Good day ladies and gentlemen. Welcome to Maxeon Solar Technologies' Third Quarter 2023 earnings call. Currently all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

And now I would like to turn the call over -- one moment..

Thank you, operator. Good day, everyone, and welcome to Maxeon's Third Quarter 2023 Earnings Conference Call. With us today are Chief Executive, 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 annual 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..

Thanks, Rob. Maxeon experienced dramatically different trajectories in our two businesses during the third quarter.

Our US utility scale revenue was up 10% versus the previous quarter and we are on track to exit the year with fully ramped manufacturing facilities a sold-out backlog at higher prices that we expect to make material margin contributions in 2024 and the achievement of important milestones with respect to our planned US factory.

In our DG business, we faced significant demand challenges caused by the suspension of shipments to SunPower and the effects of a broad market dislocation in Europe. I'll spend a few minutes now detailing these different market environments and the respective implications for Maxeon.

Kai will then review our Q3 financial performance and provide guidance for the rest of the year, and then we'll conclude with Q&A. The US utility scale market is a key focus for us in our primary growth driver.

With our existing North America utility scale supply chain reaching important operating efficiency and profitability milestones in our planned New Mexico factory entering the engineering and design stage.

We believe that Maxeon is positioned to be a leader in helping reshore advanced solar cell and panel manufacturing to the United States at meaningful scale. Towards this end, we are working intensively with the US Department of Energy's loan program office to finance a 3.5 gigawatt solar cell and panel factory in Albuquerque.

This capacity represents an increase of 500 megawatts compared with our original design. With site preconstruction work well underway, we've hired a general manager for the facility that secured options on adjacent parcels to allow for future capacity expansion.

In order to accelerate and de-risk the ramp of our US factory, we plan to install a TOPCon pilot line in our existing Fab 3 in Malaysia and expect this line to be up and running next year well ahead of the anticipated factory ramp in Albuquerque.

We expect this pilot line will provide valuable process development experience and serve as a training platform for copy and exact technology transfer to our US factory. Finally, we are advancing well in negotiations for multiple offtake agreements, which we plan to execute prior to the closing of the DOE loan.

Q3 shipments in our utility scale business were at an annual run rate of over 1.3 gigawatts with 100% of this volume shipped into the United States. Pricing increased from the first half of the year and we expect pricing to further increase in 2024 as we transition to shipments for orders booked during 2022.

Note that ASPs may fluctuate from 2024 onwards as we transition to index pricing structures tied to certain cost inputs. Contracted backlog now stands at 3.3 gigawatts for delivery through 2025, plus an additional 500 megawatts of supply allocated in each of 2025, 2026 and 2027. Let's now turn the attention to our DG business.

Since June of this year, conditions have deteriorated rapidly due to an oversupply of Chinese commodity modules in Europe and SunPower falling short of their contractual purchase obligations. However, we continue to be bullish regarding the importance of this sector in the mid to long-term.

This view is supported by increasing global retail electric prices, the integration of battery storage to create smart and dispatchable systems and the avoidance of grid congestion as a potential barrier to continued renewable energy penetration.

The DG sector is currently experiencing headwinds associated with high interest rates, policy disruptions as well as excess supply and inventory. None of these challenges are unique or unprecedented, but in combination, they have produced what is a very challenging industry environment.

We are confident, however, that the DG sector will continue to be a vital part of the solar industry in the long run.

We remain focused on our DG strategy, mainly developing, manufacturing and selling the world's best solar panels through a differentiated direct-to-installer sales channel with increasing attachment of beyond the panel hardware and software that enables homeowners to control their energy usage.

As many of you know, our recent financial performance in DG has been severely hampered by a dispute with SunPower that led us to suspend shipments from July through the end of Q3. I'm pleased to announce that we have reached a settlement with SunPower earlier this week that enables us to resume shipments.

The settlement calls for the parties to transact on 85 megawatts of IBC panels through February 2024 at previously contracted prices and resolved outstanding claims and contract breaches.

The parties have also agreed to and other contractual supply obligations by the end of this quarter, including purchase obligations by SunPower beyond the 85 megawatts and constraints on Maxeon product sales to SunPower installers.

Offering panels directly to installers will eliminate the mark-up SunPower has historically added to our products, allowing us to deliver the world's best panels to customers at more competitive pricing. This will enable our plans to aggressively ramp our sales in the US market.

Leveraging our recent Solaria acquisition, which nearly doubled the number of dealers actively buying our product to over 170.

The Solaria transaction also accelerated the development of our channel sales and marketing infrastructure with the addition of key talent, including Vikas Desai, the former President of Solaria who is now our North America General Manager.

Vikas was the original architect of SunPower's installer channel and successfully grew that business to over $1 billion run rate in just five years. He will be focused on replicating that success here at Maxeon.

While we currently expect a year-over-year decline in the US residential market demand in the first half of next year, with California being the key variable, we expect that demand will recover by the time we begin sizable shipments of our new Maxeon 7 panels starting in mid-2024. Turning to Europe.

Our shipments were down 37% sequentially due to elevated industry-wide module inventories. In most key European markets, Maxeon sells primarily directly to installers, which has allowed us to successfully maintain healthy ASPs and positive gross margins, albeit with reduced volume.

Our SunPower reserve battery product is now widely available to our dealers in Belgium, France, Italy, Spain and Australia and we have received excellent customer feedback regarding product quality and ease of installation.

As we mentioned in our last call, we increased our sales focus into the commercial and industrial segment and we are pleased to announce an early win as a module supplier for Italy's Turin airport as well as a growing pipeline of similar high-profile projects in the region. Let me now say a few words about our IBC solar panel technology.

Our sixth generation panels were a big step forward compared with the second-generation products they were placed and have been a critical contributor to our DG business, particularly in the US.

With near-term US DG volume expected to decrease due to the discontinuation of the SunPower offtake, we have made the decision to phase out our Maxeon 6 technology and focus on Maxeon 7 and future generations.

We now plan to bring Maxeon 7 to market a full quarter earlier than previously planned, and we will reserve Fab 5 for future Maxeon 8 capacity.

We will pre-manufacture sufficient Maxeon 6 volume to ensure a smooth product transition to Maxeon 7 in all of our key markets and plan to utilize the space freed up in Fab 3 to install the TOPCon pilot line mentioned previously.

We are very excited about our seventh generation IBC platform which is the first IBC technology developed and commercialized by Maxeon since the spin.

Maxeon 7 delivers increased efficiency and other performance attributes that will extend our technology leadership and allow homeowners to generate even more power from their limited roof space, thereby maximizing bill offset in this era of electric vehicle adoption.

Since NREL efficiently crowned Maxeon 7 as the world's most efficient solar panel back in June, our early-stage production runs have continued to improve, with nearly half of our module output currently exceeding 24% efficiency. However, as we'd like to remind people, it's not just about efficiency.

Maxeon 7's architecture achieves these record performance levels while simultaneously controlling hotspots and other degradation issues that are common challenges for high-performance solar technologies and which we observed with regularity in our competitors' products.

We expect to start shipping Maxeon 7 panels from next summer which corresponds with the peak selling season in the US residential market. Finally, I want to say a few words about intellectual property. With Maxeon 7, we are taking another major step forward with respect to IBC architecture, and we are adding to our considerable IP moat in this field.

As our competitors attempt to close the performance gap to our products, they are finding it increasingly difficult to navigate around the IP portfolio that we have developed over the last several decades.

Earlier this year, we filed a patent infringement action against Tongwei and sent cease and desist letters to several European distributors related to our shingled cell panel technology. Yesterday, we filed a patent infringement action against Icosolar and European distributors related to our IBC solar cell architecture.

With over 1,600 granted patents and 360 pending patent applications across 30 countries, Maxeon has a formidable IP portfolio addressing fundamental enabling elements for creating high-performance solar cell and panel architectures. We plan to continue to defend our IP aggressively.

In summary, our US utility scale business is on track to deliver increasing margins as we prepare to deploy our next major capacity increment in New Mexico.

Although we and many others were surprised by the speed and magnitude of the changes in the DG industry this year, we are well positioned with our technology and channel initiatives and expect our DG margins to recover in the back half of 2024 as Maxeon 7 is introduced. With that, I'll turn it over to Kai..

Thank you, Bill. I will discuss the drivers and details of last quarter's performance and then provide guidance for the full year. Total shipments for the third quarter were 628 megawatts. And for the first time in Maxeon's history, the majority of shipments went to utility-scale customers.

We expect this to be our new normal for the foreseeable future, though with a continued sizable DG market share in the highest ASP geographies. Also, for the first time in Maxeon history, our utility scale shipments went entirely to customers in the United States.

Total shipments were consistent with our updated guidance range and down 22% sequentially, largely due to the dispute of SunPower, which also resulted in a significant inventory build-up. Shipments were also impacted by the industry-wide supply-demand imbalance in Europe, which caused our European volumes to decline more than 30% year-on-year.

Revenues for the third quarter were $228 million and included a 10% sequential increase in US utility scale revenues attributable to higher volumes. On a blended basis, ASPs declined sequentially due to a lower mix of DG sales.

Our ASP in USDG was largely flat sequentially at above $0.70 per watt with only limited shipments to SunPower early in the quarter. ASPs for our performance series in the global DG market were down 13% sequentially and partially offset by COGS reductions. Gross profit in the third quarter was $3 million or 1% of revenues.

This significant sequential decline was driven by the dispute of SunPower, Europe DG oversupply conditions and inventory write-downs.

GAAP operating expenses were $67 million and included restructuring charges of $24 million, primarily in connection with the cancellation of purchase orders for the previously planned capacity expansion of Maxeon 7 at our Fab 5 in the Philippines.

As announced in early October, our decision to convert existing Maxeon 3 manufacturing capacities to Maxeon 7 at our Fab 4 instead of expanding in Fab 5 is expected to result in net CapEx savings of approximately $100 million after accounting for these cancellation charges and allows us to accelerate the introduction of Maxeon 7.

Non-GAAP operating expenses were $38 million in the third quarter below our guidance range of 43 million, plus or minus 2 million due to austerity measures that we put in place. The decline does not include any impact from our announced reduction in force, which I will discuss in the context of our fourth quarter outlook.

Adjusted EBITDA in the third quarter was negative $20 million, consistent with our October pre-announcement. Net loss attributable to stockholders came in at $108 million compared to 2 million in the previous quarter.

The sequential decline was primarily driven by lower gross profit combined with the $24 million in restructuring charges and $37 million attributable to the remeasurement loss on our prepaid forward. Moving onto the balance sheet.

We closed the third quarter with cash, cash equivalents, restricted cash and short-term investment of $277 million compared to $456 million at the end of the second quarter. Total inventory levels increased sequentially from $349 million to $386 million due in part to suspended shipments to SunPower.

Cash levels were also impacted by lower shipments and margin dollars from our global DG business, the reduction of contract liabilities related to our US utility scale business capital expenditures during the quarter, restructuring expenses and a reduction in short-term debt.

Capital expenditures came in at $15 million for the third quarter below the low end of our guidance range as we took actions to execute the lower CapEx plan associated with the introduction of Maxeon 7.

Going into the fourth quarter, we expect the distinct dynamics that have been unfolding our utility scale and distributed generation businesses to largely continue.

Volume shipments and ASPs in our utility scale business for the United States have been contractually locked in and are increasing over time, and manufacturing costs are tracking favorably. By comparison, the DG business outlook has more uncertainties due to the industry headwinds in Europe and elsewhere.

Given the velocity of those headwinds that have developed over the course of only a few short months, we have taken decisive action to quickly pivot our manufacturing capacity while maintaining strict austerity measures to ensure a healthy liquidity and safeguard our ability to invest in our priorities.

Most notably into Maxeon 7 as well as the preparations for our manufacturing project in the United States. Cash and working capital management have always been a high priority for Maxeon's finance organization, and we are re-doubling our efforts in this area.

We have reduced raw material orders and are moderating our IBC manufacturing volumes in line with inventory on hand and existing orders while rightsizing our manufacturing footprint and related resources. As a result, we expect significantly reduced inventory levels as we exit the year.

We have also negotiated more favorable payment terms with many of our suppliers. And as mentioned, our CapEx plan is substantially reduced by our pivot of the Maxeon 7 ramp. On the sales side, we are focusing on a narrow set of DG growth initiatives. First, expansion of our Maxeon branded US residential channel and leveraging the Solaria acquisition.

Second, further penetration of the commercial and industrial segment of the DG market in Europe and the United States. Third, scaling of our beyond the panel offerings. And finally, market introduction of Maxeon 7 in mid of next year.

With this context in mind, I'll now turn to our guidance for the fourth quarter and its implications on the full year guidance. We project fourth quarter shipments of between 610 and 650 megawatts. This includes shipments to SunPower as contractually agreed under the settlement agreement.

Also, the midpoint of this guidance includes continued growth in our US utility scale volume, while Europe is projected to be relatively flat sequentially with growth in C&I, offset by a decline in residential. We project fourth quarter revenues of $220 million to $260 million.

Has slight sequential increase at the midpoint, mainly due to higher shipments to SunPower. Incremental sales resulting from our Solaria acquisition will start having a net positive impact on sequential revenue, but carry a lower ASP than our previous IBC only pricing in the United States.

Non-GAAP gross loss is expected to be in the range of $5 million to $15 million, which includes certain idle charges and excess costs related to our IBC capacity pivot potential liquidated damages because of delivery delays in our utility scale as well as the risk of further inventory write-downs, adding up to approximately $25 million combined.

GAAP operating expenses are expected to be $113 million, plus or minus 4 million.

These include restructuring expenses totaling approximately $70 million for the write-down and accelerated depreciation of certain Maxeon 6 manufacturing assets charges for Maxeon 7 related purchase orders canceled in the beginning of the fourth quarter as well as severance costs for our previously announced reduction in force.

We originally expected that 15% of our global workforce would be affected, but with the decision to entirely phase out Maxeon 6 as well as other operational realignment we now expect that number to be approximately 22%. Non-GAAP operating expenses are expected to be $38 million plus or minus 2 million.

As an increase in US sales and marketing head count is offset by austerity measures. Note that the vast majority of the reduction in force initiated during the quarter impact our manufacturing operations and therefore, will have a disproportionate impact on cost versus OpEx.

Adjusted EBITDA in the fourth quarter is expected to be between negative 27 million and 37 million. The expected sequential decline is attributable to lower gross income on largely unchanged non-GAAP OpEx levels.

Fourth quarter capital expenditures are projected to be in the range of $10 million to $20 million, a majority of which is planned for our Maxeon 7 ramps and initially preparatory spending for our Albuquerque site.

While this initial CapEx for the US facility may be bridged by our balance sheet, the expectation is that we will secure the majority of capital needed to build the facility in the months ahead from the DOE and customer co-investments.

As implied by our 3Q results and 4Q guidance, we update our 2023 revenue guidance to $1.114 billion to $1.154 billion. Our adjusted EBITDA guidance to $4 million to $14 million and our annual CapEx guidance to $66 million to $76 million. With that, I'll turn the call back to Bill to summarize before we go to Q&A..

Thanks, Kai. Reducing our headcount this quarter was a painful but necessary decision in response to a suddenly increased DG demand profile. I'm pleased by the professionalism displayed by Maxeon's leadership team and the speed of our response.

Acceleration of Maxeon 7, rightsizing our IBC capacity settling our SunPower dispute and related channel expansion initiatives should get DG back on track by the second half of next year. Kai and his team are laser-focused on cash management and our operations growth continues to grind out cost reduction and yield improvements.

We expect success on these fronts will get us back to adjusted EBITDA profitability within 2024, and as we work toward deploying our Albuquerque cell and module factory. We appreciate your support. Now let's go to Q&A. Operator, please proceed..

Thank you. [Operator Instructions] Our first question comes from the line of Julian Dumoulin-Smith with Bank of America. Your line is open..

Hey, guys. It's actually Alex Vrabel on for Julian. Maybe if I may, I mean, you guys have made a lot of adjustments, I think, to kind of what your manufacturing footprint was versus what it will look like in 2024. Obviously, some onetime items causing a gross loss, which we alluded to previously.

And it sounds like the adjusted EBITDA losses might continue into the first half. I'm wondering if you can kind of just help us with the cadence that you guys are putting out there.

How big is this TOPCon line, for example, what's the phase down of Maxeon 6 look like as far as revenue contributions? And when do you expect to kind of be able to get back on track from an adjusted EBITDA lens in 2024 with all these moving pieces?.

Yes. Hi, Alex. Bill Mulligan. Yes, thanks for the question. I think we had incredibly strong demand in the first half of this year. And what's -- the silver lining of this downturn has given us an opportunity to pivot quickly to our new next-generation Maxeon 7 technology.

And we're going to do so in a much more cost-effective manner than what we had previously planned. I always think it's important to respond to an industry downturn like this very aggressively. Our outlook for Europe for next year is fairly sober. So we decided to bring the capacity down to what we view as a more balanced structure looking forward.

All of these actions together, we're doing a good job of keeping inventory in line, absent the SunPower dislocation, we actually would have reduced our inventory this quarter. So we're ahead of this. We're trying to get out in front of it. It's going to take a little time to recover.

But I think by the next half of -- the second half of next year, we should be in returning to profitability..

Yes. I would maybe -- this is Kai, Alex. I would maybe add for the inventories, you've seen kind of a record high number here at the end of the third quarter that, as Bill mentioned, was mostly because of the build-up of inventories for SunPower and also some other DG markets, but mostly SunPower really because we suspended shipments.

Now as you have seen, we've come to a settlement with SunPower, we're going to ship them 85 megawatts through February time frame. And frankly, all that stuff is in inventory as we speak. So there's also from a cash standpoint, not much more cash that we need to put into working capital is all going to come out and turn into cash.

So that's kind of where we are turning that part of the machine around. And in terms of the MAX 6 phase out that we alluded to. We are running at about half capacity right now.

We are using up the remaining materials, putting those into inventory and think that we're going to have enough Maxeon 6 inventory to bridge the transition to Maxeon 7 then from the mid of next year..

Got it. And maybe just a follow-up. As you guys think about sort of looking at your exposures as the way I'll frame it on MAX 7 into mid-'24, I think, is when you sort of talked about unveiling that product to the market. What I mean with the breakage with SunPower, what's sort of your sales strategy going forward.

Obviously, you guys have the Solaria channel, which seems like one opportunity, the Green Tech channel has already existed. But how are you thinking about sort of bringing that into market relative to kind of what your brand has been associated in the past versus what it will be going forward? Thanks.

Yes. Yes, thanks. Well, our IBC products are still absolutely the best panel on the market. And MAX 7 just really helps take that to a next level. And there's a large base of folks in the United States that know that and believe that and want that product. And so there's latent demand for this product out there.

I think this transition from SunPower allows us to control our own destiny. As we mentioned in the prepared remarks, having Vikas Desai and the Solaria team is a big plus for us. It's really jump-starting our build-out of our own channel here.

So we're really optimistic about that, bringing in a great product with a rebuilt team to a market that knows this product and appreciates this product and has historically very strong ASPs. So we feel good about it. It's going to take a little while to rebuild.

And -- but like I said, by the back half of next year, we should be in much stronger positions..

Awesome. Just a quick clarification, if I may. Just on the SunPower megawatts, is there any sort of cadence commentary you can give us? Otherwise, we'll take the rest offline..

I would say out of the 85, the majority, the 85, I think we have disclosed is going to run through February. The majority is going to be in this current fourth quarter..

Awesome. Thanks, guys. We'll take the rest offline..

Thank you. Please stand by for our next question. Our next question comes from the line of Brian Lee with Goldman Sachs and Company. Your line is open..

Hey, guys. Good afternoon. Thanks for taking the question. I had several. Maybe just to start off, I wanted to understand kind of the evolution of the SunPower dispute resolution here. So they got -- you got 85 megawatts of volume committed pricing fixed at the original terms.

But effectively, at least it sounds like you're allowing them to terminate the prior contracts that you had for '24 and '25.

But I guess I don't really hear what you guys are getting in exchange for letting them out of both contracts because they effectively, I don't think they're fulfilling volume commitments under the '23 deal, and then '24 and '25 are going away.

So I just -- I guess I'm struggling to understand how this -- I know you wanted to dispute behind you and you can move forward and strategically, this gives you better clarity heading into the next few years.

But is there anything I'm missing just it feels like this was a one way -- a bit of a one-sided resolution?.

Yes. Yes. Thanks, Brian. Well, the settlement does include warrants for us. So that's part of the upside for us. I come back to, though, that the primary reason was for us to be able to go out directly to these installers.

Really cutting out the middle man with SunPower in a challenged market like this, there's just really not a lot of room for stacked margins. So we're going to be able to offer installers better pricing and also achieve higher ASPs ourselves by eliminating the mark-up that SunPower has historically applied to our products.

So that is really our view is we wanted to be able to get out of this exclusive relationship, diversify our customer base. So it was really a strategic move. And we felt this was the right time to do so..

Okay. That makes sense. I guess as a follow-up to that, it's going to take a little bit of time, right, to recover, if you will. But in the medium term, it sounds like this is a good transition for you, Bill, as you mentioned, you're going to get higher ASPs, you cut the middleman out.

Presumably higher ASPs, I would assume that means higher margins for you as well. So in the interim, it does sound like margins are going to be pretty negatively impacted by underutilization on IBC relative to performance.

When do you think we see kind of margins get back to a point where you're significantly higher on IBC versus performance like we were probably seeing in the first half of this year when you were doing consolidated mid- to high teens gross margins..

Yes. We're absolutely excited about this for the long term, right? Just taking control of our destiny in the US market, which is becoming increasingly important to us. With the world's best product, we think, we're well positioned for the long haul. You're right that there's a little bit of a time between here and there.

It's the reason we're taking pretty dramatic action on rightsizing our capacity because we don't want underutilized capacity, right? So we're dealing with that now so that we can work through the problem quickly.

And so I think we've sort of struck the right balance there between capacity for growth and maintaining profitability and positive cash flow in the near term to the extent possible. so that we're strong coming in out of the second half next year..

Yes. And I would add that talking about the second half of next year, if you think about it, we're going to have a completely revamped product portfolio for the DG markets. In Europe, we're going to introduce Performance Series 7. So the latest incarnation of that product which the sales team is really excited about.

And also, we're going to have 100% of our IBC production on Maxeon 7 on the very latest technology. So all these moves are designed to bring us back to these margin profiles that we have enjoyed in the past.

And in the United States, we're also going to deploy Maxeon 7 and then we'll also have the new Solaria suite of products that we are importing into the United States. In addition to that, we are ramping up beyond the panel complementary offerings to really have a full suite of products for DG home owners.

So that's our strategy, and we think that's going to play out successfully after the transition in the first half and then coming to a full swing in the second half of next year..

Okay. Great. That's helpful. Last one for me and I'll pass it on. I think, Kai, you mentioned during your prepared remarks, you alluded to some customer co-investments as it relates to the New Mexico facility.

Can you maybe elaborate a little bit on that? What kind of discussions are you having what sort of the magnitude you could potentially expect if you see those come to fruition? And then time-wise, is it right ahead of construction? Or what sort of -- what should we be thinking about as we look to that potentially being a cash in source?.

Yes. It's something, Brian, that we have talked about pretty consistently actually as the main pillars of our financing of the US manufacturing side, which are the DOE loan and customer co-investment.

Customers are very, very excited about that new facility and we've been in touch with them and discussing all these things that you just mentioned around volumes, pricing timing terms and conditions and so on. We're not in a position right now where we would disclose the details.

But I think suffice it to say that these things have to come together, the DOE loan and the customer co-investment as the two main pillars of that financing and both of these items are on track..

Okay. Thanks, guys. Appreciate all the color..

Thanks, Brian..

Thank you. Please stand by for our next question. Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is open..

Yeah, thanks for taking the question. Let me shift gears and ask about Europe.

Given all the changes surrounding SunPower, is it fair to say that Europe will be more than half potentially a lot more than half of your sales in first half of '24 or even all of '24?.

No. I mean, keep in mind, the other huge segment for us is the US utility scale market. And right now, that's becoming the major part of our shipments. So that's going to be -- and growing very nicely right now and moving into double-digit gross margins next year. So that is a primary growth for us. Europe is still going to be very important.

And we expect that market is sort of flattish, though for this year and next year. We hope to expand share in various segments of that market. We always play in the premium segments or introducing our complete beyond the panel solution now with integrated storage and EV charging and panels and software and control software.

So we think that product is exciting and getting some traction. So -- but I think overall, given the very high levels of inventory in the European channel right now, we have to be somewhat conservative on what the outlook is there. It's -- there's a lot of inventory in the channel. So Europe is going to continue to be very important.

But the US is -- it continues to be our strongest market. And I think very quickly, we'll recover in US DG to the point where it's going to be comparable size or even bigger than Europe..

Okay. China will be, by far, the largest market of '23 and indeed, probably the only market where new build estimates have actually increased since the year started.

What's the latest on the JV in China? How is it benefiting from the domestic installation boom?.

Yes. Our JV partners are driving their own domestic consumption. We use the JV primarily or exclusively for offtake in our international markets. So I don't really want to comment too much on the domestic Chinese market. It's extremely competitive, let's just say, right now.

There's just not enough homes for all these panels worldwide based on the massive amount of production capacity that's out there. For us, the JV has been very successful because we're able to take off a residential format panel that has been a great product for us in Europe. We're just introducing our seventh generation performance line panel.

That's a TOPCon client-based panel that's really state-of-the-art. We expect that to have really strong competitiveness in Europe. So that's going to be one of our major growth products for Europe. So we're benefiting from the joint venture in that regard.

You're right, the majority of the volume from the joint venture does go into the domestic Chinese market. That helps us from the standpoint that they have scale and a very attractive cost structure which we benefit for our foreign offtake..

Last question, deliberately zooming out here. Module pricing, when we look at the benchmarks is down 30% over the last six months, deepest drop since the global financial crisis.

Do we have evidence to suggest whether this magnitude of price decline is starting to stimulate a bounce on the demand side, which sort of Econ 101 would suggest to be the case?.

Hey, Pavel, this is Peter. I would say not yet. There have been a few folks talking about that possibility. Keep in mind that module pricing particularly in the DG segment is a fraction of the total installed cost to the homeowner.

And in both in the Europe and the US, higher interest rates have -- are kind of working against lower module prices in terms of end user payback periods. So I'd say we haven't seen that -- I don't believe we're seeing that yet. On the utility sales side, there's a lag, of course, due to project cycle times and PPA cycle time.

So maybe we'll see that in the Rest of World PowerPoint business first. In the US, I think we're also seeing the effects of higher interest rates being a counterbalance to a potentially lower module costs on the spot market here in the near term..

All right. Thank you guys..

Long winded. No, not yet. I think..

Yep. Appreciate it..

Thanks..

Thanks. Please stand by for our next question. Our next question comes from the line of Philip Shen with ROTH MKM. Your line is open..

Hey, thanks for taking the questions. First one is on margins. So I know you're not providing guidance for '24, but you did make a commentary that you expect margins to recover until back half 2024.

So I was wondering if you might be able to quantify in any way what margins might look like in Q1 and 2? Should we expect it to be similar to current levels or a modest recovery in Q1 and 2 and then stronger performance in the back half of '24. Thanks..

Philip, this is Kai. I think for the question. Yes, we've we're not giving guidance yet. We -- as you said, we hinted to margin and EBITDA recovery in the second half, which is, of course, based on the new introductions that we're going to have of seventh generation performance series, the Maxeon 7 further progress also on our US utility scale.

I think we had something in our prepared remarks where we said that we expect further cost reductions there, efficiency improvement and ASP increases, which should get these margins up potentially into the double digits.

So that's going to be a positive thing, of course, working through inventories, of course, of some Maxeon 3 and Maxeon 6 inventory still in the first half of the year and probably also a little bit of a tail in the second half.

I would say in terms of the fourth quarter and how things are going to develop from there, you have seen in my prepared remarks that I was listing some nonrecurring items that are going to affect margins in the fourth quarter guidance. We expect those to be nonrecurring, and we are still working on some of those.

So we also expect that these things are going to get better as we reengineer our overall manufacturing footprint, take costs out, rightsize things. And then go into 2024 with better spring..

Okay. Thanks, Kai. On the flip side, let's talk about pricing, again, if we can for IBC. You're going to be controlling your own destiny, Bill, as you mentioned earlier, a number of times. And so that happens in March. And heading into March, I can imagine you're working on deals to try to secure agreements with different players.

And so I was wondering if you could share how those conversations might be going now? Is it a little bit premature to get a feel for how close you are in locking down volume and pricing? And then some of our checks suggest modules in the US resi channel may not clear until after Q2 of next year.

So high efficiency module pricing has already come down dramatically since the summer. What kind of pricing can you guys secure in a post SunPower relationship with your benchmark. Well, you guys are typically the benchmark.

But as you think of other peers that are trying to do what you guys do and their pricing is, I don't know, maybe $0.40, $0.50 for a lower volume, but maybe $0.40 plus with that level for higher volume. Are we going to need to see you guys pricing that kind of $0.50 range as we think about modeling ASPs for our IBC volume in '24? Thanks..

Right. Thanks, Phil. Yes. I think -- first of all, I want to just clarify that we're actually free to approach sent our dealers starting January 1. We have exclusivity on the Maxeon 6 product through the end of Q1, but we are able to sell Maxeon 3 and Maxeon 7 starting the first of the year. It is a little early to see how that's going.

We've obviously been very careful not to approach SunPower dealers while the contract is still in place. And that remains to be the case for a number of dealers, not all of the dealers, but a number of the dealers through the end of the year. We're just 6 weeks away or so, three of those weeks are holiday weeks.

So January 1 is going to be here very quickly, and we'll engage super quickly at that point in time. With regards to ASPs, we're still actually running quite healthy ASPs in Europe. We made the choice not to chase ASPs to the bottom. We've always had a premium product. We play in a premium segment.

We sort of feel like it's a fool's errand to just race to the bottom. So we prefer to take a little bit lower volume and maintain our pricing. We've done very well with that in Europe state. Pricing in the US is actually still today fairly substantially higher than what it is in Europe, even though it's lower than it has been for sure.

But again, with eliminating the mark-up that SunPower puts on our panels being able to access these dealers directly. We think we've got headroom there to really be competitive in the market in the current situation. And again, a lot of it is being able to sell the premium product story. I'm super excited to have Vikas Desai back.

Vikas and I worked together from 2005 to 2010 and he was the architect of this. He knows how to tell the story. We've got the best panels in the world. We just got to get out there and tell that story. And it's very effective, if you do it right. And we're going to be doing that. And again, I think we've got headroom. But we feel good about our pricing.

It's going to be higher than what the numbers you were throwing out for sure, substantially higher..

Great. Okay. Thanks. A couple more here, and then I'll pass it on. In the SunPower 8-K, there was some mention of effective components and some sharing or split between you and SunPower on the cost of those defective components.

Can you provide a little bit more color on what that is and maybe quantify what it might be and what the split might be between the two companies? And then shifting over, I think, in your release, you guys gave some detail on some $30 million payment security bond that SunPower sped up.

Can you provide a little bit of detail on the mechanics of that? And how that might work? Thanks..

Sure. Sure. So the issue you're alluding to is a warranty issue that is a long-standing warranty issue that goes back to the time of the spin. I think certainly beneficial for all parties to get that dispute behind us. So I think it's as simple as that. On the payment bond, maybe, Kai, you could give some color on that..

So Phil, it's just basically a payment security. Of course, we have experienced a time where SunPower has not paid us at the very beginning of this dispute that we have now settled I think both parties have an interest that we don't get into such a situation again.

So this payment bond is there to secure our deliveries because there are payment terms and that's just the security for making sure that we collect the money..

Got it. Okay. Thanks very much, guys. I'll pass it on..

Thank you..

Please stand by for our next question. Our next question comes from the line of Donovan Schafer with Northland Capital Markets. Your line is open.

Hey, guys. Thanks for taking the questions. So I first want to ask about an article that was in the Albuquerque Journal reporting it says you made a request to the City Council for a $2.4 billion revenue bond. And according to the article, this revenue bond itself, it's really about property tax abatement.

But this -- the $2.4 billion magnitude cited is a reference to -- per the request or filings that the idea is that, that is the dollar amount or the estimated dollar amount you would be investing within the city limits or whatever the city councils jurisdiction is.

So the question is, is $2.4 billion, is that -- is that a useful -- does that a utility as a reference point or a touch point in terms of expected cost? Or is there something about it that would sort of lead us to stray, whether it's they need -- there are only certain -- there's a subset of costs that they can you allowed to include in the estimate or something like that, anything where it would be meaningfully misleading to us.

And also, is that -- do you know if that's tied to the 3 gigawatt initial capacity or the 3.5 gigawatt..

Don, this is Peter. That's not a useful reference point. We're not planning to invest anywhere close to that amount of money, as we've said pretty consistently. The other thing we've said in our prepared remarks today was that we've settled on the 3.5 gigawatt capacity for the project..

Okay. That's -- thank you for clarifying. For the DOE for the time line, so in the release you guys gave for the DOE loan guarantee and the offtake agreements, saying your target is to have updates on both before the fourth quarter call.

Does that imply an interplay between these were maybe better than expected outcomes in the optic agreements could mean a lesser need on the DOE loan guarantee or vice versa? Or is it just the -- or is the timing of updates on both fronts just a coincidence in this case?.

Don, this is Peter again. The latter, the timing of the closure of the deli loan and of the going effective of the customer co-investment agreements would be contemporaneous..

Okay. And then my last question is we talked about Maxeon 7. You talked about it's not just the efficiency, but there's also positive attributes are in hot spots degradation improvements. So do you anticipate -- or maybe it's too soon to say, but do you see yourself extending the 40-year warranty that you, I think, offer on Maxeon 6 now to Maxeon 7.

Could that potentially end up being a warranty that goes beyond 40 years or so where would it be maybe less than that? And since it came up, the warranty dispute, the split between you guys and SunPower until in the response to Phil's question, can you talk if any of that has to do with having such a long warranty if it's related in a new way to providing warranties that go out for decades..

Yes. The warranty length is something we always look at. But I would say, at the moment, we're pretty happy with the 40-year warranty. We haven't seen a lot of customer demand for anything more than that. I think we always look at what we're reserving for warranty and as we have higher reliability products. There may be things we can do there.

But yes, I don't see any big changes in the warranty. This is more of a competitive attribute, right? Many of our competitors' products have problems with things like hotspots and degradation over time. Technology like HJT that some of our competitors are pursuing.

It's fundamentally kind of an unstable compound that's very sensitive to moisture degradation. We see that. We have a lot of field experience with all these different products. So again, we're always -- we make the world's best panel, and the attributes of that are really important. It's not just about efficiency. So we sell that and that's what we do.

But the warranty is one piece of the equation. We don't think there's a lot of juice in particular to extend that. But we talk about it and who knows what the future holds, we'll do what the market needs..

Donovan, this is Peter. Just your last question about the warranty dispute. That had nothing to do with the solar panel itself..

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

Thank you. Please standby for our next question. Our next question comes from the line of William Grippin with UBS. Please line is open..

Great. Thanks for the opportunity good to speak with you all here. My first question was just you talked earlier in the call about getting out there and telling your story on the modules and the premium position that you kind of hold in the market.

Could you address maybe what you're thinking in terms of costs for ramping your DG customer base or investments that might be needed to do that and kind of backfill this lost SunPower demand?.

Yes. Will, yes, we're trying to do it with a light touch approach. This is not an area where we feel like we have to make a huge amount of additional investment. We have the model working today in Europe. The basic plan is to replicate that model back here in the U.S.

And again, we have a lot of people at this company that have a lot of experience in developing and operating this kind of a channel. So we know how to do it efficiently, and that's our goal..

The only thing I would say, Will, is our -- if you look at our historical OpEx. It's -- I think it's fair to say that cost of running a channel sales organization is single-digit gross margin percentages. So it's not it's not a tremendously expensive thing to do, number one.

Number two, these are people that we already have on staff now, largely as a result of our Soleria acquisition. So in terms of incremental spend, there's some marketing expenses. But for the most part, I think we're there to do what we need to do in 2024..

Got it. I appreciate that. Just last one here. On the production changes, you talked in the pre-announcement about replacing Maxeon 3 capacity with Maxeon 7. And now you're talking about running down Maxeon 6.

So just as you transition here, is there going to be a gap in your DG module production as a result of the shift? Just really trying to understand the cadence and timing of these changes..

Yes. Well, as we mentioned in the remarks, we are going to prebuild some Maxeon 6 technology to bridge us through the transition. And again, this is an opportunistic time given with demand down to make a change like this and do a transition because you obviously can't continue to manufacture at 100%, while you're making a transition.

So we're going to prebuild some inventory, manage a fairly rapid transition then ramp back up, and that's our bridging strategy..

And I just want to add in spite of prebuilding that inventory, we still expect inventories to go down from here with the expected shipments to SunPower and also further shipments into DG channels. So we are kind of modulating it in a way that we continue to sell more than we are making for the time being in order to get closer to an equilibrium..

You perfectly anticipated my follow-up. Thank you. That's all I had..

Thanks, Will..

Please stand by for our next question. Our next question comes from the line of Andrew Percoco with Morgan Stanley. Your line is open..

Great. Thanks so much for taking the question. And maybe this is a follow-up. So I’ll ask it. But as we think about moving into next year, obviously, you're highlighting margin pressure could continue into early next year.

How are you thinking about the cadence of free cash flow? And what point would you consider the need to raise additional capital? Are there any liquidity thresholds or balance sheet metrics that you're hoping to maintain as you go through this transition period?.

Yes. Thank you, Andrew. So I think it has, of course, a lot to do with the things that we have been discussing.

You've seen the negative cash flow in this quarter, which had a lot to do with the growing imbalance between our manufacturing operations and sales that has developed during the third quarter, and that's, of course, then reflected in changes in working capital.

We have taken all these decisive actions on the working capital side on the side of our manufacturing footprint and so on and modulating the capacities in order to address, especially that.

So we think that with the current cash balance that we have and all these measures that we talked about during the call and in the prepared remarks, that we are in a good position to generate sufficient cash and maintain sufficient cash levels for our existing business..

Great. That's super helpful. The rest of my questions have been answered, so I'll take the rest offline. Thank you..

Thanks, Andrew..

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. This concludes today's conference call. Thank you for your participation. You may now disconnect..