Earnings Call Transcript
Maxeon Solar Technologies, Ltd. (MAXNQ)
Earnings Call Transcript - MAXN Q2 2021
Operator, Operator
Good day, and thank you for standby. Welcome to the Maxeon Solar Technologies’ Second Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Robert Lahey, Head of Investor Relations. Please go ahead.
Robert Lahey, Head of Investor Relations
Thank you, operator. Good day, everyone. Welcome to Maxeon’s second quarter 2021 earnings conference call. This is my first earnings call with Maxeon and I’m excited to be part of this exceptional team. With us today are Chief Executive Officer, Jeff Waters; 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 Jeff. 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 6K 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. 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. I also want to remind everyone of a few changes that we started last quarter in the presentation of our numbers. First, we report and guide adjusted EBITDA excluding the mark-to-market fair value re-measurement of our prepaid forward and physical delivery forward. Second, we report and guide non-GAAP gross profit and non-GAAP operating expenses by excluding stock-based compensation expenses and restructuring charges. Finally, we want to point out the comparisons to the second quarter of 2020 reflect a carve out of Maxeon’s results while it was still part of SunPower last year. We began operating as an independent company on August 27, 2020. With that, let me turn the call over to Maxeon’s CEO, Jeff Waters.
Jeff Waters, CEO
Thank you, Rob, and good day, everyone. I’ll start by giving a business overview and covering recent accomplishments. Kai will then review our financial performance and outlook, and we’ll conclude with Q&A. Before we get to the results, I have some comments on employee health. Malaysia is currently experiencing a difficult wave of the COVID-19 pandemic and proactive testing at our Malaysia facility has revealed an increasing number of positive cases. We have therefore temporarily paused production in line with government regulations to deep clean the facilities and focus on our highest priority, the health and safety of our employees. All other Maxeon facilities, including Mexico, France, and the Philippines are undergoing proactive testing and we’re pleased to report there were no indications of material positivity rates. I continue to be proud of the work done by our teams globally as we defend against this global pandemic. Moving to second quarter results, the quarter was very productive operationally and our push to drive growth and solidify our balance sheet saw results in line with guidance, with revenue of $176 million and strong bookings that put us in a solid position for growth in the second half of the year. Our distributed generation business in Europe performed especially well, posting record revenue for the quarter while laying the foundation for our beyond the panel strategy. We’re seeing strong growth in both our Maxeon and Performance products, and we believe that we will continue to grow our share in 2021 in nearly every European market we serve, with especially significant share growth in Italy, France and the Netherlands. European DG is important to us for many reasons, not the least of which is that it is among our most profitable markets. As supply chain costs normalize and we grow revenue beyond the panel, we believe that our European business will be a key driver of profitable growth. In addition to posting quarterly financial results consistent with our targets, the company also executed well on key operational initiatives. We posted strong, positive operating cash flows in the second quarter, coupled with a successful equity raise in April; we are firming up our balance sheet. With respect to key margin drivers, we completed the phase-out of our oldest solar cell technology. During the second quarter, we produced our last Maxeon 2 solar cell and commenced installation of Maxeon 6 equipment. Our new technology will deliver significantly higher margins than Maxeon 2. We are on schedule to ship our first panels later this year. This shift will also coincide with logistics savings from the optimization of our factory network, whereby by the end of the year, we will be servicing Asian and European Maxeon 3 and 6 customers from Malaysia rather than Mexico. The company is focused on our three strategic pillars for profitable growth that we believe will transform the company. Our execution on these three pillars will enable us to achieve our target business model within 2023 of at least 20% revenue growth, greater than 15% gross margin, and greater than 12% adjusted EBITDA. In our panel innovation pillar, the highlight this quarter was the progress on our Maxeon 7 cell development and the announcement of our disruptive new Maxeon Air technology platform. We’ve been manufacturing the solar industry’s highest efficiency, commercially available solar panels for over 15 years. That legacy is solidly intact today with Maxeon 5 and 6, and we expect Maxeon 7 will extend our module performance lead. We took successful steps this quarter to demonstrate critical Maxeon 7 performance milestones on the pilot line being built in our factory. As both residential and commercial consumers get more educated on sustainability and the benefits their panels are creating both locally and for the planet, they are increasingly thinking about panel lifetime. Namely, how long will those panels sustain their efficient power output and how long will they reliably and safely work on their rooftop? In this area, no other commercially produced technologies come close to our products' performance; both our Maxeon and Performance series offer outstanding longevity. Panel performance is about more than efficiency, and you can expect to hear more on this later this year. We also announced our new Maxeon Air technology, a super thin, super light panel that we believe will enable an annual market of around 4 gigawatts worth of commercial rooftops in Europe alone. We expect to begin shipping Maxeon Air in 2022. For our DG channel pillar, we’re seeing strong growth broadly. As a reminder, we have a unique downstream sales approach where we have 1,200 and growing channel partners that represent our technology and brand, and who have the ability to convey the value of our industry-best panels to their customers. These relationships, built on trust and developed over time, are founded on a decade-plus of investment. Our channel sits at the foundation of our beyond the panel strategy, as our partners are in a position to effectively communicate the value of new technologies like microinverters and storage. With the introduction of Performance line AC products in July, we target exiting the year with about 20% of our non-U.S. DG sales attributable to AC modules. Storage will be one of our next key areas of focus. Moving to our utility scale pillar, as a reminder, our approach is to pursue markets where we have a unique value proposition. As a U.S. publicly listed company with global operations, a trusted reputation for our business practices, and a deep commitment to ESG, we are an especially attractive partner to many developers across the globe. This led to our announcement of 1.8 gigawatts of production expansion for the U.S. market, where our corporate culture and experience is especially important. In the near term, our early success in winning Primergy’s 1 gigawatt Gemini power plant in Nevada has put us in a strong position to selectively fill out our remaining 2020 to available capacity and focus primarily on booking 2023 and beyond. Since our announcement in April regarding our P-Series capacity expansion supply to the U.S. market, we have seen sustained strong interest from utility-scale developers, which has led us to accelerate our planning for a second phase of capacity. We’re very encouraged by the recent U.S. legislative proposals with incentives that support domestic solar manufacturing. We believe that if enacted, they will provide a great platform for Maxeon to help the U.S. government achieve their goal to reestablish a domestic solar manufacturing value chain and do so deploying cutting-edge solar technology at critical scale. We recently submitted to the DOE's loan programs office, an application to support the deployment of a 3 gigawatt Performance Series solar cell and module factory. We intend to move forward with this project pending successful negotiation of the DOE loan guarantee and the passage of enabling legislation, including the Solar Energy Manufacturing for America Act and the American Jobs in Energy Manufacturing Act of 2021. The goal is to start solar panel production in the U.S. as early as 2023. Shipping outside of the U.S. in the rest of world utility-scale business, supply chain costs are still elevated. Customer pricing expectations are getting more in line with these higher costs. Given that, we expect to begin converting our sales pipeline into booked business in the near future. Combined with the continuing scale-up of our bifacial T5 Performance Series capacity, we’re increasingly confident in renewed shipment growth in our rest-of-world utility-scale business as we enter 2022. As a reminder, our JV structure enabled Maxeon to largely reallocate our volume to the Chinese market during the first half of 2021. We expect to provide an update regarding our utility-scale backlog in Q4. Before I turn the call to Kai, a quick mention about our ESG efforts. In June, we published our inaugural sustainability report, highlighting our initiatives, achievements, and plans related to key ESG themes. Our commitment to responsible manufacturing and supply chain sourcing goes back to the inception of SunPower. Now as Maxeon, we aim to establish our leadership and drive a holistic approach to sustainability in our industry. This report aligns our ambitions and long-term goals with the United Nations Global Compact, the world’s largest voluntary corporate sustainability initiative, which we joined in December of 2020. We believe we generate long-term value for our employees, customers, shareholders, and the communities where we operate by holding ourselves to a higher standard in how we conduct our business as highlighted in the sustainability report. I will turn the call over to Kai to review our financial performance.
Kai Strohbecke, CFO
Thank you, Jeff, and hello, everyone. I will discuss the drivers and details of our second-quarter performance and then provide guidance. As Jeff mentioned earlier, total revenue for the second quarter came in at $176 million, consistent with our guidance range of $165 million to $185 million. Our revenue was up 6% sequentially, mainly thanks to our exposure to the growing European DG markets. Total shipments for Q2 were 434 megawatts, in line with our guidance range of 415 to 475 megawatts. ASP tells most of these steady in the second quarter at $0.41 per watt on a blended basis, down $0.03 from the first quarter of 2021. The sequential ASP decline is mainly attributable to product mix, as P-Series products accounted for 47% of total shipments compared to 36% in the first quarter of 2021. Although our sales revenues for the second quarter were again dominated by the DG business, with utility scale accounting for only 11%, as a reminder, like in recent quarters, we intentionally reduced our exposure to utility scale, as industry price trends have not been supportive of our margin targets for that business. These trends started to change in the second quarter, but due to the long sales cycle, this did not affect our Q2 revenue. Gross loss came in at $2.8 million or negative 1.6% of sales, that is better than our guidance range of a $5 million to $15 million loss, mainly due to the reversal of a $5.5 million withholding tax provision from prior years that favorably affected our costs in the second quarter. Included in our cost of goods sold is a $15 million impact, or 8.5% of sales from our out-of-market polysilicon contract, $2.5 million of which was a loss on the sale of ancillary polysilicon in the market. Apart from those factors, the sequential decline in gross margin is due to a slight shift in product mix towards more P Series, as well as continued cost increases from industry-wide supply chain developments affecting prices of polysilicon, freight, aluminum frames, and copper. We estimate that the supply chain cost for our product sold in the second quarter was up by approximately $15 million, or 8.8% of Q2 2021 sales year-on-year, about one-third of it was due to freight cost inflation. Non-GAAP operating expenses, which adjusts our GAAP operating expenses for restructuring charges and stock compensation expenses, came in at $31 million, right at the midpoint of our guidance and compared to $35 million in Q1 2021. The sequential operating expense decline was expected. FTE efficiencies of having a largely Asia-based cost structure became visible, while transition costs related to the separation from SunPower continue to ramp up. Adjusted EBITDA for the second quarter was negative $27.3 million as compared to negative $25.7 million in Q1 2021 and better than our guidance range of negative $30 million to $40 million due in large part to the aforementioned $5.5 million tax reversal. GAAP net loss was $77 million as compared with $39 million in Q1 2021. The sequential decline was primarily driven by a $35 million swing in the mark-to-market peer value remeasurement of our prepaid forward, from an $8 million gain in the first quarter to a $27 million loss in Q2. Recall that this item closely relates to our stock price development. Over the past few quarters, every dollar of movement up or down in the price of a stock at a given balance sheet date versus the prior balance sheet date has caused an approximately $2.3 million remeasurement gain or loss, respectively. The second-quarter net loss also included restructuring charges of $5.2 million, in line with our guidance range of $5 million to $6 million. As mentioned in our last call, these charges, which are included in our GAAP operating expenses, are largely related to the closure of our module factory in Toulouse, France. Moving on to our balance sheet. We are pleased to have closed the quarter with $267 million of cash on hand and a net increase of $136 million sequentially, driven mainly by $170 million in net proceeds from our equity issue in April and $33 million in positive operating cash flow in the second quarter, offset by our CapEx spending during the quarter. The sequential improvement in operating cash flow was achieved through careful working capital management and supported by $45 million in customer prepayments. Inventories were up by $12 million and DIO increased three days, sequentially to $212 million and 105 days respectively at the end of the second quarter. With that, our inventory levels are well positioned to take advantage of the sales opportunities in the second half of the year. Second-quarter capital expenditures totaled $52 million, near the lower end of our guidance range of $50 million to $60 million, and we’re primarily funding the transition from our legacy Maxeon 2 technology to our higher margin Maxeon 6 technology. The purchase of cell and module equipment for our 1.8 gigawatts of P series capacity for the U.S. market, as well as our Maxeon 7 pilot line investment. Now I’d like to turn everyone’s attention to our outlook for the third quarter. As we leave the first half of 2021 in the rearview mirror and end the seasonally stronger second half of the year, we continue to face fierce headwinds from a supply chain cost perspective. As logistics costs have skyrocketed and there’s global disruption and polysilicon prices have plateaued at levels not experienced for years. At the same time, we are incurring expenses and opportunity costs for phasing out Maxeon 2 and transitioning to Maxeon 6, along with the transformation of our manufacturing network and due to COVID-related disruption. We are also taking action to manage the exposure from out-of-market polysilicon purchase contracts. These transient challenges, along with our investment and operational improvements, continue to drag down margins in the second half. But we are confident that the current disruptions will taper off and the improvements to our operations and our business, including technology upgrades, manufacturing footprint optimization, and prudent cash management, will position the company for profitable growth and be a catalyst for additional business opportunities once the situation has normalized. With that in mind, our guidance is as follows. Please also see a detailed breakdown of our guidance in our supplemental earnings slides. We project shipments in the range of 580 to 640 megawatts driven by seasonal tailwinds in our core DG market and the material uptake in our utility-scale business. Our expectation for increased shipments next quarter supports projected revenues in the range of $220 million to $240 million, or up 25% to 36% sequentially, reflecting ASPs that are holding relatively steady by product lines. At the midpoint, this revenue guidance reflects a year-on-year growth of 11% over the third quarter of 2020. Non-GAAP gross loss is expected to be in the $10 million to $20 million range, which includes charges related to our out-of-market polysilicon contracts in the range of $20 million to $23 million. This assumes a significantly increased sales volume of ancillary polysilicon compared to recent levels as our commitment for quarterly poly off-take volumes from our supplier is stepping up in the third quarter. We plan to take advantage of high pricing levels in the polysilicon market to opportunistically sell any excess poly that is not consumed in our value chain during the quarter. This way, we expect to realize attractive market prices for those poly sales and increase our cash flow, but also incur a loss on P&L as our contractual purchase prices are even higher. In that context, and to keep you abreast of our remaining purchase obligations as of the end of the second quarter, those stood at $191 million worth of polysilicon to be purchased to the end of 2022, for which we have made $74 million in prepayments already. In summary, we expect non-GAAP gross loss for Q3 to be larger than Q2 due to a higher out-of-market polysilicon charge, rising supply chain costs, increased costs related to our transformational activities, and the COVID-related shutdown. Also, unlike Q2, in Q3, we do not expect to experience another withholding tax reversal. However, we believe all other aspects of our business that drive profitability are on plan and otherwise provide a sequential improvement for gross loss, while we keep investing in the improvement of our business. Non-GAAP operating expenses are expected to be $31 million plus or minus $2 million. We see this operating expense level as our near-term baseline now that the spin-off activities are largely behind us. In future quarters, you can expect us to be disciplined on spending as a percentage of revenue, but on an absolute basis, you will also see continued OpEx investment in our future technology platforms, global channels, and focused approach to utility scale. Adjusted EBITDA is expected to be in the range of negative $30 million to $40 million. This is largely driven by the same factors that are affecting our non-GAAP gross loss. Further, we are projecting restructuring charges to be in the range of $3 million to $4 million for the continuous restructuring of our manufacturing network. Our capital expenditures are expected to be in the range of $55 million to $65 million for the third quarter. Based on our guided 2021 CapEx of $170 million and internal cash flow projections, we expect to maintain a strong liquidity position through the end of this year. And we will provide further information about 2022 CapEx plans and business outlook by the time of our Q4 2021 earnings call in early 2022. In conclusion, we are pleased with how our team performed this quarter, hitting or beating our planning guidance is a practice we intend to maintain. At the same time, we will continue to set ambitious targets for ourselves. Our sales team is energized by positive demand trends, especially in Europe. Utility scale global pricing trends are headed in the right direction for expected first half 2022 bookings. And in the U.S. utility scale, we are actively discussing exciting opportunities for potential made in America products from 2023. On the margin side, the investment we are making today in both the Mexican and performance line products should pay dividends for years to come. And of course, all of us at Maxeon are looking forward to the conclusion of our out-of-market polysilicon contract at the end of 2022. With that, I’ll turn the call back to Jeff to summarize before we go to Q&A.
Jeff Waters, CEO
Thanks, Kai. Exciting levels are growing here at Maxeon; our collective focus is on achieving increasingly ambitious quarterly targets while executing key operational initiatives to enhance our financial profile in 2022 and on our three strategic pillars to transform Maxeon in 2023 and beyond. Those pillars, again, are our leading panel innovation, our differentiated DG channel, and our focused utility scale approach. We’ll provide more detail about our progress as we execute this strategic plan and intend to hold Maxeon’s first-ever Capital Markets Day as an independent public company in the first half of 2022. Now let’s go to the Q&A session. Operator, please proceed.
Operator, Operator
Your first question comes from Pavel Molchanov with Raymond James. Your line is now open.
Pavel Molchanov, Analyst
Thanks for taking the question. Based on your guidance for Q3, it looks like, if you didn't have the out-of-market issue, your gross margin would have been in the 5% to 7% range. What would that number be in a more normalized logistics and just generally supply chain environment as well? In other words, how much of it hit or you taking from everything other than your out-of-market contract?
Jeff Waters, CEO
Thank you for the question, Pavel. And I’ll turn over to Kai for more detail, but as you pointed out, there are some significant headwinds that we believe to be temporary in Q3, like logistics that are having an impact. And Kai, I’ll turn it over to you for some more detail.
Kai Strohbecke, CFO
Yes, that’s right. And again, thanks for the question, Pavel. As we said for the second quarter, we provided in my remarks kind of the comparison compared to a year ago, which we consider a time when prices and supply chain costs were still more normalized. Costs went up year-on-year by about $15 million, as I said in the remarks. I would expect something similar probably in that range also for the third quarter. So $15 million is probably a good mark for that as well.
Pavel Molchanov, Analyst
Okay. That’s helpful. Obviously, a lot of manufacturing in the Philippines, where COVID is now yet again serious as it is throughout Southeast Asia. Are any of your fabs in the Philippines disrupted, running below capacity, or otherwise affected by the pandemic and by the social distancing restrictions?
Jeff Waters, CEO
Yes. So first, as I discussed in the prepared remarks, our thoughts and prayers go out to the people in Malaysia that are in particular being hit hard these days. Within the Philippines, as you said, there was also an increase in the infection rates. I would say, across all of our plants, and I would include Malaysia in that as well, we do have strong operating processes that have really helped us withstand the vast majority of the COVID surges over the course of the last year plus. And within the Philippines now, we’re not seeing any disruption to our operations. There were also not any local limitations on transportation that are creating issues, but we’ve also come up with plans and have processes in place to help mitigate any effects from that as well. So I’m very pleased to say that we have been able to keep our employees safe across all of our factories, but particularly in the Philippines, things are operating at full capacity. The same is true with our Mexico plants as well.
Pavel Molchanov, Analyst
Okay. And what are the capacity statistics in Malaysia at the moment? Sorry. So the capacity, just what utilization are you able to run at in Malaysia at the moment?
Jeff Waters, CEO
Sure. So with the current issues that are being faced across Malaysia, our plant is going to be shut down until August 19, and we will be reopening. We are in discussions to open up some specific smaller operations for critical path activities. But for now, it is closed until August 19. We expect, given the great track record that we have and also the very positive feedback we’ve gotten from local health authorities in Malaysia, we’re confident that we’ll be able to reopen. But I’d say more importantly, we’re confident in being able to keep our employees safe. The rise in Malaysia has really been countrywide, and we’re still confident across all our factories with the procedures we have in place that we haven’t, to date, in any of our plants seen any kind of in-plant spreading of COVID. But as you know, our employees don’t set our factories 24/7, and it’s really when they’re back home and they’re out and about that infections tend to occur. We do have good plans and processes in place to help mitigate any stopping of any employees coming in that are infected.
Pavel Molchanov, Analyst
Okay. And then lastly, just at a high level, have you had any revenue shortfall, revenue dislocation, because of the inability to produce on schedule for the customers’ needs?
Jeff Waters, CEO
We have not – and certainly if you look at the production stoppages that we have in Malaysia, we do have inventory that will help, especially in the near term, to make sure that our module factories are able to continue producing. There is a brief stoppage in cell production. We’ll continue to work to mitigate those effects. If there were to be any kind of a bubble, you might see it happen in Q4, but again, with the inventories that we have in place, I’m confident that we’ll be able to manage it. Based on current plans to reopen that factory on August 19, we should be in good shape.
Pavel Molchanov, Analyst
Thanks very much.
Jeff Waters, CEO
Thank you.
Operator, Operator
Your next question comes from the line of Julien Dumoulin-Smith with Bank of America Securities. Your line is now open.
Julien Dumoulin-Smith, Analyst
Thank you, operator. Good afternoon, team. Thanks for the opportunity. Appreciate it. Well done and holding the line here.
Jeff Waters, CEO
Thank you.
Julien Dumoulin-Smith, Analyst
Absolutely. So perhaps just if I can focus on the financing side and talk about this new angle around U.S. expansion, can you talk about some of the parameters of what it might cost you? What is the size of a DOE loan guarantee? And then ultimately a little bit of preempting some of the commentary looking forward to 2022, how do you think about financing? Any such expansion here organic cash flow or otherwise you can speak to it a little bit, maybe some of the parameters around the U.S. investment principally, I suppose that's more tangible.
Jeff Waters, CEO
Yes. I’ll cover the first part, and Kai certainly you can fill in with any details that you see fit. As we said, the plant expansion is for both a fab receiving 3 gigawatts of capacity. The DOE loan guarantee, first, I guess one thing to point out is that that program is fully funded, so it’s not awaiting any additional congressional approval. The current plan is that that would supply 80% of the capacity requirements or the CapEx requirements with the loan guarantee. And maybe with that, Kai, if you want to add any additional color to help with the question.
Kai Strohbecke, CFO
Yes, I think just overall we really believe that this project represents a unique opportunity for us for really, really strong value creation. One of the cornerstones is the loan program, as Jeff just mentioned, currently that provides 80% of the CapEx plus some other defined expenditures that can also be funded at an 80% rate from this loan program. Of course, that’s really important. We also believe that there are maybe four other state and local level incentives available that can go towards that initiative. Overall, we are really confident that with a strong backing from the U.S. government for this project and given a strong value proposition, we will be able to secure sufficient and appropriate funding for this. But we are not in a position right now to discuss the details, but we are really excited about this opportunity when it passes, and all the different items are in place.
Julien Dumoulin-Smith, Analyst
Just to clarify on that, can you tend to that a loan guarantee may or may not materialize? What about under the Ossoff Bill, would that suffice? Would that be adequate to make the economics work for you, if you will?
Jeff Waters, CEO
Yes. I think we would need to consider that situation. What I would say is that we have a very high level of confidence in the DOE loan guarantee; as we said, it is fully funded. We’ve been having a number of conversations with various constituents in the government and Washington, D.C. So I’d say we’re very confident that that DOE loan guarantee will come through. As we said in the prepared remarks, the Ossoff Bill is also very important; we’ll say as who went through and did the analysis, the incentives that they put in place are actually, you can tell that they did it in an educated way, and very much meet the needs and requirements that you would need to produce in the U.S. in a cost-competitive way. The combination of those two, combined with who we are as a company with the manufacturing capability that we have and the technology that we have, create a great opportunity for us to really help the administration and the government achieve their goals of producing very competitive, leading-edge, cost-effective solar in the U.S.
Julien Dumoulin-Smith, Analyst
I started to clarify this just real quickly, if you can. Are you still expecting to ship from Q2 2022 as initially planned? Are there signs of delay given the broader utility slippage as we see the late? Just wanted to throw that one in.
Jeff Waters, CEO
Everything is still absolutely to plan and that still will absolutely be coming out of Mexicali. So what we’re talking about with this 3-gigawatt expansion, that is an expansion over and above the 1.8 gigawatts that we announced last quarter coming out of Malaysia and Mexicali.
Operator, Operator
Thank you. Your next question comes from the line of Philip Shen with Roth Capital Partners. Your line is now open.
Philip Shen, Analyst
Hi, everyone. Thanks for taking my questions. First one is on P-Series. I think you said you might give a more detailed update later this year. But I was wondering if you can share how much volume you might expect for P-Series in Q3 and four. And then maybe just to give a little bit of color on how you’re thinking by 2022, given the input costs and just the pricing and so forth. Thanks.
Jeff Waters, CEO
Thank you, Phil. Yes. So as you know, we’ve been carefully tracking and monitoring the market in the rest of world utility scale market for the product that’s coming out of our Chinese power – Chinese P-Series production. What we have begun to see is getting more of an equilibrium between the pricing that’s out there in the rest of the world market and the current supply chain costs, and we’ve begun to see some more of that business become profitable. We’ve seen that with some additional booking of business that we’ve done within Q3 and some shipping in Q3. As we look into 2022, the large pipeline we have of opportunities is turning more favorable. I would say it’s a little early to predict fully, and we’re not quite prepared to give full insight into exactly how much of that business we expect to come back for us to be able to fulfill in 2022. But I say it’s definitely trending in the right direction. So our confidence is very much building for 2022 return to volume in the utility scale market.
Philip Shen, Analyst
Great. And can you – go ahead, Kai.
Kai Strohbecke, CFO
Sorry. So just to add for your question in terms of the growth of P-Series in the near term, so the growth that we have guided for the third quarter here sequentially really the vast majority of that is coming from the P-Series. As you know, all IBC capacity is capped at levels roughly around where we have been shipping. So most of the growth in the near term is going to come from P-Series from our joint venture, and then of course in 2022, also from the additional supply chain from Malaysia and Mexicali.
Philip Shen, Analyst
Great. Thank you for that. And as it relates to the shipping and logistics, what’s your sense as to when – sorry if I missed it, but what’s your sense as to when you think the shipping situation improves? I think this morning or overnight in Asia, you had another plant – sorry, ports in China shutdown. I think the port of Ningbo and it was due to COVID, so it seems like things are incrementally getting worse, but do you expect things to improve in Q1 or Q2, or is it more of a hope?
Jeff Waters, CEO
Yes, that’s a great question, Phil. I think everybody is trying to understand exactly what’s going on with logistics and forecasting. It is a very dynamic situation. I think it’s probably too tough for us to handicap at the moment. What I will say we are doing is really trying to attack logistics costs in ways that we can control. So one in particular, if I look at our IBC product today, we produce cells in Asia that we then ship into Mexico to produce into panels. Then we ship panels out of Mexico to the European and Asian markets. So we are, I would say, have a high level of exposure to transportation. This goes back to when we were part of SunPower; it was very much a U.S.-focused business. We’re in the process, as we’ve discussed now, of building up a module manufacturing facility in Malaysia. From there, we will then service for IBC the European and Asian markets to be able to really cut down on shipping and logistics, which it’s that kind of infrastructural change that we think will make us less sensitive to logistics as we have that in our today. The other thing that I would add is that it’s also one of the things that we like about the incentives that are going in place to help with the U.S. market. Certainly, being able to produce in-region is very good from a cycle time and logistics cost perspective, and from a working capital perspective, it’s good all around. So it’s one of the reasons why we’re aggressively pursuing a U.S. presence as well.
Philip Shen, Analyst
Great. I think you may have presented the Maxeon Air at the SNAC Conference this year in China. How was the reception there? And then can you talk about what the order book looks like for Maxeon Air? What are you seeing that might be promising?
Jeff Waters, CEO
Yes. First, it was very, very well received at SNAC. I think, when you explain Maxeon Air, I think when you actually see it in person, it’s a bit of a game changer. What’s been interesting as well is the reach out we’ve heard from customers, including roofers and others that traditionally have not been people that have reached out to us as customers. So there’s a lot of excitement in the channel globally for our current plans. We are going to be scaling up production, at least the initial production for 2022. That product really starts to hit the sweet spot when our Maxeon 7 cells are available. You can start to think of Max Air as building up in 2022 using the current cell technology, and in 2023, we will then get into more of a scale using Maxeon 7. Maxeon 7 has some of the heat and reliability improvements that it has, making it even better than what we currently have with IBC. It will help us do cost reductions and improve the performance of Maxeon Air in a way we think that will broaden its applicability and marketability. So I see some nominal revenues for that in 2022; it's really 2023 when you’ll start to see it scale.
Philip Shen, Analyst
Okay. Thanks for that. And as it relates to your AC panels, I think you’re targeting 20% of non-U.S. sales to be within a microinverter by the end of this year. I think you reaffirmed that in a slide. I was wondering if you might be able to give a little bit more color on how that’s going. What do you think that could look like in 2022? Maybe what kind of price premium that offering yet relative to just the module and what the future might hold for that segment?
Jeff Waters, CEO
Sure. Let me give some comments on that, Phil. Certainly, Kai, if you think I’ve left anything out, you can jump in. I’d say first, what we’ve talked about publicly is that we expect the penetration of AC panels for our business outside of the U.S. to continue to grow. As you said, we expect that to approach upwards to 20% by the time we exit 2021. We expect that to continue into 2022. So we would expect it to be above 20% in 2022. I’m sure we’ll get more specific as we get closer to 2022. In terms of how it’s going, I would say it’s a product that our channel has embraced. There are some markets that are better positioned for AC; France is a good example of that. There are other markets like Italy, where it’s a bit from a kind of a standing start position. We are going to start to see growth in Italy, especially as we get a certified system for the second half. We’ll start to see things grow in Italy. However, this is really where the value of our channel comes into play because there is an education that needs to happen with consumers as to the benefits of an AC panel, and that education process in particular across Europe, but also now spreading into Australia for us, is going very well, which is leading to the growth we’re seeing. What’s also adding, I would say, to the growth is that we’ve now expanded that AC panel from our Maxeon IBC panels to our Performance Series panels. That also helps us hit a different price level of customers as well. I would say so far so good. We’re very excited about it, and I think it pretends a lot of positive progress for us, especially as we get into 2022.
Philip Shen, Analyst
Great. And just one follow-up and I’ll pass it on. In terms of the AC panels in the countries that are most suitable for it, can you talk through the characteristics of those countries or markets that make it more attractive there? I’m guessing a high labor market, more rooftop. But can you comment on what percentage of what you’re seeing today is a rooftop? Is it a 100% rooftop or is it that there are some segments that actually want it that’s not rooftop? Thanks.
Jeff Waters, CEO
Thank you, Phil. So let me provide some upfront commentary, then I’ll have Peter Aschenbrenner maybe provide additional color on some of the market applicability. I’d say, there are markets – first of all, where we see the market for AC panels is in the rooftop segment. There are definitely markets like France that I would say have a more running start when it comes to AC panel adoption. We’ve seen more of the early uptake there. But Pete, I’ll hand it off to you to provide more color.
Peter Aschenbrenner, Chief Strategy Officer
Okay. Yes, I think that, Phil, the short answer is that all of our AC PV is on rooftop. We think that will continue to be the case for some time. You might get a system or two where that’s not the case, but by far the majority of systems are on the roof. The value proposition for the installer, which really drives an ACPV penetration, is around logistics, streamlining, design, flexibility, and ease and speed of installation. It’s something that when installers re-engineer their logistics and installation teams, it’s just a much simpler process for them, with fewer parts to worry about, quicker installation, etc. For the end user, I think they really like the granularity of the monitoring solution and not having to have big boxes on the wall with the string inverters. So those are the things that drive penetration so far.
Philip Shen, Analyst
Great. And sorry, one last question, is the margin profile for the AC panels healthily better than the corporate average? I’m just wondering if, as you grow the segment, that might be a source of margin improvement.
Jeff Waters, CEO
On a margin percentage basis, we’re seeing margins comparable. So if you have the DC panel versus the DC panel with the microinverter, the margin percentages are comparable. Put another way, we’re getting effectively the same margin on the microinverter as we are on the panel itself. So yes, it is good to create upside for us.
Philip Shen, Analyst
Okay. Thank you both. I’ll pass it on.
Jeff Waters, CEO
Thank you, Phil.
Operator, Operator
Your next question comes from the line of David Arcaro with Morgan Stanley. Your line is now open.
David Arcaro, Analyst
Hi. Thanks so much for taking my question. You had a pretty nice bump up in operating cash flow in the quarter. I was wondering if you could make any comments on how operating cash flow might look for the back half of the year. Any working capital nuances or just how do you expect operating cash flow to trend in the back half?
Jeff Waters, CEO
Great. Thank you for the question, David. Let me hand it off to Kai.
Kai Strohbecke, CFO
Yes, absolutely. Thanks, Dave. Yes, if you look at the operating cash flow, it's really good performance this quarter; $33 million positive. We really focused on that one, and we've also been helped by some prepayments that came in. We continue to focus for sure on operating cash flow. You have noticed that our inventory levels actually have gone up quarter-to-quarter. So the second-quarter number has not been helped by inventories. We expect actually over the back half of the year to bring our inventory levels down as we fuel the growth that we guided in terms of sales. I would expect some tailwind on the operating cash flow side from those inventory developments. As we said, we expect for the second half of the year to continue to be in a good and strong liquidity position, continue to be after the operating cash flow and also after making some CapEx as guided. So we feel pretty good about our liquidity position, maybe outlook for the back half of the year, and we continue to focus on operating cash flow.
David Arcaro, Analyst
Got it. Understood. That’s helpful. And then I was just wondering, you alluded to it earlier, but maybe just on the volumes that’ll be coming out of Mexicali next year. Have you made progress looking for further orders for 2022 as that comes online, beyond the big project obviously that you have starting to kick in 2022? And I guess, how is demand shaped up for locking in orders for next year for that plant specifically?
Jeff Waters, CEO
I would say demand has been very strong for 2022. As you know, we booked up a fair amount of the volume with the Primergy 1 gigawatt, which has led us to really securing some smaller deals to fill up the balance. Let’s say right now, our focus and attention is more on 2023. And there again, a lot of opportunities; it’s really more around us closing and looking for the most ideal opportunities that exist for us in 2023. But when we look at the demand for panels coming out of that factory, again, because of the technology, performance, who we are as a company, and the positioning we have in Mexicali, we are seeing great demand that has us really set for 2022. It’s really more around 2023 and filling up the book with the best business that we can.
David Arcaro, Analyst
Okay, great. Thanks so much.
Jeff Waters, CEO
Great, thank you.
Operator, Operator
And we have no further questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may now disconnect.