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

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. And here with me to have the chat is Ronen Faier, CFO.

Hello. Nice to be invited and nice to be here.

So I have a whole bunch of questions prepared, and I probably would split it U.S., Europe and then commercial. So starting with the U.S. market, 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 in the U.S.? 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, first of all, starting from a market, underlying demand that is not growing this year or maybe even declining, and actually expectations to see further this kind of trend continuing at least into '24, where I think that we hear today more and more pessimistic 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 6 to 8 months of inventory days. But inventory days are a little bit tricky because usually, you look at level of inventory divided by the sell-through data. And what we see right now is that the sell-through is relatively low. It's not, I would say, absolute amount of inventory that is there, 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 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, at 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 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 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.

The market always likes to focus on 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, other than pricing? I'm sure in the past with supply chain constraints, it was just availability of product. But now that that's not a problem, is it payment terms? Is it better pricing in exchange for exclusivity? Just kind of can you walk us through the [indiscernible]?

So the first thing that I would say is that we neglected a little bit the U.S. market during 2022, when we did a 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 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 2 or 3 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 it's 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 2 good companies with very good products that are very appealing to the customers. And I don't think that there is 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 2 companies, and this is how we are looking at our storage connection to the system. The technology that we are 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 of conversions between DC to AC. Actually, you do 1 compared to 3 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-kilowatt inverter, for example, you usually put 13 kilowatts 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 conflicting. When you have a DC-coupled system, you can basically take this energy to the inverter. We're still taking away 10 kilowatt in this example of energy out. And that means that we can provide more energy. On a calculation that even 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, 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 [indiscernible]. It is something that collides today with our concerned 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 can 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 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 wanted to move to California specifically. Some of the larger installers have thrown out some really high charge rates that they're seeing for recent originations. But a couple of them seem to have their own batteries, so they're pushing -- or will push once they're out, while others have mentioned Powerwall cost.

Yes.

So to expand on that, what are your thoughts about 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 a fact 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, because we do have our own open garden technology that allows to connect other batteries to. 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 is selling more batteries. We do not see yet any major change because of California, honestly speaking. We hear a lot about it. We are active amongst 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 are selling. I'm not sure that we're always the best priced battery in this case. I believe that one thing that we need to do better work at -- or job at is basically to explain the DC coupling technology, because the DC coupling technology, even though we can be a little bit more expensive on day 1, is 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 1. And I'm not sure if we're doing good enough here. We will do much more effort and we'll start with this, 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 from the other fact in our view, at least. And I think that here, it will be our job to simply try to educate the market of the fact that, again, the DC coupling is so much more important. The fact that the Tesla inverter is a string inverter and there are a lot of benefits for distributed technologies. And I think that we will have basically to simply show over time why we have an advantage there. With that said, I do believe that all in all if they do open the market today, even there will be no further players in this market. I think that given our position in the U.S. market today compared to where it was like years ago when we lost share because of the fact that we tend a lot to Europe, we have opportunity to take share even when Tesla is in the picture. And it will make us better in competing and it's always interesting to be, you know...

Okay. So let's move over to Europe. I think the market was generally a little surprised at your comments around the Europe kind of inventory for both the inverters and batteries on the last quarter call. So now that it has been a couple of months, can you give us an update on what you're seeing here today? Has sell-through moderated at all? And is distributor stress impacting how quickly you can close the receivables? I think you kind of touched upon 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 call with only colors being a little bit more vivid in 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 great. We are seeing every quarter the sell-through 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 in 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 old participant in the market at the very beginning of the year. But we are still seeing something that we translate into 30% to 40% growth year-over-year of the market in installations. And this is something that is very much different in 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 said they're going to provide up to EUR 9,600 grant if you install a PV with a battery with an EV charging. And 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 2 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 thought that maybe they will not be able to get more products. This resulted 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 we don't want the product to come to Europe, because they will allocate them to other customers. You'll take them and you'll [indiscernible]. And now they're getting our products into Europe and they see that the levels in which they are in 2-3 months. This is, by the way, that 2-3 months. The U.K. is also another [indiscernible] that it's clear from after the call that the installer, who usually used to own a lot of inventory, also stocked because of the fact that they were afraid that they will 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 then 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 will not be able to meet. And they're relying on the fact that we're able to actually provide inventory at a much quicker pace than we used to do before. Today, we can provide in Europe some products even within 2 to 3 weeks. So we feel that this is something that will go away within the next 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 the 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 of the new distributors, which will be most likely 1 month of inventory to make 6 weeks of inventories more stabilized, and then we will see a backstream of growth between growth that we'll see in Europe, believed to be [Audio Gap] again 30% to 40% to their 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., we see that inverters are growing, batteries not too much. In Germany, for example, about 80% of the systems are only 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 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 talked about 11 gigawatts this year. Is that going to continue to grow? And then just on the competition side as well, I would have thought the competition, especially on the Chinese side, would be actually more fierce here, because I think that's actually how they entered the industry, 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 market. In general, the C&I growth is usually following the same trends that you see in residential. So that means that if in U.S. you don't see a lot of growth in residential because of interest rates and electricity prices, this will basically be the same case for C&I. And in Europe, because it's a very good installation -- return on the installation when it comes to residential, you see the same in C&I. So 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 cooperation to put more and more solars in order to neutralize their carbon emission. Now when you go to Europe, it's a great economic investment. We invested on a system on our Italian manufacturing side. We're talking about 2 years, 9 months of [Audio Gap] period for a system that we will need for 25 years. A great saving asset for any company that wants to make financial investments and especially if you have concerns about electricity availability. But other than this, it helps us over to offset some of our carbon emissions. So we see it in Europe [Audio Gap] we see, by the way, outside of the United States. The potential here is bigger. 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 rooftop 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 streams, like 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. And that means that we can actually decide towards whether at this rate you would push electricity to grid, 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 reducing. And this is something that we know how to do out of the box with our SolarEdge ONE capability. So that's a great advantage. The other advantage is the overall comprehensive solutions if you know how to do it. We acquired the company in U.K. called Hark. Hark allows C&I campuses to very easily connect to their energy management systems, the Schneider and Honeywell, and in a very inexpensive project to be able to see through 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 on your refrigerator the temperature by 1 Centigrade in degree, it's 5% saving on energy. So the fact that we can come with a package that is so much comprehensive with storage, with inverter, with energy management systems and other software that allow 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 bit of anti-Chinese sentiment, mostly around C&I related to the fact that, I don't know if it's [Audio Gap] or if it's the concerns about security of the systems. But you're right, we do see that also the Chinese are pushing a little bit less when it comes to the segment, while they're more focused on residential at this point in time.

Very helpful. And then you've -- actually, just I'm going to put you -- try to [indiscernible]. So 11 gigawatts, is that slated to go higher? Do you have the visibility to kind of [indiscernible].

So I believe 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 at, as I said, tens of percentages. And since our biggest C&I market is U.S., definitely, we see C&I growing here.

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 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.

So as mentioned, we're not planning 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 EBITDA rather than gross margins or even revenues. I'm happy to get more profitability on smaller revenues than the other way around. So that's why we would need to look, when you look at prices, what is going to be the overall impact that you 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 the tool that we're using. And we believe that we can either grow share that we can either change a little bit the dynamics related to what products we want to push. So for example, in the U.S., we've 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, 3 or 4 years from now, to be more ready for new things 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 results 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 would be much more beneficial for them than, I don't know, $0.02 on the [indiscernible] side. Once we do see the price [indiscernible], EBITDA is a legitimate tool as long as it increases profitability.

So one follow-up to that question. You mentioned how distributors might be cutting prices of products just to get them off the shelf. Do you have any say in how much they can cut the product (sic) [ price ]?

No. Not necessarily, because once we sold, it's theirs. We will try to help them not to do so, by the way, because I think that it's not 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 on the flip side, it helps us 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 the [indiscernible] run. And once we make sure that our partners, their well-being, their financial well-being is a little bit better, it is better for us than taking markets right now or holding prices a little bit longer.

Right. You also mentioned that you -- like 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. Have your thoughts changed here at all with respect to exporting it outside the U.S. and using the subsidy to offer lower pricing in new markets?

So [Audio Gap] think about it because it seems to us a little bit non-logical to use taxpayers' money to go to subsidize and go cheaper inverters in France. It simply doesn't make any sense for us. If this is the case -- we're a company that is bottom line oriented. So we don't see any 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, [indiscernible] when you're manufacturing -- based on its 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 activator 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 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 8 years in this industry are just very quickly running, and then in 8 or 9 years from now, when the IRA benefits are gone, you 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 economical structure. So something that we can do, but we won't do everything [indiscernible].

And then do you have an expected timing on when you can expect to get treasury [indiscernible] on the full [indiscernible]?

So I've been wrong so many times that I'm not willing to bet right now. So I'd say that experimental bets are talking about October. I'm not sure yet. .

Okay. And then 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 the timing for 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, 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'll 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 '24, beginning of '25, simply because of the time that it takes to build a 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 the answer is definitely.

With that, we are out of time. So thank you, Ronen.

Thank you very much.