Maxeon Solar Technologies, Ltd. (NASDAQ:MAXN) Q2 2023 Earnings Call Transcript

Maxeon Solar Technologies, Ltd. (NASDAQ:MAXN) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Good day, ladies and gentlemen. Welcome to the Maxeon Solar Technologies Second Quarter 2023 Earnings Call. [Operator Instructions]. 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 Second Quarter 2023 Earnings Conference Call. With us today are Chief Executive Officer, Bill Mulligan; 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 Bill. 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 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 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, Bill Mulligan.

William Mulligan: Thanks, Rob. Maxeon delivered a solid second quarter with revenue growth 9% sequentially and 46% year-on-year. This growth was driven largely by our increasing exposure to the U.S. utility-scale sector. In spite of significant price pressure in the distributed generation market, we maintained strong ASPs that allowed us to achieve gross profit and adjusted EBITDA above our guidance midpoint. However, we experienced a rapidly worsening demand environment late in the quarter, which unfavorably impacted our DG shipment volume and associated revenue. Kai and I will cover that in greater detail later in my remarks. Last, but certainly not least, I’m very pleased to report that we have selected Albuquerque, New Mexico, as our U.S. manufacturing site, a major step forward for this project.

I’ll now provide an update of our second quarter key initiatives and accomplishments in our utility-scale and distributed generation businesses. Kai will then review our Q2 financial performance and expectations for Q3 and the full year, and then we’ll conclude with Q&A. As mentioned above, Maxeon’s utility-scale business has become our primary growth driver. We shipped over 1.4 gigawatts of annualized volume in the second quarter, 90% of which was to customers in the United States. This included Primergy’s Gemini site outside of Las Vegas. Our first project in the U.S. utility-scale market as an independent company and the new record holder for the largest solar power plant in the country. Completing this 968-megawatt project was a big deal for us, and we can now shift our focus to delivering further into our 3.5 gigawatt backlog with higher contracted ASPs. We also celebrated our Mexicali Modco achieving full capacity in late June with a ribbon cutting ceremony attended by Governor Ávila and other senior government officials from the State of Baja, California.

We expect that Mexicali shipments will continue to ramp up through the second half of this year. Over the past 4 quarters, our technology and operations teams have delivered continued improvement, expanding factory output by over 3x and increasing average panel power by around 5%. With this solid operating foundation in place, and offtake visibility at contracted prices into 2027, the table is fit nicely for our U.S. expansion. We disclosed today that we have selected a site near Albuquerque for our U.S. cell and module factory, and we are very grateful for the strong interest and support extended by the state and local governments. I’m speaking to you today from our new site where we will be welcoming Governor Grisham and other dignitaries tomorrow for a press event.

We are pleased to have completed our exhaustive site selection process and are now moving forward quickly to submit site-specific plans to the DOE so that they can conduct site diligence and complete environmental studies, including a NEPA review. Due to strong customer demand and the anticipated availability of sufficient infrastructure at the New Mexico site, we are evaluating the option of upsizing the scale of our U.S. factory by approximately 50% to a nameplate capacity of 4.5 gigawatts. We are currently in discussions with customers and expect to be in a position to provide more definitive information in the near future regarding the final design capacity of our Albuquerque factory. Maxeon is uniquely positioned to be a leader in reshoring a solar supply chain to the United States.

Our product is in strong demand due to its industry-leading performance, reliable delivery record and high ESG standards. And our stakeholders appreciate the value of our proven experience in deploying world-class solar technology worldwide, including in North America. We are highly focused on moving forward swiftly to realize this exciting project. Now let’s shift gears to the DG business. As I mentioned earlier, we experienced an unexpectedly rapid change in the market demand environment late in Q2. The cause of this change was high levels of industry-wide channel inventory in both the U.S. and Europe. In the U.S., the primary drivers were the implementation of NEM 3.0 in California and the effect of higher interest rates on residential sell-through and low cost of power regions such as the Southeast and Texas or sales processes focused mostly on year 1 bill savings.

The NEM 2.0 sales rush in the first quarter essentially pulled in demand that would normally have been spread over several quarters. And it will now take time to replenish the top of the funnel. The consequent installer backlogs led many sales professionals in California to take time off in the second quarter. And dealers are just now testing NEM 3.0 sales processes and the end customer value propositions. We fully expect the California market will regain its fundamental strength over time, but we have tempered our volume outlook in California for the second half of 2023 to reflect the impact of this policy disruption. We saw less impact from the aforementioned demand softness in the Southeast in Texas since our exposure in those states is relatively limited.

In U.S. residential, we are typically most active in locations with high utility prices, roof size constraints and installer sales processes based on product quality and long-term savings. The majority of U.S. DG sales were to SunPower and were in line with the terms of our supply agreement. In addition to SunPower, we now also have our own Maxeon-branded dealer channel, which is showing promising growth, roughly doubling sales from distribution to installers in Q2, although behind our original volume targets due to the demand factors mentioned above. As a reminder, the purpose of this channel is to address segments of the market not currently served by SunPower. We have increased the rate of new sales hires and dealer onboarding and expect to start seeing the results of this activity later this year.

While we continue to maintain a net positive relationship with SunPower, as recently disclosed, both parties believe that certain provisions under the master supply agreement have not been complied with and have notified the other of such noncompliance. SunPower has alleged noncompliance of the non-circumvention clause, to which we are responding by conducting a thorough investigation and providing the information requested by SunPower as well as taking proactive steps to cure the alleged noncompliance. Maxeon has notified SunPower, in writing, that it has failed to pay approximately $29 million of past due invoices. As contemplated under the dispute provisions of the master supply agreement, we have engaged with SunPower and intend to work towards a swift resolution of such claims.

We remain confident that both parties are incentivized to resolve these disputes in a manner that is beneficial for both parties and consistent with the spirit of the current contracts. In Europe, overall demand is still growing, although the abundance of low-priced Chinese modules have created a significant inventory bubble in the commodity segment of the market. Because we sell a fundamentally different product and have direct access to installers, the market dynamic is a bit different for Maxeon. Having said that, the sales environment in Europe is also quite challenging, and the job of our sales team is more difficult today as price reductions are a top-of-mind theme in customer conversations. In Q2, we reduced IBC prices in line with our earlier plans and made ASP cuts on our performance line panels that were more than offset by cost reductions.

Even with these price decreases, we held our Q2 DG gross margins above 20% in Europe. Overall, in our DG business, our differentiated products and channels enabled Q2 ASPs that were largely within the expected range, and we hit our planned profitability levels both in absolute dollars and percentage terms. To mitigate the current demand slowdown in residential, we have been allocating increased sales focus and products to C&I applications, both in the U.S. and in Europe. Due to the longer sales cycles associated with C&I projects, we expect these sales to somewhat increase the weighting of our second half shipments towards Q4 and into 2024, as Kai will explain later. We have experienced several demand cycles in our 19 years in the solar business and have built our product portfolio and channel strategy to be as resilient as possible to the impact of such cycles.

We believe that our strategy of selling differentiated products through a differentiated channel is effective, and we intend to continue to develop this strategy. Key next steps along this journey include extending our competitive advantage with Maxeon 7, expanding revenue and profit contributions from our Beyond the Panel strategy and continuing to ramp up our Maxeon-branded channel in the U.S. In summary, we strongly believe that our portfolio of U.S. utility-scale and global DG exposure is a sound strategic platform that provides long-term opportunity for profitable growth while diversifying market risk. With that, I’ll turn it over to Kai.

Kai Strohbecke: Thank you, Bill. I will discuss the drivers and details of last quarter’s performance and then provide guidance for the current quarter as well as updated guidance for the full year. Total shipments for the second quarter were 807 megawatts, up 4% sequentially and 55% year-on-year. We fell short of our guidance of 860 to 900 megawatts, primarily due to the previously mentioned unexpectedly rapid changes in U.S. and European DG demand. Revenues for the second quarter were $348 million, also below our guidance. We posted healthy sequential growth in U.S. DG and maintained our ASP levels there above $0.70. In our new Maxeon-branded channel, our volume ramp was lower than expected, but higher-than-planned ASPs allowed us to exceed our objectives in terms of profit margins.

In Europe, we executed planned price decreases on both IBC and performance line SKUs, but held our price premium to market, which enabled us to slightly expand gross margin sequentially. Non-GAAP gross profit in the second quarter was $57 million or 16.3% of revenues, which was above our guidance midpoint. This was driven by strong efforts by the sales team to maintain ASPs, continued cost reduction progress by the operations team and the favorable supply chain environment particularly with regards to polysilicon and freight costs. Non-GAAP operating expenses were $41 million in the second quarter, up from $38 million in the first quarter and consistent with our guidance of $42 million, plus or minus $2 million. Adjusted EBITDA in the second quarter was $30 million or 8.7% of revenue and in line with our guidance of $24 million to $34 million.

GAAP net income attributable to stockholders came in at negative $1.5 million compared to the $20 million result in the previous quarter. The difference was primarily driven by a delta of $19 million from the mark-to-market valuation adjustment of our prepaid forward. Moving on to the balance sheet. We closed the second quarter with cash, cash equivalents, restricted cash and short-term investments of $456 million compared to $304 million at the end of the first quarter. This increase was attributable to our capital raise in May and partially offset by second quarter capital expenditures of $24 million as well as some debt repayment. Following our capital raise, we began planned project expenditures for our next-generation IBC technology, which accounted for more than half of our CapEx for the quarter.

Inventories expanded from $316 million to $349 million during the quarter, reflecting the slowdown of DG demand and the continued ramp of our performance line cell and module capacity for the U.S. utility-scale market. In this current quarter, we expect continued competitive pressure and challenging demand dynamics in the residential market to hamper our growth trajectory on volume and margin. And in utility-scale, we still have some lower price bookings from 2021 to fulfill. In DG, we expect competitive pricing pressure and challenging demand to persist in residential for the remainder of the year and, therefore, expect to see a somewhat higher mix of C&I business. With this context in mind, I’ll now turn to our guidance for the third quarter of 2023 and the full year.

We project third quarter shipments of between 700 and 740 megawatts. The midpoint of this guidance represents a roughly 10% sequential decline due to the softer near-term residential demand order. We project third quarter revenues of $280 million to $320 million, consistent with the expected sequential volume decrease. Non-GAAP gross profit is expected to be in the range of $30 million to $40 million, reflecting expected gross margins in the low double digits. This profile of lower Q3 margin sequentially is consistent with our previous expectations, but we now expect that our Q3 gross margin percentage will be also affected by the challenging market conditions. Non-GAAP operating expenses are expected to be $43 million, plus or minus $2 million, a $1 million increase from the previous quarter at the midpoint, mainly resulting from incremental investment in our U.S. DG sales and marketing team.

Adjusted EBITDA in the third quarter is expected to be between $2 million and $12 million. Third quarter capital expenditures are projected to be in the range of $29 million to $35 million, higher than previous quarters, reflecting a full quarter of Maxeon 7 CapEx investment, which we started late in the second quarter following our capital raise. For 2023, we expect total CapEx to be in the range of $150 million to $170 million, consistent with our previous guidance, which we adjusted in May to account for Maxeon 7. As a reminder, this annual CapEx guidance excludes spending for any U.S. manufacturing. For the full year 2023, we are updating our revenue guidance to $1.25 billion to $1.35 billion and our adjusted EBITDA guidance to $80 million to $100 million.

With that, I’ll turn the call back to Bill to summarize before we go to Q&A.

William Mulligan: Thanks, Kai. As I have said on previous earnings calls, my goal is to help make Maxeon one of the most profitable companies in the solar industry by driving aggressive manufacturing cost reduction and operational excellence, while extending our panel technology leadership and leveraging our unique global channels to market. Despite the current industry headwinds, I am still fully focused on this objective. Looking forward, over the coming 3 years, we have a pipeline of projects that I expect will drive financial performance improvement at a structural level. In 2024, we expect to benefit from an entire year of full capacity operation in our utility-scale manufacturing facilities, selling into a firm backlog at higher contracted prices.

In 2025, we expect to see significant contribution from our new Maxeon 7 capacity. And in 2026, we are excited about the prospect of ramping our new Albuquerque cell and module factories. Thank you for your support. Now let’s go to Q&A. Operator, please proceed.

Q&A Session

Operator: [Operator Instructions]. Our first question from the line of Julien Dumoulin-Smith with Bank of America.

William Mulligan: Julien, are you there?

Julien Dumoulin-Smith: Sorry, I was on mute there. Apologies. I wanted to just ask you guys about what’s going on in Europe here? And how are you thinking about the IBC versus P-Series. Can you talk a little bit about where the pressures are and just confirm how you’re adapting to the new evolving landscape, especially as you think about the international markets? And maybe how you think about C&I as another evolving end market to pivot into. And maybe how this impacts your expansion opportunities, if you think about leaning in the Max 7 and further DG-oriented production expansion?

William Mulligan: Yes. Julien, Yes. Well, it has been tough in Europe. I think the conditions there deteriorated faster than most of us in the industry expected, primarily driven by these really high inventory levels in the commodity sector. We are somewhat immune to that because we sell with a different value proposition and sell direct to installers with a unique product, but we’re not isolated from it. So it has created some pressure for us. We’re going to respond in a couple of ways. First of all, there’s still many opportunities to grow within Europe just from a market share standpoint. For example, in Europe and Germany, the biggest PV market in Europe, we still have a very small share. So we’re doubling down on our sales and marketing efforts to try to just grow the bigger — the full pie.

And you mentioned C&I. That really is a good opportunity for us. We have a lot of past experience in that sector for those of you who have been following this company for a long time. It’s a sector we know well. And there is a lot of opportunity there. There are specialty applications within that sector where our high-performance products play really well. For example, in Carrefour, in building integrated TV or even in the U.S. here, particularly in things like agricultural applications where ammonia resistance of our panels is valued. So we do have other markets we can pivot into. But I would say, fundamentally, we do believe Europe is still growing. It’s a bit of a plateau. We still are very bullish on the DG market in the long haul, but I think this is obviously a little bit of a bump in a road here.

Kai Strohbecke: And Julian, this is Kai. Since you also asked about the P-Series specifically in Europe. So on the P-Series, as you know, we are in a position where our costs follow a commodity price index. So basically follow the prices of commodity panels that go into Europe. And also, we have an offtake right from our joint venture, but not an obligation. So here also, we can modulate the offtake in line with our demand forecast.

Julien Dumoulin-Smith: Excellent. And then if I can pivot super quickly over to the question of — look, you’ve got this SunPower arrangement, obviously, in ’23, but also there’s some question marks on ’24. Can you talk a little bit about that conversation here and the reopener? And how one could impact the other here? Just elaborate a little bit more about the situation at hand and the conversation ahead, if you will, and tie those 2 together, if you can?

William Mulligan: Yes. As we mentioned in my prepared remarks, we have entered into a dispute with SunPower. But at a high level, we do believe that our interests are fundamentally aligned. It’s a symbiotic relationship. And they’ve had many years of experience. They know how to do it well. We deliver a really high-quality product that is great for their channel. So we think it’s a mutually beneficial relationship, and it’s going to be in the interest of both parties to resolve this thing as fast as possible.

Julien Dumoulin-Smith: All right. But you’re still expecting some amount of volumes next year. No change those conversations?

Kai Strohbecke: The contract stands as it is, Julian. So we expect that it will continue and the volumes will continue.

Operator: Our next question comes from the line of Philip Shen of ROTH MKM.

Philip Shen: Just wanted to follow up on the SunPower thread there. You talked about maybe having $29 million that you’re collecting and then SunPower has their allegations against you guys. I wanted to understand what the path to resolution might look like and as well as the timing. And so do you think it’s a near-term type of resolution? Or do you think this could sustain for some period of time? And during that time, are additional receivables being added to the balance, and so is that increasing over time?

William Mulligan: Yes, Bill here. Yes, this thing has just started. So I don’t really want to speculate on the trajectory that will take. I will just say, once again, this is a very symbiotic, mutually beneficial relationship. There’s plenty of value here to go around. I think it’s something that both parties will be certainly incentivized to resolve quickly. And Kai, maybe you could speak to the second half of that question.

Kai Strohbecke: Yes. I would say that on the topic of the cash flow, we are in contact with SunPower on that topic. We are willing to work with them. But of course, at the same time, we’ve got to monitor our exposure and modulate accordingly. So — but generally, I think there is a path that we can come to a resolution there.

Philip Shen: Got it. Okay. Is there a way to frame what the size of the potential exposure might be? $29 million seems like a base level. Is there an — like what might a cap be on that number?

Kai Strohbecke: No, not really at the moment. So the number that we have disclosed, obviously, is the $29 million that is overdue, we have shipped more than that. There’s other invoices out there. Maybe just one number I can give, which we have publicly disclosed last quarter, our total sales with SunPower were $79.3 million in the second quarter. So just to give an extra reference point.

Philip Shen: Okay. Got it. And is all of that in question in terms of collections or just a modest percentage?

Kai Strohbecke: Well, as I said, at the moment, we are stating the facts here, and we are in discussion with SunPower to resolve that situation. So I can’t comment about what is in question, what is not. I think we’re going to come to a resolution. From our standpoint — just to add, from our standpoint, you have seen our liquidity balance. So I think we are in a position to help our customers there to some degree.

Philip Shen: Shifting over to the slowdown that you’re experiencing. In your release you talked about that slowdown could persist at least through Q3. So I was wondering if you could share how long do you think the slowdown lasts and maybe speak to it from the 2 key continents, U.S. and Europe? And then could it persist through ’24? And what do you think needs to happen in order for the challenging environment to turn around? So — and there might be differences between the regions.

William Mulligan: Yes. So Phil, I would say, as you can see from our guidance, we expect Q4 to be stronger than Q3. So there’s going to be some recovery there. Part of that is due to seasonality. I would say, having been through many of these cycles before, they actually can correct fairly quickly, not oftentimes as fast as they deteriorate, unfortunately, but I’m still quite bullish on the long-term prospects of this market. I think we will see a recovery in California. It’s still a very strong market. It’s a new world under NEM 3.0, but I think the value proposition still works. You will see increasing storage attach rates. It’s still going to make sense economically for end customers. And so I think it’s just going to take a little time for this to settle out for the inventory bubble to be bled off. And then hopefully — no one can predict the future, but hopefully, I think the long-term fundamentals — I mean, I know the long-term fundamentals of DG are strong.

Peter Aschenbrenner: Phil, this is Peter. Just to make a note, just to be clear, we don’t see an actual demand slowdown, market slowdown in Europe. The market there is growing nicely. The issue there is inventory that needs to be worked off.

Operator: Our next question is from Brian Lee of Goldman Sachs & Company.

Brian Lee: I guess just following up on the line of question around SunPower here. I just wanted to understand a little bit the dynamics. So given the situation there, are you restricting shipments to SunPower in the near term, just given the situation of not getting paid? Or are they, I guess, reneging on contracts, should we obligate in volumes in the near term until some of this gets resolved? Kind of what’s the sort of go forward here in 3Q, 4Q? Because it sounded like in your prepared remarks, 2Q came in, in line with expectations, all obligations, what kind of fulfill, but what’s this current situation translating into in terms of how you’re treating them over the next couple of quarters?

Kai Strohbecke: Yes. Brian, it’s Kai. So we can’t really go into all the details here of the conversations at all, so this is relatively fresh. So I just wanted to say that we reiterate from the previous answer that we are willing to work with them. That we, of course, have to monitor our exposure and modulate that we have the ability to be helpful here and also that we expect that the contract is going to be honored. And I think I’ll leave it there.

Brian Lee: Okay. But I guess just given the guidance here coming in relatively soft versus expectations and maybe versus normal seasonality this part of the year, I guess the question is how much of this is broader market slowdown, inventory rebalancing versus just this customer-specific issue, albeit I’m sure there’s some demand issues underlying some of the challenges with that customer. But what part of this is just the broader market read across versus what you’re trying to ultimately resolve with SunPower here in the near term?

William Mulligan: Yes. I mean, again, we’re assuming that we’re going to get the SunPower relationship back on track and the contracted shipments are part of our guidance. The softness we’re seeing here is largely a result of the broader market slowdown in inventory buildup in Europe. And so it’s at times like these where we see a slowdown in DG that we’re very happy that we are a diversified company and have exposure to the utility-scale sector that’s very strong and growing. As we noted in my prepared remarks, we are — it’s the growth area for our company going forward. In fact, we’re here in Albuquerque, New Mexico, at our new site. We’re super excited about getting this project up and running. It will be a few years before it starts to contribute meaningfully.

But in the meantime, we’re also growing our existing Malaysia, Mexicali revenue for next year. So these markets tend to be somewhat cyclical. So we believe having some diversification between the DG market, which is currently in a bit of a slump, and the U.S. utility-scale sector, which is currently on fire is a good strategy.

Brian Lee: Understood. Maybe just 2 final ones, and I’ll pass it on, and I hate to keep harping on this, but it seems like it’s a pretty incremental development here. So I just want to make sure we’re all on the same page. So what it sounds like you’re saying, Bill, and correct me if I’m misinterpreting it, you are basically assuming shipments to SunPower over the rest of the year is in line with whatever your original expectations would have been prior to this kind of challenging status with the customer having arisen here recently. That would be the first question. And the second question is, presumably, the back and forth here is around price. Is that fair? And then what’s the potential resolution if you guys need to come to some sort of compromise? Is it all just going to come down to price?

William Mulligan: Yes. I think in terms of the contracted volumes that your presumption was largely correct. In terms of what the dispute is about, I really can’t say much more than was in our prepared remarks that there’s — the mutual breaches were discussed there.

Kai Strohbecke: And just to say, the guidance is really the contracted minimum. So no upside or anything — any additional volume. So really the minimum that is in the contract.

Operator: Our next question comes from the line of Andrew Percoco of Morgan Stanley.

Andrew Percoco: I just wanted to come back to the manufacturing facility in Albuquerque. So as you think through that incremental 1.5 gigawatts that you might add, very clearly it’s dependent on the strong demand that you’re seeing. I mean is that broad-based demand? Or could there be 1 or 2 large customers that are willing to sign as anchor tenants on that incremental capacity? And maybe a slightly different question on the same topic. How are you thinking about contracting out that capacity when it comes to pricing around domestic content and some of the dynamics that play with the global polysilicon prices?

William Mulligan: Okay. Great. Well, I’ll take the first end of that, and I’ll let Peter talk a little bit about the pricing environment. Yes. I think when you think about utility-scale customers, the developers we’re selling to, they buy in big chunks, right? Our Primergy customer is just a great example, 968 megawatts, right? 4 gigawatts to 1 customer for 1 project. When we think about it, it’s less than 10 utility-scale customers that will contract this entire volume. The upscaling is basically just really based on the strong market environment. And also the fact that we found this really outstanding site here that is really shovel-ready, and will have all the necessary facilities that we need for such a large facility in place in time to ramp this facility.

So we’re in negotiations with customers. We’re optimistic about it. It will be at least 3 gigawatts, but we’d like to be in a position to be able to have the land, the space, utilities, the infrastructure to be able to upscale in this really strong market environment right now. And Peter, I don’t know if you want to mention ITC or…

Peter Aschenbrenner: Sure. I’d say that in terms of pricing structure for any incremental supply, but also for the baseline 3 gigawatt supply, there’s no fundamental difference there in terms of our philosophy. We’re looking at pricing that includes the value of local manufacturing, both at the cell and module level. And I think we’ve been clear that we expect that that will be a big help to our customers in terms of getting them the ITC bonus. So there’s some value of that for us. And it also would involve indexing to keep price inputs — cost inputs for us so that our margin would be protected over time with a multiyear offtake tenor.

William Mulligan: And when we execute this project, we will have signed contracts. And right now, we’re talking about contracting all the way through 2028 and into 2029 with these customers.

Andrew Percoco: Got it. Okay. That’s helpful. And then coming back to the size of the facility. So it sounds like it’s pretty easy to add extra 1.5 gigawatts based on the land that you have available to you there. How much higher can it go before you need to start doing substantial rework around the land or substation upgrades? Just wondering what’s the max capacity that we could be thinking about longer term at this facility specifically?

William Mulligan: I’m looking out over a field that runs flat for about 5 miles out to the mountains with nothing there. So we have a lot of space here. And — actually, in all seriousness, we have options on adjacent parcels that will give us optionality to go even bigger if we want to. And perhaps, I think one of the things that’s likely to happen in the U.S. is more localization of components of the supply chain closer to the — where the end demand is. So I think that’s a probable outcome as well over time.

Operator: Our next question comes from the line of Graham Price of Raymond James.

Graham Price: I guess just following up on the prior question. If you do end up upsizing the expansion project to 4.5 gigawatts, would the DOE loan scale as well? And if we think about something like an 80% LTV, is that kind of in the ballpark?

Peter Aschenbrenner: This is Peter. We would expect the DOE loan to scale. The constraints there are typically around some of the financial metrics, loan to total value, debt coverage ratio, et cetera, which should scale with the size of the facility. Obviously, that’s not a done deal yet, but that would be our expectation. With respect to the total coverage of the loan to total project costs, we haven’t mentioned that or disclosed that specifically. What we’ve said is we would expect that to be a majority of the — to cover a majority of the expense of the project — to the project cost and together with customer prepayments would be a large majority.

Graham Price: Okay. Got it. That’s helpful. And for my follow-up, just quickly on the guidance, are you able to provide the breakout between IBC versus shingled maybe for 3Q and the full year? I know previously, IBC was expected about 1 gigawatt, but obviously, that’s come down a bit.

Kai Strohbecke: No. No, Graham. Typically, we do not provide that guidance on a shipment or a revenue basis the breakdown. The 1 gigawatt is our internal capacity for IBC.

Operator: Next question comes from the line of Kevin Pollard of Pickering Energy Partners.

Kevin Pollard: I wanted to stay with the utility-scale just a little bit longer and this expansion in the U.S. with — I think we’ve talked in the past kind of about targeted low to mid-teens gross margin for what you were bringing in from Mexico. As you think about the expansion in the U.S. and taking into account the totality of the $0.11 credit ITC value-add pricing, but also higher U.S. costs, what is a reasonable expectation for the margin of those facilities?

Kai Strohbecke: Kevin, it’s Kai. I think you already kind of put up the pieces pretty well here in terms of how to think about the margin. The incentives that we are getting — so-called SEMA incentives under the IRA are meant to kind of bridge the difference in cost between Southeast Asian-made modules and modules made in the United States and also provide a little bit of an incentive to build in the United States and not just make it about the same margin and return-wise. And then, of course, on top of that, there is the ITC credit that we expect to be eligible for with the products, which also is going to provide an additional benefit here. So overall, we actually expect to be above this 15% long-term financial model margins for us in that part of the business. How much above the 15%? We haven’t really commented on. I think it’s a pretty — it’s a bit premature to comment on that right now on this call, but we do expect them to be above that marker.

Kevin Pollard: Okay. Great. And then I guess on the DG side, with the shift in focus to the C&I, does that have a similar margin profile to the residential? Or is it a little bit — I typically think of that as being a little bit lower margin business? Can you comment on that?

Kai Strohbecke: Yes. C&I typically is a little bit lower margin. But as I said earlier, we typically do sell into the value segment of — subsegments of that segment, which are things like carports and other specialty applications that command a premium. And then also from a cost structure, the format of these panels is different. They’re more commercial format panel, and so they’re a little less costly to make. So yes, the margin profile is a little bit lower, but they also come in bigger chunks of sales as well. So there’s a little less OpEx required to move them into the channel.

Kevin Pollard: Okay. And just one last quick one on the guidance. So the implied Q4 is a pretty decent step-up in EBITDA. I think I heard earlier you referenced seasonality in that. But is there an improvement quarter-on-quarter in the DG business embedded in that improvement in Q4?

Kai Strohbecke: If you talk on an absolute level there, Kevin, there is more shipments into the DG and margins on a quarter-on-quarter basis, we would expect them also to be slightly healthier again — compared to the third quarter. So we will have both volume effect and the favorable margin effect that then gives us more EBITDA dollars basically for the quarter for the reasons that we talked about a seasonal, but also given the Maxeon business recovery.

Operator: [Operator Instructions]. Our next question comes from the line of Donovan Schafer of Northland Capital Markets.

Donovan Schafer: So I want to kind of flesh out the C&I side of the business a little bit just because you are kind of a sprawling organization, you’ve got a heck of a lot of products to offer. And historically, there was — you could do some larger C&I-type sales with a direct force. You talked about like agrivoltaics and stuff. But then there’s also historically when part of SunPower, there was the CVAR channel, commercial value-added resellers. I kind of forget if that’s still something that SunPower owns in the U.S. market or if you have your own CVAR channel in the U.S. while also having like a direct C&I channel? And then what that’s like in Europe? And also, again, with all the product offerings, you have cases where IBC can be fantastic if roof space is limited, but then if you’re talking about like a big box retail store, maybe they’ll go with P-Series.

And then you even have stuff that — like the Maxeon Air panel that was going to be pretty — was going to be lightweight so that you could go on rooftops in Europe that are 100 years old and not have to retrofit the building. There’s a whole suite of stuff you’ve got there in kind of different channels. So I’m just wondering if you can kind of update us where the bigger parts of that are? Where the emphasis is? And kind of just help us to think about it instead of — just, again, it’s a real sprawling offering you’ve got. Anything there would be helpful.

Peter Aschenbrenner: Sure. This is Peter. I’ll take that one. So CVAR was kind of the organized channel approach that SunPower had for many years and in fact, that — we have a similar channel in Europe. SunPower, I believe, got out of that business some time ago. We’ve continued to serve commercial customers in Europe generally through a similar structure where a lot — many of the installers do both, but some of the installers are specialized primarily in small commercial, might we say small commercial, but it’s up to, say, 0.5 megawatt in terms of roof size. And as you said, there is certainly a fair share of installations that can benefit from higher efficiency, higher productivity, shade tolerance, all the things that our technology can deliver.

And in addition to — there’s some owners that own the building, want a longer-term energy delivery prospect as opposed to being primarily focused on year 1 savings. So you see the same kind of distribution of buying behavior in commercial that you do in residential, and we cater to the premium part of that market. In the U.S., we do have kind of — I’d say, legacy connections to some of the players — the EPC players that serve that small commercial, light commercial market. And there’s also a reasonable amount of demand in slightly larger beyond the meter — behind-the-meter applications where because of limited land space or because of expensive BOS in the case of a car park, where, again, our product makes a lot of sense. And then as you mentioned, Maxeon Air, planning to introduce that and a little bit higher volumes next year, serves a specific segment.

So the C&I market’s not new for us. I think what is new is the more of a bias towards that market to mitigate a little bit of slack on the resi side until that inventory clears.

William Mulligan: Right. And I think what I would add, particularly in Europe, we don’t talk a lot about it. But for example, in Italy, we already do a fair amount of C&I business. And up until recently, we have been very supply constrained on our IBC product. So it hasn’t been a huge focus for us. But given that we have a lot of historical knowledge and like Peter said, some legacy connections here, it’s something we feel like we can move into fairly quickly. He also mentioned Maxeon Air, which is still in our plans. And you’re right, that could be a really excellent product for a number of different applications.

Donovan Schafer: Okay. And then a second question I have is, this is for you, Bill. I watched a video clip of you from Intersolar Europe. I believe — I’m kind of trying to recall this off the top of my head. So I might be remembering some things incorrectly here, so feel free to correct me if I’m wrong. But in the interview, you were talking about plans to move to topCON with the P-Series shingling. So I’m just curious if you — if it’s — if you have any kind of a timeline around that, if that’s premature? And then if there would be meaningful investments that would need to be done or if this is basically just using really the same type of slicing and dicing shingling equipment that you have? And there would just be sort of additional validation or certification work around shifting or being — enabling to do topCON.

And then lastly, just that’s — if it’s just about kind of keeping up with general solar trends or if there would be any sort of special incremental technology benefits? I mean, I know — or performance benefits? I know you get an uplift in durability, efficiencies and stuff with the current mono PERC cells? Is any of that kind of magnified or multiplied in if you started doing this with topCON?

William Mulligan: Yes. Okay. Great. Good question. Yes, our new U.S. factory will use topCON technology. It’s maturing rapidly right now in the industry. So there’s not very much technology risk with it at this stage. That being said, it does get harder and harder to make high-efficiency cells at — the further up you move in the efficiency charts. Our intel is that there are a lot of companies in the topCON space that are currently still struggling with yields and costs. Our long, long experience in high-efficiency technology actually puts us in a preferred position to address some of these issues because when we start to converge on very high-efficiency solar cell designs, a lot of the issues converge as well. And so we have technology solutions and expertise that I think can make us a really world-class topCON manufacturer.

And so that’s part of our strategy. Everything going forward will likely be topCON technology. Whether or not we retrofit some of our old PERC capacity, TBD, but it could be because that product is still doing very well, being able to import that into the U.S., and we had to contract it out for a long time.

Peter Aschenbrenner: Don, it’s Peter — just in all of our technology going forward for our performance line will be topCON.

William Mulligan: That’s right. Sorry for the performance line. Of course, we’re going to continue to grow and expand our IBC portfolio as well.

Donovan Schafer: Okay. And just to be clear on a couple of things. So Bill, when you said yield — other companies struggling on yield, you’re talking about the manufacturing yields, not like an energy yield or something for the cells?

William Mulligan: Perhaps a little bit of both, but yes. I think…

Donovan Schafer: And then you’re saying, so there would be a sort of retrofit of some kind that would be required for, say, like the Mexicali facility? Not that you would necessarily [indiscernible] you’re not…

William Mulligan: Let’s hope not. Yes. Yes. We built those facilities just a couple of years ago, we had seen this trend coming. So we did plan additional space in the facilities to upgrade, if necessary. It’s just a pure question of economics of that additional investment payback. And so we’ll do that math. And when the time comes, we’ll consider that. But for right now, we have a lot of work on our hands to build a 3-gigawatt factory here in New Mexico. So we’re going to focus on that.

Operator: And for this question, we’ll welcome back Philip Shen of ROTH MKM.

Philip Shen: Just had a few on the DOE loan guarantee and the new facility. I was wondering if you could give us a sense of the timing of when that could be finalized? Are we getting closer? Could it be in the next month or so? Or do you think we have to wait until year-end or perhaps into ’24? And then also, can you remind us or help us understand what the wafer sources would be? And so have you with this announcement locked in a secured supply of wafers, if you mentioned that earlier, sorry if I missed it. And then finally, why announce this facility today when the DOE loan guarantee has not been provided?

William Mulligan: All right. Thanks, Phil. Well, the site selection process, unfortunately, has taken a little bit longer than we liked. It really has been the bottleneck for completion of DOE due diligence. There’s a certain amount of site-specific diligence they have to do, including things like environmental review. Also, we really can’t finalize the financial model for the project until we knew the site-specific details. So that’s done now. And so we expect that we’re going to be able to move this project forward at a rapid clip from this point. I’m sort of hesitant to forecast timing. Perhaps Peter can give some color on that. And also Peter has been a little closer to the wafer supply situation. So…

Peter Aschenbrenner: Yes. On the timing, Phil, as Bill said, I think the sort of — this is the last major obstacle out of the way here in terms of completing the DOE diligence. We’ll see what that turns into in terms of timing of a conditional approval. On wafer supply, I think our objective in the midterm on this project is to be able to source wafers in the U.S., and there’s a variety of people looking at that. We’re in conversations with those. But at the time that we would sign the DOE loan and give the formal go-ahead in the project, we would have all of our wafer supply locked up. That’s normally the way we handle as well as the customer offtake commitments. And in terms of the why now, I would say that we have a site event planned for tomorrow, and we thought that investors would want to know about it.

William Mulligan: Yes. And I mean it does allow us to get moving, right? We will do a certain amount of engineering and maybe some long lead time risk purchases to keep the timeline moving forward. So we can’t — we really couldn’t unlock all of that until we hit the site.

Operator: As there are no further questions, we will now conclude the call. Thank you all again, and you may now disconnect.