Earnings Call Transcript - MAXN Q2 2023

Operator, Operator

Good day, everyone. Welcome to the Maxeon Solar Technologies Second Quarter 2023 Earnings Call. I would like to now turn the conference over to our host, Mr. Robert Lahey of Maxeon Solar Technologies. Please proceed.

Robert Lahey, Host

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.

Bill Mulligan, CEO

Thanks, Rob. Maxeon delivered a solid second quarter with revenue growth of 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 distributed generation 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 four quarters, our technology and operations teams have delivered continued improvement, expanding factory output by over three times 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 set 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. 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 distributed generation 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 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 and 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. distributed generation 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 with 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 has 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 distributed generation gross margins above 20% in Europe. Overall, in our distributed generation 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 commercial and industrial applications, both in the U.S. and in Europe. Due to the longer sales cycles associated with commercial and industrial 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 distributed generation 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, CFO

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 distributed generation demand. Revenues for the second quarter were $348 million, also below our guidance. We posted healthy sequential growth in U.S. distributed generation 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 the 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 distributed generation 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 distributed generation, 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 commercial and industrial 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 margins 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. distributed generation 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.

Bill Mulligan, CEO

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 three 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 contributions 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.

Operator, Operator

Our first question comes from Julien Dumoulin-Smith with Bank of America.

William Mulligan, CEO

Julien, are you there?

Julien Dumoulin-Smith, Analyst

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, CEO

Yes, Julien. It has been challenging in Europe. The conditions have worsened more quickly than many in the industry anticipated, mainly due to very high inventory levels in the commodity sector. While we are somewhat insulated because we have a different value proposition and sell directly to installers with a unique product, we are not entirely unaffected. This situation has added some pressure on us. We plan to respond in a couple of ways. There are still many opportunities for growth in Europe regarding market share. For instance, in Germany, which is the largest PV market in Europe, we have a relatively small share. Therefore, we are intensifying our sales and marketing efforts to increase our presence. The commercial and industrial sector represents a significant opportunity for us, as we have considerable experience in that area. Our high-performance products fit well in various specialized applications, such as building integrated PV in Carrefour or agricultural uses here in the U.S., where the ammonia resistance of our panels is advantageous. We have other markets we can explore. Nevertheless, we believe Europe continues to grow, albeit at a slower pace. We remain optimistic about the distributed generation market in the long term, even if we are currently facing some temporary setbacks.

Kai Strohbecke, CFO

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, Analyst

Excellent. If I could quickly shift to the question regarding the SunPower arrangement in 2023 and the uncertainties surrounding 2024. Could you provide some insight into that discussion and the potential reopener? Please elaborate on the current situation and future conversations, and explain how these two aspects might influence one another.

William Mulligan, CEO

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, Analyst

All right. But you're still expecting some amount of volumes next year. No change those conversations?

Kai Strohbecke, CFO

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

Philip Shen, Analyst

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, CEO

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, CFO

Yes. I would say that we are in contact with SunPower regarding cash flow and are open to collaborating with them. However, we need to keep an eye on our exposure and adjust as necessary. Overall, I believe we can find a resolution.

Philip Shen, Analyst

Got it. Okay. Is there a way to frame the potential exposure size? $29 million seems like a base level. Is there a cap on that number?

Kai Strohbecke, CFO

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, Analyst

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

Kai Strohbecke, CFO

At this time, we are presenting the facts and are in talks with SunPower to address the situation. Therefore, I cannot comment on what is under discussion. I believe we will reach a resolution. Additionally, you have seen our liquidity balance, and we are in a position to assist our customers to some extent.

William Mulligan, CEO

Yes. Phil, as indicated in our guidance, we anticipate Q4 will outperform Q3, showing some recovery. This is partly due to seasonality. Having witnessed several cycles before, I've noticed they can often correct rather quickly, though not always as rapidly as they decline, unfortunately. Nonetheless, I remain optimistic about the long-term outlook for this market. I believe we will observe a recovery in California, which remains a robust market. Although we're operating under the new NEM 3.0 regulations, I still think the value proposition stands strong. We can expect to see higher rates of storage attachment, and it will remain economically viable for end customers. It may take some time for the inventory surplus to diminish, but while predicting the future is challenging, I am confident in the strong long-term fundamentals of distributed generation.

Peter Aschenbrenner, CSO

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, Operator

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

Brian Lee, Analyst

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 to 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 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, CFO

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, Analyst

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, CEO

Yes, we believe we can get the SunPower relationship back on track and that the contracted shipments are included in our guidance. The current softness is mainly due to the overall market slowdown and inventory buildup in Europe. During these slowdowns in distributed generation, we appreciate being a diversified company with strong growth in the utility-scale sector. As I mentioned earlier, this sector is a key area for our future growth. We are excited about our new site in Albuquerque, New Mexico, and while it will take a few years before it significantly contributes, we are also working on increasing revenue from our existing markets in Malaysia and Mexicali for next year. These markets can be cyclical, so we think it's wise to have a mix between the currently sluggish distributed generation market and the rapidly growing U.S. utility-scale sector.

Brian Lee, Analyst

Understood. Maybe just two 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 are 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.

William Mulligan, CEO

Yes, I think your assumption about the contracted volumes is mostly accurate. Regarding the nature of the dispute, I can't provide much more information beyond what we mentioned in our prepared remarks, where we discussed the mutual breaches.

Brian Lee, Analyst

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, CEO

Yes. I think your assumption about the contracted volumes is mostly accurate. Regarding the nature of the dispute, I can't provide much more information beyond what was included in our prepared remarks, where the mutual breaches were outlined.

Kai Strohbecke, CFO

The guidance represents the contracted minimum, with no potential for additional volume or upside. It is simply the lowest amount outlined in the contract.

Andrew Percoco, Analyst

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 one or two 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, CEO

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 one customer for one 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, and the infrastructure to be able to upscale in this really strong market environment right now.

Peter Aschenbrenner, CSO

Sure. In terms of pricing for any additional supply and the baseline 3 gigawatt supply, our philosophy remains unchanged. We are considering pricing that reflects the value of local manufacturing at both the cell and module level. We have been clear that we believe this will significantly assist our customers in receiving the ITC bonus, which also adds value for us. Additionally, we plan to implement indexing to manage our cost inputs, ensuring that our margins are protected over time with a multi-year offtake agreement.

William Mulligan, CEO

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, Analyst

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, CEO

I'm looking out over a flat field that extends for about 5 miles to the mountains, and there's nothing there, so we have plenty of space. In all seriousness, we have options on nearby parcels that will allow us the flexibility to expand even more if we choose to. One likely trend in the U.S. is that components of the supply chain will become more localized, closer to where the demand is. I believe this is a probable outcome over time.

Graham Price, Analyst

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, CSO

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 cover a majority of the project cost and together with customer prepayments would be a large majority.

Graham Price, Analyst

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 Q3 and the full year? I know previously, IBC was expected to be about 1 gigawatt, but obviously, that's come down a bit.

Kai Strohbecke, CFO

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

Kevin Pollard, Analyst

I wanted to focus a bit more on the utility-scale and consider the expansion in the U.S. We have previously discussed a targeted gross margin in the low to mid-teens for what you were receiving from Mexico. Considering the expansion in the U.S., along with the $0.11 credit ITC value-add pricing and the higher costs domestically, what would be a reasonable expectation for the margin of those facilities?

Kai Strohbecke, CFO

Kevin, it's Kai. I believe you have summarized the situation regarding the margin quite effectively. The SEMA incentives under the IRA are designed to help close the cost gap between modules produced in Southeast Asia and those made in the United States, while also encouraging domestic manufacturing. Additionally, we anticipate being eligible for the ITC credit with our products, which will further enhance our benefits. Overall, we expect our long-term financial model margins for that segment of the business to exceed 15%. However, we haven’t specified how much above 15% we might go, as it's still a bit early to provide that detail on this call. But we do anticipate surpassing that threshold.

Kevin Pollard, Analyst

Okay, great. Regarding the DG side and the shift in focus to the commercial and industrial segment, does this have a similar margin profile to residential? Or is it generally considered to have lower margins? Can you provide some insights on that?

Kai Strohbecke, CFO

Yes, commercial and industrial typically have a slightly lower margin. However, we usually sell into the value segments of that market, such as carports and other specialty applications that can command a premium. Additionally, the panels used are different in format, being more commercial, which makes them less expensive to produce. So while the margin profile is lower, the sales tend to be in larger quantities, which reduces the operational expenses needed to move them through the channel.

Kevin Pollard, Analyst

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, CFO

If we look at the absolute numbers, Kevin, there are more shipments into the DG, and we expect margins on a quarter-on-quarter basis to be slightly stronger compared to the third quarter. This means we will benefit from both higher volume and improved margins, leading to increased EBITDA dollars for the quarter due to seasonal factors and the recovery of the Maxeon business.

Operator, Operator

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

Donovan Schafer, Analyst

I’d like to elaborate on the commercial and industrial aspects of the business because of the extensive range of products you offer. In the past, it was possible to make larger sales in the commercial and industrial sector through a direct sales force. You mentioned agrivoltaics and similar technologies. Additionally, I remember when SunPower was associated with the CVAR channel, which included commercial value-added resellers. I'm unclear whether SunPower still has this channel in the U.S. or if you now operate your own CVAR channel while also maintaining a direct commercial and industrial sales channel. Could you also clarify the situation in Europe? With the variety of products available, there are scenarios where IBC panels are ideal for limited roof space, whereas a larger retail store might opt for P-Series panels. You also have products like the Maxeon Air panel, which was designed to be lightweight enough for use on older rooftops in Europe without requiring building retrofitting. Given your diverse offerings, could you provide an update on the primary focus areas and where the biggest opportunities lie? Any insights would be appreciated.

Peter Aschenbrenner, CSO

Sure. This is Peter. I'll respond to that. CVAR was the organized channel approach that SunPower used for many years, and we actually have a similar channel in Europe. SunPower exited that business some time ago, but we've continued to serve commercial customers in Europe through a similar structure. Many of the installers handle both small and larger projects, while some focus mainly on small commercial installations, which can refer to projects up to 0.5 megawatts in roof size. There are certainly installations that would benefit from our technology, which offers higher efficiency, productivity, and shade tolerance. Additionally, some owners prefer a long-term energy delivery perspective rather than just focusing on immediate savings. The buying behavior in the commercial sector resembles that in residential markets, and we target the premium segment of this market. In the U.S., we have some established connections with EPC players that cater to the small and light commercial markets. There's also a solid demand for slightly larger behind-the-meter applications, particularly in situations with limited land or high balance of system costs, like in car parks, where our product fits well. Going forward, we plan to introduce Maxeon Air at higher volumes next year, targeting a specific segment. The C&I market is not new for us, but we are now placing more emphasis on it to offset some slack in the residential sector until that inventory is cleared.

William Mulligan, CEO

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. 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, Analyst

I have a second question for you, Bill. I saw a video clip of you from Intersolar Europe, and I might not remember everything accurately, so please correct me if I'm wrong. In the interview, you discussed plans to transition to topCON with the P-Series shingling. I'm wondering if you have any timeline for that or if it's too early to discuss. Would this require significant investments, or would it mainly involve using the same slicing and shingling equipment you currently have, with some additional validation or certification needed for the switch to topCON? Lastly, is this primarily about keeping pace with solar trends, or are there any unique technology or performance advantages? I understand that the current mono PERC cells provide benefits in durability and efficiency; would any of these improvements be enhanced if you transitioned to topCON?

William Mulligan, CEO

Yes, our new U.S. factory will utilize topCON technology, which is rapidly maturing within the industry. At this stage, the technology risk is minimal. However, as efficiency levels increase, producing high-efficiency cells becomes increasingly challenging. We understand that many companies in the topCON sector are still facing challenges with yields and costs. Our extensive experience in high-efficiency technology places us in a strong position to tackle these issues, especially as we develop very high-efficiency solar cell designs, where many of the challenges also align. We possess the technology solutions and expertise to potentially become a leading topCON manufacturer. Thus, our future strategy will likely revolve around topCON technology. The possibility of retrofitting some of our existing PERC capacity is still to be determined, but it remains a consideration, especially since that product has been performing well and we had previously outsourced production to the U.S.

Peter Aschenbrenner, CSO

Don, it's Peter. Moving forward, all of our technology for the performance line will be topCON.

William Mulligan, CEO

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

Philip Shen, Analyst

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, CEO

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 know 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.

Peter Aschenbrenner, CSO

Yes. On the timing, Phil, as Bill said, I think 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 it as well as the customer offtake commitments. And in terms of 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, CEO

Yes, it enables us to start making progress. We will conduct some engineering work and possibly make risk purchases with long lead times to maintain the schedule. However, we couldn't fully unlock everything until we reach the site.

Operator, Operator

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