Complete Solaria, Inc. (NASDAQ:CSLR) Q1 2024 Earnings Call Transcript

Complete Solaria, Inc. (NASDAQ:CSLR) Q1 2024 Earnings Call Transcript May 3, 2024

Complete Solaria, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Brian Wuebbels: Good afternoon and welcome to the Complete Solaria’s Earnings Call. My name is Brian Wuebbels, and I am the Chief Operating Officer for Complete Solaria. Joining me here today is T.J. Rodgers, Chief Executive Officer, Complete Solaria. We will be presenting the company’s recent financial and operational results for the fourth quarter of 2023, first quarter of 2024 and a business update. The formal presentation will be followed by a question-and-answer session. A few quick reminders before we start. First, today’s call is being webcast. A link to the webcast can be found along with our press release on our Investors section of our company website at www.completesolaria.com. Second, during this call we will be making forward-looking statements based on current expectations and actual results may differ due to factors noted in the press release and in our periodic SEC filings.

We will reference some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today’s release on our website. Last, questions can be submitted any time during the call using the Question Submission Box found on your screen. And with that, I will turn it over to T.J. Rodgers.

T.J. Rodgers: Thanks, Brian. First of all, let me introduce people going starting with you. This is as you said Brian Wuebbels, who’s our COO. He is actually our CFO, as well. He is – we will hire to replace him. And since Brian is moving up in the company, I’d like him to introduce himself to you.

Brian Wuebbels: Thanks T.J. And just a little bit about myself. I joined the company about a year ago as the CFO, as T.J. mentioned. I started my life out as an engineer. I have a mechanical engineering degree from the University of Illinois. I’ve also got my MBA. Before I joined Complete Solaria, I was with a multinational company and I was the President of the Control and Elevator Division of that business and that company was called NIDEC. Before I joined NIDEC, I’d actually spent some time in solar, quite a bit of time actually – at GCL, running their US finance operations. And before that I was with almost 10 years MEMC Electronic Materials and SunEdison, where I last – with various operating and finance roles. And then prior to my experience in solar, which was about 10-plus years, I spent my life at two large industrials.

I spent my time at Honeywell for about four years and in the beginning of my career, where I worked in operations and finance with the General Electric Company, under Jack Welch’s leadership. So I’m super excited to be here. Like I said I’ve been on the long road in the last year getting the company public. And I think what’s really exciting about where we’re at right now as the company is I can come in and provide some stability. I can also help the company move to the next level in quality, delivery and cycle time, which T.J. is going to talk about today. So I’m super excited to be part of this transformation and work closely with T.J. as our new CEO. So I’ll turn it back to you T.J.

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Q&A Session

T.J. Rodgers: Next is Will Anderson. I’ve introduced him before. Will is the founder of Complete Solaria 12 years – 13. Will is still probably our best engineer. He’s certainly in a software side grade. And he is the guy we go to solve problems. I’ll talk about stock grants today and how it helped us out a way until I get there. Last one is Siddarth Madhav. Siddarth is from Ayna. Ayna is a company that spun out of McKinsey. McKinsey, the famous McKinsey that we all know. The most highly known McKinsey Group was Palo Alto. That group came to my company and helped me, when I went to Enphase for a turnaround effort. I rehired the same group because they’ve been very – did a lot for me at Cyprus. And Siddarth was the project leader for the Enphase turnaround.

I think that one’s pretty famous. That’s one that went from $115 bucks today. And when I came in they were $0.92 and they were big enough that the turnaround isn’t me coming in pounding on the table. The turnaround is 15 guys working for a year to get a lot of stuff fixed. And that is the level of work we’re doing right now at Complete Solaria. Siddarth go ahead.

Siddarth Madhav: Thank you T.J. As T.J. said my name is Siddarth Madhav. I have been with the team that is supporting Complete Solaria in its [indiscernible] on the topics that Brian covered – gross margin, cycle time, quality, customer satisfaction. The company is on the verge of much of initiatives, which will take time to bear fruit, but we’re already seeing early results. And it’s a privilege for me and the team to work with T.J. and his team on this effort.

T.J. Rodgers : Okay. So let’s get on with the quarter report. First of all, we did our first 10-K this year and that thing didn’t get ready until almost the end of the first quarter. So we decided to put the first-quarter report and the 2023 Q4 report together. By the time, of course you get to the first quarter that’s all you care about, and you want to know about the second quarter, so that’s really what we’re going to talk about today. Okay, press release, I wrote this myself. So I picked the title that I thought would tell you the most important thing that happened, and that is we’re to be self-funded in the quarter we’re in right now. T.J., won’t be writing anymore checks. That’s even more important for me. That’s a lot of work and I’ll show you what that is.

The bullets, first, talking about revenue. Our Q1 revenue was $10 million half of the prior quarter. We got cut in half from one quarter, even though our backlog was $17.8 million. The revenue drop is due to a shortage of working capital, we can’t buy panels to put on people’s roofs therefore, we can’t charge in and get our revenue. And that’s where we are right now. And that’s we’re running just super lean on capital. The working capital crunch due to an unresolved loan situation, with one of our private equity funding firms Carlyle and our revenue in the second quarter we already had a very lean April. We’ll also be limited. And depending upon rather not get a few hundred thousand bucks designee, maybe I’ll do crowdfunding. The $300,000 we can be on the high end of that.

Okay, our gross margin was 24%. That is not our target. Our target is over 40%, but with $10 million in revenue that was pretty good. And we’ve got a forecast to break this 30% mark in Q2 again, with the low revenue hanging over it. Headcount and employees, we now are down to 109 employees. We started last June the 428. That’s almost exactly three out of every four, pretty tough layoff, tougher than I’ve ever been involved in before. And the team handled it well. I’ll show you that the tranches that we did. Our remaining employees have now been awarded retention stock options. So, that’s the way Silicon Valley works. This company did not work that way, and we now have given out options. I’ll talk about that. Our OpEx is now $5.5 million. That’s down from $12.9 million, the year ago quarter.

We’re forecasting next quarter, we’ve got some cuts we’ve already made to get to $3.6 million. So that’s almost a factor of 3 down in OpEx, in terms of OpEx were about where we want to be. Sales commissions, so the way our industry works for those who don’t know it, is that you typically buy your orders if you don’t have a sales force. And an order cost you 33% 34% of sales and you pay for that a lot of it upfront. And the order fallout rate is something on your order of 30%. So a lot of times you pay, and then the order doesn’t happen, the guy that changes his mind whatever. So, this is if you want to ask, the weakest part of our profit and loss statement right now. It’s getting control of — these orders. And by the way, last quarter, we dropped from 38%, which is higher than the industry to 31%, which is better than the industry specifically, from having worked on this problem.

But we’ve got further to go. On the last equity employed [ph] in the company is $5 million in January and we now believe based on we have very accurate cash flow capability, that’s going to last us up to through the second quarter. So I put July 2 2024, here. I will need more money at that time, but we’re not voracious for money. We’re running real close to cash flow breakeven. Here are the finances from the report and by the way, that report if you go there — this where they go to get the report. Okay, you go to this and this report is available. Okay. So here’s the non-GAAP numbers. Look at revenue, gross margin, our bank funding, cash flow and cash balance at the end of the quarter. We’re looking at the last quarter before Q4 2023. This is a report for Q4 of 2023 and Q1 of 2024.

So you can see the cash crunch has taken a rep new down dramatically. We do have orders and I’ll show you our orders. Story number one is normally a few revenue gets cut in half in the quarters and the fact is our losses, which were $12 million last quarter went to $6 million. So we actually cut our losses in half, meaning our cost cutting efforts offset a massive revenue decline. And we actually cut our losses the same time and of course that projects forward, I’ll come to that later. There’s the last wheel $5 million, and you can see our funding was required, you need cash balance is kind of an artificial thing with your operating income and what’s got to fill in from funding. And as you can see our funding has been dropping dramatically in this quarter, which have not forecast is zero.

Second thing I want to talk about is gross margin. In last quarter even with $10 million, we had 24% gross margin and we have a whole team working on gross margin. And we’re actually very proud that we got hammered this badly. If you look in the year ago quarter, we had 2.5 times more revenue in the same gross margins. So all of that came out of cost and we’re proud of that, and that’s been painful, this has not been an easy road. Okay, we changed. I became — the week or so ago the CEO. Our CEO, Chris Lundell is from Salt Lake. He was our man in the corner. He was a steward of the place, right now we need and I helped with cost cutting. So, I was kind of like a driving force. Now, w need to raise some money and we need to do some M&A. And I’ve done a lot of those in my career, when I was CEO of Cypress, I acquired 26 companies in 34 years.

So I even have spec for it, what a surprise. Rodgers objective as CEO and there’s really two points, in the press release about a month ago I said, I am not willing to work for Carlyle for free anymore. In fact I’m not we’re willing to work for Carlyle at all, and that’s still true that’s got to get resolved if we’re going to go forward. And then when becoming CEO, I’m 76. All of this stuff happened literally when I take one vacation, you go and sit in the beach in Mexico and read the book, I didn’t have time to read and I got the call down in Mexico, more like 20 of them in one day, and so I took over. And, therefore, I want to well-defined endpoint. This is not career two for me, and we’re going to have one or two things happen. We’re going to have success and I’ll define that.

And it’s vague right now, I’ll quantify it later. When we’re on solid economic footing that means we’ve got a bank account and we’re not rationing capital and telling stories like that, and growing rapidly, meaning we’re taking off from that revenue trough and solar world is not that great right now, we’re recovering back to ld revenue. We’ve routinely had revenue in the low 20s to the low 30s of millions of dollars per quarter in the past. The failure point is when I believe that the chock holder private equity debt holders have on us, and I’ll talk more about that later it will prevent the company from ever being successful. I’m not willing to waste my time. I am willing to walk off my own investment. We already introduce you to Brian. So I won’t do that, he’s a COO.

During the quarter, we reorganized the product lines, but when I ran a chip company in my industry, you ran it with product lines in this studs in this semiconductor company were the seven product line managers who all made silicon things, but there were different chips made differently for different customers and they really were different businesses. And we’ve designed and divide the new product lines, one for California, one for rest of US, and that means for us now Texas and the East Coast, Massachusetts, Connecticut, New York and one for Starbucks and other new homes we have. People don’t know much about Starbucks, but is it’s pretty interesting opportunity. We’ve already upgraded 33 of their outlets and we got another 42 contracts. So here’s a Starbucks solar owning, lot of panels up there, 50,000 lots.

So this looks good and it makes a statement about being committed to solar. It also will cut your electricity and will wait out, because it produces a lot of power. Okay. Headcount. So shown this graph before the number of employees starting at 428 back in June of last year and then at the right we got to the last RIF to WIP down to 109. And like I said I’ve never been through it before. The companies I’ve worked for run, typically if you do have 5% layoff you get screaming and crying, if you do a 10% layoff to get a temper tantrum and this was the most severe I’ve seen. It also obviously says the Company was fat and I used exactly those words. They actually use the term morbidly obese consult with them. Here’s our risk number one, it was difficult and then I’ll show you — you notice this climb here and I’ll talk about that in a minute.

When you get to 109 people than the math even for $10 million a quarter of 409 employees, the math works out to be $367,000 per employee, per year. That’s right there even a little bit better than Sunrun, Sunnova or SunPower with only $10 million a quarter for revenue. So the point is there’s a huge amount of leverage in our company for dropping through orders. We have a lean and efficient company. We’ve had just a quarter ago or two quarters ago $24 million quarter. That number starts to approach $1 million in any company that has $1 million per employee, per year, is a viable company in any industry. Our Tier, I told you we laid off and then we had the backsliding, as classic. I have a system called the Rec Auction that is Requisitioned as an Employment Requisition to hire somebody.

All companies typically have hundreds of these and they are the giant waste of time and a big game. And I managed to get rid of them. Cypress. And the way they work is simple. There are no risks. You can interview anybody, anytime you want. And the only way you get to hire somebody is if somebody else quits. I’m talking about the stasis in headcount. You can go up and down by adding and subtracting or extra from the mix. But let’s suppose you’re trying to hold headcount, then you have — you get a weekly report, exactly who left, the courses denominated in dollars. So you’re dealing with this. This is done in dollars and when I’m going for the sake of explanation talk about where it is. So you got your Staff Meeting and present. It runs that and the VP of HR comes in and says Mary, Jane and marketing quit last week.

Then you got one rack. And then the question is, what do you do with it? It is a very valuable asset. This fills up the mentality. People are valuable assets. And you don’t waste someone. You don’t have the extra ones. So you go around the room and each VP argues why he or she wants such and such a person. What I loved about it used to be nine VPs against TJ. And I would argue your efficiency isn’t that good. You should get more per person, per week out of that fab or you should be able to sign a shift with so many people. I was always — I am in the end of one argument, on the wrong side of it. In the new method, direct gets thrown out a piece of the table. Meet price under the boardroom table. And then the VPs start talking about why the person they want is most important.

And I also learn, don’t try to get 18 racks, don’t hire a recruiting firm, find the one person you need, take your time to find the really right person who will change a company and bring them in and make a compelling argument that overwhelms the other guy’s compelling argument. That’s called the Rec Auction. That’s how it works. And it does work. So here, I didn’t have it. And I saw the classic backward drift. Here I turned it on. And in this case, we had to turn on with less than one-to-one replacement. And as you can see, we — even though we were really lean, we were drifting downward at a new record low level. That’s the Rec Auction. So I actually filmed a Staff Meeting and the VP of — VP of HR came in and said Mary, Jane and Mark can you leave.

And then when we decided, who would get that. By the way, the way the system works, think about it, your attrition the people that don’t want to be there may not be that productive. You can be higher, but that is an important position. But it’s very unlikely that somebody will request it. It’s going to be more important than the most important person, higher than the corporation. And that’s what you get. So you have this turnover, and less important people go away and key people get hired. And after you do that for a year, it changes your company. And, by the way, this is very scalable. Think about a 1,000-person company. They’ve got a 5% turnover. That’s 50 people a year. Okay, and 5% turnover is moderate or even a little bit low. Well, 50 people a year is one person a week.

So the rec auction means every week VP walks in HR and says, we can hire one person, maybe two, maybe zero. And then you have the argument, then you hire the person. And a year later, you have 50 people that the consensus of the executives are key people. And you don’t have 50 other people whose names you maybe even can’t remember anymore. That’s how it works. Now I want to show it to you in action. And this was truly Mary Jane in marketing quitting. And then we’re trying to decide who gets it. I was going to bring in my hat today. I forgot it. So there’s the wreck auction in action. By the way, that system I just described comes out of a book I wrote in 1992. And that book was the story of building a semiconductor company from 1982 when I wrote the business plan in my living room site for a semiconductor to getting it to $100 million in revenue.

It was all the things you had to do to build a company and it’s all it’s systems for hiring systems for giving raises giving out stock measuring efficiency specking and bringing to market on time new products et cetera, and each time back in those days we had no tools right and we didn’t have IT departments, which really isn’t that bad okay and we ended up having to use the tools we had, Word, and that time was WordPerfect,, Excel and that time was Lotus123 and the other — and PowerPoint, and that’s what you had to run a company with and you had to run a chip company, so it was not an easy company to run. So at age 10, I worked on writing all those systems down. And what’s interesting, the book didn’t sell very well. The reason I have a picture of one to show you here with a brand-new clean cover on it is that I have several cases of them in my study.

But it turns out this book is exactly right for where these guys are. They don’t have a lot of money. They don’t have an effective IT department. And they need to build a company. And investors don’t care about any of that. Okay, fab. So we call the area where we make new solar systems for people’s houses a fab because of my background. It is a virtual fab in that there are no physical objects working through it. But if you look at a fab in semiconductors, you’ve got a box that’s got wafers in it, bunny suits, and the boxes move through the fab from step to step. Typically, you have something like 35 or 40 masking steps, and each masking step has two or three operations, so you have something like 100 operations. Our fab has 42 steps, and we’ve documented it semiconductor style.

So each step has got a spec, and it’s not perfect yet, but every time we mess up something, we make that spec a little bit better. And we are getting better, and the numbers will show you in a minute. Okay, so this is jobs. And so the our fab, we used to have things back in the non-computer days called lot travelers. So they’d move with the silicon, and the operator would come in, they’d mark the step they’re at, they’d mark the machine number, they’d mark the lot number, they’d go and do the operation on the machine, pulling up the recipe that they were supposed to. There’d be an output measurement, thickness of a layer, whatever, and they’d mark that down. And then that lot traveler would move through along, and at the end of the line, you’d have a record, and that also is computerized on a silicon lot, so you can start doing yield analysis and cycle time measurement and stuff you’ve got to do to make a fab run right.

So we exactly have a fab, only we have the lot traveler, and the things that move around in the world are out in Texas or Southern California. So we treat it like a fab, and we think about it like a fab. Okay, I’m now looking at the number of jobs in the fab, and that’s 2,000, 4,000. And this is back in January 23, and everybody in the company tells me those are the good old days. So we started out saying 2,000 is what we can handle. 2,000 is what we can handle and not screw it up. And what screws you up, of course, is each job has its own special problems. Like the city won’t give you a permit because the person has an un-permitted structure and they’ll shut you down for that. That’s illegal in California, but legal everywhere else. Or the financing got done and then the dating on the financing expired, and the financing expired, and now you’ve got to go get refinanced, et cetera.

I can name 100 of them. And these are the defects that pile up, and when you have a lot of jobs in the fab those defects end up being pretty important and they slow you down and that’s what happened here. So here you see, this when I came in, on June 23 and their inventory was big. I did it for fab guys call back-of-the-envelope analysis on the inventory, and I say you guys have bloated inventory. So then I said, you got to cut down on the inventory and then they said, no, we’re not going to do that. In the standard way ignore me, and then go off and do what they want. So we wanted a little bit longer. And when we got to that point I send out the memo. No new jobs are going to go in our fab, none. But does that means we’re going to turn away orders up.

But if we don’t have orders, we may not have revenue up. And if we don’t have revenue we might die. I go bingo. So you better get the problem fixed, don’t you think. And that kind of shut non-authority is often used in the real world in manufacturing where when you screw something up, it’s not a recoverable, they’re getting another permit is in a recoverable there ruining away for that never will produce revenue. So there we shut it down? When do we turn it back on? I should have put that in here?

Unidentified Company Representative: November.

T.J. Rodgers: Okay. So I didn’t really hang in there too long. I turned it back. We had this drop and I remember this drop here and I turned it back on, but that broke the problem. And then, the inventory came back and the news today is we now have 2,000 lots in line. And so I have to shut down. Now, what’s interesting is when we started, our cycle time is 112 days, we managed to hold that cycle time best way to slow just FYI and this was cycle time from order to install complete. We managed to hold it, but it’s not good enough and you can’t react quickly enough to problems. You can’t slice your line. You can take advantage of new orders if you that slow. So we started working on cycle time and cycle time primarily is getting rid of quality defects and that’s in the semiconductors scope first pass yield.

Do you want something, you go to a step, go through the step, get it done right the first time and move on, and do all that in a fraction of the day. Today — and by the way, we have a couple semiconductor experts that are helping us on this problem in line. And their work, which is primarily quality has brought our cycle time down to the 34 to 40 days. Meaning when you here you can do 2.5 cycles per year, so you can make 2000 times 2.5 lots per year. Here, let’s say, means use 34 a month, you can do 12 cycles a year. So you can do 24,000 lots a year. So you’re getting more out of the same fab. It’s a very powerful effect. And that’s where we are today. And if I had the name one thing that changed the company is that. Now the other point is, this is our target, and let’s take that as the given.

I’m going to suggest it’s not good enough in a minute, had $56 million of revenue in it. And so when you run a fab like this, you’re taking money and you think about roofing the guy’s house with $100 bills and they stay there for months and then you do another one and another one and another one then you run out of money. You borrowed some money and that was a problem. And of course, what we’ve done now is we’ve taken that money back out or the fraction of that was still left. You lose some and we’re down here. I did a calculation today. It’s again back of the envelope but it’s not far from wrong. And within a week it will be a paper on exactly what we have to hire consultants. I think we should have 1,000 jobs instead of 2,000. And I think we could maintain our revenue of half the whip, half the money and web, web work in process.