPower contract. Can you break out the Q1 ASP margin uplift from the SunPower contract? Could we see possibly $0.50 for an ASP in Q2? And should we see further sequential increase in margins in Q2?

Yes. Maybe I'll give about comments and then Kai, if you'd like to add some color, please do. I'd say that first, what you're talking about the ASP increase, that is a blended ASP increase. So certainly, the prices that we get on our IBC product in DG are demonstrably higher than what we get in the utility scale space, even though we are seeing, I would say, very good pricing for our Performance Series channels and utility scale within the U.S. I really wouldn't want to go into any more detail around our pricing, certainly, especially as it relates to SunPower. What I would say is that, that agreement that we did with SunPower, I think was good for both companies. For us, it did allow us to get our -- with the renegotiation of our pricing up to more market rates for 2022, at least for the last three quarters. And it also gives us the opportunity beginning in 2023 to address the U.S. market. And in there, when you think about SunPower, a big player in the U.S., but there's still a good 90% of that market that they don't address. And when you think about some of the competitors in the premium space who have dropped out, we see expansion in the U.S. as being a great growth motivator for us in 2023. So, we're really excited about that. And certainly, that would also have a positive impact on ASPs when you look at it at the corporate level.

So just technically Phil, just to add here, this is Kai. So you're right, it includes March -- the first quarter numbers include the new contract starting from March and that gives a bit of an uplift. But also, as Jeff mentioned, there are other factors that are also going on the general product mix because we have less power plant in the first quarter and more DG in general. And then it's also true that then in the second quarter, we should see the full quarter impact of that, but we're not giving any specifics on that.

Okay. And then as it relates to the margins on the Mexico facility, I was wondering if you could share -- I mean, Jeff, you talked about a premium in pricing. Can you share roughly what the margins look like there? I mean, we know what the corporate margins are, but are you double-digit percentage margins there potentially? Or how does that look?

Well, the way to think about our margins on that business, we've talked about how when we see that business scaled up, the factory scaled up, that we will be achieving our corporate target margin or greater I think 15% in that range or better. Now over the course of 2022, we are scaling up factory. So you've got a lot of employees, operators on board. You are working through the scale-up of the factory so you're not producing at full capacity. So costs are at their highest, especially in the first few quarters. So we're not going to get to 15% on day 1. I wish that were the case. But everything that we're seeing with our cost projections going forward, still tell us that with the pricing we have that this is a good business that fits the vision we have, which is a 15% plus gross margin business that will add a lot to the top and bottom line for us as a company.

Great. And one last one. As it relates to anti-circumvention, it looks like the case should be decided tomorrow. I mean there's a small -- there's a chance that it gets put in. But what I recall is you guys are not roped into that risk, just I think it might be useful for everybody to hear how you guys are or are not implicated if the anti-circumvention two case gets taken on by the DOC. So wanted to just -- I'll turn it back to you guys, but it would be helpful for everybody to hear.

Peter, why don't you comment on that?

Yes, Phil, we're not named in the anti-circumvention complaint request. And we think it's extremely difficult to make a case an anti-circumvention case around SunPower and Maxeon. We've been in the same spot there in Malaysia for over a decade. So, we haven't gone anywhere or changed our operations. So, we'll have to see how that goes, but we don't think we're in the center of the target, let's say.

Yes. I would just add to that, that I would say no one has ever accused us of selling panels below markets or dumping in the markets. We definitely play at a very high premium relative to the competition.

Right. So between the premium and the length of time you've been there, you really shouldn't be a party to the case. That said, the case would be countrywide. And so ultimately, if this does get taken on by the DOC, and they render a decision, then it would be up to you guys to make sure that you're carved out of that, whatever the final decision is by the DOC. Is that the right course of -- the right path of events?

Yes. I think we'll have to -- again, we'll have to wait and see how this investigation goes. I would not expect us to be a major component of that going forward.

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

Most of mine have been covered, but maybe just a quick housekeeping one to start off on the DOE loan guarantee. Can you kind of provide us an update on where that stands, maybe next steps in the process, any kind of expectations around timing?

Yes. Brian, this is Peter. We are in the process. The next steps are detailed diligence and negotiation of the loan guarantee itself. We expect that process to be multiple months. And so we're continuing to work through it.

Okay. Fair enough. And multiple months in terms of expecting a final decision yes? Yes -- no or multiple months here to kind of get to the next step in the process?

Multiple months before the end of the process, which is a determination on the extension of the loan guarantee or the loan itself and the signature of an agreement.

Okay. Fair enough. And then maybe just on that topic. Outside of the loan guarantee, how are you guys thinking about liquidity needs here? I know the CapEx budget for '22 is not that robust. And a lot of the capacity expansion TBD based on SEMA and the loan guarantee. But just as you think about the margins here as well as some of the working capital commentary you made, is there any updates you can provide around how you're thinking about liquidity, just what sources outside of some of the prepayment strategy you mentioned. Anything else you're considering from a financing standpoint?

Kai, why don't you take that one?

Yes. Thank you. And certainly, thank you, Brian. Yes, I think from a liquidity standpoint, as you have seen, we are pretty pleased with the cash balance at which we ended the year that has already been there a lot of the CapEx that was needed for our current transformation. We spent about $154 million in CapEx in 2021. So the heavy lift is really behind us. And you have seen that the baseline CapEx budget to get all this done in 2022 is pretty moderate of $85 million to $90 million. But as you point out, there are other growth initiatives that we have in mind the most maybe concrete one, and that is really in our control is Max 7. And Max 7 Is making really, really good progress, both in the pilot line in the Philippines as well as in R&D. So we have yet to decide on the funding for that particular initiative. And there is, of course, a variety and range of options out there that we continue assessing. And I would say, in general, the same is true for any other growth initiatives that we that we see out there, including the U.S. footprint, which would come to a large part with the loan guarantee if our application is successful from the DOE, but also some more financing possibilities that we probably have to put in the next year.

Okay. Fair enough. Appreciate that. And last one for me. Just -- I appreciate the color, Jeff, around be sold out effectively for '22 and '23, and your pricing strategy sounds like in real time, you're getting more aggressive proactive. But as the cost environment and have continued to escalate, I think things like aluminum and logistics, we've heard from some of your peers, starting to pinch margins here in the near to medium term. What are you able to do to kind of mitigate that on existing bookings, not necessarily the ones you just reported today and the ones that you've been seeing better pricing on, but the ones where you're allocated to deliver the next 6, 12, 18 months and cost has moved up quite a bit. Are you going back and actually renegotiating pricing? Are you did you have contingencies in place on some of the costs where you can do that? Or what's sort of the strategy on some of the backlog here?

Yes. Thank you, Brian. I would say if and where there are -- there is flexibility in our contracts to adjust pricing, we would have those conversations, and that's true in the DG space as well as utility scale. I think as you know, typically within utility scale, because of the nature of the end customer, it's tough to have that kind of flexibility in there. So what we've done, in addition to getting, I would say, very good price premiums is we've really worked more on the supply chain and really try to target the more significant pieces of the cost structure to put in some contracts so that we can lock in pricing better. So if you look at our input costs -- and one thing I would say around that is even if you look at it from a freight perspective, it is just by having our factory like Mexicali so much closer to where customers are that really helps mitigate some of the freight concerns that we have. But there are other significant input costs that we've been able to work with suppliers in more of a strategic way and come up with some collars around the costs that give us the ability to stand by the pricing that we negotiated and to live up to our contracts like we always do as a company.

We have a follow-up question coming from the line of Julien with Bank of America. Your line is open.

Sorry, just to clarify this. you were talking about being sold out here, can you talk about the P-Series, if you don't mind, in terms of just kind of leaning into that opportunity here, especially as the world looks sets to really need some of this incremental capacity over -- maybe not just this year, but leading into next. How are you thinking about kind of leveraging that over time here? Are you kind of alluded to it broadly earlier, if you don't mind, if you can elaborate?

Sure. We think about it in two ways. First, the joint venture we have with the HSPV joint venture we have with is great in that we've got access to a lot of capacity out there. So as the market demand grows and as pricing begins to equilibrate we think that opens up a lot of opportunity for us. And the capacity in the JV, I would say, just continues to grow, so a lot of flexibility there. And again, it's not take-or-pay. So if good business isn't there, we don't have to get ourselves in trouble. The other piece is on the U.S. side because HSPV producing in China serves pretty much everywhere except for the U.S. market. So, for the U.S. It is -- the first foray into this really was our converting a good portion of our Malaysia fab over to mono PERC cell production. We just did a bunch of things. First, it gave us a good reliable non-China supply of cells. The other positive, though, is it filled up that factory. And that's a factory that has long been underutilized. And as you know, that just adds to costs. So a great win for us there. We then opened up the -- we then converted our Modco in Mexicali over to Performance Series. And again, the benefit there was twofold. The first was that it allowed us to now take the capacity of the module capacity there that was going to customers in Europe and Asia and to actually move that capacity over to Asia, so helps with freight and a variety of other pieces. But right now, we've got that, what will, at full scale, be 1.8 gigawatt with that Malaysia Mexicali combination. We see a lot of opportunity to grow before we talked…

Julien, let me just add one thing about the joint venture and the rest of world demand. As you might imagine, the big increments of capacity that's been brought online there recently, have been using the large G12 wafer format that TCS really pioneered a couple of years ago. We're in the process of transitioning our DG product offer to that new larger capacity, those increments -- large capacity increments based on the G12 wafer format. So that's going to unlock bigger chunks of available capacity for us to deploy into the DG market in the near future.

Got it. But with respect to the JV, not meaningfully ready to talk about ability to market rest of the world, as you said.

I'm sorry, Julien, could you repeat the question?

Yes. Just the expectations on rest of world demand, Peter, as you were alluding to a moment ago, just on just the -- leading into the demand on that front. It doesn't sound like you're ready to kind of commit to any kind of level of utilization despite the expansion of the capacity quite yet.

Yes, that's a fair comment. It's -- as you know, it's very dynamic. And especially the overseas utility scale business the margins are leaner than they are in the United States. So that margin buffer is much more sensitive to costs. And I would say right now, given the volatility that we see in that market, it's we're better deploying those panels into China through the JV, and we're better, of course, still continuing to grow our DG growth with Performance Series given that there's much more of a margin buffer there as well.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.