Maxeon Solar Technologies, Ltd. (MAXN) Q2 2021 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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.

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.

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 pause production in line with government regulations or we 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, results were 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 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. A supply chain costs normalized, 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 sell technology. During the second quarter, we produced our last Maxeon 2 solar cell and commence installation of Maxeon 6 equipment. Our new technology will deliver significantly higher margins in Maxeon 2. We are on schedule to ship our first panels later this year. This shift will also be coincidence with logistics savings from the optimization of our factory network, where 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 were 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 is highest efficiency, commercially available solar panels for over 15 years. That legacy is solidly intact today with Maxeon 5 and 6 and we expected Maxeon 7 will extend our module performance leads. We took successful steps this quarter to demonstrate critical Maxeon 7 performance milestones on the pilot line being built in our fab form. 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 its 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, 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 that are developed over time and we’re building 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. When you focused to 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 or 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 are 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 to 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 provide a great platform for Maxeon to help the U.S. government achieve their goal to reestablish a domestic solar manufacturing value chain and to do so deploying cutting edge solar technology at critical scale. We recently submitted to the DOEs 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 book business in the near future, combined with the continuing scale up of our bi-facial 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’ve published our inaugural sustainability report, highlighting our initiatives, achievements and plans related to the key ESG themes. Our commitment to responsible manufacturing and supply chain sourcing goes back to the inception of SunPower. Now is Maxeon, we aim to establish our leadership and driving 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 the way we conduct our business as highlighted in the sustainability report. I will turn the call over to Kai to review our financial performance.

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 2Q 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 cents 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 with 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 fairly long sales cycle, this does not affect our 2Q 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 and gross margin is to reside off a slight shift in product mix towards more P series, as well as continued cost increases from industry wide supply chain development, affecting prices of polysilicon freight, aluminum frames and copper. We estimate that the supply chain cost for our product sold in the second quarter were up by approximately $15 million or 8.8% of 2Q 2021 sales year-on-year, about one-third of it was due to the 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 become visible. While transition costs related to the separation from SunPower continue to ramped 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 before mentioned $5.5 million tax reversal. GAAP net loss was $77 million as compared with $39 million in the first quarter of 2021, the sequential decline was mainly 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 is closely related 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. 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 close the quarter with $267 million of cash on hand and 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 and 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 up 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 rear view mirror and end of the seasonally stronger second half of the year, we continue to face fears 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 for 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 contract. These transient challenges as well as 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, we positioned 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 and 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% or 36% sequentially reflecting ASP’s 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 into 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 of P&L as our contractual purchase prices are even higher. In that context and to keep you abreast of our remaining purchase obligations as per the end of the second quarter those stood at $191 million worth of polysilicon as the contractor prices 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 cost relating 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 or gross loss, while we keep investing in the improvement of our business. Non-GAAP operating expenses I expect it 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 directions for expected first half 2022 buckets. 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 in the end of 2022. With that, I’ll turn the call back to Jeff to summarize before we go to Q&A.

Thanks, Kai. Excited levels are growing here at Maxeon, our collective focus is on achieving increasingly ambitious quarterly targets on 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 Instructions] Your first question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question. Based on your guidance for Q3, it looks like, if you did not have the auto market, its hard to do 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 you’re a [indiscernible] contract?

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.

Yes, that’s right. And again, thanks for the question, Pavel. As we said, for the second quarter, we have provided in my remarks kind of the comparison compared to a year ago, which we consider a time when prices and supply chain costs was 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.

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?

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 pretty hard hit 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 a very strong operating processes that have really helped us withstand, the vast majority of the surges of COVID 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 – not only keep our employees safe across all of our factories, but in particular in the Philippines, things are operating at full operating capacity. The same is true with our Mexico plants as well.

Okay. And what’s 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?

Sure. So with the current issues that are being faced across Malaysia and the country, 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 some 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 and 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. We’re still, I would say, confident across all of our factories with the procedures we have in place that we have – we’ve not to-date in any of our plants seen any kind of implant 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 when the infections tend to occur. And we do have good plans in place and processes in place to help mitigate the stopping of any employees coming in that are infected.

Okay. And then lastly, just at a high level, have you had any revenue shortfall, revenue dislocation, because of inability to produce on schedule for the customer’s needs.

We have not – and certainly it’s – 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 still producing is there is a brief stoppage in cell production. And 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 the way that based on current plans to reopen that factory in August 19, we should be in good shape.

Thanks very much.

Thank you.

Your next question comes from the line of Julien Dumoulin-Smith with Bank of America Securities. Your line is now open.

Thank you, operator. Good afternoon, team. Thanks for the opportunity. Appreciate it. Well done and holding the line here.

Thank you.

Absolutely. So perhaps just if I can focus on the financing side and talking 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 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.

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 [indiscernible] 3 gigawatt of capacity coming out of both. The DOE loan guarantee, first, I guess one thing to point out is that that program is fully funded. So it’s not a waiting any additional congressional approval. And 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.

Yes, I think just overall we really believe that this project represents a unique opportunity for us for really, really strong value creation. And 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. So overall, we are really confident that with a strong backing from the U.S. government for this project and given a strong value proposition that we will be able to secure sufficient and appropriate funding for this. But we are not in a position right now to discuss for the details, but we are really excited about this opportunity when it comes to pass and all the different items are in place.

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 that differently to make the economics work for you if you will?

Yes. I think we would need to consider that situation. What I would say is that our – 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 governments 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 meets 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 manufacturing capability that we have with technology that we have, we think it creates 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.

I started clarify this just real quickly, if you can, are you still expecting to ship from 2Q 2022 as initially planned, are there signs of delay given the broader utility slippage as we see the late, just started throw that one in that.

Everything is still absolutely to plan and that still will absolutely becoming out of Mexicali. So what we’re talking about with this 3 gigawatt expansion, that is an expansion over and above the 1.8 gigawatt that we announced last quarter coming out of Malaysia and Mexicali.

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

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 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 color on how you’re thinking by 2022 given the input costs and just the pricing and so forth. Thanks.

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. And what we have begun to see is getting more of an equilibrium between the pricing that’s out there on the rest of the world market and the current supply chain costs. And we have begun to see some more of that business become profitable. And we’ve seen that with some additional booking of business that we’ve done within Q3 and some shipping in Q3. And as we look into 2022, the large pipeline that we have of opportunities is turning more favorable. I would say it’s a little early to fully predict, and we’re not quite prepared to get full insight into exactly how much of that business we expect to come back and for us to be able to fulfill in 2022. But I say it’s definitely trending in the right direction. So our competence is very much building for 2022 returned to volume in utility scale market.

Great. And can you – go ahead, Kai.

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 kind of 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 our own supply chain from Malaysia and Mexicali.

Great. Thank you for that. And as it relates to, I think you’ve talked about this briefly shipping and logistics. What’s your sense as to when and 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 it’s more of a hope.

Yes, that’s a great question, Phil. I think everybody is trying to understand exactly what’s going to be 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 our – is really trying to get after an attack logistics costs in ways that we can control it. 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. And then we then 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 was very much a U.S. focused business. We’re in the process, as we’ve discussed now of building up a module manufacturing in Malaysia. And 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, it’s also one of the things that we like a lot about the incentives that are going in place to help with the U.S. market. Certainly being able to produce in region is not only very good from a cycle time, but from a logistics cost perspective, 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.

Great. I think you may have presented the Maxeon Air 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?

Yes. First it was very, very well received at SNAC. I think it is you can explain Maxeon Air. I think when you actually see it in person, it is – it’s a bit of a game changer. And I think what’s been interesting as well as the reach out that 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 are that we are going to be scaling up production, at least the initial production for the 2022, that product really starts to hit the sweet spot when our Maxeon 7 cells are available. So you can start to think of Max Air is building up in 2022 using the current cell technology in 2023. We will then get into more of a scale using Maxeon 7 and Maxeon 7 because of some of the heat and reliability improvements that it has that make it even better than what we currently have with IBC. It helps 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.

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 a price premium that, that, offering yet relative to just the module and what the future might hold for that segment?

Sure. Let me give some comments on that Phil and 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. And 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 is a product that our channel has embraced. And I would say 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 be starting 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. But I think this is really where the value of our channel comes into play, because there is an education that needs to go on 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, I would say, is going very well, which is leading to the growth that 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. So that also helps us hit a different price level of customers as well. So 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.

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 there are some segment that actually wants it that’s not rooftop. Thanks.

Thank you, Phil. So let me provide some upfront commentary, then I’ll have Peter Aschenbrenner maybe provide some additional color on some of the market applicability. I’d say, there are markets – first of all, I would say that where we see the panel the market for AC panels is on the rooftop segment. And there are definitely markets like France that, I would say, have a more of a running start when it comes to AC panel adoption. That’s what we’ve seen more of the early uptake. But Pete, I only handed off to you and provide some more color.

Okay. Yes, I think that, Phil, the short answer is that all of our ACPV 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 the systems are on the roof. And the value proposition for the installer, which really drives an ACPV penetration is around logistics, streamlining, design, flexibility and ease and speed of installation. So it’s something that when installers reengineer their logistics and installation teams, it’s just a much simpler process for them, fewer parts to worry about, quicker installation, et cetera. For the end user, I think, they really liked 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 of so far.

Great. And sorry, one last question, is the margin profile for the AC panels, healthily better than corporate average. I’m just – I’m wondering if as you grow the segment that might be a source of margin improvement.

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 or put another way, we’re getting the same, effectively the same margin on the microinverter as we are on the panel itself. So yes, it is – it’s good to creative upside for us.

Okay. Thank you both. I’ll pass it on.

Thank you, Phil.

[Operator Instructions] Your next question comes from the line of David Arcaro with Morgan Stanley. Your line is now open.

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?

Great. Thank you for the question, David. Let me hand it off to Kai.

Yes, absolutely. Thanks, Dave. Yes, if you look at the operating cash flow, a really good performance this quarter, $33 million positive, we really focused on that one and we’ve also helped by some prepayments that came in. We continue to focus for sure on the 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. And we expect actually over the back half of the year to bring our inventory levels down as we fuel the growth that we have a guided in terms of sales. So I would expect some tailwind on the operating cash flow site from those inventory developments. And 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 if 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.

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 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.

I would say demand has been very strong for 2022. And as you know, we booked up a fair amount of the volume with the Primergy 1 gigawatt, which leading then us 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 us looking for the most ideal opportunities that exist for us in 2023. But when we look at the demand for the panels coming out of that factory, again, because of the technology, because of the performance, because of who we are as a company, because of the positioning that 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.

Okay, great. Thanks so much.

Great, thank you.

[Operator Instructions] And we have no further question at this time. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may now disconnect.