SolarEdge Technologies, Inc. (SEDG) Earnings Call Transcript & Summary

So let's pick this up. Good afternoon, everyone. Hopefully, everyone at this point, between the last meeting and this meeting has been able to grab lunch. So we'll continue moving. Thank you, Ronen, for joining us again.

My pleasure.

I appreciate every time you're able to come over.

My pleasure.

It's nice to see you again. What a year, again. Listen, let's I want to take the narrative where you want to start it. So you can kick it off with opening comments or we can just go right for it, whatever you like.

Let's jump into questions. I'll try to say everything smart as part of the questions and answers.

Excellent. Well, thank you again. So I mean, listen, why do we start at this, right? This year has been an interesting pivot. It's just been growth and just trying to keep up with growth. I think that's the best summary that I can come up with for this year. How do you think about resolving that and getting to a more aligned place on streamlining your supply to match what admittedly was an unpredicted amount of growth, right? I mean -- I think no one quite sought this way?

Definitely. So I think it's an ongoing battle, I would say, because it's like just imagine that you have a boat with pouring water and every time that you throw a bucket, you have another wave that's being thrown at you, and this is the situation as we see it today. When we start from the 40,000 foot -- feet kind of view, we see demand that is intensifying every quarter. And even though we are able to grow, and we grew close to 50% our manufacturing year-over-year, despite of these component shortages, we see demand that is far exceeding our growth ability. And therefore, I think that what you've mentioned is exactly what we have. We're seeing, on one hand, very large growth in all of the markets in which we participate. So that means residential, commercial, utility, that means U.S., Europe, rest of the world. While at the same time, we're facing all of these supply, I would call it, challenges starting from the component shortages that everyone is well aware of, that is not going anywhere or at least in the -- power semis, going through COVID cycles in China and outside of China and through various other hurdles. And in general, yes, we're trying to grow. So where are we standing and where do we see it happening? So I think that the first thing to do is to make sure that we are having enough components. We are working with the largest component manufacturers in order to strike long-term agreements that will allow us to grow and to have the components that we need. That means that we're going into agreements that sometimes are stretching into 2026, 2027, working very closely with our semiconductor partners to share with them what are our future designs and how they can fit into them. In some places, by the way, in order to make them more interested is actually exploring together with them some new cutting-edge technologies where, I would call it, R&D power, match what they do in order to bring products a little bit quicker to the market. So that's, first of all, teaming up with these guys. And that means that we try to be focusing on small amount of semiconductor manufacturers, but being large enough portion of their business. The second side is actually building capacity. So we're growing Mexico very nicely. By the end of this quarter, Mexico will be at a run rate that can deliver the majority, if not all, the United States resi demand. And we continue to grow everything that we have outside of Mexico. So it's growing in China, in Vietnam, in Israel. Europe is a little bit less. And of course, going into manufacturing in the U.S. where we are now exploring. So that's the second stage. And the third one is basically making sure that we work very closely with our customers to understand their needs in the few quarters to come because we see that their needs are also changing a little bit. We start to see, for example, that in Europe, the average size of installation is growing because of the fact that you see much more electrification of vehicles. We are working much closer with battery manufacturers and battery customers to make sure that the battery is meeting with their need when it comes to installation time and ease of installation. So that's the last part. And I assume that we still have at least 1.5 years that is going to be relatively challenging in that sense. But at the end, taking everything into proportion, we're facing about 50% growth in 2022. We expect to see double-digit significant growth in 2023, '24. It's a work in process, and every morning is a new battle.

I hear you. I respect the challenge because we can admittedly see it externally. How do you think about. Let's tackle one piece of that. That relationship, convincing these customers that you're sizable and you're serious, and they should take you and scale their businesses along with you. Where are you in trying to wrestle that piece, right, [ down ]?

So actually, we -- the situation today is a little bit the opposite. It's basically telling them that we cannot provide everything that they need because they come to us and they ask for our products. Now the reason that they come to us is a combination of several things. First of all, technologically, I think that when you take, I would call it MLPE, either microinverters or DC optimizers and you compare them to the older string inverters, you understand that in the new world where you won't have everything connected. When you have to have smart home connected to the battery, where you can control from the app, your EV charging, your management of energy, should I charge the battery now? Should I discharge? Should I sell it to the utility? Should I buy it from the utility right now? I think that the only game in town is usually companies that are more technological. And therefore, when customers, especially in the Western world, are looking into these kind of applications, they come to us. Actually, I think that some of the challenge today is to tell them, "bear with us and even though we're -- it's hard for us to provide everything that you need today, we're able to grow with you." I can tell you that we have many customers coming today to our factories to see how do they look like? What [ is ] the manufacturing look like? How does automated manufacturing impacting the growth that we can provide and how does it impacting the products that we can provide from quality and reliability point of view. So I think that it's basically aligning their desires with our, I would call it, offering and what we can offer and giving them enough of, I would call it, confidence that we will be able to meet their growing demand with the capacity that we put in place and with the technological road map that we have ahead of us.

Excellent. Let me pivot subjects a little bit here as we think about it. How do you think about capturing the benefits of IRA? Like that's been like the starting question for most companies all day here, right? It's like what are you doing? What's your plan? And again, I get treasury is still pending, but what are your thought process here on monetizing credits, there's a lot of different things I could see here, CapEx.

Sure. So the first thing is, I think, U.S. manufacturing. That's by far the more interesting area. And here, Yes, we are waiting for the clarification. But since everyone is telling this, I'll spare the audience this. But in general, we're looking into manufacturing in the U.S. We're looking either at teaming up with the contract manufacturers or building our own capacity. One of the things that we have -- we have in Israel, a factory that we run and we manage. Actually, it's the best producing factory that we have worldwide today from productivity per employee per square meter for everything, and this is why we're looking at both. I think that what we want to be able to do is to make sure that by 2023, we can already ship products in the United States, made in the United States and then to grow into this one. So that's the first stage. And by the way, it's a very large benefit. I think that it's much better than anything else that I could describe. The second area is actually supporting our customers. We have a relatively strong position with the TPOs. TPOs can enjoy from the domestic content in the ITC that they're actually receiving. So that means that if you're a Sunrun or a Sunnova, you can basically enjoy a little bit of more benefit on the ITC, if you're using American products, and we want to make sure that we team -- we give them whatever they need in order to be there. And the third thing, which is something that will be a little bit more in the horizon is looking into our battery manufacturing. We have today a gigawatt factory -- a gigafactory in Korea. We're going to expand it prior to building another one, but there is a substantial incentive to making ourselves here in the United States. Making battery packs is even easier because once we have an inverter and optimizer factory, assembling batteries here and enjoying the benefit is also something that's relatively easy. So I think that these are the areas that we're mostly looking at right now.

Do you want to talk a little bit about the time line for making these decisions too?

So the decisions, we try to match those -- that we will have all the parameters ready when the regulations do come out because there's still a little bit of ambiguity of, for example who is the manufacturer? Is a [ CM ] manufacturer or not? What is manufacturing in the U.S.? If I make a PCBA in Mexico, I just bringing to U.S. and I assemble it, is it manufacturing here or there? We do not know yet. And this very much is going to reflect how we're going to build our position here. In general, I can say that we see footprint in the United States, almost as imminent. The question now is what kind of a footprint? And this what kind of a footprint will very much be determined by the regulations. At least right now, our working assumption is that we will get the $0.11 per watt. And our working assumption is that we will need to do everything here in the U.S. So that means from what we call front-end manufacturing of SMT all the way to final assembly.

Excellent. Actually, can I go back to one thing on supply chain, if I can? I meant to bring this up earlier. How are you thinking about the China restrictions, the dynamics that are ongoing there in sort of a very real and active sense of late. Any quick comment on that you would offer?

So when it comes to -- COVID restrictions in China that we see right now. So first of all, we're not gladly this time impacted by them. All of our manufacturing sites are working and are -- we do not see any disruption to our supply chain so that -- from that end. I think that the only thing that we do see from the restrictions and not related to what we see recently is that in Europe, if we used to see that Chinese manufacturers could deliver almost any given amount of products that were needed in Europe, let's say, until the end of last year, this is changing. We see, today, a demand that even Chinese manufacturers cannot satisfy either because they're also meeting the limitations on components or due to the fact that they are not able to manufacture effectively. And this is something that is changing a little bit the dynamics that we have in Europe, including pricing dynamics that we have. But other than this, I think that we don't see any major impact.

Excellent. Appreciate that. I just feel obligated to check in on that so as they said. But all right, let me pivot away from this. IRA, just what total quantity, right? When you think about the size of like you sell x here, right, in the U.S. Are we talking about 50% of x? I mean what -- how big [ could you get ]?

Last quarter, U.S. revenues were 40% of our total revenues, actually 32%, 60% were Europe. 40% is the number that we should look at, I believe, at least in the next 3 to 4 years.

Got it. Okay. Right. You're saying that -- that was of total revenues in the U.S. revenues?

Yes, total revenues.

Got it. Excellent. And then what portion of that should we expect to see you build out like a U.S. footprint from a manufacturing perspective?

Within 2 to 3 years, everything.

Everything.

But it takes a while because ramping a factory that is highly automated, relatively large in size will take a while in order to make sure that we have quality products coming out. So within 2 to 3 years, everything we sell in the U.S. we would like ideally to bring from the United States.

Excellent. What about -- just quickly from an FX perspective, I'm going back a little bit, but this has been another subject that's come up. And obviously, it's been another point of frustration, I get, right? Like if it is without one thing, it's another thing here. How do you think about effectively being able to pass along that cost? And again, some of this could just be simply go into the backlog and saying, "hey, like, help us."

Correct. So actually, we're doing this, and I'm aware of the frustration and -- as we said all along, the fact that we have international business is a great advantage when you look at things happening in the U.S. such as NEM 3.0s, where basically, we don't care about it, whether passes or not, it doesn't impact our businesses at all. But at the same time, yes, it does create a little bit of, I would call it, exposures that are coming by the fact that we're working internationally. What we see right now in Europe is something that really allows us to take away some of the frustration that we [ sold ]. The euro, since the beginning of the year, let's say, to the end of Q3, actually devaluated by about 16%. And when you have 50% of the business there, it means that about 800 basis points of your gross margins are just being taken away by the euro. Now when you have -- when you pair it with the situation where you have a backlog that is sometimes stretching in our case, into Q4 2023 already, it's very hard to come back to a customer and say, "hey, I'm not delivering new products right now because I can't. And then if prices need to go up, I now come and I change the price on an order that you already have there." It's an issue. But at the same time, things are changing. The first thing that is changing, and I mentioned before is the fact that Chinese cannot deliver now everything that the European market needs. So if in, let's say, 3 quarters ago, I was a little bit hesitant to increase prices because someone could go and buy Huawei, they cannot to do it right now. So that's number one. Number two is the fact that -- actually the impact of us absorbing some of it is something that when we go today to our customers in Europe, and we need to remember that unlike modules, the connection between the installer and the inverter manufacturer is much closer than the module manufacturers because modules are very much commoditized in that sense. And when we go today to our distributors, to our installers and we say, look, we got the hit of the euro devaluating for so long, and we need to increase prices on future orders for sure, but sometimes on existing orders and we start to do this as well, they actually understand it. They see our reports, they see where we are. They see how the market responds, by the way, to us losing margins. And they're a little bit more receptive. And I would add to this, the fact that now that you see inflationary pressure around Europe and the fact that they need so much products, they're much more receptive to do this. So I would say that we have had a series of price increases in Europe all over the year. We are continuing this, and we will actually continue this into Q1 next year already. By definition, this should make us whole compared to -- by Q1 compared to where the euro was just, let's say, at the beginning of 2022, and we believe that we can continue hovering from this. But from time to time, we will see some mismatches. Sometimes, prices will stay high even though the Europe will get evaluated, we'll make a little bit more here. Sometimes the euro will go down, and we will have to somehow absorb some of it. But in general, we will try to follow and track the euro changes with our prices.

Just to elaborate on that last point there about -- by first quarter here, I mean, obviously, you've been actively working this, as you say, right? And you have this backlog that extends all the way through the course of the majority of next year. When you say you're kind of dealing with this by one -- first quarter, how do you think about the gross margin hit through the course of '23 at this point, considering what you've been able to pivot here?

So I think that in general, we should be back to where we guided at the end of our Analyst Day last year. So that means that -- and I'll give everything because I think that the map is important, and I'll explain. That means to be at 20% to 30% annual growth where actually there is a potential to be accelerating this a little bit, depends on components because the demand is there. So that's number one. Gross margins to be within 28% to 30% on a corporate level and 30% to 32% on the solar business, where there is a little bit of an upside here as well given the fact that while we're increasing prices, the euro is starting to come back to where it was. So there's a little bit of an upside here. And then operating profit of 20% to 22% when we exit 2023. And I think that this is a very important point to mention because this industry has been an industry of losing companies. And therefore, the emphasis was on gross margins. We look at operating profits, operating profit margins and the fact that you can sell today batteries that are, by definition, lower margins, but can bring quite a lot of revenues that are translated to a much better operational leverage because when I sell someone -- send a salesperson to Sunrun, he sells the inverter and the battery at the same time. He doesn't need -- I don't need to send two people or three people in order to do this, then I'm able to enjoy this. And we believe that what you will see is that our growth in revenues will be relatively faster because of the batteries, while gross margins are going to be lower than they used to be. Again, because of batteries, but the overall profitability level will be the same on higher revenues, which will be translated to higher profits. That's the way that we look at it.

Excellent. If I can go back to a couple of things you just said, just to make sure I heard them right. So that your comment there about hitting your Analyst Day targets because I know that, again, about a year ago, you were all chatting about like what you could -- the art of what was possible, you feel on track for full year '23 being in those ranges?

So I think that -- the reason I'll be cautious is not because everything related to our execution, I feel very comfortable. The wildcard, the euro and the time that it takes us to adapt to it may change things a little bit, plus again, and we discussed there is still COVID in China, and you never know. But I would say that under normal circumstances, we feel very comfortable with hitting the margin targets by the second quarter of 2023, maybe with a slight potential even to increase those or to exceed those and to be at those numbers towards the end of the year. Will it be for the full year? I believe that it can be, but so many things are moving today, that it's very hard for me to comment on it.

Yes. So that's remarkable, really. Well done in light of the numerous constraints that we started that conversation on.

That's what we paid for you.

Absolutely. It's what I'm here to do. With respect to just as you think about that transition, the pivot, right? I asked you narrowly about, well, across the full year average, can you get the targets? I mean your point is really critical, right? Maybe not necessarily across the full year, but as you look at the inflection from 2Q onwards, if I hear your comment, that you could actually see some upside bias. Can you talk about what that -- where that's coming from? And again, ultimately, what does that portend here into '24? You talked about being self-providing your products from the U.S. in 2 to 3 years. Presumably, with the benefit of some of those credits, maybe that's margin enhancing. So again, I don't want to put words in your mouth, but what does the trajectory look like?

No, no. So first of all, when it comes to the IRA, honestly, the reason that I don't say what -- how will it impact, for example, margin is because since I do not know yet where it is going to hit the P&L. Will it be under the tax line or in the gross margin's line? I don't know how to guide on margins related to this, but definitely, this is big chunk of money that will come to the bottom line. Where in the P&L? Yet to be seen very much dependent on the regulations that we'll find. But taking this way -- what we are seeing and -- first of all, we are increasing prices. And again, we are increasing prices compared to where the euro was at about [ $1.1 ]. That's the first benefit that we can actually harvest because if the euro is going to be [$1.05, $1.06, $1.11 ] maybe, then we're going to benefit a lot of this. And in the absence of competitive environment that required to reduce prices, in an inflationary environment, you do not expect prices to go down. So I think that that's the first thing that can happen. Actually, our prices can actually compensate from what we've lost in 2022. That's number one. The number two is the fact that we actually do operationally very well when it comes to the expansions that we're doing in Mexico and the other areas. And here, the main question that we will see is whether we can transfer as much as we can from an expedited shipments into regular shipments. If this is the case, that's about 400 basis points that are still remaining that we can see a benefit coming in, and this is relatively large. At the same time, again, I want to clarify that there are many moving items there. For example, and you touched a little bit Julien, the batteries. We have today two battery sale agreements before we're going to our capacity in Sella 2. We have Samsung and another one that we cannot disclose. That means that in general, in Europe, if we will see next year, let's say, 600-megawatt quarterly, this is something that we can today say, yes, we can fulfill this because we have enough capacity. It will impact margin for sure on the gross level. I do not know what's going to be the impact. And I think that we are going to see much more batteries going into Europe. And this is why when we look into '23, '24, we still stay with this 30% to 32% because we will see that batteries will increase -- portion of batteries will continue to increase even once our optimizers and inverters margin will go back to 36 give or take 1% as they used to be. And the second thing that we will see is much more C&I that is always characterized with lower gross margin. In C&I, we take, we capture a lot of market share. We take a lot of deals and we see demand that is growing much quicker than the demand for residential, and this is something that we also want to capitalize on because we really have the ability to do it here.

Actually, lots of points to just raise there. So let me take one at a time.

Life is complex.

Life is complex, indeed, always. I'll break it down this way. So you alluded to -- you've consistently commented about operating leverage versus gross margins. right? And this is a point that is not novel. But I want to unpack that a little bit. How do you think about that potentially trending versus gross margin guidance? And how much of an improvement in scale could we see both not just in '23, but even beyond. Again, I'm making this point, you're talking about 600 megawatts on the storage side. How does that accrue to continued compounding improvement in operating margin expectations?

I'm not sure that I know exactly to give you the outline and -- but I'll try to give you what moves it. And I'll start by just taking you into the budget process that we do this year. We're now sitting and it will not surprise you that as a CFO, you usually see head of departments that come with bigger budgets, usually a requesting what you're able or willing to give them. This year, I see a much smaller phenomenon. It's not that they don't want to spend more than I can allow them, but actually, the difference where I started is much smaller. And why is it? Because we grow -- if you take the midrange of our Q4 guidance, we're growing 54% year-over-year in 2021 of a basis of $2 billion revenue for a hardware company. By the way, it's relatively quick if you take into account everything that is happening there. Now if my R&D wants to grow at the same pace, they need to recruit 600 to 800 engineers annually and make them efficient and make them productive. They can't do it. They simply can't match this growth. When I'm going now and I'm selling and batteries -- to your question, if I'm going now to Krannich Solar, one of the largest distributors. And I sell them not one inverter, but one inverter plus one battery, I have quadrupled the revenue coming from this deal with the same person exactly. So by definition, sales are growing much smaller. When I look at G&A, when I have my bookkeeper making journal entry for $1 million or $10 million, it's the same journal entry. We're not able to meet that growth with the same growth of expenses. Now I would like to say that we should see every year, 10% to 20% improvement in the operating leverage. That's what I would like to see. I think that it's feasible, but the one thing that we do see is that even if we want to grow our OpEx spending quicker, actually, we can't. It's becoming too much big of an operation. And this is why, again, when we're talking about, if I'm not mistaken, today, at about 15 -- on a non-GAAP basis, 15% of operating leverage. We will be able to grow the margins by about 400 basis points plus accelerated growth, it's very easy to get this 500-basis point improvement simply going from this operational leverage that will become smaller. It's relatively easy. And by the way, and have no doubt, we grow. We grow R&D, we grow sales and marketing. We grow our geographical footprint, we grow.

Excellent. All right. Lots of points you made there, but let me come back here if I can from a moment ago here. How do you think about the -- you know what let me move on. I don't want to [ depict ] too much. Let's come back to the next big subject because we're losing time. Capital allocation, right? Like you've raised capital, you've got a cash flow profile that is attractive. As you look forward, how do you lean in, right? Like, let's put it this way, you're getting your issues behind you, right, broadly speaking. Gives you, in theory, more latitude to be more offensive, what are you looking ahead to?

So first thing that you see, and again, this is due to the IRA, we will need to spend money on factories. So that's by definition is something that will happen. Now on the CapEx side, Building a factory in the U.S. means I would say $150 million to $250 million. It depends whether we buy the building, lease it or not. We've built Sella 2 factory, which is 2 gigawatt, but we can expand it up to almost 6 gigawatt, and that will require, I would say, almost similar amount to the number that we've already invested. If we want to do it because the building was built already to be close to 4 gigawatts. So that's relatively easy. So that -- if you take only these, these are about $400 million that will be needed in the next few years. I'm not sure that we will expand Sella 2 immediately. We need to see that we're ramping, that the demand is there, but factory in the U.S. will happen. So CapEx is one thing. And I think that today, the ROIC that you see, by the way, on CapEx when you build a factory here in the U.S. is about 2.5 years, which is amazing simply because of the benefits that you're getting. So that's the first thing. Second issue is indeed acquisitions. And we are very acquisitive. I think that in a sense, acquisitions are imminent rather than will they happen. And the acquisitions that we will do will be around various areas, mostly related to these what we call energy transformation that is happening from just being an inverter company that knows how to harvest energy to a company that knows how to harvest, how to store, how to utilize, how to time and how to manage energy. And we see many opportunities happening there. We're looking at various companies. And I think that this is something that will come over time in this area. We will look at other companies that will do storage. We're a battery player, which I think people do not understand the power of having your own chemistry and what you can do with it in order to basically adapt it to what the usage is going to be. So we're going to look at this. We will see much more acquisitions coming there. And I think that this is what mostly we want to do. We believe that capital allocation is always a question of shareholder value. As long as we feel that by increasing capital spending and acquiring companies, we know how to grow EPS, where, with the right multipliers create strong return for our shareholders. That's what we would like to do. The way -- the day that we feel that either we do not find any targets to buy or that we do not need, we will find a way how to return it to investors in a predictable, and I would call it a way that will be structured so people will know that this is not an opportunistic kind of a movement. I don't think that we're here yet. I think that you know and in today's environment, it's easier for me to talk. When I initiated last raise that we did in March, and I actually initiated -- entertained the idea somewhere in December, markets were falling. Prices -- stock prices were going down by tens of percentages. Energy prices went back a little bit. But if you remember, prices fell down rapidly. We felt, as management, that we're going into an era where we will have multiple opportunities to grow inorganically. Valuations will be very rational, and I think that there are going to be bargains. I think that today -- in today's environment, it makes a lot of sense that we've raised this money. Now we have the burden of proving that we not only raised it, but I actually know how to use it. But I think that we do all the step -- or we take all the steps needed in order to make sure that we can show you how we are deploying this money in the next few quarters.

Excellent. All right. Let me just continue [indiscernible]. So one other question here. I got earlier, let me just dose out to you, what do you think about this lawsuit? I want to just pivot a little bit and just [indiscernible] what do you have to say today? How is it progressing?

So first of all, it's an ITC lawsuit, so it moves very rapidly. We got two lawsuits by a company called Ampt. It's a company that we have challenged some of their patents, and we believe that going to the ITC instead of the patent office is simply a way to try to divert it from the course that is a little bit less, I would say, comfortable for the company that's suing us right now. What we saw is as follows. They sued us on the ITC, they sued us in Delaware. The Delaware court decided to stay the case for the meantime. And on the ITC, we will vigorously defend ourselves. I think that it's not an ITC case, it doesn't make any sense for the consumer. It doesn't make any sense for the industry. And I think that we're groundless, so we'll simplify it. And as usual, lawyers will make money.

There's one reliable [indiscernible]. Awesome. Let me ask you this, but what about attach rates? And just ramping storage, right? So before we used to talk about storage is, wow, can we get enough product. Now we talk about are installers aligned to sell the product as rapidly as we'd contemplated. What are you seeing on that?

So let's differentiate U.S. and Europe. Europe, we see today, every country in Europe is different. In the Netherlands, there is feed-in tariff. Actually, no reason to have a battery because you get paid very nicely for everything that you sell. In Germany, it's 80% to 90% attach rate because you cannot push electricity to the grid and you would like to utilize the energy that you're using. So if you come home with an EV in the evening, that means that you need to store the energy until you're actually using it. So I think in Europe, you see either higher attach rate. And by the way, in Italy, there was an incentive that actually paid you 110% of the cost of the battery by the government. So it made sense to put three batteries in your yard because you've got 30% from the government. So in Europe, we see very high attach rate. In the U.S., I think that -- and this is Julien in honor of the sales guys, I think that you lived in a kind of an imaginary world where you have a big market where there is a lot of demand. There is no such demand in the United States. Prices are too high. I think that we said it in the past, I believe that above $450, our selling price to the market, it's not economic to have batteries in the United States space. Simply doesn't make sense. And when we're selling at about 600 basis points, it is either people that want to have resilience or if you have cases that are, I would say, marginally, it makes sense. We don't see the U.S. market evolving into much higher attachment rates, especially if we're thinking about recession coming in. Maybe NEM 3.0 will change it a little bit. By the way, I don't think that's going to be dramatic, but it may change it a little bit. We still see the opportunity, mostly in Europe and rest of the world. And as such, we have the capacity. So I believe that next year, whatever demand there is out there for our products, we can basically satisfy it either in the U.S. and in Europe. I think that if we said in Q2 that 75% of our batteries went to Europe. In Q3, this number was higher. This percentage was higher. I think that we will continue to see strength in Europe and a little bit less strength in the United States.

Wow, interesting. Let me come back to that. What kind of growth statistics can we expect coming out of the storage segment here, right? I mean we talked a little bit more on the power electronics a moment ago. What about storage very specifically here? What's your sense? What's your visibility?

No, I'll tell you, visibility is good. And again, we cannot disclose it, but I can tell you that it can be tens of percentages, high tens of percentages growth, high tens of percentages, but it's mostly related to the mix. Germany intends to be, within 2 years, 3x the U.S. residential market. The U.S. market in general, by the way, 3x. This comes with 90% attachment of batteries, so that means that at least in Germany, this is what you'll see. Now the difference is -- the main question is, what's going to be the overall mix? My sense is that you will see very decent double-digit growth mostly coming from Europe, very decent one, again, not 10, not 15.

Okay. All right. Excellent. In fact, let me just -- since you bring up Europe again here, let me just flag this earlier. The comment, I think you said earlier was the 40% revenue composition was expected to remain relatively static, i.e., or maybe you didn't say that.

First of all, I didn't, but I'll try to say. I think that it can be -- no, no. The issue is as follows: Take Germany, take U.S., in Germany electricity prices went up 300% since the beginning of the year. Interest rates moved from minus 25 basis points to 75 basis points. In the U.S., it depends on the state. Electricity prices went up by 11% to 15%. Interest rates moved from 0 to 3.75%. It is evident where it is a much better investment to put a solar system on the roof top. Under NEM 3.0, putting a system in California will make your payback period 10.5 years. In Germany, it's 2.5 years. By definition -- and by the way, I did the calculation for our Italian factory, 2 years and 8 months for a system on the rooftop. The economics goes with Europe. I think that Europe will overgrow the United States dramatically. Now add to it another impact, which is IRA in a hindsight. If you used to think prior years that maybe next year, you will have lower ITC, then you would rush to install. Now you know that for the next 10 years, you'll have the same ITC. Nothing is actually rushing you to install. Payment period is not very nice, interest is high and maybe expected to go down eventually, IRAs here. Why growing? Why installing right now? So I think that Europe, by definition, will grow quicker. How much? Again, it's a question of how much we have, how much we want to allocate between markets, I think that Europe will be very, very strong.

Last question for me and then I'll take some from the audience.

Sure.

Just super quick. European competitive backdrop, right? I would just love to hear a little bit more, increasing commentary from some of those others out there. Any quick comments on that?

So I don't think that something's structurally changed. Europe will be a competition between Chinese string and MLPE being us, I believe, over the long term. We do see right now that because of demand that is not satisfied, you sometimes see some of the European players that used to be very weakening being relatively stagnant. You see a little bit of new players. I think that eventually, it's a very price-sensitive market. And I believe that it's going to be us versus Chinese moving forward.

What does that mean for margin?

For margins, so it depends on a [ $1.1 ] euro rate, margins in Europe and in the U.S. are similar for us, at [ $1.1 ]. So everything increase/decrease now, it's a question of where do you think the euro will be. But prices are predominantly lower in Europe, I would say, by 20% compared to the United States, overall prices.

Right. But your point -- and just let me clarify that, your expectations and confidence, you conveyed a moment ago about margin improvement was despite and cognizant of the gas iterations on global and European competitions?

Correct. And again, simply because of the fact that we increased prices in Europe, the prices are still about to be realized into our margin profile.

Right. And you're not worried about too much of a deflationary impact in pricing?

We're worried all the time. But I think that right now, we don't see anything that will change it. When we look at what we call sell-out from our channels, you see peak selling point of sale, what we call peak demand unprecedently high and the lowest ever inventory levels in the channels. We do not see this changing very quickly. Now since we know that most of the issues are coming from the lack of power semis, and we do not see this resolved in the very near future. I think that for the next year or two, we do not see deflationary pressure in Europe.

Excellent. Any questions from the audience? I know it's just rattling off very quickly here, but someone want to jump in? Once, twice, thrice, go.

Yes, in terms of your demand within the United States, is that -- I don't know if you mentioned it was it related to the ramp-up of the Mexican plant. Is it -- what effects were driving the growth rate in the United States?

So question was about demand in the United States and what affects the growth rate, is it related to our Mexico manufacturing? Actually, the demand that we see is pretty similar to what you see the growth rate of resi today because we're talking about, if I'm not mistaken, approximately 15% year-over-year, this is the amount of demand that we see. What you actually see in the U.S. is that there is a very nice stickiness of installers to the inverter manufacturers. Unless you do something very bad to them, they'll stick with you and as they grow, they grow with you. So we see a demand that is coming based on the growth and about the same size of the growth of the market. Mexico is just how we are basically fulfilling it. So for example, if I'm not fulfilling from Mexico, I'll do it from Vietnam or China. So it has a little bit less relation to this. One thing that we do believe can happen if you will see either crunch on the ability to lend monies for solar to long-tail players because of interest rates or credit scores or if you'll see some phenomenas, again, coming from the IRA where TPOs are getting slightly tailwind, I think that this is something that can be positive for us given the fact that our sales in the U.S. are more concentrated in the large TPOs rather than in the long-tail smaller installers.

I think we probably...

Hit it, I think.

I think we hit it on the nose as usual. Thank you, Ronen.

Thank you very much. Thank you for listening guys.

Thank you.