Welcome to the SolarEdge Conference Call for the Second Quarter ended June 30, 2023. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Events/Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved, and any recording, reproduction or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event/Calendar page of the SolarEdge Investor website. I would now like to turn the call over to J.B. Lowe, Head of Investor Relations, Investor Relations for SolarEdge.

Thank you, David. And good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2023 as well as the company's outlook for the third quarter of 2023. With me today are Zvi Lando, Chief Executive Officer, and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the second quarter ended June 30, 2023. Ronen will review the financial results for the second quarter followed by the company's outlook for the third quarter of 2023. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release in the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter ended June 30, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now I will turn the call over to Zvi.

Thank you, J.B. Good afternoon. And thank you all for joining us on our conference call today. Starting with highlights of our second quarter results, we concluded the quarter with record revenues of approximately $991 million. Revenues from our solar business were at a record $947 million, while revenues from our non-solar businesses were $44 million. This quarter, we shipped 5.5 million power optimizers and 335,000 inverters. This quarter, we also shipped 269 megawatt hours of residential batteries, a 22% increase from last quarter. Our solar business revenue grew quarter-over-quarter by 4% and by 38% year-over-year, mostly driven by record revenues in Europe, offset by a decrease in revenue in the United States and rest of world. We saw record revenues in many countries this quarter, including Germany, the United Kingdom, Switzerland, South Africa and Thailand. Particularly noteworthy is the growth we have been discussing for several quarters in the commercial segment, which has seen megawatts shift go from 1.5 gigawatt in the fourth quarter of 2022 to 2.1 gigawatts in the first quarter of this year to 2.6 gigawatts of shipments this quarter. The solar market is going through a transition, emerging from the recent period of component shortages, high energy prices and rapid growth to one now impacted by higher interest rates and excess inventory. Given this shift, I would like to review the major trends that we are seeing in the various regions and how it affects our company. In Europe, installation rates continue to be high in both residential and commercial. However, the strength in the market is somewhat more moderate than what was anticipated heading into 2023, largely due to a milder winter, reduced concerns over energy resilience and lower electricity prices. With that in mind, our growth in Europe in the second quarter was…

Thank you, Zvi. And good afternoon, everyone. This financial review includes a GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. Segment profit is comprised of gross profit for the segment less operating expenses that do not include amortization of purchased intangible assets, impairment of goodwill and intangible assets, stock-based compensation expenses and other certain items. Total revenues for the second quarter were a record $991.3 million, a 5% increase compared to $943.9 million last quarter and 36% increase compared to $727.8 million for the same quarter last year. Revenues from our solar segment, which include the sales of residential batteries and trackers, were a record $947.4 million, a 4% increase compared to $908.5 million last quarter and a 38% increase compared to $687.6 million for the same quarter last year. Solar revenues from the United States this quarter were $195.6 million, a 23% decrease from the last quarter and a 37% decrease from the same quarter last year, representing 21% of our solar revenues. Solar revenues from Europe were a record $688.5 million, a 19% increase from the last quarter and 112% increase from the same quarter last year, representing 73% of our solar revenues. In Europe, we continue to see meaningful quarter-over-quarter revenue growth in general and noticeable records in Germany, with 64% growth reaching close to $300 million of quarterly revenues. Sweden, with 106% growth, the United Kingdom with 50% quarter-over-quarter growth and Slovenia with 54% growth. Revenues from batteries grew slightly this quarter in Europe, limited by the fact that we are still constrained by three phase inverter supply, which is needed for battery coupled systems. We do identify some excess battery inventory in the European…

[Operator Instructions]. And we will take our first question from Mark Strouse with J.P. Morgan.

I wanted to start with the 3Q revenue guide. When we look at the $80 million, $90 million dip quarter-over-quarter, can you break down how much of that is driven by Europe, US, rest of the world? It sounds like the inventory issue is fairly broad, but I'm just curious if we should think about kind of – if Europe is 70% of your revenue and US 20%, is that similar kind of mix for the change quarter-over-quarter.

Actually, when we look at the guidance for the next quarter, we need to look a little bit region by region because we see a little bit of a different dynamics. I would say that most of the reduction that we see is coming first of all from less revenues of batteries, mostly in Europe. As we mentioned in the prepared remarks, we found a situation that our batteries shipments were a little bit faster than our ability to ramp up the inverters that come with them, mostly three phase inverters. And as a result, there is a built inventory within the channels there that needs to be cleared in order to continue and grow. And this will be cleared mostly through the adoption or getting more inverters from us during the third and the fourth quarter. And this is why, by the way, we're also increasing our air shipments. So, first of all comes this decrease. The second one comes actually from optimizers. Again, in Europe, it's also happening in the United States but a little bit more in Europe because Europe is more characterized with commercial systems. Because of the fact that inverter shipments were a little bit slower to ramp compared to the other products, again, because of the three phase products that we needed to get more components, what we usually see is that installers, and especially commercial installers, who are installing the modules faster than they do the inverter, actually they install the inverter only at the very last moment, used to take a little bit more optimizers in order to make sure that they can basically complete the installation of the modules either on the roof or in the overall installation. And then once the inverter comes, they simply install it and commission it. So since the majority of the revenues came from Europe, the majority of the down this quarter is also coming from Europe because of these two phenomena. At the same time, when we go to the United States, as Zvi mentioned, we believe that we have basically seen a lower amount that we do not expect to go much lower in the next quarter because of the fact that, on one hand, indeed, the inventories are high, but still some of the products that are needed are still missing there and we're going to ship them. And when it comes to rest of the world, again, it's a relatively mixed situation where, again, we expect to see, I would say, something that will be relatively flattish. So the majority will come from Europe, the majority will come from batteries and optimizers that were first of all delivered, and rest will be relatively flattish to maybe slightly down.

Your comments were interesting regarding the European distributors and kind of managing the number of suppliers. Just curious if you can give us a fairly high level update on what you're seeing with the overall competitive environment.

Mark, the phenomena that I described, and it is indeed – for those that have been active in Europe for years, it's something that we've seen through the cycles. I can give you an example that some of our distributors in Poland are carrying today 10 brands of inverters. Six or seven of them are new that they didn't have before that, during the period of shortage, they just took whatever they could get a hold on because that's what the installer needed. And now as things have stabilized, they're paring down the number of brands that they're carrying into a more classical combination of, call it, the high end, the base, and the economic solution, if you will. And this is a dynamic that has repeated itself multiple times. And it's more pronounced in the module side. And if you've seen some of the reports and from our discussions with distributors, they also emphasize that the inventory levels on modules are abnormally high. And a lot of that inventory is by now – the module pricing in the market is significantly lower than the prices at which those modules were purchased. So a lot of distributors are in some form of financial challenge. And with that, they are resolving that by going to, on the overall offering, to low levels of inventory that are maybe lower than those that they would normally carry in this type of a period, especially because the overall demand is still high, but just in order to control their financials. So, the market is very active. Installations are up. And demand for equipment is drawn. Just there's an adjustment on the channel side to limit their portfolio, drain the volumes that they've accumulated during the closing months of the shortage period, and get back to a more sustainable growth type of model.

We'll take our next question from Brian Lee with Goldman Sachs.

Had a couple here. I guess, first off, maybe for you, Ronen, appreciate some of the color around the different dynamics in Europe, rest of the world, US that played into the weaker, maybe the unexpected 3Q guidance here. It sounds like some of that's persisting, though, beyond just this quarter. So can you give us sort of an early read into what you're expecting as you think about the timing of inventory balance, battery shipments and weakness in US as well as seasonality you called out? Like, is there a path for 4Q to be flat, up, down? Just kind of give us the put some takes around how we should be exiting the year on the top line. And then I might have missed this, but did you give a specific battery shipment guidance as well?

First on the second, no, we didn't give a specific guidance for batteries, but they are going to be down substantially next quarter compared to this one, given the dynamics that we see, especially in Europe, more batteries in the channels than I would say, normally, the distributors would like to have because they're still missing the inverter. So in batteries, it's definitely going to be substantially lower next quarter. Now, when it comes to the dynamics in the quarters, unfortunately, life is very complex in this area. And I will try to give a little bit of the puts and take there. I'll start from Europe, again, being the center of our sales today. In Europe, today, what we see is that the inventory levels on one hand are relatively high, but when you look at the days outstanding, which is a result of the sale through from the channel, they're not high at all. They're actually at the normal level. And when we are looking at the point of sale data of how much is being sold from the channels, we see record levels over the last two quarters that, to our understanding, are continuing, which means that, in that case, the demand is there, the demand is fairly strong, not maybe as strong as people believed from the very beginning of the year, but still very strong. And, therefore, you would say that the levels of inventory that the distributors have, and maybe a little bit of change in its patterns and making orders a little bit shorter time from the time that they need it because there is enough supply in the market creates a situation where, basically, some of them even say that it'll be one or two quarters, but not more than this until…

Maybe just to follow-up on that. You didn't mention batteries. Is the battery adjustment happening all in 3Q? Do you think it goes back up in 4Q? I'll just squeeze in my last one. On gross margins, kind of surprised by how much gross margins are being guided down relative to the strong performance at the beginning part of the year here. Is the entire 300 basis points at the midpoint coming from the air freight and does that go away after 3Q? Are there other impacts embedded in there? Just trying to understand the 35% solar gross margin going to basically 32% in three months and then what the sort of forward would be in terms of recapturing some of that, what the levers are there?

First of all, I think that the question that was sneaked will be a higher answer than the first one. So I'll start from the first one. In general, we expected the batteries in Q4 – and again, we do not guide yet, but we expect them to be similar and maybe slightly up compared to the third quarter. And here, the reason is, again, it's end of the year. Nobody would like to exit the year with too much of an inventory. So we assume that this is more related to less market dynamics and more of inventory management dynamics. And especially, by the way, understand, Brian, that this is a product that is relatively expensive. And once you have availability in the market and the distributors know that the suppliers do have availability and the availability is relatively close to them, they know that they can get sometimes batteries within days, they try to shift a little bit their load at the end of the year because of their financials and the way that they look to the vendors or to the manufacturers themselves. I would say that, at least from a – if I would take not one or two quarters, but let's say like two or three quarters ahead, the phenomena is going to be of a growth inventory pattern rather than declining or stabilizing one. It's just that, again, there's a little bit of play where end of the year is a determining factor. On the margins, actually, here, it's a little bit of a different situation. The first thing is that we are going to ship much more inverters that are three phase commercial inverters during Q3 and Q4. This is the product that is mostly missing in Europe. And this is the product…

We'll take our next question from Philip Shen with ROTH MKM. We will next move on to Colin Rusch with Oppenheimer & Company. Please go ahead.

Can you talk a little bit about the R&D spend and how you're thinking about the relationship with Infineon? Anything that we should be attending to from a prepayment perspective, how that might streamline some of your R&D spending, anything else [indiscernible] agreement?

I think the R&D spending pattern has not changed significantly. We're continuing to invest with mild growth as we're expanding into new areas, new products and continuing to develop next generation products for the existing markets that we serve. The cooperation within Infineon has two elements to it. The first is assurance of supply to the components that we use en masse in our current product. So this is semiconductors and most significantly IGBTs that are used in every inverter that we do. That's the first layer of the corporation with them. And that does not impact R&D, obviously. That's an operational view. The second element is working together on next generation power semiconductors like silicon carbide and gallium nitride. And that is a long term cooperation that is again – it's not it's not a big swing on R&D investment one way or another. It's preparing the future of our power semiconductors by working with one of the leading companies in this area as well as other companies that we work with. So it's a strategic partnership for us. Obviously, it's not something that has a direct impact on our R&D spend, but more on our roadmaps and assurance of supply,

From a pricing perspective, we've gone through multiple rationalizations of the solar demand profile over the years and you've adjusted pricing in various ways. I guess what would you need to see to start taking some price action in the market at some point to continue to take market share and then how you think about the importance of market share in terms of long term growth of the business?

I think exactly as you described, there's a business as usual mode for the market and for being a technology and high end supplier within the market, where we focus on differentiation and constantly make sure that our pricing is justified by the value in differentiation relative to our competitors. If you look historically, in the market, there is a dynamic where, on an annual basis, there's cost improvements that suppliers make, we invest a lot in cost reduction, there's volumes increase, and that supports our cost reduction. And that, in turn, also enables some price reductions and making sure, again, that the gap relative to our competitors is justified by our value. So the last couple of years have been very disruptive or very different in terms of the dynamics. I do think that it's likely that, next year, following some of the dynamics that we described over here, the market will be back in more of its normal type of situation where things are stable. And then there is more activity on the area of cost reduction as well as more activity in the area of reasonable price reduction. So I don't hold out that happening sometime next year. Right now, we're still not in that type of environment and we don't see the need to reduce prices and our prices have been stable recently.

And we'll go back to the line of Philip Shen with ROTH MKM.

You talked about how pricing is stable. That said, are you open to price reductions in early 2024? And perhaps you can talk through it by geography and by end market? And also, can you talk through how many weeks of inventory may be in the channel by end market and also by geography?

Starting with the second part, at high level, in Europe, the inventory levels are still, I would say, below a quarter, probably in the range of two months. For some products like the three phase inverters, it's less than a month. For some products like single phase inverters, it's probably more than two months. And historically, these are very reasonable inventory levels for the European market. What's happening is what we described it and I described before, is the dynamic where they're sitting on very, very large inventories of modules and trying to control financials, and in a way maybe call it taking the risk or being on the edge in terms of the overall inventory levels that they're holding, but I think that the inventory levels in Europe are, are in that range and considered reasonable, maybe on the high end of reasonable. But considering the very high sell-through and installation rates, it's not the major bubble, if you will. The US probably – the inventory levels are higher. They're closer to two quarter level. And as Ronen described, although we're seeing gradual uptick in installation rates and sell-through, to work through that type of inventory will probably take a bit longer, unless there's a more significant uptick in installation rate. Maybe as NEM 3.0 becomes more clear, we are seeing much more activity in terms of understanding the value of our DC coupled architecture for California. And I discussed the anticipation that we have that commercial will also begin to pick up. But if there isn't a major pickup in installation rates in the US, it will take a bit longer to work through that inventory. In regards to the first question on pricing, going back to the answer to the previous question that, during 2024, I think that this topic will be a relevant topic as we have a better view on our cost management structure and the market is in a more stable condition. I can't say that we rule it out. At this point, it's just not something that is in discussion for the coming few months.

Shifting over to C&I for a bit, I was wondering if you could update us on what the backlog is there. And then in terms of your financial targets, if the implied lower EBIT margin for Q3 is just operating deleverage, just curious about that. Or if you think there's something more structural. Can you address whether or not the 2023 exit rate targets of 20% to 22% EBIT margins are still achievable?

First of all, when we look at the operating margins levels, we don't see anything structural in the way that our financials in our business is working at that point of time. So I would say that the majority of the – less of the leverage that we're going to see in Q3, and again, Q4, we're not yet guiding, but this will be exactly the same phenomena, is actually related to the level of revenues rather than related to the level of anything that is happening on the margins or on the pricing level. Now, in general, I can say that we're relatively restrictive on growing operating expenses in general. We've been and we've seen through various stages of the solar market. We do not see, at this stage, as was the case in Germany, let's say, or Europe in 2013 when market disappeared, again, we see it's more of a correction rather than a crisis that's going around the overall, I would call it, situation related to financing and a little bit of availability that exists there. So the operating margin improvement model is exactly the same. It will resume exactly to be the same operating leverage once revenues are up. And I would say that the fourth quarter target will be achievable based on the revenues forecast that we will provide at that point of time. And whether it will be this or not, it's only a revenue issue rather than anything else. Phil, I apologize, but I lost the train of thoughts on your first part of the question.

No problem. It's on C&I backlog.

So, C&I backlog, I want to talk about, first of all, volumes and then on the backlog. From volume point of view, from the very beginning of the year, we have already delivered the volume that is very close to the entire last year. And the backlog that we have is a more than what we have already delivered for this first half. So when last quarter, we said that we had something which, with very simple math, you could see about 11 gigawatt. This year, this is still a number that we see happening for this year. And again, based on our availability, we'll have more products, it can even be bigger. From backlog buildup, on the other hand, this is something that is changing because as long as the distributors knew and the installers knew that there's a lead time of sometimes 12 months for a product, they saw very good reasoning to put an order into place, binding orders. And so, it's possible to make sure that they get product. And sometimes, by the way, they did it simply because they knew that there was going to be a little bit of allocation, so they wanted to ensure their places. Once we're moving into product availability in the field and also if you look at our inventory levels and finished goods inventory levels that are building, by the way, in a healthy way to reduce shipment costs in the various regions, there is no reason for any particular distributor to put now a backlog into a year from now. So I can tell you that we have a solid backlog for Q3, of course, Q4 and even Q1. From Q2, where we still take orders sometimes by the way, we see smaller backlog and I would estimate that, over the next few quarters, we will see backlogs being shorter in nature compared to where they were a year ago. This is not necessarily indicative of the actual volumes. It simply means that we will turn more orders into revenues in the same quarter than maybe compared to the spoiled situation that we were few quarters ago where we know, before we started already, that everything that we can manufacture we can sell.

We'll take our next question from Andrew Percoco with Morgan Stanley,

I just had another follow-up question on the commercial segment. If the percentage of total megawatts sales continues to drive, go higher quarter-over-quarter, it sounds like that's going to be a driver of lower margins in the third quarter. Have you disclosed what the margin level on some of those commercial customers look like on maybe on an average basis? Just trying to think through, if commercial continues to grind higher in 4Q and into 2024, what we should think about for potential floor on gross margins?

I'll start by, first of all, a little bit of the numbers. We used to say that usually commercial margins were 500 basis points to 700 basis points lower than residential margins. And this is, by the way, still the case dependent on the size of the installation, where, usually, when we have – the bigger the installation is, the lower the margin is on the product. So from that point of view, I think that it gives us an answer. We also, by the way, need to remember that not all three phase inverters that we're shipping are commercial because Europe, and especially Germany, Austria, Switzerland, are markets that are three phase markets where we sell three phase inverters. And again, most of our shortages today are in three phase, both in commercial and residential. I would like to add one more thing, and this is that, yes, of course, the more commercial you see, the lower the gross margins, but at the same time, usually, because of the fact that these are installations that are bigger, their contribution to the operating margin is close to similar to what you see in residential simply because they draw with them much less operating expenses. So while you do see usually lower gross margin, you can see almost similar operating profit when it comes to these products specifically.

Maybe just to follow up, and apologies if I missed the answer to this, but have you broken down what your expectation is in the third quarter on your solar revenue, specifically between Europe and the US in terms of quarter-over-quarter trends?

We usually don't break it on a forward-looking basis.

We'll take our next question from Jordan Levy with Truist Securities.

Most of my questions are answered. But maybe I'll just ask sort of thinking on the progression on the battery side, the first kind of on the performance of the current battery state as you ship them and volumes ramp and then maybe looking out into next year as you roll out some of the new initiatives and just any updated thought there.

We didn't hear you that great. But if I understand correctly, the question is about the performance of battery. So specifically, batteries are not yet challenged in terms of lifetime and cycles. So, it's hard to give a clear answer on those. It will take a few more years. The two parameters that I would consider a critical point at this time is the – first is ease of installation and commissioning time and the second is our reliability and failure rates. I think we're far from perfect, but I think we're doing good and we're getting positive feedback from the market on both. We've introduced continuous improvements on installation times. Commissioning software wizard that guides the installers through the installation process and are getting very good feedback for the market on that topic. And on reliability as well, failure rates have been low and performance has been robust, so we're pretty satisfied in that area. And again, that said, on lifetime and cycles, it will take some time until that picture is clear.

We'll take our next question from Corinne Blanchard with Deutsche Bank.

Maybe as a follow-up, you mentioned I think probably two quarter to clean the channel in the US. But I think at the beginning of the call, you mentioned that the [indiscernible] of your product did increase by 10% this quarter. So, I just wanted to clarify this, and then I will have a follow-up on the battery side after.

I think, again, it's a bit about magnitudes. We are seeing a positive indicator, I would say, of sell-through by our distributors that this has increased in the US by 10% quarter-over-quarter. But as I described, I think the inventory levels are still such that this is not a sufficient enough increase to drain the inventories quickly. So, either it will take a bit longer for the inventories to decline, unless this is an indicator that will continue to improve and sell-through and installation rates will go much higher. But at the current rate, it will take at least a couple of quarters to get through the inventory.

The follow-up on the battery cages. And maybe I missed it, so apologize if I did. But can you just give a quick update maybe on Sella 2 and where you trend? And where do you see the pricing on battery going over the next 12 months or so?

Remember, Sella 2 is – our current residential battery offerings are not yet to using cells from Sella 2. So, Sella 2 is ramping and, as we described in the prepared remarks, will reach its full capacity by the end of the year and is in parallel selling cells and batteries for other application. Meanwhile, they are also beginning to produce the type of cells that we intend to use in our next generation batteries that will be introduced – beginning to be introduced in the first half of next year. So, gradually, the capacity of Sella 2 will move more into our own batteries. And that will give us flexibility also in terms of assurance of supply, also in terms of pricing and also in terms of technology of making sure that really the cells are optimized for the application in the system of our own batteries and inverters. So, that's the picture regarding Sella 2. Regarding battery pricing, again, we're not seeing major trends. We did reduce slightly battery prices on our single phase batteries. But, generally, we don't see additional major shifts on battery pricing in the coming couple of quarters.

We'll take our next question from Julien Dumoulin-Smith with Bank of America.

Just following up on a few different comments here. Actually, first off, if I can, 45X, just would love to get an update here on that front. What percent of the overall production, as you think, ramping into 2024 do you think could ultimately qualify? To what extent could you ultimately leverage even European volume to take advantage of 45X here, just wanted to make sure we double back to that as we get some final clarity here on that front, first off. Then I've got a follow-up on the margin conversation.

As I described, we're starting off with inverter manufacturing. Already, we will be delivering inverters that qualify for 45X in the current quarter, but they won't be significant from a financial point of view. And in the fourth quarter, we will be delivering more than 30,000 inverters and that's when it will begin to have an impact. We intend to continue to ramp, of course, into 2024, add optimizer manufacturing to the mix and ramp initially, of course, to satisfy the US demand. After we reach that milestone and will continue to add capacity for other purposes, assuming we can benefit from the same incentives, for the regions, that's still going to take time. And by then, I think a lot of the IRA regulations will be more clear in terms of what is possible and what is not.

So it sounds somewhat dynamic looking to scale off the 30,000 units in 4Q, but the plan – especially as you think about the C&I compliance is still in flux, it seems like. But if I can actually jump back to the margin question and the conversation on that front real quickly. Just to clarify earlier, right, you talked about this inventory issue persisting on the residential side for some quarters here, but obviously, the C&I looks much healthier. How do you think about that target margin going back to the earlier 20% to 22% as you see – or at least as you seem to imply that 2024 is going to see materially higher C&I contributions as a percent of the total mix, but I don't want to read too far into that.

Again, yes to see 2024 because we're also surprised a little bit by the second half of 2023. But I would say that the dynamics would be as follows. What we see right now, especially in Q3 and Q4 is the fact that the US market that is correcting right now, which is usually characterized with high resi and higher margins, by the way, compared to other regions, is slowing down very much, which, of course, impact negatively the margin. And at the same time, Europe is growing. And the commercial side is also growing. And this is also something that takes us a little bit down because the portion of commercial compared to residential in our overall mix, at least in Q3, Q4 is higher than we anticipated or anticipate to see. If you combine these, the expectation should be that, in 2024, where we believe that, first of all, Europe will come back to course much quicker than the United States and we will also see, of course, again, there an increase in residential. Plus the fact that the US market that contributes to margin very nicely is also going to go up within, I don't know, two, three, four quarters, but this is still within 2024, yes, we do expect that 2024 margins should come back to levels that we've seen, at least in the last quarters. With that said, again, the major ace is going to be here batteries because we do see that battery prices continue to go down at least right now. And as we've mentioned before, batteries target gross margin should be around 25%. So even if today or in some quarters it's higher than this, I'm not sure that this will persist. So I would cautiously say that 2024 should be, of course, first of all, back in the model, by the way, which we also believe that this may be the case even this year as well for the next two quarters. And second is that, yes, there are some drivers that suggest that 2024 can be on the upside part of it rather than on the downside part of it

And actually 45X, any expectations there just to go back to the part.

I'm not sure where the expectations are. But at least from a – as we said, we believe that the $0.065 is something that we have already in our pocket. So everything that we'll manufacture this year will be at least $0.065. We believe that we will retain at least 50% of these to our margins, given the fact that manufacturing in the US is a little bit more expensive.

We'll take our next question from Kashy Harrison with Piper Sandler.

Maybe just at a higher level, just given the increasing availability of equipment supply, do you think that the distributors' definition of normal is going to structurally decline just given some of these new cash flow dynamics? Or do you think this is more of a temporary thing where if they thought, to your point, two months was normal before, but by the time you go back to 2024, that's what they define as normal? Or that two months become a month or half a month? Just want to get some sense of how you think about distributor thought process and cash flow dynamics, et cetera.

What I'm saying is based on experience and the conversations that we had with distributors recently, but it could be different. But our judgment would be that, at some point, it goes back to the type of dynamics that we've seen in the past. If you look today, following the period of shortages – first of all, also in installers are holding inventory today which is the phenomena that usually installers don't want to hold inventory. And then on top of that – and the picture of how much inventory installers are actually holding is not clear. On top of that, distributors, they're carrying seven, eight, nine types of inverters, a similar number of module suppliers. For each one, they're holding inventory, many part numbers. It's really in their interest and their classical behavior to bring it down and to have a much smaller line card and much more control. In that type of environment where installers don't hold inventory anymore, distributors hold a limited portfolio of products, even though the suppliers and the equipment manufacturers will have availability, it still, I believe, will go back to the classical model of holding in the range of a quarter worth of inventory within the distribution channel, give or take, depending on the type of product and dynamics. But I think that that's likely going to be the steady state that the channels will return to following this adjustment and the amount of time it takes.

And we'll take our next question from Joe Osha with Guggenheim Partners.

We spent a bunch of time talking about what the inventory drawdown might look like, in particular in Europe. But as we enter next year, it does seem that we have a few policy headwinds, in particular in southern Europe. So I'm just wondering, I know it's early, if you can opine what you see the demand picture looking like early next year as we come out of this inventory correction in Europe.

Actually, just a few data points, our installation rates in – take Italy, for example, right now – are higher than they were a year ago despite the fact that some of the programs have changed and some of the installations are less lucrative for the homeowners. So we're not seeing the policy changes having – in the countries where there are, what you would consider maybe negative policy changes having an impact. And I think it's an opportunity also to explain a little bit more what Europe is. So, you have the large markets like the German market, where I mentioned that, in 2022, it was 7.5 gigawatts. And this year, it's expected to be somewhere between 10 to 12 gigawatts of installations and to continue to increase into 2024. And in parallel to that, you have all kinds of different size markets with different type of environment. And just as an example, in the prepared remarks, Ronen mentioned Slovenia, our revenue in Slovenia in 2022 was €25 million. In 2023, our revenue in a country like Slovenia is expected to be in the range of €70 million to €80 million annually. So these small markets that are evolving, they're not so small and there are not many, but there are multiple such markets. So all in all, again, things can change. But looking at the European landscape, at least for us and considering our position in many of these large, small and mid-sized markets, is we're very optimistic still about the dynamics in the European market going into 2024.

We'll take our next question from Vikram Bagri with Citi.

Ronen, first off, you mentioned substantial cash buildup or generation the next few quarters. Can you talk about capital allocation and particularly about share repurchases, if that's in the budget?

In general, we do not have plans for this right now. We do experience right now because of the phenomena that I explained a little bit later, a longer cash creation cycle, and this is something that will start to play out in Q3 simply given the fact that we are starting to reduce inventories and collection is going to be a little bit faster. With that said, we still believe, and this is why we also raised capital last year, is that there are opportunities out there to present faster growth and to present a much more comprehensive growth. We do not believe that we have exhausted these opportunities. We're still reviewing them. Some of them are being due diligenced these days as well. And at least at this point, we believe that there is much better creation of value to investors by acquiring companies, building the business and building a portfolio rather than just returning it to the investors. Once, by the way, we feel that this would not be the case, we will surely consider this, but we don't have any religion against it. But I believe that opportunities are going to be created, I believe, in the near term to use this cash.

My follow-up is on inventory again, the hundredth question on the same topic. I apologize if this has been answered. Can you provide the magnitude or at least cadence of rebalancing in third and fourth quarter? Ronen, you mentioned in your prepared remarks, US, the shipments were down 29%, but the sell-through rose more than 10%. So inventories in the US, it seems like, are already down more than 30 and are still manageable? Your comments on Europe, it sounds like, the inventory rebalancing required is not – the magnitude is not that big. So it seems like most of the rebalancing happens in third quarter. So the balancing in fourth quarter is more dependent on your projected demand and sort of borne out of caution and it might not happen. So if you can comment on the magnitude, if you can characterize what the impact on revenue is, and the cadence, how much of the rebalancing happens in fourth quarter and third quarter?

I'm not sure if I can cover all of it because, again, we see multiple segments, multiple regions and multiple phenomena such as the, again, Q4 seasonality in Europe, which is usually a big drawback compared to the fact that, as you mentioned, and rightfully so, that we believe that the inventory corrections, at least in Europe are going to be a little bit quicker. In general, I would go again one by one. I said that, in Europe, I think that, yes, the correction within the distributors should be relatively quick, given the fact that the inventories levels that Zvi mentioned before are not so high when it reflects inventory days, while we still see record high point of sale data. And the bigger question there is going to be how will Q4 look like and what is going to be, from a cash perspective, the appetite of the larger installers to continue and maintain – sorry, distributors continue and maintain inventories. That's I think the biggest question. Again, I would say that we're cautiously optimistic there. But I'm not sure that I have a good answer. In the US, your analysis is almost correct, other than the fact that we start from a relatively high level of inventory. So even though we decreased the shipment, when we look at the exiting point of the quarter, this is the time where Zvi mentioned that sometimes we've seen some distributors close to two quarters of inventory. This is exiting the quarter. And this is why we think that this is something that would take a little bit more time. In general, we believe that since Europe is very strong for us, since rest of the world, by the way, continues to be very strong, this will be the thing that will – and this is, by the way, together, today, close to 80% of our business. This will be the area that will be moving quicker from this kind of correction into more normalized patterns of orders, where we think that the US will lag, I would say, by, I don't know, maybe two or three quarters after Europe in this sense.

And we will take our next question from Jonathan Kees with Daiwa.

I just want to double click on – you're saying one of the trends for 2024, the third party ownership, can you provide some more color? Is that something that's – there's obviously a shift undertaking now. Do you see that being – I guess you're anticipating that to be quite material in 2024, more the first half second half, and that should have a big offset for the higher interest rates. If you can just provide some more color about that, that'd be great.

It's a trend that a lot of people in the market anticipate for the reasons that you mentioned. There are some benefits in the IRA for third party ownership as well as the impact of interest rates on loans. Some of the large installers that we speak to are beginning to see this shift, although not in a dramatic manner yet. So, I think it will take some time to build up. And then, of course, that refers to the origination. So that's at the time that the consumer close the contract. For that to move through to purchases and installations takes a little bit longer. So we're not seeing anything rapid happening in in this regard. But there is a trend in that direction that is expected by the people. We don't have any special visibility on this. So it's more what we read in here. And the market is expected to be a meaningful shift from loan to third party ownership to lease.

And there are no further questions on the line at this time. So I'll turn the program to SolarEdge CEO, Zvi Lando, for closing comments.

Thank you. So in summary, we're pleased with our results this quarter, which demonstrate the advantages of our position across diverse markets and application. So thank you all for joining us today and have a good evening.

This does conclude today's program. Thank you for your participation and you may now disconnect.