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 speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker, Mr. Robert Lahey of Maxeon Solar Technologies. Sir, you may begin.
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 CEO Jeff Waters.
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. Then Kai will review our financial performance and outlook, and we'll conclude with Q&A. First though, I'd like to acknowledge the recent passage of the Inflation Reduction Act and what it means for Maxeon. We couldn't be more pleased with the result of this legislation after more than a year of consideration in Washington. The investment tax credit extensions are a new long-term tailwind for both our utility-scale and DG businesses. As a reminder, we just re-entered the U.S. utility-scale business in 2021 and have already booked nearly 3.5 GW to date. On the DG side, we commenced shipping directly to commercial installers last quarter and are launching our residential channel later this year.
We were 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. 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've 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-GW 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 also 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 1 GW 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 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 a contracted backlog of over 3 GW 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 SunPower Reserve battery storage system and a product roadmap including our SunPower 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 in Fab 4 and our Ensenada ModCo, as well as to 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 break-even 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 GW 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 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 6 capacity of approximately 500 MW. 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 our Ensenada ModCo 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 and 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, and with roofs staying the same size, 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 or exceeding delivery targets and end customer NPS scores. In Australia, the team also exceeded sales targets and executed a very well-attended and energizing installer roadshow focused around 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 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, with over a decade of presence in most key markets and a longstanding 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 are also providing our partners with qualified lead opportunities from campaigns to BBVA's broad customer base. We believe that financial products and lead generation will be an important part of our long-term Beyond the Panel offering.
Pulling back up 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 a Beyond the Panel business in its early days. Conversion of Maxeon 3 to Maxeon 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 GW 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 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 GW. Since announcing this initiative in April of last year, we've been continuously increasing our bookings volume at a steadily improving ASP. After more than a year of CapEx and OpEx investment, we now expect to nearly double our revenue run rate between early 2022 and late 2023. In closing, at the summary level, Maxeon is serving two distinct end markets, each based on differentiated competitive advantages and with 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 OpEx 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.
Thank you, Jeff. 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 MW, 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 were also up 7% on a sequential basis to $238 million. Year-on-year, our top line grew by 35%, 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 Maxeon 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 under utilization charges and $7 million in lower of 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 is 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 six equal monthly payments through January of 2023. Second quarter GAAP gross loss, which includes the charge to cost of goods sold for this 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. 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 with a two-year hard non-call 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 booking and expect that this will de-risk 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 E.U. countries. We expect to deliver top line growth and margin expansion this quarter and project this trend to largely continue toward 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 580-620 MW, 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-$290 million. Non-GAAP gross loss is projected to be in the range of $10-$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 ± $1 million. We will continue to manage our OpEx 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 -$27 million to -$37 million. Third quarter capital expenditures are projected to be in the range of $21-$25 million. 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 break-even 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. utility-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 from 2022.
With that, I'll turn the call back to Jeff to summarize before we g o to Q&A.
Thank you, Kai. Next week, Maxeon will be celebrating its second birthday, and what an amazing 2 years it's been. 2 years of continuous and significant investment for the future. We've upgraded the majority of our products. We've closed unprofitable plants, ramping new capacity, and progressing to fully utilized factories. We're within months of outlasting 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 2 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, a recently bolstered balance sheet, and with a 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.
Thank you. As a reminder to ask the question, you will need to press star one one on your telephone. That's star one one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is open.
Hey, team. It's Alex on for Julien. Congrats on the quarter here. 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 or manufacturing facilities. So if you could clarify on that timing as well as the credit availability. Thanks.
Sure. Thank you, Alex. This is Jeff. Maybe just first to describe it at a higher level, we feel we're in an excellent position to help drive kind of the reemergence and resurgence of the U.S. solar supply chain. We are right now, as we speak, cutting our teeth on the first scale-up of close to 2 GW 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.
When we think about this next phase, part of this is the DOE application. We've got a real strong application that we feel fits the administration's goals for the program, so we have good confidence there. We expect about 6 months for the loan guarantee to come through. Once that concludes, about 2 years from that to first production. You can think about kind of early 2025 for us to begin producing. When we think about the credits, I guess first, our expectation would be that we would meet all the requirements for both the cell fab credit of $0.04 per watt and also the ModCo credit of $0.07 per watt. When it comes to other things around the ITC adder for domestic content, our expectation there 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.
Great. I think just 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 3Q, I know you mentioned $40 million of year-over-year headwinds as far as supply chain. 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. I mean, if you can give us just a little more color of what the moving pieces are 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 EBITDA guide that you gave for 2023.
Okay. 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, professional, just great 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're not ready to guarantee anything or if we put any of that into the guidance, but I'm feeling optimistic that we are going to be able to restructure some of those contracts in a way that will be favorable to us.
I would say good progress there, but nothing yet to report. Kai, do you want to expand kind of more broadly on margin improvement?
Yeah, absolutely. Thank you, Jeff. Hi, Alex. This is Kai. In terms of the margin improvements, 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 break-even for Maxeon in the fourth quarter. That's kind of the first marker in the ground. 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. Also on the power plant side, as we are ramping that facility, we expect reduced idle cost.
We are expecting still some lower of cost or market provisions because of the low prices at which we are currently shipping those products. All those things should be improving over time. As we are going into 2023, we see further tailwinds there on the U.S. power plant side as we start shipping the higher-price later bookings for that capacity, as well as starting to fully utilize that capacity over time in 2023. On the DG side of the business, we would expect more shippings also from HSPV P series into the various DG markets, which are really, really strong markets right now and in the foreseeable future, as you know. Also, we expect Beyond the Panel offerings to take a bigger share of the DG business.
Last but not least, also our further entry into the DG space in the United States, which we are starting to gain a foothold there and expand from there. Thanks, team. I'll take the rest off the line.
Thank you. Please stand by for our next question. Our next question comes from the line of Donovan Schafer with Northland Capital Markets. Your line is open.
Hi, guys. Thanks for taking the questions. I just want to follow up on Alex's question about your kind of renegotiating those contracts, the fixed-price ones for the power plant P series modules. I guess I'm just curious from a timeline standpoint when, because there's always some concern, and we just have to be kind of prepared for it and aware of it if you get caught in kind of a low gross margin or potentially the negative gross margin contracts. Hypothetically speaking, if that were to the contracts you had signed were not renegotiated into a more favorable way, how long would the impact persist? I guess that's what we're asking. When would those contracts that maybe don't look quite as great right now, how far would they extend, and then when they would roll off?
Any color there would be helpful.
Sure. Thanks, Donovan. 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 2023. The way you should think about them is that those kind of lower ASP contracts would be done within 2023. When you then because we've also been reporting I think since then, we've been getting pricing that is more in line with where the market is today. As well, more recently, we've been doing contracts that are cost-indexed. We've evolved. I think when you think about 2024 and beyond, you'll see much less margin exposure than maybe we had with some of the very initial contracts that we did.
Okay. That's great. I also want to ask so for the ASP uplift, going from Maxeon 5 to Maxeon 6, is there any way you can kind of quantify what the incremental premium in maybe cents per watt you're able to get? I know an important part of these technologies is also lowering the cost associated with making what is still a premium product and/or sort of what their gross margin improvement would be, maybe the incremental sort of margin per watt, cents per watt you can get through this Maxeon 5 to Maxeon 6. Just for simplicity, maybe just because I know the mix is going from 50%-100%, but let's just focus on panel to panel, apples to apples. For one Maxeon 5 panel versus one kind of Maxeon 6 panel, essentially.
Sure. I think the way to think about Maxeon 5 and Maxeon 6, essentially, it's the same technology. It was just a bump-up in kind of a minor bump-up in wafer size. The overall performance of the panels and the specs of the panels are very similar. Really, as you intimated, though, it's really more around the cost reduction for Maxeon 5 versus Maxeon 6. That's what we saw there. I would say you could even say the same, really, about Maxeon 6 to Maxeon 3. Maxeon 3 is still also a very good competitive technology that provides very good industry-leading efficiencies out in the marketplace. Maxeon 6 provides a cost reduction relative to that.
When we think about Maxeon 7, really, you've got a couple of pieces there. The first instance of Maxeon 7 is going to be not really so much about a cost reduction as it is going to be about a significant efficiency improvement, but also around adding additional features like elimination of hotspots because of the architecture of the cell. For us, when we think competitively, it's not just about efficiency.
It's about things like how long our panels stay out in the marketplace with industry-leading 40-year warranties with a much lower degradation than what the competition has. From generation to generation, from Maxeon 3 to Maxeon 5 to Maxeon 6, and even with the first instance of Maxeon 7, it's more around I would say the first Maxeon 3 to Maxeon 6 has been more around cost reductions, or Maxeon 2 to Maxeon 6 has been more around cost reductions.
7 is when you'll really see a performance bump.
Okay. Well, then actually, on that topic, you guys have talked about kind of your best-ever efficiencies coming off the pilot line for Maxeon 7. I know you may be not at a point where you're ready to quantify that and share those numbers with us. I mean, if you are, that'd be great. Please do. But I guess is there sort of a timeline of when you maybe you're waiting to get a third-party certification or anything? I'm just wondering or if that's something maybe you guys plan on sharing with us during the analyst day, just kind of the timeline on when we could actually know what the efficiency improvements are.
Sure. I think at Analyst Day, we will provide probably more insight into Maxeon. You can expect to see that there. I would say when it comes to third-party verification, I think one of the things that certainly sets us apart is that when we talk about efficiencies that we're achieving, it is on cells that are going into hundreds of thousands of cells per day type volumes. It's not something that we're doing in the laboratory. I think we've established credibility over the decades in our being able to when we talk about our efficiencies and performance we're achieving, that it really is something that will be at the production level.
What we've talked about, and I'll just reiterate, is that we continue to see in our labs and on our pilot line, which is a replica of what will happen in high-volume production, but out of those lines, we are seeing record cell efficiencies, and we're putting together panels that will create record panel efficiencies. You can look at where we sit today with our Maxeon 6 panel as an example and just know that we're going to do better than that, how much better. Like I said, we'll probably give more insight into it into our analyst day that we have coming up.
Just on the production line question, you said that you were hitting targets at the pilot line. I'm just curious if you can tell us kind of what attribute you're talking about there. Is it running the pilot line at a faster speed than you were? I know you were at half speed, I think, on the last call. Is it increasing that speed and having higher yield panels coming out? Or what are the attribute or metrics where you're saying you're seeing you hit targets there?
Yeah. What I was referring to there was more around the efficiencies that we're producing, so the actual cell performance perspective. That's seeing record performance.
Awesome. Again, I'll take the rest off the line. Thank you, guys.
Sure. Okay. Thanks, Donovan.
Thank you. Please stand by for our next question. Our next question comes from the line of Philip Shen with ROTH Capital Partners. Your line is open.
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 cell and module could come online early 2025. I just wanted to explore that a little bit more. Would it be possible that it could come online a fair amount sooner than that? When we think about and historically, mod lines take about a year to bring online and maybe six months even, six months to the year, and then cell might be about a year. Do you think it could actually be sooner? And if so, how much sooner? And then as it relates to the next facility, to what degree are you guys contemplating another 3 GW facility? The law is passed now. There's a very clear path.
Of course, the ITC adder, domestic content adder, is not as clear, but the $0.04 and $0.07 is very clear as an incentive. Are you guys very much contemplating already that next 3 GW or larger facility? Thanks.
First, I would say we're not ready to commit to anything earlier than what we stated around early 2025, at the beginning of production. What I would add, though, to what you said is that it really is us needing to construct a new facility to house the cell fab and ModCo. That's part of what makes it not a one-year turnaround. If you look at the current 1.8 GW that we have with the ModCo in Mexicali and the fab in Malaysia, that fits roughly what you were saying. We were able to get those up and running in first production in about a year's time. A little bit longer of the delay here would be doing construction within the U.S. to house that new facility. That would be the comment I'd have on that.
I think in terms of additional capacity, certainly, there is demand that's out there. I would say for where we sit today, we're not ready to announce doing more than what we've already stated. Certainly, we will continue to talk with customers, take a look at our progress as it comes along with this first capacity that we're going to be building out, and we'll be ready to adapt and to proactively jump if we believe that more capacity beyond what we've talked about makes sense.
Thanks, Jeff. Shifting over to your DG business, you announced the partnership with CED recently, and so was wondering if you could remind us when you expect those volumes to ramp up. I think it's back half this year or soon. How much volume do you think CED could have in 2023 from a MW standpoint? Additionally, when you think about the potential for another distributor, are you working through that now? Is there potential for yet more partners near-term as it relates to distribution? Thanks.
Sure. What I would say is first, with CED, we start shipments in the beginning of 2023. January of 2023, we will begin shipments to CED. To answer, I think, your third question, with CED there, the biggest in the U.S., as I know you're aware, we're very happy with that relationship. We see them as a great partner. Our expectation is to really focus and be a great supplier to them, along with continuing to be a great supplier into SunPower. We really do see CED and SunPower as being very complementary in that SunPower, with their unique channel model that understands our product, knows how to sell the premium elements of our panels, they'll continue to be a great customer for us. We're very happy with that relationship.
CED really allows us to go after the other 90% of the market that's out there that to date has been served by the likes of LG and Panasonic. There is a big chunk of the United States that's really looking for Maxeon panels. We're excited to start that relationship. In terms of the amount of volume that we could forecast, that's not something that we're going to be talking about publicly, about the kind of volume we could free up. What I will say is that we are looking at doing a variety of things to, I would say, kind of repartition or redistribute supply that we have from maybe other markets that are less margin attractive and to funnel them into the U.S.
We're trying to find, I would say, as many panels as we can out of our capacity to be able to supply the U.S. market. Now, that said, we've got other great markets we serve. Europe is a phenomenal market. Australia is a phenomenal market. But there are some markets like take some of the commercial markets outside of the U.S. can be maybe a little more challenging from a margin perspective. You could expect to see us shift more of the IBC volume into U.S. resi.
Great. Thanks for that detail. Finally, on liquidity, you guys, congrats on the converts and the raise there. What's your sense as to whether or not you might need more? If so, would that be driven by the current 3 GW cell and module facility decision, or do you think you would have sufficient liquidity for that capacity? If it's a decision for the next 3 GW, that's really what would trigger the next leg of potential capital. As it relates to the converts, what percentage of that would you expect to pay in cash every 6 months? It seemed like there was some variability in the release or the 8-K or 6-K. Do you expect to pay half of that, 7.5%, in cash or all of it or maybe none of it? Thanks.
Okay. I'll defer the majority of that answer over to Kai. First, I will just say that we are obviously very happy with the $207 million convertible that we were able to do with TZE. We think it's a sign of the confidence that they have in the business and where the business is going ahead and the potential that we have. Let me turn it over to Kai to answer some of the more detailed questions you had.
Yeah. Thank you, Jeff. Hi as well, It's Kai. In terms of course, you have seen the terms and conditions, and we think they are very competitive, and it bolsters the balance sheet and gives us the ability to do the Maxeon 3 to Maxeon 7 conversion in the Philippines and Ensenada, as we previously said, among other things. That's really, really good news here to get that done in a timely manner for that. You have also seen that the market reaction has been very positive on that. Maybe let me tackle the question first with regards to the interest. Yes, it's true. 3.5% of the coupon needs to be paid in cash, and there's other possibilities to pay the remaining 4 percentage points. We haven't really made up our mind yet. The first payment is six months out.
I guess we'll make a decision on these things on a payment-to-payment basis based on the circumstances at the time. The overall coupon is 7.5%, and you can maybe just pencil in as an assumption that it's paid in cash, but we'll make decisions as we go. With regards to the funding, how far does that take us? We have said before that the use of proceeds is going to be Maxeon 7. In addition, it puts liquidity on the balance sheet that we can use for different things. Will it be enough for the U.S. expansion? Likely not. We need additional funding for that because that's a lot more than what we have raised.
Of course, as you know, we are expecting that the vast majority of that funding would come from the DOE loan and also arrangements with customers, which have very high demands for that kind of capacity. In addition to that, we always are evaluating a range of options for these kind of growth investments. We are a growth company in a growth industry, and there's always lots of opportunities. We also believe there are many options at our disposal to execute at the right time, given circumstances and opportunities at that time.
Great. Thanks for the caller, Kai and Jeff. I'll pass it on.
Thank you, Phil.
Thank you. Please stand by for our next question. Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.
Hi. Thanks for taking the questions. This is Grace on for Brian. I guess my first question, just to follow up on the questions on margins, I appreciate all the colors in the prepared remarks and the Q&A. I just want to bridge the gap from today's gross margin of negative 5% to the 15% gross margin target in 2023. I know you talked about drivers like Maxeon line and then also the ramp-up of the U.S. utility-scale shipments. I just wonder if you can put some numbers around those drivers, like how many basis points should I expect from, for example, the ramp-up of the utility-scale shipments in the U.S., and also what kind of margin ramp should we expect in 2023? Thanks.
Kai, I want to hand that over to you.
Sure. Thank you, Grace. Overall, I think we have or Jeff has said in his remarks that for the DG side of the business, we are expecting more than 20% margin as part of those 15% target. The way we are going to get there is with some of these items that I mentioned in the previous discussion here. Then, of course, there's the power plant side, which at the moment is negative gross margin, and there's also lots of dynamics that I described before. With regards to quantifying all those, we haven't really quantified them yet. We are planning to give more color on these different items, and I would say they are relative contribution to that development at the analyst day. Please bear with us until then. I think the main points and dynamics we have laid out here.
Okay. Understood. On your capacity expansion plan, I think besides the 3 GW in the U.S. for your Performance Line, I think in the past, you talked about a potential of 2-3 GW of capacity expansion for your IBC line. Of course, that was depending on funding optionality. Now you got IRA. How is that going to change your capacity plans in terms of both timing and size? Thanks.
Just first, Kai, certainly, you can add more color. I would say that our first priority for Maxeon 7 is to do the conversion from Maxeon 3 to Maxeon 7. You can think about that as the capacity that we have in the Philippines fab, our fab 4. I would say for any additional capacity adds beyond that, it really would come along with the improvements that we've talked about with Maxeon 7 with the re-architected metallization back end of the product, which will reduce both the CapEx and the COGS of that product pretty significantly. That'll really be what really unleashes us moving into more capacity expansion. I don't think we're prepared today to talk about that in any detail. Kai, anything I've left out there that you'd want to add?
No, nothing really to add.
Okay. Thank you.
Thank you, Grace.
Thank you. Please stand by for our next question. Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is open.
Thanks for taking the question. You talked a lot about U.S. and European markets. Let me touch on Asia-Pacific. The only slice of your revenue mix, which was down a tiny bit in U.S. dollar terms versus a year ago, is that a lack of demand, or are you deliberately reallocating volume to regions with even greater demand?
Yeah. Great question, Pavel. I would say it's a bit of a mix of both. I would say first, as we said, we are reallocating our demand, and particularly our IBC demand, to markets where there is higher margin potential. Just with the surge of demand that we have in the European market, that's meant some reallocation. You're going to see, I would say, similarly in 2023, given the surge that we're going to have for the U.S. market too, you'll see a more shifting of that. The other piece, though, with Asia-Pacific is we do have a fairly lumpy rest of world power plant business, as we refer to it. That is taking the performance series product out of the joint venture that we have out of China.
There, I would say we're following the same model that we've been talking about now, I think, for well over a year, which is that the output, there is no take-or-pay element to that joint venture or what comes out of that 8-GW factory. As long as there is a market in China that can command better ASPs than what we can get outside of China, we'll continue to pursue that. What you probably saw a year ago is we would have had some revenue from some of the Asian utility-scale business we have that we've not been refilling either to the same extent or at all in the most current quarter.
It ends up being a pretty small part of the business for us right now with the U.S. utility scale and then certainly Australia, Europe, and U.S. DG making up the lion's share of what we do as a company.
My follow-up is on something you briefly touched on, which is the Chinese joint venture. I think it lost or your share of it was negative $4 million this quarter, and it's been pretty consistently negative. I know you don't guide to it, but any sense of when it should get at least to break even?
I'd say that business is in pretty significant scale-up. If you go back to 3 years ago, even 2019, to today, effectively, we scaled it up from 0 to 8 GW. It's very much in scale mode. While you're ramping factories, you've even seen it with our own, the factories that we've ramped up for the Performance series product for the U.S., it does put an impact on profits in the near term, but it's because you're investing for the future. I would say as that business scales, it's getting more and more cost-competitive because it's getting more economies of scale. As that stabilizes, we expect it to hit profitability. We're not providing any forecast at that level for when we expect it to get to profitability. Right now, it's probably more of an emphasis on scale and growth than it is on near-term profitability.
Fair enough. Thank you, guys.
Thank you, Pavel.
Thank you. Please stand by for our next question. Our next question comes from the line of Kevin Pollard with Pickering Energy Partners. Your line is open.
Thank you. Just one last quick question for me. With Maxeon 7 funded and kind of proven up in the pilot and ready to scale, can you give us a little bit more color on the timing of exactly when that starts and how long it'll take to fully scale? I guess what will be the ultimate capacity of the Fab 4 once that transition has occurred?
Sure. Thanks, Kevin. First, the existing capacity for Maxeon 3 in the Philippines is about 550 MW a year. You can think about Max 7 as providing an uptick to that because you are going to be getting higher efficiencies, so more watts per panel than what you would get. Think of it as a small bump above the 550 that we currently do. As for timing, as we said in the prepared remarks, given the current market environment, given the new capital that we have, we are looking at doing an investigation of potentially going to a larger wafer than what we currently planned, which was a 5-inch wafer. We'll make some decisions on that quickly, but that would have an impact on the exact timing of when Max 7 would come.
You can think about it as kind of around the turn from 2023 to 2024, so around that timeframe.
Okay. Thanks. I wanted to just ask a little bit longer-term question on the U.S. Performance Line business. You've kind of talked about the DG margins being 20%+ going forward. With the U.S. Performance Line, obviously negative right now with the startup and ramp costs and the initial contracts, but what's the margin profile that U.S. Performance Line business look like once you kind of move to fully ramped and you're pretty much on full variable pricing contract?
Yeah. Absolutely. From the get-go, we've been targeting and are still committed to and forecasting a 15% gross margin, kind of our long-term financial model target for the company. You can think about it as a 15% gross margin or potentially better, but that's where we've been forecasting it.
Okay. Don't change it. Okay. That's all for me, guys. Thanks.
Thank you again. You may now disconnect.
Thank you. As there are no further questions, we will now conclude the call. Thank you again. You may now disconnect.