Good day, ladies and gentlemen. Welcome to the Maxeon Solar Technologies Third Quarter 2022 Earnings Call. Currently all participants are in listen only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator instructions] I'd now like to turn the conference over to our host, Mr. Robert Lahey of Maxeon Solar Technologies. Sir, you may begin.

Thank you, operator. Good day, everyone, and welcome to Maxeon's third quarter 2022 earnings conference call. With us today, our Interim Chief Executive Officer, Mark Babcock; 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 Mark. 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, 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 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 presentation of the most directly comparable gap measure, as well as the relevant GAAP to non-GAAP reconciliations. With that, let me turn the call over to Maxeon's CEO, Mark Babcock.

Thank you, Rob, and good day everyone. I was appointed Interim CEO of Maxeon in September when our board and Jeff Waters made the mutual decision to transition to new leadership. We are very thankful for Jeff's nearly four years of service to the company during which we successfully spun out of Sun Power, refreshed the majority of our manufacturing fleet, launched our beyond the panel initiative and commence shipping our first performance line products into the United States. As we look forward to the next four years, we expect our focus to be primarily on panel manufacturing capacity growth, expansion of our footprint in the US market, and increasingly material contributions from our beyond the panel initiatives. The board search for a new CEO is well underway, and in the meantime it's a privilege for me to serve the company during the transition. With that said, I'll now provide a detailed update on Maxeon's key transformation initiatives and progress toward achievement of our long-term financial model. Then Kai will review our financial performance outlook and we'll conclude with Q&A. Now let's talk about progress of our business starting with distributed generation. We were thrilled to formally launch our US channel expansion initiative at the RE+ conference in September. Our largest DG customer SunPower had a significant presence there and expressed strong interest in our products for 2023 and beyond. While this partnership has evolved since the spin out, their relationship remains mutually beneficial and we look forward to continuing to be a key supplier to SunPower well into the future. We also began booking our first sales of Maxeon branded products destined for the DG market through a new partnership with Greentech Renewables, previously known as CED Green Tech. This new channel is busy selling systems for delivery starting…

Thank you, Mark, and hello everyone. I will discuss the drivers and details of last of performance and then provide guidance for the current quarter total shipments for the third quarter. Were 605 megawatts consistent with our guidance range of 580 megawatts to 620 megawatts. This represents a 16% sequential increase attributable large lead to our first full quarter of US utility scale shipments from our North American MoCo. That is still ramping up its capacity. DG volumes were also sequentially led by increased volumes of Maxeon six from recently converted capacity in factory revenues for the third quarter were $275 million, also consistent with our guidance range and representing a 16% sequential increase. DG ASPs were up in many geographies due to a combination of price increases and a higher mix of beyond the panel revenue. However, total blended as P was diluted by a higher mix of utility scale volume as well as some opportunistic sell sales. Non-GAAP gross income in the third quarter was negative 16 million in line with our guidance of negative $10 million to $20 million and an improvement of $8 million from our second quarter results, which we have earlier identified as the trust in our multi-year transformation. The sequential improvement reflects the higher mix of our flagship max on six panels, a higher mix of beyond the panel products and geographic optimization strategies. In the third quarter, cost of goods sold includes $1 million of out of market poly silicon charges related to our legacy supply contract. This figure is now significantly smaller than historical levels as policy comprises in the market have come very close to our fixed contract price. The year over year impact of supply chain cost inflation on our cost of goods sold was $17 million. This was…

Thank you Kai. We're primarily focused on three critical projects, first completion of our capacity transformation, which is a key element of achieving our long-term financial model. Second, we're leaning into demand opportunities with plan manufacturing capacity expansion, and third, we are scaling and expanding beyond the panel product sales to become a material and transformative portion of our DG business. Now let's go to Q&A operator. Please proceed.

[Operator instructions] Our first question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is now open.

Hey, good afternoon team. Thank you very much for the time. Congratulations and the results here. If, if I may just to follow up on the positive margin commentary here, can you talk a little bit more about the ramp through 22 here? Just as you see those legacy ASPs rolling off that you alluded to in your prepared remarks as well as the ramp here, as well as some of the under-utilization. You, commented in the remarks about, demand all the way out through 28 versus under-utilization still in in a real time way. Can you talk about sort of the ability to fill volume and then also ultimately some of those other considerations here in the back half?

Yeah, so I'll start and then I'll might let kind of finish up here, but in general, as we said, we see demand in that US utility space being very strong. We are booking booking out several years in advance and in active discussions with folks for volumes out there in the short term. It's really a matter of as we ramp up the facilities, we are not utilizing all of the capacity yet. But if we look through into next year, there's three big components of how we get to the long term financial model. One of those is moving through and past the lower contracted prices that we have from sort of the, the earlier signed contracts where contracts for delivery in the second half of next year are at significantly higher ASPs than those for delivery this year, and it's started next year. The second piece is the COGS the cogs assumptions in terms of both an improvement in overall cogs for that for that space, as well as the under-utilization basically disappearing as we move into much closer to full, full capacity production. And then the last piece is a combination of other things including optimization of ASPs and DG space and some other some other areas there. So I think the other thing I think that'll, that'll come in next year is we expect a real contribution from our additional beyond the panel products. We talked a little bit here about the contribution from the micro inverter products but we will begin shipping the storage product in Australia in Q1. We're already taking orders for that. We should start shipping the storage product in Q2 in Europe and that's going to provide some significant uplift there. So it's really a combination of those of those things that gets us on that trajectory. I don't know, Kai, do you have anything to

Add? Yeah, I just want to fill in a few things, Kai, Julia, and with regards to the underutilization. So as Mark mentioned, the underutilization is purely operational and not due to a lack of demand. We are certainly not suffering from a lack of demand. So under-utilization charges have peaked in the second quarter at around $14 million. We just reported about 10 million for this quarter. And then we expected to go further down from here over the coming quarters. And the nature of that is just that we have fixed costs for our building clean room facilities some equipment that we have already installed and where we are ramping the additional capacity into, into these the additional volumes into this capacity. So this is how, as we are ramping that Underutilization gets less and less over time.

Got it. Excellent. If I could just clarify here, as you presumably see some more drag from those out of market utility scale contracts from early 23, how should we think about the cadence of margins? You talk about positive here does not look like IBC price increases have hit just yet, and as you say, the beyond the panel is still ramping. How do we pair those two trends? Right, higher dg, especially the ASPs with, with Green Tech, presumably more utility scale drag, at least in the first half, if we can try to be more specific, if you don't mind.

So I think, we will start selling to Green Tech in January. So I think that's something that kicks in almost immediately, although the volumes will not be flat throughout the year, they'll be ramping, ramping during the years we build that business. So the contribution from those ASPs would also build during the year. As I think I said earlier, the contracts for the first half of the year are not at exceptionally favorable ASPs in the utility space, but those get significantly better in the second half of the year. So it will be exactly a linear ramp, but it will be a ramp through the year. Whereas we said during 2023, we expect to get to our long term financial model. Yeah. And as you, Julian, as you draw a line between the fourth quarter of 2022, we are where we are targeting to be cross margin break even to a 15% gross margin in 2023 in accordance with our long term financial model. We still have some runway in dg, as Mark said, from already in the third quarter, meaningfully positive gross margins. But I would say the majority of that improvement would come from the improvements in the US performance series that Mark talked about. Yeah, so still on track of that accelerated 12%, just even margin. Yes. That also aligned with our long term financial models. So we take the 15% gross margin as a proxy for the whole long term financial model, which also includes 12% adjusted ADA margin.

Thank you. Our next question comes from the line of Donovan Schafer with Northland Capital Markets.

Hey guys thanks for taking the questions. My first question actually I'm curious I just, I kind of track and follow all the news and sometimes there's press releases that might be more promotional from a company than necessarily means something super material. But I've noticed some, some IVC related announcements from other companies. So there's a German company called ISC-Konstanz it's spelled like ISC-Konstanz, and I think there was also maybe a Chinese company. I'm kind of blanking on the name, and then it's a little bit cloudy in my mind, but I feel like there were some other ones I saw talking specifically about either IBC or maybe just some, some other sort of form of back contact and of course I know, Panasonic and LG they left the IDC market or walked away from their offerings because of the patents you guys have and how they had to do, additional process steps and everything that basically made it uneconomic for them. But with some of these other just press releases or announcements or interviews or whatever it is I was seeing, can you give us sort of an update on kind of the IBC market and technology more generally? And I guess maybe your patents when any of that expires, sort of what geographies, maybe this German company is doing it because they're in a better patent position in that geography, but maybe not the US. Just kind of those sort of specifics around technology, patent, trend of that versus pop con and, and other architectures and the updates there would just be really helpful because I know you have an advantage there and you've got good patents, but again, like I said, I think I sort of qualitatively feel like I saw a little bit of an uptake and just some other name saying, Hey, we're going to do an IBC thing.

Okay. And Donna, this is Peter Aschenbrenner. So I'll try to be a pretty, pretty succinct. So we feel extremely good about our patent protection. We've been innovating and building our IP portfolio for 35 years. We continue to not only file patents on fundamental innovations like some of the architecture around our Maxeon seven cell, but also some really disruptive metalization ideas. And so it's not really a question of things rolling off. I think it's a question of ongoing innovation. So strong IP still in place. And we tend to file in place -- in markets where we we're going to cover the vast majority of our sales, so EU, US, China. Some countries in Southeast Asia. So we feel good about patent protection. There are always folks I would say sort of getting in and getting out of IBC. You mentioned a few of them. The institute in Constance is as an R&D outfit. They're one of the institutes that's been looking at IBC for a long period of time, or back contact, I should say. It's important to note that the way we do back contact sales with the interdigitated metalization on the back, which we, that's why we call it I B C is one of the things that we have very good patent protection on, and most other people that have done back contact cells have used different types of metalization, which is a little more cumbersome. So I would say there's an ongoing level of interest in, in this structure. We believe it's, as we said, consistently over the past 15 years, we think it's kind of the entitled form of a crystal and silicon solar cell. We're still working towards that and we're starting to see other people get interested as well,…

Okay. Okay. Industrywide, okay. And then if I can get another one in, I want to ask about, the weaker for Labor Prevention Act. I apologize if you did cover any of this. I was kind of jumped between this and another call, but I know you guys have been able to -- there's the P series cells outta Mexico panels actually that you're assembling there. And those last I checked, there was no issue, every day you have trucks basically going back and forth between the US and Mexico border. And so, obviously no issues again last time I checked getting into the us so just want to make sure that that's sort of still the case. And then, clearly if you said, you were talking about conversations bookings out for 2028 there may not be room to, for you to kind of cash in on an incremental interest, but maybe that ties into expansion in the us. Like just curious if that ability to have truck trucks coming back and forth across the border every day, if customers look at that and say, okay, they can get really comfortable behind these panels. That increases our interests, that increases these conversations. And then kind of the same thing on the IBC side, because that I know there's a technology exemption but I don't think that would apply to that was more ad CVD. So with the force labor, you get the poly from Hemlock, but also that, that's going away. Just curious on the forced labor prevention stuff, just getting product into the us any kind of updates, developments there?

Sure. So on the well, I think the, with respect to issues around forced labor and, and blockages at the border I think we, we, our customers feel comfortable with the supply chain we have in place now. And as you said, we're, shipping hundreds of shipments a month and have been it's, it's a very different type of supply chain from what most companies are delivering here into the us. And so we think that is solid and we will look to continue that and potentially expand it with respect to manufacturing in the US that kind of takes most of those issues off the table by definition. On the IBC front, the exclusion is a section 201 exclusion, which is slated to go away in a few years. So we don't anticipate any issues related to our IBC product being shipped into the US in the future either.

Okay. Great. Thanks, that's helpful. I'll take the rest of my questions offline. Thanks guys.

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

Hey guys, good afternoon. Thanks for taking the questions. I'll try to keep them quick. I just had two more numbers related on the billion dollars of CapEx. Can you give us a sense of how that's going to be phased in over the next couple years, how much we should be thinking in '23 and then in '24, and then on the DOE loan guarantee, just I think you've quantified it in the past for us, but can you give a sense of how much you are reasonably anticipating to get from the DOE and then what would be your kind of net burden?

Sure. Brian, this is Peter, I'll take those. First of all, the, the, the roughly billion dollar number that we, we disclosed today is a total project investment that's not the CapEx per se CapEx course is an important part of that. But that includes facility contingency lease, lease costs over the period of the project, etcetera and it's the way that the DOE sort of calculates a total project cost. We haven't disclosed specific timing for the this project. I think you'd assume that, if the plant's coming online and mid-2025, you'd assume that a lot of that CapEx is spent prior to that. And with respect to the DOE percentage we haven't mentioned a specific percentage yet. Of course we would like that percentage to be, that's a negotiated number. We'd like that to be as high as possible. There are some precedents out there that you can look at. And what we have said is that we expect the vast majority of investment in this project to come from a combination of the DOE and from customer co-investment.

Okay. That's great. Appreciate that additional caller. And then just follow up from me on I, I think we saw filing from one of your largest shareholders as well as maybe you guys put something out this evening as well. Can you, can you speak to total selling their stake, it seems like over the next 12 months I know they've been a strategic investor slash partner for a number of years, even back to the Sun Power days. Anything to read into that, just maybe give us a little bit more background on, on what's going on there? Thank you.

Yeah, so we obviously can't speak for total. However, if you observe their actions over the past years they have become significantly more active in the large scale generation asset ownership space. And that really appears to be their focus there. So not especially surprising that since we are much more upstream on the large scale side we do have obviously the downstream some good downstream exposure in DG, but that we understand why it would potentially not fit with their with their current investment objectives. So we don't not, not especially surprising given where totals focus appears to be, but, if you really want to get the story on what they're doing, you'd obviously have to ask them.

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

Hey guys thanks for the questions and wanted to follow up on some of Brian's questions on the DOE and, and the three gigawatt facility. The billion dollars is the total investment. Can you share what the CapEx is? And if so, what is, Well, actually, regardless of whether or not you can or can't, can you talk about what you expect your CapEx in 23 to be? Thanks.

So, hey. Hey, Phil, we are not in a position right now to further break down the CapEx. There's, different gifts and takes and decisions still to be made and what technically kind of will qualify as, as CapEx. So we are putting that number out there. That is a total investment of a billion roughly right now. And that's all that we are disclosing at this point. With regards to 2023 CapEx also here we are not giving CapEx guidance right now for 2023. We'll, do that in the next earnings call in early 2023. There will be some spill over from some of the CapEx that we originally had in our guidance for this year. You have seen that we spend about 56 million of CapEx till the end of the September quarter. We are now guiding at the midpoint for about another 18 million. So that puts you into the $74 million range. We had guided originally $85 million to $90 million. So there's going to be some spill over, just some finishing up of some of the existing projects, some milestone payments for equipment that has already been installed and is reaching specifications. But beyond that we are not giving further CapEx guidance for 2023 at this point.

Okay. Thanks guy. In terms of customer co-investment, you guys talked about that as a meaningful source of funds, can you talk through how that might be structured? Would they invest in an equity piece of the three gigawatt facility, or would it be, just the large deposits that they give for a long term maybe three year contract. What are the different scenarios that you guys are playing with? And then also can you talk about the risk that the facility could be delayed beyond 2025? We're hearing that transformers, just a couple months ago, they were two years out in terms of lead time and now they may as much as three years out in terms of lead time, given, you have the chips bill and then the IRA, and a lot of people are trying to access transformers now. So what are your thoughts on the risk around that '25 numbers well, or timing? Thanks.

So the two questions, First question is on form of customer co-investment. And second question on schedule risk. This is Peter, Phil. So with respect to a customer co-investment, we're, we're still evaluating a couple different models. I would say the, the plan a model would be a, a prepayment or a loan that would be repayable at some point into the project off take. There's interest in other forms of investment also. And I think as we get further into the deal diligence process, that's one will probably make final decisions on, on co co-investment structure with respect to facility schedule risk. I think you make a good point that we we're not the only ones trying to build a facility like this in the us. Having said that, we've been at this now for about a year in terms of planning and detailed engineering and so I think we have a pretty good handle. I feel like we have a pretty good handle on key equipment delivery, and a lot of that is, is somewhat site dependent as well. So I think we're confident in our in our ramp time currently. Thanks for the caller. Shifting gears to your relationship with Sun Power. So think about how much you might end up supplying to Sun Power in 2022. Do you think your megawatts in 2022, sorry, in 2023 might be up or down versus what you ship to them in 2022? I think that would probably be slightly down, but not significantly down in 2023. And that would again, be part of the margin optimization that we spoke about earlier. But we have a, a good relationship with Sun Power. We've been working with them for a long time. They've been selling our product for a long time. And so it's really a matter of discussions ongoing with them for as I think they mentioned on their call, we've actually supplied more than contracted in 2022. There's some potential to supply more in 2023 but it's yeah, it, there's, there, there is a lot of demand out there and Sun Power is a great partner and it wouldn't be a significant reduction if there is a reduction.

Really appreciate that color Mark. And then finally, in terms of the CEO process Mark your interim the, the shift or change was a bit of a surprise I think for everyone. Where are we in the process? When do you think we, what's the timing in terms of finalizing a new CEO and do you have your name in the hat?

So I don't think we have a, a specific a specific timeline set that we're, that we're disclosing. The process is ongoing and we are engaged with a, a recruiting headhunter to work on that. Obviously. it's something that's going on at the board level. But it's, I guess I'm here for as long as I need to be here. I feel like we're making good progress until such time as we do have a permanent CEO. And so it's actually not, I think, the main concern at least of the management team in terms of how we execute for 2023.

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Pavel, your line is now open.

Thanks for taking the question. You mentioned on pricing that you expect an uptick in, in q4. When we look at the PD insights benchmark, it's down pretty much every week now, I think for 10 straight weeks and down about 10% over that period. Are you seeing a different dynamic in your pricing structure?

So I think if you look at the PV insights number, you're basically looking at product leaving a factory, not product being sold to a customer to an installer or distributor. And so that's where we play in a little bit different space. We are continuing to see strong demand, both for our IBC product and our performance series product. And we've got backlogs that will carry us through Q4 and beyond, which is what's giving us the confidence in the, the ASP uptick that we, that we mentioned. We're seeing, pricing not necessarily starting to drift down yet especially for premium product. And we obviously will try to maximize that as long as we can.

Okay. Clearly some module supply constraints in the US because of the issues that you touched on earlier. Where are those modules going? The ones that are being stopped at the border by customs? Are they being essentially dumped into the domestic Chinese market, or are there other international markets where they're being reallocated?

I can't answer where everybody else is putting those excess modules. What a, what you're seeing is, I'm assuming utility scale, very large format bifa modules that, that are, are getting turned away. Outside the US we're much more active in the DG space. And so we're not seeing that same product overlap into those areas. There is generally more module availability in the rest of the world than there is in the US, but again, we play in a very premium space both with the IBC product as well as our performance series product. And so far we're not seeing any sort of flood of product that's not getting into the US affecting the DG markets internationally.

Okay. And then lastly, and me, a region 50% of your revenue this past quarter, I think that's an all-time high. Any kind of hotspot to highlight?

Well, I think we, we mentioned France where we're moving over 20% 20% market share. We continue to be strong in Italy. Really all of the DG focused markets in Europe, we're doing quite well there. The combination of our IBC product at the top end with our performance series product in, in the mid-range is really having great effect there. We are doing quite well with the AC products with the AC modules there, as we mentioned some of the penetration rates earlier. So it's great to be selling more complete systems and as I said, in Q2 of next year, we expect to be shipping our storage product into Europe. We'll already be shipping it into Australia and q1. And so, overall we feel like that's one of our big differentiators is our exposure to the important DG markets around the world. The US is important, but the u but the EU e a markets are also very significant.

[Operator instructions] Our next question is a follow up from Julien Dumoulin-Smith with Bank of America. Your line is not open.

Hey, thank you much for here. Can we talk about…

You're breaking up so much still that you can't…

I apologize guys. I about your comments 2020 in in your prepared remarks and you talked about the next IBC technology that you were accelerating. Can we talk a little bit about the and to align with the 28 deliveries and demand that you otherwise described in your remarks?

So I think I understood that you're asking about next generation performance technology that we would be delivering in 2028. Is that correct?

Yeah, I just wanted to talk about, the go for it…

Sorry, Julian, the first time you went through your question, we got about 40% of the words you were breaking up. You're now much more clear. Could you just like do a super quick recap of your question?

Yeah, sorry, I apologize. I don't know what's going on. Just with respect to the next iteration of IBC, you alluded to in your remarks about an acceleration on timeline as well as just the relative demand for the product through that period. If you can talk about how big and how quickly you can scale.

Yeah, so I don't think we talked about an acceleration of, of timeline, although we're obviously trying to accelerate the timeline as much as possible given the window of, of demand opportunity there. So I mean, we're really focused on how we bring to market this next generation IBC technology. We talked about the benefits in efficiency, it's got additional benefits in other performance factors, energy yield, etcetera. And we are trying to bring that to market, really as soon as we can, but doing so on a being additive to the volumes. I'm not really in a position to talk about exactly how much or exactly on what timeline at this point, but those discussions are ongoing and we certainly recognize the demand is out there and we want to I guess finalize plans as soon as we're capable of doing that.

All right. Fair enough guys. Thank you very much. Have a great day.

Thank you. Thank you Jordan.

Thank you. As there are no further questions, we'll now conclude the call. Thank you all again. You may now disconnect.