Good afternoon, everyone. Thank you for joining us today for the second day of our Barclays CEO Energy-Power Conference. Next up, we're going to do a fireside chat with SolarEdge. Here with me to have the chat is Ronen Faier, CFO.
Hello. Nice to be invited, and nice to be here.
I have a whole bunch of questions prepared.
Sure.
And I probably would split it U.S., Europe, and then commercial. So.
Sure.
Starting with the U.S. market, you know, can you update us on the channel inventory situation for both your inverter and battery in the U.S., and how long you expect it to work through it? And then to solve for it, are you drastically withholding shipments, or should we think you're continuing to ship out the product, just at a slower pace than the sell-through?
So, what we see in the U.S. is, is first of all, you know, starting from a market, underlying demand that is not growing this year or maybe even declining. Actually, expectations to see further, this, this kind of trend continuing at least into 2024, where I think that, we hear today more and more pessimists, talking about even a smaller market next year. With that said, I would say that our inventory levels are not very consistent, because you do see some of the distributors that are sitting on relatively higher inventory. Sometimes you see six to eight months of inventory days. But, you know, inventory days are a little bit tricky, because usually you look at level of inventories divided by the sell-through data. And what we see is that right now is that the sell-through is relatively low.
It's not that the absolute amount of inventory that is big, it's simply that the demand is relatively lower. And it still doesn't say that the entire market is behaving exactly the same. In some cases, we do see, because of the fact that we have both residential, commercial, various sizes, we have storage inverters, batteries, and storage, and inverters that are not designed to work with batteries. You do see that there is a continuing shipment into the United States. We're not holding the shipments, they continue at a smaller pace, a slower pace than we used to see before. We are trying, by the way, as a company, to direct the market a little bit more towards our Energy Hub Inverters.
These are, these are inverters that are more ready for the future, related to the ability to actually connect battery. We actually have EV chargers connected, but in general, we continue to see shipments coming into the United States at a small, a slower pace than we used to see before, and most likely in a slower pace compared to the installations that we actually see, because we are seeing that the inventories are clearing.
Okay. You know, the market always likes to focus on, you know, market share dynamics. And so when we think about the ways that one can take market share in the inverter market, I'm curious to know, what are some of the factors that are in your control?
Mm-hmm.
Other than pricing?
Yeah.
I'm sure in the past with supply chain constraints, it was just availability of product.
Correct.
But now that that's not a problem, is it payment terms? Do better pricing in exchange for exclusivity? Just kind of, can you walk us through the.
Sure. So, the first thing that I would say is that we neglected a little bit of U.S. market during 2022 when we needed product, simply because we had a greater belief in the growth of the European market. And therefore, we directed a lot of our shipments to Europe, which, by the way, turned out to be a relatively good move, given the fact that we see Europe growing relatively quickly right now. What we do see in the U.S. is that, yes, we lost share, mostly to Enphase around this. And when we're looking at share dynamics, I think that there are two or three ways that we can actually improve our share position in the U.S. By the way, one of them is something that happens without our help.
We do see that because of financing, TPOs are getting a little bit of a bigger weight within the overall market. And I would say that our positions with TPOs is usually a little bit better compared to our competition, simply because of price. We're cheaper than our competition, and we believe that overall, something that TPOs tend to appreciate a little bit more. The second thing that we do is actually education around the product. I think that today, if you look at, name our competitor, Enphase, these are two good companies with very good products that are very appealing to the customers. And I don't think that there's a major difference in the view of the customer of what both companies could bring.
I think that there is one major differentiation between the two companies, and this is how we are looking at our storage connection to the system. The technology that we're using today allows us to do what's called DC-coupled battery attachment, and that means that the battery is connected to the inverter on the DC side. This creates a situation where, first of all, you are not doing too many conversions between DC to AC. Actually, you do one compared to three in other batteries, and that reduces energy losses. The second thing is that once you put everything on the DC side, you usually can harvest more energy, because when you have a 10-kW inverter, for example, you usually put 13 kW of modules on the rooftop to collect more sunlight in the morning.
But that means that at noon, you're basically generating much more electricity on the rooftop, and you're not utilizing all of it. It's completing. When you have a DC-coupled system, you can basically take this energy to the inverter, where it's still taking away 10 kW, in this example, of energy out, and that means that we can provide more energy on a calculation that we did, and we believe that it will be conservative enough to share, we feel that it's about 10% additional energy that we can create. When you take 10% energy, especially in NEM 3.0 situation, and you look for the long term, this creates a very good advantage. So one reason to take share in a market that becomes more and more battery inclined is simply technology. We believe that our battery technology is better.
The second one, on pricing, I don't think that there's a lot to do in the U.S. It's a duopoly de facto. We took in the U.S., the position of being a price follower and not price leader, and I think that here, competition will determine much more whether they want to do it. But that actually means that there is no reason either for us or a competitor to actually change pricing dramatically, because if they reduce prices, we reduce prices, we're back in the same position. The only thing that's happening is the customer. When it comes to other terms, it's we are helping customers.
As I said in our Q2 call, we did increase a little bit of payment terms to some of our customers, especially on the large distribution side, where we felt that the risk of doing this is relatively small. We are trying to be helpful for our customers, not necessarily by just reducing price. It is something that collides today with our concern that there will be some bankruptcies in this market. And that means that even when we help customers, we are looking also at the risk profile of the customer. Wherever we feel that the risk profile is low, we're happy to help our customers.
We believe that this is the type of partnership that we should show at this point of time, and if it helps us to take share, that's great, but also maintaining share is something that's very important. So we try to look to take share, but these will be the measures, not pricing at this point at least.
And then, just because you did touch upon battery, so I, I wanted to move to California specifically. Some of the larger installers have thrown out some really high attach rates that they're seeing for recent originations. But a couple of them seem to have their own batteries that they're pushing or will push once they're out, while others have mentioned Powerwall+.
Yes.
So, you know, to expand on that, what are your thoughts about the California market? And then if you could also opine on Tesla more aggressively coming into the market, especially as they're now also selling through distributors. And if we could get your view on whether or not you think their positioning is different in a solar-only market versus a solar-plus-storage market.
Okay. So, we do not sell a lot of batteries in the United States. That's the effect of life, unfortunately, and the fact is that the majority of the batteries that we're selling today are actually going to Europe. I think that the main reason is actually Tesla. We do see that Tesla batteries are a lot of them are installed with our inverters, which is something that we're happy. You know, because, you know, we do have our own open garden technology that allows to connect other batteries, too. And, of course, I would like to sell a little bit more of my batteries, but I'm also happy if I'm selling more inverters because Tesla, Tesla is selling more batteries. We do not see yet any major change because of California, honestly speaking. We hear a lot about it.
You know, we are active among the TPOs. They are selling into California. We are selling batteries to those TPOs. I'm not sure what is our share among the batteries that they're selling. I'm not sure that we're always, you know, the best priced battery in this case. I believe that one thing that we need to work at is basically to explain the DC coupling technology, because the DC coupling technology, even though it can be a little bit more expensive on day one, it's something that really provides great advantage over the life of the system. And this is usually, by the way, much bigger than just the CapEx difference on day one. And I'm not sure if we're doing good enough here.
We will do much more effort, and we'll start to, of course, during also RE+, coming in. We see Tesla becoming more and more aggressive. We do see Tesla coming into distribution, and Tesla is a little bit of a hard opponent to compete with, because the brand power is so big, that sometimes it shines so brightly that it's hard to see some of the other effects, in our view at least. And I think it's here, it will be our job to simply try to educate the market of the fact that, again, the DC coupling is so, so much more important. The fact that the Tesla inverter is a string inverter, and there are a lot of benefits for distributed technologies.
I think that we will have basically to simply show over time, you know, why we have an advantage there. With that said, I do believe that, all in all, it's a duopoly market today. There is no reason that there will be no fair players in this market. I think that given our position in the U.S. market today compared to where it was like years ago, where we lost share because of the fact that we sent a lot to Europe, we have opportunities to take share even Tesla, with Tesla is in the picture, and it will make us better in competing. It's always a good thing to do, you know?
Okay, so let's move over to Europe. I think the market was generally a little surprised at your comments around the European channel inventory for both the inverters and batteries on the last quarter call.
Yes.
Now that it's been a couple of months, can you give us an update on what you're seeing here today? Has sell-through moderated at all? Is distributor stress impacting how quickly you can collect receivables? I think you kind of touched on that. But generally, how quickly do you expect for them to work on it?
So I'll start by saying that nothing changed from our our call, with only colors being a little bit more vivid in, you know, where where do we see things happening. So starting from the underlying demand, the underlying demand in Europe continues to be strong and continues to be very good. We are seeing every quarter the improved data coming from our distributors. We do see every week, by the way, the number of systems that are being connected to our monitoring portal. I can tell you that in both cases, we see a very nice uplift in all of Europe and also in specific countries. I think that the DACH countries, Germany, Austria, Switzerland are leading this kind of growth, but we see it almost everywhere.
It's a very good underlying demand, not as good as we thought, also including every, all participants in the market at the very beginning of the year. We are still seeing something which translates into 30%-40% growth year-over-year of the market in installations. This is something that is very much different to the U.S. because you do see a market that is working and growing. You continue to see, by the way, government incentivizing solar, even though it's economically good without incentives. Just last Thursday, there was an announcement of the German Ministry of Transportation, by the way, both ministries, that they're going to provide up to EUR 9,600 grant if you install a PV with a battery with an EV charging.
That means that, of course, this is also further increasing residential installations in Europe. The underlying market is very good. What we do see in the distribution is that most distributors, first of all, got ready for a bigger uplift in demand. And at the same time, we're acting under the, I would call it, past two years' experience of not being able to get all of the products that they wanted, and therefore they simply overstocked, not just compared to the amount of revenues, but also because they felt that maybe they will not be able to get more product. This results in a situation where although we see record high sell-through every month, we see that the channels are relatively packed.
Some channels, by the way, even sometimes export products from us because they say, "You know, we don't want the product to come to Europe because they may, y ou will allocate them to other customers. We'll take them at your factory gate." And now they're getting products into Europe, and they see that the level of inventory they have today are two to three months. This is, by the way, that three months. What we do see is also another phenomenon that is clear from after the call, that the installers usually they used to own a lot of inventory, also stocked because of the fact that they were afraid that they would not be able to get enough inventories.
So we didn't have enough understanding how deep this inventory situation is, continuing, and I think now we have a little bit better understanding. So what do we see right now? So first of all, we do see that, yes, the cash flow is something that is very much burdening distributors around Europe. In some cases, they ask for a little bit of help there, by the way, more important for them than reducing prices, because this is where they feel the pain. We do see that in some cases, they ask to delay orders, sometimes even delay orders that they know that they will need in Q4. They will ask to delay right now because they do not want to take any cash flow obligations that they're afraid that they will not be able to meet.
And they're relying on the fact that we're able to actually provide inventory in a much quicker pace than we used to do before. Today, we can provide in Europe some products even within two to three weeks. So we feel that this is something that will go away within the next , let's say, Q3 and Q4, and we should see an improvement in Q1. Q3, we already guided. You see that the amounts are a little bit smaller. Q4 is traditionally in Europe, a down quarter because of end of year, because in December, everyone stops installing systems because of snow, and it's end of the year, so nobody would like to hold a lot of inventories.
If we will see, for example, a flat Q4 in Europe, that means actually it's a little bit of an up quarter compared to Q3. But we believe that either Q4 this year or Q1 next year should basically signal the fact that inventory levels have stabilized, that the inventory management tools of the new distributors, which will be more most likely one month of inventory to make six weeks of inventories, will stabilize, and then we will see a gradual growth between growth that we'll see in Europe, we believe to be [audio distortion], 30%-40% to the shipment level that we're having to these channels. So the biggest difference between the U.S. and Europe right now is simply that the underlying market in Europe is growing and growing very nicely.
And by the way, this is both for inverters and batteries. If in the U.S., you see that inverters are growing, batteries not so much. In Germany, for example, about 80% of the systems are installed with batteries. So here, actually, the growth is not just growth of revenues, it's growth of revenues and batteries.
And then maybe if we move over to the commercial side. We've seen, you know, the commercial business become a larger part of your company. Given the headwinds we see on the resi side, at least in the U.S., in the near term, how much more growth can this segment see? I know you've talked about 11 GW this year.
Mm-hmm.
You know, is that gonna get continue to grow? And then just on the competition side as well, you know, I would have thought the competition, especially on the Chinese side, would be actually more fierce here.
Mm-hmm.
Because I think that's actually how they entered the inverter space.
Yeah.
If I'm not mistaken. So what is the competitive advantage here?
Okay. So starting from, U.S. C&I is not very interesting because it's a relatively small market, but whatever I say here is also true for the European, for the European market. In general, the C&I growth is usually following the same trends that you see in residential. So that means that, you know, if in U.S. you don't see a lot of growth, because in residential, because of interest rates and electricity prices, this will basically be the same case for C&I and in Europe, because a very good installation, return on the installation when it comes to residential, you see the same C&I.
There is one factor that usually makes C&I a little bit better in growth compared to residential, and this is the fact that ESG investors are pushing corporations to put more and more solar in order to neutralize their carbon emissions. Now, when you go to Europe, it's a great economic investment. We invested just on a system on our Italian manufacturing site. We're talking about two years payback period for a system that will live for 25 years. A great payback for any company that wants to make financial investment, and especially if you have concerns about the availability. But other than this, it helps us over to offset some of our carbon emissions. So we see it in Europe, we see it, by the way, outside of the United States. The potential here is being good.
The second reason that the potential is bigger is because of penetration. In Europe, if I'm not mistaken, Germany, around 18% of the homes that can actually accommodate solar, actually have solar on them. On the commercial side, only 6% of the roofs that can accommodate roofs of solar actually have solar on them. So that means that the potential is very big there. And when you couple it, at least in our offering, with the fact that we know being more expensive compared to Chinese on the inverter, but we know how to make the entire installation sometimes cheaper, because we can save on other elements doing longer strings, like, you know, combiner boxes, fuse boxes, cables and everything. We can basically provide a lower cost for the installation.
The more important thing is the fact that technologically, we come today, first of all, with an energy management system that allows the system to be a little bit more responsive to changes in tariffs, and we see that dynamic tariff changes in Europe are something that are becoming more and more prevalent. That means that we can actually decide through our system, whether at this rate, you want to push the specific degree to actually store it in your battery, or maybe to self-consume it, or maybe, by the way, if you get negative rate, if you're pushing electricity to the grid, stop producing. This is something that we know how to do out of the box with our SolarEdge ONE capability. That's a great advantage. The other advantage is the overall comprehensive solution that we know how to give.
We acquired a company in U.K. called Hark. Hark allows C&I campuses to very easily connect to their energy management systems, you know, the Schneider and Honeywell, and in a very inexpensive project, to be able to see through into each and every socket, each and every application. What is the consumption of energy? Is it best used? Maybe, by the way, we should change a little bit of consumption based on the rates out there. For example, they are installing 500 supermarkets in the U.K. Just imagine that when rates are very high, if you change only your refrigerator temperature, but by one centigrade degree, it's 5% saving on energy.
So the fact that we can come with a package that's so much comprehensive, with storage, with inverter, with energy management systems and other software that allows you to save energy, is a very big advantage, and this is why we grow very nicely. Another thing that we see, by the way, in Europe, is that there is a little anti-Chinese sentiment, mostly around C&I, related to the fact that I don't know if it's the war, or if it's the concerns about security of the systems, but you're right, that we do see that also the Chinese are pushing a little bit less when it comes to this segment, while they're more focused on residential at this point in time.
Very helpful. And then, actually, just gonna put you, you know, inside the corner here. So 11 GW?
Yeah.
Is that slated to go higher? Do you have the visibility to kinda.
I believe it can, it can go there. I think that for us, right now, the main question still remains our ability to manufacture. So this year, we believe that, yes, it can go higher. For the future, yes, we expect to see Europe growing, as, as I said, you know, tens of percentages, and since our biggest C&I market is U.S., definitely we see C&I growing, yeah.
Now, I know you've talked no price cuts for this year, but could we see price cuts next year, especially if costs are coming down and you can still keep margins flat? And then what about price? And, you know, if you could talk about that U.S. versus Europe. But then also just pricing pressures from general oversupply in Europe, especially on the Chinese side, as we've spoken about.
Mm-hmm.
Um.
So as mentioned, we're not playing anything for this year. For the next year, we will need to look at each and every market. And again, the U.S. here is a little bit different than Europe because of the duopoly, I would call it, moves that you see. I would say that we will need to. We're a company that's more focused on rather than gross margins or even revenues. You know, I'm happy to get more profitability on the smaller revenues than the other way around. So that's why we will need to look, when you look at prices, what is going to be the overall impact that we see.
Right now, by the way, we do not see elasticity of demand to pricing, because, for example, in Europe, we do see that some distributors are carrying too many inverter brands, and they're trying sometimes to discount some of the other brands simply in order to get them out of the system and stop using them. We do see that in some cases, because of cash flow issues, you see discounts that distributors are giving across the board. Even if the underlying companies like us or someone else is not giving to these distributors. So I'm not sure if pricing is the right tool right now to do it. But when we are looking at the overall, I would call it, stabilized situation, pricing is always one of the tools that we can use, and this is a tool that we're using.
If we can believe that we can either grow share, that we can either change a little bit the dynamics related to what product we want to push. So, for example, in the U.S., we reduced the pricing of our Energy Hub Inverters because we want people to take a battery, an inverter that is ready for battery, for EV, because it will allow them, by the way, three or four years from now, to be more ready for a new thing that will come, even if it costs us a little bit more at the very beginning. So price is a tool that we do not see any reason why not to use, if it brings the result that we want to bring. Right now, at least in the markets as we see them right now, we don't see a lot of pressure.
If you ask most of our distributors, giving them more months of credit will be much more beneficial from them than I don't know, two cents on the inverter side. Once we can see the prices connect to like EBITDA, it's a legitimate tool as long as it increases profitability.
One follow-up to that question, you mentioned how distributors might be cutting prices of products just to get them off your, just to get them off the shelves. Do you have any say in how much they can cut the product?
Not necessarily. No, not necessarily, because, you know, if once we sold it, it's theirs.
Yeah. Okay.
We will try to help them not to do so, by the way, because I think that it's not healthy.
Right.
Healthy. So if something like this will happen, we'll try to understand why and where we can help this not to happen. But it's their decision. Maybe, you know, on a flip side, it helps us, you know, to sell a little bit more, because if they're taking a price cut based on their margins and I'm selling a little bit more, I'm happy with it. But in general, we'll first of all try to understand what is the motivation and whether we can help the supplier to ease some of their pain. It's a marathon run, you know, and once we will make sure that our partners are—their wellbeing, their financial wellbeing is a little bit better, it's better for us than taking market share right now or, you know, holding prices a little bit longer.
Right. You also mentioned that you, like, you know, that pricing is a tool that you can use for potential share gains. So I wanted to understand, when we think about the IRA 45X credit, in the past, you've noted that you would just generally produce the amount to satisfy U.S. demand.
Yeah.
Have your thoughts changed here at all with respect to exporting outside the U.S. and using the subsidy to offer lower pricing in new markets?
So I think about it, because it seems to us a little bit non-logical that use taxpayer, taxpayers' money to go subsidize, you know, cheaper inverters in France. It simply doesn't make any sense for us. If this is the case, yeah, we're a company that is bottom line oriented, so we don't see a reason, if this is legal and if it's possible to actually do it, we don't see any reason why not to do it. But we need to remember one more thing. Again, it's a marathon. When you're manufacturing, based on this logic, maybe the right thing to do is to close all of our manufacturing facilities worldwide, just put them in the U.S. and sell outside of the United States. I think the world is a little bit more complicated.
I'm not sure if Europe will be able to get their act together and really come with something effective as the IRA, but I assume that at a certain point they will need to do so. I think that from sourcing and from even by the carbon footprint, I do not want to make things here and send them to Australia because of the carbon emissions. I think that we will look at this as part of our overall manufacturing strategy, trying to capitalize, if possible, on this as much as we can, but not forgetting that eight years in this industry are just, you know, very quickly running.
And then in eight or nine years from now, when the IRA benefits are gone, we will need to still look at what's going to be the overall manufacturing footprint, and we want to make sure that we have the right economic structure. So something that we can do, but we won't do everything here.
And then, do you have an expected time on when you expect to get Treasury ruling on the full $0.11?
So I've been wrong so many times that I'm not sure that I'm willing to bet right now. So I'd say that external bets are talking about October. I'm not sure yet.
Okay.
Yeah.
Last question before I wrap it up. Just as we think about your manufacturing build out in the U.S., can you sort of give us an update on, you know, the timing for, you know, you are initially starting with contract manufacturing, but then going to your own facilities, and then just also including commercial production as well?
Sure. So we've started with contract manufacturing, because right now, for us, it will take a while to build the factory, plus, and it's always a better time to market, plus right now we do only inverters because we don't have clarity yet on the optimizers. So everything we do right now is contract manufacturing. We'll have at least 30,000 inverters coming by Q3, Q4, sorry, coming from these contract manufacturers. The factory, once we will get the clarification, we decide what size of the factory we want to build, because it depends whether we do optimizer or not.
I believe that should this happen, we will not see manufacturing ramping up, starting to ramp up before the end of 2024, beginning of 2025, simply because of the time that it takes to build the factory, and we would like to hold everything. We would like to have here both C&I and residential products made. First of all, because we do believe in the potential of this market for the long term, and we believe that C&I will continue to grow. And second, because of the balancing of the lines themselves. If we're able to do optimizers, inverters, both resi, commercial, we have a much more balanced line from production means, and that means that actually the cost of manufacturing is a little bit lower. So answer is definitely yes.
Okay. Well, with that, we are out of time. So thank you very much.
Thank you very much. Thanks, Blythe. Thank you.