Earnings Call Transcript - MAXN Q2 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to Maxeon Solar Technologies' Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Robert Lahey of Maxeon Solar Technologies. Sir, you may begin.

Robert Lahey, Speaker

Thank you, operator. Good day, everyone, and welcome to Maxeon's second quarter 2022 earnings conference call. 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 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, Jeff Waters.

Jeff Waters, CEO

Thank you, Rob, and good day, everyone. Today, I'll provide a detailed update on Maxeon's ongoing transformation and our progress toward achievement of our long-term financial model, and Kai will review our financial performance and outlook, and we'll conclude with Q&A. First, I would like to acknowledge the recent passage of the Inflation Reduction Act and what it means to Maxeon. We couldn't be more pleased with the results of this legislation after more than a year of consideration in Washington. The investment tax credit extensions are a new long-term tailwind to both our utility scale and distributed generation (DG) businesses. As a reminder, we just reentered the U.S. utility scale business in 2021 and have already booked nearly 3.5 gigawatts per day. And on the DG side, we commenced shipping directly to commercial installers last quarter and are launching our residential channel later this year. We are also pleased to see increased support for electric vehicles, which should expand demand for more efficient and larger residential solar systems, a category where Maxeon has been a leader for decades. And last but not least, as strong supporters of U.S. domestic manufacturing, we were thrilled to see inclusion of the key provisions previously proposed under the Solar Energy Manufacturing for America Act, known as SEMA. We believe the direct pay incentives and potential for domestic content ITC bonuses provide a strong catalyst for U.S. solar manufacturing. Maxeon is very well positioned to implement the objectives of this legislation. We spent over a year preparing for exactly this scenario and are well down the road with respect to site selection, facility design, and financing. Our proposed 3-gigawatt facility has the potential to drive significant top and bottom line growth for Maxeon in 2025 and beyond. We have reignited our project team to full burn, and we'll share more details on this project at our upcoming Analyst Day. Now let's talk about Maxeon's second quarter. In addition to exceeding both volume and revenue guidance, we hit our adjusted EBITDA guidance range, reflecting what we believe will be the margin trough in our company transformation. We achieved several important strategic milestones. First, we began production on our second Maxeon 6 production line in Fab 3, largely completing the IBC technology refresh at that site and bringing our total IBC capacity to over one gigawatt for the first time in over a year. This increased supply will allow us to better feed our DG channels in Europe, Australia, and the U.S. where demand and average selling prices (ASPs) for these products are very strong. Secondly, we started volume shipments of our bifacial Performance Line panels into the U.S. from our Mexicali Modco, with the contracted backlog of over 3 gigawatts for deliveries extending out through 2024. We are solidly booked out in our U.S. utility scale business and are looking at opportunities for locking in longer-term supply contracts for 2025 and beyond. Finally, we announced further details around our Beyond the Panel roadmap, including introduction of our reserve battery storage system and a product roadmap, including our DRIVE EV charger offering and the SunPower One software platform. Since the end of the quarter, we strengthened our balance sheet with a $207 million convertible bond that will allow Maxeon to pursue deployment of Maxeon 7 and Fab 4 in our Ensenada Modco as well as make further investments into other products and offerings such as Performance Line and Beyond the Panel. In short, despite facing a challenging global environment over our two years of operating existence, Maxeon is delivering on the key elements of our transformation while focusing on a healthy balance sheet. We believe we are well-positioned to grow revenue and expand margin with our sights set clearly on gross margin breakeven by the end of 2022 and achievement of our long-term financial model within 2023. Now let's cover some second quarter execution details through the lens of our three pillars of strategic growth, beginning with the leading panel technology. While we're best known for our IBC technology, Maxeon and our HSPV joint venture are also pioneers and the leading players in the shingled cell technology space, a product we sell as our Performance Line. HSPV produces and sells multiple gigawatts of these modules within China, while Maxeon focuses primarily on the global DG market, where we sell Performance Line panels in roughly similar volumes to our IBC panels. In DG, both panel types are increasingly sold with integrated power electronics and soon with our newly introduced reserve battery storage product. As with our IBC technology, we're continuously improving our shingled cell products and are in the process of introducing our sixth generation Performance Line panels to our residential and commercial channels. P6 panels deliver higher performance at a lower cost and perhaps most importantly, with significantly increased supply capacity to address surging demand in Europe. The increased supply of P6 will allow us to reallocate some of our IBC supply toward higher ASP opportunities such as the residential and light commercial markets in the United States. Speaking of IBC, I'm happy to report that we've transitioned fully from Maxeon 5 to Maxeon 6 with a total Maxeon fixed capacity of approximately 500 megawatts. Our Maxeon 7 pilot line has achieved its mission and with sufficient liquidity now in place, we plan to begin the upgrade of Fab 4 and from Maxeon 3 to Maxeon 7 in the near future. Considering the favorable market conditions and our strengthened liquidity position, we are now also evaluating the option of moving to larger wafers during the conversion project; we will provide further details during our Analyst Day. Maxeon 7 enhances end customer benefits and enables higher ASPs relative to Maxeon 3. Growing adoption of electric vehicles and heat pumps is causing a fundamental change in household energy needs. The best way to add value to the homeowner is with more efficient panels and longer, more reliable operation. Moving to our differentiated DG channel, 2022 is shaping up as a really strong year for demand in our DG business. In Europe, we posted a fifth consecutive record quarter for shipments with announced price increases expected to materialize significantly in Q3 and Q4. Supply timing and logistics remain a challenge at the moment, but the team is executing well, hitting and exceeding delivery targets and end customer Net Promoter Score (NPS) scores. In Australia, the team also exceeded sales targets and executed a very well-attended and energizing installer roadshow, focused on the launch of our battery storage and end customer software products. AC module sales as a percentage of revenue climbed to the mid-30% range in the second quarter in Australia, behind only the Netherlands and France, where they now account for the majority. We are seeing a clear preference by end customers for complete systems provided under Maxeon's SunPower brand, which has over a decade of presence in most key markets and a long-standing reputation for top quality and customer service. We continue to see channel partner expansion in Mexico and are very pleased to report that with BBVA, the largest lender in Mexico, our installer partners are able to offer their customers financing terms unique to the Maxeon offering. We're also providing our partners with qualified lead opportunities from campaigns to BBVA's broad customer base. We believe these financial products and lead generation will be an important part of our long-term Beyond the Panel offering. Pulling back for a moment to the bigger picture in our DG business, we are now in our 17th year as the global solar panel technology leader, and we are the only solar panel manufacturer with a direct-to-installer model at scale. We believe the combination of these two factors provides us with a solid economic moat. Our differentiated products attract installers who understand the benefits of selling a premium product under a strong brand. Our channel provides us with a conduit to the end customer and the opportunity to influence how the product is sold and for how much. As a result, we're somewhat isolated from short-term solar market volatility and are well positioned to expand our Beyond the Panel offering. In 2023, our first full year with full Maxeon 6 production, we project that our DG business will contribute gross margins of more than 20% by year's end. Keep in mind that 2023 will still include significant legacy Maxeon 3 capacity and Beyond the Panel business in its early days. Conversion of Max 3 to Max 7 and continued expansion of our Beyond the Panel attach rates should provide further DG margin tailwinds in the following years. Our third strategic pillar is our focused utility scale effort. Our sales team here also continues to execute very well. We signed two additional contracts for over 1 gigawatt of deliveries in 2024. All contracts include partial prepayments, and we executed our first agreement using a new variable pricing structure designed to reduce our margin volatility. While the near-term ramp of Performance Line continues to be affected by elevated supply chain costs and the impact of COVID-related zero tolerance measures on our equipment suppliers in China, our long-term prospects for the U.S. large-scale business are strong, with a total backlog now standing at 3.4 gigawatts. Since announcing this initiative in April of last year, we've been continuously increasing our bookings volume and a steadily improving ASP. After more than a year of capital and operational expenditure investment, we now expect to nearly double our revenue run rate between early '22 and late '23. In closing, at the summary level, Maxeon is serving each based on differentiated competitive advantages and with the unique contributions toward increased shareholder value. Our engagement in the utility scale market has the potential to grow our revenue to unprecedented levels, even counting our legacy SunPower days, and to do so with healthy margins and a modest operational expenditure structure that facilitates attractive EBITDA generation. Our offerings for the DG markets are expected to generate 20% or higher gross margins, thanks to our highly differentiated panel technology and direct-to-installer channel, and it has the potential to evolve over time from a components business to a systems and platform model. I look forward to sharing more of our vision for serving these two end markets at our upcoming Analyst Day. With that, I'll turn the call over to Kai.

Kai Strohbecke, CFO

Thank you, Jeff, and hello, everyone. I will discuss the drivers and details of last quarter's performance and then provide guidance for the current quarter. Second quarter shipments were 521 megawatts, exceeding our guidance range and growing 7% sequentially, thanks to exceptional delivery efforts to European customers and the initial shipments into the U.S. utility scale market, which commenced commercial deliveries in late April. The majority of our European shipments this quarter were Performance Line products from our HSPV joint venture. We also saw an initial contribution from the new North American Performance Line facility. Total revenues exceeded our guidance range as well, and we're also up 7% on a sequential basis to $238 million, mainly as a result of increased Performance Line volume. Revenues benefited both sequentially and year-over-year from price increases in DG markets, including the United States, where this was the first full quarter of the new 2022 SunPower pricing. ASPs for DG grew slightly on module price increases in Europe as well as a growing amount of non-panel revenue. On a blended basis, overall ASPs were flat sequentially due to a higher mix of Performance Line shipments in both DG and utility scale. While IBC volumes are expected to grow in the near term as the conversion to 6 is completed, we expect to see a similar overall ASP trend going forward, with price increases and a higher mix of non-panel sales offset by a growing share of lower-priced Performance Line volumes. Non-GAAP gross loss came in at $24 million. Second quarter headwinds impacting gross loss included $14 million in ramp-related capacity underutilization charges and $7 million in lower cost or market provisions for quarter-end inventories of our Performance Line products for the U.S. market. Our gross margins continue to be affected by elevated supply chain costs, which we estimate to have had an adverse impact of $40 million year-over-year. Note these annual supply chain cost increases were partially offset by $30 million of price increases compared to the year-ago quarter. Also included in gross loss did a $3.3 million charge for out-of-market polysilicon prices. For several quarters now, polysilicon prices in the market have gotten ever closer to the fixed prices underlying our long-term take-or-pay contract, and we expect less significant if any out-of-market charges in the remaining two quarters of that contract than what we have experienced in the past. As at the end of the second quarter, our remaining obligations under that contract stood at $33 million, for which we have made $12.9 million in prepayments already. We also agreed to a $15.2 million settlement of our previously disclosed contract dispute with our polysilicon supplier over the alleged trigger of an inflationary price escalation clause. As a result, we will be making 6 equal monthly payments through January. Second quarter GAAP gross loss, which includes the charge to cost of goods sold for the settlement, was $39 million. Non-GAAP operating expense came in at $30 million, better than our guidance range. This reflects continued austerity efforts during our transformation. GAAP operating expenses were $36 million and included restructuring charges of $1.8 million, primarily related to the shutdown of our remaining module manufacturing facility in France. This is the final step in the post-spin cleanup of our manufacturing network. Adjusted EBITDA was negative $37 million, in line with our guidance. The sequential decrease is attributable to the previously mentioned margin factors. GAAP net loss for the second quarter was $88 million. Moving to our balance sheet. Cash levels, including restricted cash, decreased sequentially from $208 million to $180 million due to net loss, capital expenditures in the quarter, and increased inventory levels. Operating cash flows were negative $11 million, with net loss and inventory increases offset partially by careful management of other working capital items as well as $54 million in prepayments from our recent utility scale bookings. Days Inventory Outstanding (DIO) went from 92 days at the end of the first quarter to 89 days at the end of the second quarter. Capital expenditures in the second quarter were $18 million, somewhat lower than our guidance range due to careful cash management. As Jeff mentioned, we recently announced a $207 million private convertible bond issue to our shareholder, TZE. The note pays a 7.5% coupon, has a conversion price of $23.13 per share, a two-year hard provision, and a five-year maturity date. This transaction provides the funding for our Maxeon 7 conversion project, other ongoing and possible future capital investment projects, working capital, and general corporate purposes. This transaction also highlights TZE's continued commitment to and confidence in Maxeon's success. Now let's turn our attention to the outlook for the third quarter. We expect that our P&L will improve sequentially as the balance of headwinds and tailwinds is expected to turn in our favor, leaving the second quarter to be the margin trough as previously guided. Q3 will be the first quarter where we ship significant volumes to U.S. utility scale customers, albeit from cell and module capacities that are still in ramp mode. The top-line impact will be significant going forward, but the margin contribution will lag until 2023 when the factories are fully ramped, and we complete deliveries on early 2021 bookings that were priced below current levels. As Jeff mentioned, we successfully negotiated a variable pricing mechanism on our most recent utility scale bookings and expect that this will derisk our utility scale margin projections in the future. Positive contributions towards gross income in the third quarter will include higher IBC volumes from the Maxeon 6 ramp and price increases on DG products in various EU countries. We expect to deliver top-line growth and margin expansion this quarter and project this trend to largely continue towards achievement of our long-term financial model within 2023. With that in mind, our third quarter guidance is as follows. Please also see a detailed guidance breakdown on Slide 9 in our supplemental earnings slides. We project shipments in the range of 580 to 620 megawatts, with sequential growth driven by an increase in both DG and utility scale shipments. Revenue for the third quarter is expected to be in the range of $270 million to $290 million. Non-GAAP gross loss is projected to be in the range of $10 million to $20 million, which includes an approximately $1 million impact from our out-of-market polysilicon contract. The sequential improvement is driven by a higher mix of Maxeon 6, further ASP increases in DG markets to offset historical unfavorable supply chain cost development and improved output from the initial U.S. utility scale lines. Although we expect to again incur incremental provisions on our Performance Line inventories for the U.S. Non-GAAP operating expenses are expected to be $35 million, plus or minus $1 million. We will continue to manage our operating expenses very carefully while investing in initiatives that will drive significant long-term value for the company. As a percentage of revenue, we expect operating expenses to decrease considerably for the balance of 2022 and in 2023 as capacity ramps and shipment volumes increase. Adjusted EBITDA is expected to be in the range of negative $27 million to negative $37 million. Third quarter capital expenditures are projected to be in the range of $21 million to $25 million.

Jeff Waters, CEO

A few final comments regarding our longer-term outlook. In our discussions, people regularly ask us for details on the financial turnaround required for us to reach our stated target of 12% adjusted EBITDA within 2023. We understand the interest, given it implies a plan to go from negative to positive EBITDA and a year-over-year improvement of more than $100 million. Let me shed some light on the topic. With Maxeon 2 and 5 at end of life, the DG business is gross margin positive today, led by robust Maxeon 6 ASP. We target a profitability of our DG business that we believe will drive Maxeon to an overall breakeven gross margin level by the fourth quarter of this year. Further, we expect margin expansion to occur in early 2023 with Maxeon 6 fully ramped growth in Beyond the Panel and contributions from our new U.S. residential channel business. In 2023, we expect our U.S. utilities scale capacity to become fully utilized, improving our cost levels. In the back half of the year, this business is scheduled to start shipping the higher ASP bookings on 2022. With that, I'll turn the call back to Kai to summarize before we go to Q&A.

Kai Strohbecke, CFO

Thank you, Jeff. Next week, Maxeon will be celebrating its second birthday, and what amazing two years it's been: two years of continuous and significant investment for the future. We've upgraded the majority of our products. We've closed unprofitable plants, ramped new capacity, and progressed to fully utilized factories. We're within months about lasting a decade-plus out-of-market polysilicon contract, and we're doing all of this during a tumultuous industry environment. We've been consistent over the last two years in saying that by mid-2022, we'll have the majority of the foundation set for a financially successful Maxeon in 2023—one poised to reach our target model of over 20% revenue growth with EBITDA margins of 12% or greater. With a few more quarters to go in the turnaround, our recently bolstered balance sheet, and with the future that we expect to include U.S. manufacturing, it continues to be an exciting time to be at Maxeon. We appreciate you all joining us on this journey. Now let's go to the Q&A session. Operator, please proceed.

Operator, Operator

Thank you. Our first question comes from the line of Julien Dumoulin-Smith with Bank of America.

Unidentified Analyst, Analyst

Hey, it's Alex on for Julien. Congrats on the quarter here. I wanted to ask a little bit more, and obviously, I think one of the headlines people are watching closely here around this expansion effort that you guys target in the U.S., if you could give any clarity as far as the timing that you might expect as well as the credits that you would think that you're eligible for? I know that there's a lot to unpack between some PTCs as well as possible ITCs for some of these solar panel manufacturing efforts. Can you clarify on that timing as well as the credit availability? Thanks.

Jeff Waters, CEO

Sure. Thank you, Alex. This is Jeff. So maybe just first to describe it at a higher level, we feel we're in an excellent position to help drive the reemergence and resurgence of the U.S. solar supply chain. We are right now, as we speak, scaling up close to 2 gigawatts of capacity out of Malaysia and Mexicali. That's really giving our teams the learning curve and the capability to do the next generation of scale up for us, which we're expecting here to be in the U.S. market. We've also, through this process, established a really proven U.S.-friendly supply chain. We're shipping dozens of shipments a week into the U.S. so we feel real confident with that. We've also got tremendous demand because of who we are as a company and the supply chain. So when we think about this next phase, part of this is the DOE application. We've got a strong application that we feel fits the administration's goals for the program, so we have good confidence there. We expect about six months for the loan guarantee to come through. Once that concludes, about two years from that to first production. So you can think about early 2025 for us to begin producing. When we think about the credits, our expectation would be that we would meet all the requirements for both the fab—the cell fab credit of $0.04 per watt and also the Modco credit of $0.07 per watt. Our expectation is that we're kind of piecing it through. We will expect the details to get finalized here over the coming months. Obviously, our goal will be to do everything we can to meet those domestic requirements and help maximize the ITC adder.

Unidentified Analyst, Analyst

Great. And my follow-on, if we can sort of, I guess, focus back a little bit to the near term. As far as the margin guide for Q3, I know you mentioned $40 million of year-over-year headwinds related to supply chain. And I think you mentioned last quarter, you were trying to sort of reprice some of your contracts, particularly at the utility scale level to account for some of that. Can you give us just a little more color on the moving pieces there as far as how successful your efforts were on repricing, what the headwinds you're seeing today are and then how we expect that to evolve into the end of the year and the adjusted EBITDA guidance that you provided for '23?

Jeff Waters, CEO

Okay. So I'll speak first on some of the repricing efforts, and then I'll hand it over to Kai to provide some more details on some of the other contributors to margin improvement. First, I would say that we've been very happy with the customers that we've taken on with our utility scale business within the U.S. We have been able to secure a handful of very strong companies with great leaders and really have built up some good collaborative relationships. We are working through some of the contracts; I would say I'm optimistic. We haven't guaranteed anything, nor have we put anything out that's going to be able to restructure some of those contracts in a way that will be favorable to us. I’d say good progress there, but nothing yet to report. Kai, do you want to expand on kind of more broadly on margin improvement?

Kai Strohbecke, CFO

Yeah, absolutely. Thank you, Jeff. Alex, this is Kai. In terms of the margin improvement, we put a few markers out there. Obviously, we said that on the DG side of the business, we are already gross margin positive today. We also mentioned that we are targeting an overall gross margin breakeven for Maxeon in the fourth quarter. So that’s kind of the first marker in the ground and the third quarter margin guidance is really kind of a waypoint to go there. As we think about that improvement, there's further improvement on the DG side expected. We are expecting higher—we have been increasing prices; so we’re expecting higher prices to report next quarter on that side. We have higher volumes on Maxeon 6. But also on the power plant side, as we ramp that facility, we expect reduced idle costs. We are still expecting some lower of cost or market provisions because of the low prices at which we are currently shipping those products. However, all those things should be improving over time. As we go into 2023, we see further tailwinds there on the U.S. power plant side as we ship the higher price later bookings for capacity, as well as starting to fully utilize that capacity over time in 2023. On the DG side, we expect more shipping also from HSPV P-Series into the various DG markets, which are really, really strong right now in the foreseeable future. Also, we expect our further entry into the DG space in the United States, which we are starting to gain a foothold in and expanding from there.

Unidentified Analyst, Analyst

Thanks, team. I'll take the rest offline.

Operator, Operator

Thank you. Our next question comes from the line of Donovan Schafer with Northland Capital Markets. Your line is open.

Donovan Schafer, Analyst

Hi, guys. Thanks for taking the questions. I just want to follow up on Alex's question regarding those fixed price contracts for the power plant modules. I'm curious about the timeline. If those contracts were not renegotiated into a more favorable structure, how long would the negative impact occur? Also, at what point do those contracts expire and when would they roll off?

Jeff Waters, CEO

Sure. Thanks, Donovan. Yeah, as we've said in the past, these were the very initial contracts that we took for the business. These would have been priced back in early 2021 when it was a very different supply chain market with different expectations for 2022 and '23. The lower ASP contracts would be done within 2023. We’ve also been getting pricing that is more in line with where the market is today. More recently, we've been signing contracts that are cost indexed. So we've evolved, and I think when you think about 2024 and beyond, you'll see much less margin exposure than maybe we had with some of those initial contracts.

Donovan Schafer, Analyst

That’s great. I also want to ask, regarding the ASP uplift from Maxeon 5 to Maxeon 6. Can you quantify the incremental premium—in cents per watt? Or what their gross margin improvement would be on a panel-to-panel, apples-to-apples basis?

Jeff Waters, CEO

Sure. The way to think about Maxeon 5 and Maxeon 6 is essentially the same technology with a minor bump up in wafer size. The overall performance of the panels and the specs are similar. It's more about cost reduction than direct ASP uplift. As for Maxeon 6 and Maxeon 3, both provide good efficiency and competitive advantages. Maxeon 7 will notably improve performance through enhanced efficiencies and features, but Maxeon 6 primarily focuses on cost efficiencies and with Max 7 aiming for performance and longevity.

Donovan Schafer, Analyst

Okay. Thanks. I also wanted to ask about the best ever efficiencies coming off the pilot line for Maxeon 7. Are you ready to share those numbers yet, or will this be discussed at Analyst Day? What is the certification timeline and how do you confirm these efficiencies?

Jeff Waters, CEO

At the Analyst Day, we will provide more insight into Maxeons. When it comes to third-party verification, we talk about efficiencies achieved in production volumes, not just in labs. We're achieving record efficiencies and expect to share more at the Analyst Day.

Donovan Schafer, Analyst

Thank you.

Jeff Waters, CEO

Sure. Okay, thanks, Donovan.

Operator, Operator

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

Philip Shen, Analyst

Hi, everyone. Thanks for taking my questions. First one is a follow up on the next leg of capacity expansion. I think, Jeff, you mentioned that the 3-gigawatts of solar modules could come online early 2025. I wanted to explore that a bit more—could it come online sooner? Typically, module lines take about a year to bring online. What do you foresee in terms of the timing and capacity of that Fab 4 once the transition occurs?

Jeff Waters, CEO

We're not ready to commit to anything sooner than what we stated around early '25 for the beginning of production. We will be constructing a new facility to house the cell fab and modco, and that adds to the timeline. For additional capacity, we are not ready to announce more than what we've already stated, but we will be evaluating customer demand and progress before adapting our plans.

Philip Shen, Analyst

Thanks, Jeff. Shifting to your DG business. You announced a partnership with CD recently. When do you expect those volumes to ramp up? How much volume do you think CD could have in 2023 in terms of megawatts? Are there other distributors that you may partner with in the near term?

Jeff Waters, CEO

With CD, we start shipments in January 2023. They're the largest in the U.S., and we’re excited about this relationship as it opens up a larger segment of the market previously served by other manufacturers. We're looking at redistributing supply from lower-margin markets to satisfy demand in the U.S., so expect to see more IBC volume in the U.S. residential space.

Philip Shen, Analyst

Great, thanks for that detail. Regarding liquidity: Congratulations on the convertible raise. How do you view the need for more funding moving forward? Would that be driven by the U.S. expansion decision? What percentage of the 7.5% coupon would you expect to pay in cash every six months?

Jeff Waters, CEO

We’re happy with the $207 million convertible with TZE. It’s a sign of confidence in us and helps bolster our balance sheet. However, this won’t fully cover the U.S. expansion, and we anticipate needing additional funding primarily from the DOE loan and customer arrangements. As for the coupon, 3.5% requires cash payment; we'll make decisions on the remaining part closer to payment times, but you can expect to pencil in cash for planning purposes.

Kai Strohbecke, CFO

To add to Jeff's point: The convertible raises liquidity for the Max 3 to Max 7 transition and supports other capital projects we have. Additional funds will be evaluated as further growth opportunities arise in a growth-focused market.

Philip Shen, Analyst

Great. Thanks for the color, Kai and Jeff.

Jeff Waters, CEO

Thanks, Phil.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi, thanks for taking the question. This is Grace on for Brian. I guess my first question—just to follow up on margins. I appreciate all the color in the prepared remarks and the Q&A. Just trying to bridge the gap from negative gross margin of 5% to the 15% target in '23. Can you provide some detailed drivers of the progress particularly from U.S. utility scale shipments? What ramp should we expect in '23?

Jeff Waters, CEO

Kai, I’ll hand that over to you.

Kai Strohbecke, CFO

Overall, we expressed that we expect more than 20% margin on the DG side by next year, while working to achieve overall gross margin breakeven for Maxeon by Q4. We aim for detailed discussions on these drivers at Analyst Day. The power plant side is currently under pressure, but we expect improvements through pricing adjustments and higher volumes.

Unidentified Analyst, Analyst

Understood. On capacity expansion, besides the 3-gigawatts in the U.S. for your Performance Line, I think you talked about a potential of 2 to 3 gigawatts of capacity expansion for your IBC line. Now with IRA, how will that change your plans regarding timing and size?

Jeff Waters, CEO

Our priority remains on converting Maxeon 3 to Maxeon 7. For additional capacity above that, we recognize potential opportunities created by the IRA but aren't prepared to make announcements today.

Philip Shen, Analyst

Thanks, Jeff. Finally, with Asia-Pacific demand down this quarter, is the decrease due to lack of demand or shifts in allocation due to stronger opportunities elsewhere?

Jeff Waters, CEO

It's a mix of both. We are reallocating demand to higher-margin markets, which has impacted Asia-Pacific. Additionally, we have a fluctuating utility scale business there, and our output is being prioritized for more profitable markets like Europe and the U.S.

Pavel Molchanov, Analyst

One last question on the Chinese joint venture. Your share was negative $4 million this quarter. Can you provide insight on when it might reach breakeven?

Jeff Waters, CEO

The business is scaling from zero to 8 gigawatts. In the near term, we're investing in growth over profits, but it should stabilize and reach profitability as we expand.

Operator, Operator

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