Good day, Ladies and Gentlemen. Welcome to the Maxeon Solar Technologies' First Quarter 2021 Earnings Call. Currently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host Mr. Gary Dvorchak of The Blueshirt Group. Sir, you may begin.

Thank you, operator. Good day, everyone, and welcome to Maxeon's First Quarter 2021 Earnings Conference Call. With us today are Chief Executive Officer Jeff Waters; Chief Strategy Officer Peter Aschenbrenner; and Chief Financial Officer Kai Strohbecke. Let me cover a few housekeeping items before I turn the call over to Jeff. As a reminder, a replay of this call will be available later today on the investor relations page of Maxeon's website.

Thank you, Gary, and good day, everyone. I'll start by providing a business overview and covering recent accomplishments. I will then review our financial performance and outlook, and we will conclude with the Q&A. In our last earnings call, I explained our three pillars of profitable growth. These are our leading panel technology, our unique focused approach to utility scale business, and our strong global brand in DG channels. The entire company is focused on the execution of these pillars, and we're making exciting progress. First, on our leading panel technology, two days ago we unveiled Maxeon Air, a novel ultra-thin, ultra-light, and flexible panel technology that eliminates glass and aluminum framing. This innovation is disruptive in many respects, being nearly half the weight of conventional panels. Maxeon Air will enable solar deployment on low-load commercial rooftops that are not engineered to accept the weight of a conventional panel. We estimate this untapped market to be over four gigawatts just within Europe alone. Using a strong factory-applied polymer, the peeling-stick panels are easy to install and are therefore expected to significantly reduce installation time and cost. You can learn more on the Maxeon website. In addition to low-load commercial applications, we plan to extend Maxeon Air to other markets, such as residential rooftops and large-scale loading power plants in the future. We believe the competitive moat around Maxeon Air is substantial and that this form factor will not be easily replicated by our competitors, as it is predicated on the unique capabilities of our surprise IBC cell technology. Alongside superior efficiency, low power degradation, and leading reliability and durability, Maxeon IBC Solar cells also have the unique ability to share current and reverse bias while shaded, thus avoiding damaging or dangerously high temperatures. This feature is particularly important where panels are adhered directly to the rooftop.

Thank you, Jeff, and hello, everyone. I appreciate the kind words. I am excited to be part of this team of highly passionate and talented people who are driven by Maxeon's mission of powering positive change. I also look forward to meeting all of you, our analysts and shareholders, in the weeks ahead. Before we dive into the results, I'd like to discuss a few changes that we are making to the presentation of all the numbers. We want to provide a more consistent and meaningful picture of our operational performance to all investors. First, starting now, we will report adjusted EBITDA excluding the mark-to-market sale value re-measurement of our prepaid-forward and physical delivery-forward instruments. This gain or loss on those instruments will be excluded because it is not part of our core operating activities, nor do these gains or losses contribute to a meaningful evaluation of our current, past, or projected operating performance. Secondly, starting now, we will report non-GAAP gross profit and non-GAAP operating expenses by excluding stock-based compensation expenses and restructuring charges. We have always excluded stock-based compensation expenses and restructuring charges from adjusted EBITDA, so this change complements that practice. Adjusted EBITDA, non-GAAP gross profit, and non-GAAP operating expenses are how we evaluate operating performance internally. We believe that consistently presenting these measures will aid your understanding of our business. For more details, including a reconciliation of GAAP to non-GAAP financial measures, please refer to the section 'Reconciliation of Non-GAAP Financial Measures' in our Form 6K filed today. With that, let's now turn to our financial results. I will discuss the drivers and details of our first-quarter performance and then provide guidance. As expected, Q1 results tracked the outlook we provided about six weeks ago. The team at Maxeon executed well, and we are pleased with our accomplishments and progress in the first quarter. Q1 revenue of $165 million was slightly above our projection of $160 million. The 33% sequential revenue decline reflected expected seasonality in DG and the pause in the cords in large-scale projects. In addition, note that the fourth quarter of fiscal 2020 was a regular 14-week quarter, while Q1 of 2021 was a regular 13-week quarter. The 28% decrease in revenue versus last year’s Q1 is mostly a result of large-scale costs. The revenue declines, both sequentially and year-over-year, tracked shipments, but we were offset in Q1 by higher ASPs compared to the prior quarter. Overall ASP was up 16% sequentially, with IBC revenue per watt increasing to $0.53 from $0.49 sequentially, while performance line revenue per watt increased to $0.28 versus $0.25. The sequential increase in overall ASP resulted from a combination of factors, including a mix shift to a higher share of IBC sales driven by DG, as well as a favorable Euro to US Dollar exchange rate and some price increases as we pass on higher supply chain costs where possible.

Thanks, Kai. We have great confidence in a growing and increasingly profitable Maxeon. This confidence is predicated on three unique pillars of growth, each of which has the potential to transform our company. Over our first few quarters as a company, you're seeing tangible execution for each of these pillars that should provide confidence and excitement about our potential. For decades, we've had the world's leading panel technology, and now you see us extend that capability with both Maxeon 6, the world's highest efficiency panel available on the market, and with Maxeon Air, a disruptive solar technology that has the potential to change the way the world deploys solar. With our focused approach to the large-scale business, you're seeing us quickly establish traction in the U.S. market thanks to who we are as a company and the performance, quality, and reliability that comes with it. Those same attributes also position us well for a successful return to the large-scale market outside of the U.S. once the supply chain returns to normal. Lastly, with our strong brand and unique global DG channels, you're seeing us continue to outgrow the market in key regions like Europe. We're also making progress on our Beyond the Panel strategy as we begin monetizing our channel and brand by selling integrated micro-inverters with more system products to come. All of us at Maxeon are energized by the progress we're making and are focused on execution. A year from now, we will look like a very different company, and we will see our execution reflected in our top and bottom line. We thank you for coming along with us on this journey. Now let's go to the Q&A session. Operator, please proceed.

Thank you. Our first question comes from Brian Lee of Goldman Sachs. Your line is open.

Hey guys, thanks for the questions. I guess just first off on the gross margin trajectory, I know you're out from now; mix is going to help a lot, you get some scale, but in the interim it seems like you, alongside the rest of your peer group, are facing a lot of cost pressures. Margins are down-ticking, and everyone's trying to figure out what the bottom is. Is Q2 the bottom for you, or do you think we continue to sort of see margins stay at these depressed negative levels through the balance of the second half? Just trying to get a sense of what you think is a reasonable cadence in the margin recovery to be thinking about in our modeling and then I had a follow-up.

Sure, Brian. Thanks for the question. This is Jeff, and I'll provide some details, and then Kai can add more. Generally, we are closely monitoring the supply chain like everyone else. It's encouraging that we are beginning to see some stabilization in supplies and costs. For example, glass prices seem to have peaked and are now decreasing. We haven’t returned to pre-COVID price levels yet, but the trend is positive. The same applies to logistics, where we are observing improvements, though not yet back to last year's levels. We are all keeping an eye on how quickly things improve in the second half. We are cautiously optimistic that costs will improve during this time, which would benefit our margins. Additionally, we have new products coming, like Maxeon 6, which will start shipping in Q3 and Q4, helping our margins. We're always focused on cost reductions, so we’re actively working on that. Overall, from a supply chain perspective, we are cautiously optimistic. Kai, would you like to add anything?

Yes, I think that's right. So, of course, those headwinds that Jeff described are not really under our control. But there are also other things that work in our favor, such as seasonality and the initiatives we’re implementing internally with Maxeon 5 and 6 via AC panels in the DG business in general, which play to our advantage. So, of course, we also have the out-of-market polysilicon contract that can be a little bit lumpy at times regarding how it impacts our P&L. But again, I believe there's the possibility that we'll see margin improvement in the second half, likely more pronounced towards the end of that period, but cautiously optimistic, as Jeff said.

Okay, fair enough. And then, I guess the second question here just on the pause in large scale in China. You're talking about 2022 sort of getting back to some level of normalcy in that business. Can you maybe elaborate a bit on what you're seeing out there right now and why you don't expect that to maybe recover faster? Also, what gives you, whether it's visibility or orders you're seeing, what gives you the confidence that in 2022 you'll see that pause really ease up? Thanks, guys.

Sure, Brian. There are a few things to highlight here. We are starting to see pricing overseas and supply chain costs start to come closer to equilibrium. So, as we look into Q4, if you compare it to maybe a quarter ago, there was a significant mismatch in the overseas market outside of China regarding costs, and now we're seeing that come much closer. I would say it’s a dynamic situation that we continue to assess, but things are definitely trending in the right direction. You would expect that even if supply chain costs stay where they are, pricing will start to align. That’s why we're confident about 2022 — we're still waiting and seeing what happens as we get into 2021. We are involved in deals, and we are a very attractive supplier to most of the planet. So we have a significant pipeline and visibility into a lot of great opportunities outside of China. As we approach the end of ’21, we feel strongly optimistic about ‘22.

Thanks a lot.

Thank you. Our next question comes from Philip Shen of Roth Capital Partners. Your line is open.

Hi, everyone. Thanks for taking my questions. Congrats on the 1 Gigawatt P-Series deal in the U.S. Just curious if you guys increased pricing on your P-Series product recently as a result of the supply chain challenges, or did the market pricing increases kind of put your P-Series products in a more relatively competitive positioning, if that makes sense, making it a more natural and easier choice for customers to buy the P-Series here in North America. Thanks.

Yes, thank you, Phil. I’d say the pricing is strong, and we have a solid pipeline and strong demand in the U.S. again for our P-Series product that we just announced last month. The pricing we are seeing from customers is in line with the costs we’re experiencing. We spoke earlier about this U.S. P-Series initiative, and we expect gross margins for the whole plant to align with our 2023 target of 15%. There will be a gradual ramp-up over that time, but around the 2023 timeframe, we expect gross margins to be in the 15% range. We're still observing that, and if anything, I’d say that pricing in the U.S. has remained consistent with the price increases we've seen in the supply chain, so it’s calibrated quite nicely.

So fair to say the price increases in the U.S. did help the value proposition for P-Series near-term?

Yes, I suppose I don't know that I'll necessarily think about it in such terms. What we bring to the party as a company that has a plant right down in Mexicali, and as a U.S.-publicly listed company with a strong brand and reputation, is what’s driving our funnel. It's not just the rising costs that are originating from some of our Chinese competitors. It really reflects our unique standing in that space.

Okay, thanks. As for Maxeon Air, it seems like a very interesting unique product to what the unique value proposition was. I was wondering if you could share how you think that pricing and the cost structure kind of align relative to your other products. Perhaps if you can’t talk about absolute cents per watt, maybe you can speak about it on a relative basis?

Yes, it is a very exciting product. The selling point is that it significantly lowers installation costs. This will allow us to set favorable pricing on it and capture a portion of the value that comes from those lower installation costs. Therefore, we expect ASPs for the Maxeon Air product could be higher than what we're observing with similar products going into comparable markets using IBC technology. I think it's a fantastic product, and we expect that since we are targeting projects in low-load commercial rooftops, at least in the near-term, we have a product that is without competition. We believe this will enable us to sell at healthy ASPs with good profitability while contributing to the overall deployment of the product.

Great. Where do you expect to manufacture the Maxeon Air?

We'll start in France. One of the advantages of Maxeon Air is its ease of transport to any of our factories. We're borrowing significantly from our existing module assembly processes being conducted in France, which will cater to the European market initially, but we can flexibly integrate it into any of our production sites.

Great. From a bankability standpoint and encapsulant perspective, are you using traditional EVA or can you talk about how bankable the product is now? What kind of volume could we see sold in ‘21 as well as ’22?

Let me begin, and then I will ask Peter Aschenbrenner to provide a little more detail regarding EVA. We view Maxeon Air as having pilot production underway. We have already conducted tests across at least five different sites on different continents. In 2022, you will see the initial ramp of the product, and in 2023, that is when we expect a significant increase as Maxeon 7 cells become available. These cells offer even better performance than our current cells regarding reverse bias and heat generation in shaded situations. I anticipate a steeper ramp-up once we reach 2023. Peter, would you like to address the EVA aspect of Phil’s question?

Yes, Phil. This module does not use EVA encapsulant, as we do not use that in any of our products. We have been conducting extensive encapsulant development for over five years, and this non-glass product employs a new stack of materials that deviates from the conventional glass panels. In terms of bankability, we are working with various testing agencies and some membrane suppliers in Europe, and we feel confident about its bankability as we launch these initial pilot installations in the second half of this year.

Okay, great. Thank you both. I'll pass it on.

Thank you. Our next question comes from Pavel Molchanov of Raymond James. Your line is open.

Thanks for taking the question. As you know, we have seen spot prices of polysilicon double roughly year-to-date, now more than $20 a kilo. Yet, your above market cost on your contract is actually going up in Q2 versus Q1. Can you just explain how the math works?

Yes, Pavel, thanks. Let me quickly clarify that. The out-of-market polysilicon is really two components: one is the polysilicon we use in production, and the other is the ancillary sales of material that we aren't using internally. That can be the lumpy segment when looking for opportunities to sell; we're selling at a loss because the contract prices are locked in well above market levels. However, we do expect to see some of those sales come in during the second quarter, which explains the lumpiness that doesn't correspond directly to volumes or the shifting market prices. We are periodically reviewing the baseline for those market prices and adjusting what we classify as out-of-market.

Okay, understood. In Q1, there was a loss of $2 million on the non-controlling interest line. I assume that is from the joint venture in China. Given the premium module pricing that you talked about because of the demand in China recently, why would that JV be at a loss?

Yes, let me clarify that. The JV itself is currently in ramp mode. We initiated volume production at two gigawatts, which has scaled to five gigawatts, and we are also in the process of scaling up to eight gigawatts. So, you're seeing significant transition costs as the factory begins to expand. I believe this is a big part of what you're observing — we're on a solid trajectory within the JV to deliver a low-cost product. We have new derivatives of the P-Series coming out toward the end of this year, and coupled with the scale we’re achieving as we ramp up the factories, we expect to see improved results from the JV in future quarters. What's happening here is more transitional as we begin commercialization.

Got it. That’s helpful. And final question, this one is also on China. As you're well aware, there are ongoing discussions about the forced labor issue in Western China regarding polysilicon supply. Can you just walk us through your sourcing of polysilicon for the Chinese operations and the steps you're taking to avoid any linkage to forced labor concerns?

Yes. For the IBC products that we produce out of Malaysia and the Philippines from our fabs, we source all of that polysilicon from suppliers not located in the U.S. For the JV operation at HSPV, going back almost five years, we implemented a tracing protocol for polysilicon and the supply chain. This was key as we explored some of the low carbon footprint businesses that we were looking into from France and European markets. We have processes in place to trace that material, and we're now expanding this protocol within the JV factory to provide assurances to U.S. customers and even others beyond the U.S. for the product, including products coming from China and our joint venture with U.S. P-Series out of Mexicali and Malaysia. The wafers entering production there will follow the same traceability paths. Additionally, we have been engaged in extensive discussions with our direct suppliers and feel confident about our stance. As a company, we have signed the United Nations Global Compact, which includes a commitment to eradicating all forms of forced and compulsory labor. So, we believe we are in a strong position.

Okay, good to hear. Thank you, guys.

Thank you, Pavel.

Thank you. One moment, please. As there are no further questions, we will now conclude the call. Thank you all again. You may now disconnect.