Ronen Faier: Sure. So of course, you know, cash is, especially in these times of very low revenues, is one of the major items that we’re keeping our eyes on. And as I mentioned in my prepared remarks, we expect this quarter to be actually the lowest cash point for the year. The main reason for the position that we’re in right now is the fact that while we did see the revenues declining already when we guided for Q4 and then for Q1, you still have commitments for inventory procurement and also for manufacturing towards your contract manufacturers. And that means that during the first quarter we still manufactured more than we actually sold. And this, of course, results in the fact that we had to pay for the inventory and we had to pay our vendors.
What happens in the second quarter is that this phenomenon is actually reversing. We are going to start selling more than our actual manufacturing and actually, we’re going to utilize the inventory that is just $1.55 billion of cash sitting in the form of products. And once we’re going to start reversing those, we expect the cash to start to be generated again. So we already expect to see cash generation in Q2, and we’re going to see intensified generation into Q3 and Q4, where not just that we will have higher revenues, we will also have higher utilization of the inventory.
Andrew Percoco: Thanks so much.
Ronen Faier: And one thing, by the way, just to complete on the convertible bond, currently, of course, these amounts, we treat them as debt. They’re out of the money. We treat them as debt. We work under the assumption that these are monies that will have to be refunded to the debt holders. And as such, we simply make sure that all of our cash positions are not taking them into account as something that we can use.
Operator: We’ll take our next question from Brian Lee with Goldman Sachs. Your line is open.
Brian Lee: Hey, guys. Good afternoon. Thanks for taking the questions. I jumped on the call late, so I apologize if you already addressed this, Ronen, but can you update us on sort of what you’re seeing in the pricing environment? Are you taking any new actions in the U.S.? I know in the past you’ve been saying the U.S. pricing situation is pretty stable. And then in Europe in the past, you said mid-to-high single digit price declines are what you’re planning to implement. Have you implemented those already? Do you see any more actions potentially being needed in terms of pricing in Europe, given the market dynamics out there? And then I had a follow up.
Ronen Faier: Sure, Brian and thanks for the question. So, actually, we have already started to implement price reductions in various forms this quarter. I would divide them into two. The first one are price reductions that we’ve implemented to our batteries and this is something that is done across the board and across the products. And this simply means that you buy today batteries at a lower price than you used. In other regions what we’re trying to do is actually to make our price reductions a little bit more effective in the way that they help our customers, because we need to remember that some of our customers are sitting on large amount of inventories and sometimes, if you’re reducing prices, those loyal customers of yours or channels that have a lot of inventory are in an inferior position to someone that’s just entering the market or has less inventory and therefore being a little bit damaged by this and this is something that of course we don’t want to do.
So what we are doing is that we’re trying to match various price reductions or initiatives to help those. For example, in Europe today, we see that we have lower ratio of optimizers in the channels compared to inverters. That means that our channels will have to buy more optimizers. What we basically did is that we have temporarily reduced the price of our optimizers in those regions in order to make sure that when our distributor is buying those optimizers, he basically gets them at the lower price. He can sell, by the way, the entire system at the lower price and this is, we are not just allowing them to get a better pricing. We also help them to get rid of some of the inventory that they have and by this we are accelerating the inventory clearing.
So we definitely do this. We’re very flexible in the way that we do it. We put a lot of thought about how to not just use them, have the reduction amount, but how to use it properly. And yes, we’re doing it in every region separately in the U.S. I must say that we don’t see a lot of this right now because as we mentioned before again, the environment is relatively stable.
Brian Lee: Okay, that’s helpful. And then I know there’s been a lot of focus on the gross margins here. I guess I’m a little surprised that with the revenue pickup in 2Q, the gross margin guidance isn’t improving a bit more. I know there’s a lot of volume and fixed cost drivers or absorption drivers that ultimately are going to be a big part of the gross margin ramp back up. So I guess two questions here. What actions are you taking to kind of get back to that target of 25 to 27 ex-IRA, if that’s still the appropriate target? And is there anything that maybe you’ve been surprised by or is more challenging than you thought and isn’t getting you maybe a gross margin uplift on better volumes here in the very near-term? Thank you.
Ronen Faier: Sure. So first of all, no surprises here from our side. Given the fact that we still expect to see gross margins where we said all along they will be towards the end of the year. So we don’t see change in the end target. The two main differences that you see right now compared to maybe a quarter ago is that one, the rate of selling our residential batteries in the U.S. is a little bit quicker than we thought. And again, when you have relatively limited revenues, you just dilute the margins by very low margin products. And that’s the result here, by the way. Again, it’s a zero sum game because the quicker we are consuming them, that means that margin will recover in 2025 when we completely get rid of those batteries.
So that’s the easier part. The second part is actually related to regular seasonal effect that we see every year. Usually in the second and third quarter because of summer, we see a little bit of a higher spending on actual warranty expenses. You see more, first of all, replacement of units. It’s easier to go on the roof to, to replace units. And sometimes you see a little bit of a higher failure rate during the summer. So here, really, it’s a combination of faster battery sales and no surprises with the overall OCOGS. Again, our target, long-term target, remains exactly the same.
Brian Lee: All right, thanks so much. I’ll pass it on.
Zvi Lando: Thank you.
Operator: And we’ll move next to Philip Shen with Roth Capital Partners. Your line is open.
Philip Shen: Hi guys. Thanks for taking the questions. The first one is a follow up on pricing. Ronen, checks suggest you guys may be launching, or may have launched recently, a new promotion in the European Resi segment, which is to buy. When you buy a kilowatt, you get an optimizer free. So, wondering if you could comment on the specifics around that promotion. Our sense is across Europe, our sense is it will last from May 1 to September 1 and so, just curious, if you can talk about the dynamics there? And then from an inventory standpoint, it seems like there might be still a year left of inventory for the European Resi segment. This might slow things down from a channel clearing standpoint, because the distributors will get a coupon to then have to buy more optimizers or at least more product. And so given that dynamic, when do you think the European channel can clear? And if you agree that it might be a little bit slower now. Thanks.
Ronen Faier: So, first of all, the initiative that you mentioned, Phil, is exactly to my last answer is exactly one of the tools that we’re taking. What we basically saw here is that we see higher ratio of inverters to optimizers within our channels in Europe a result of the fact that at the very beginning of 2023 we had problem to provide inverters. Everyone ordered so many, and then the slowdown in the market came in. And what we have identified is that whether they like it or not, a lot of the distributors will have to buy quite a lot of optimizers. This will be a necessity for them and had we just decided to reduce prices across the board of all of our products, that means that they would not really benefit from this price decrease, given the fact that what they need is optimizers.
So the initiative around optimizers was very easy. Let’s help our distributors exactly where they need it, because they will have to buy, and by allowing them to buy cheaper optimizers, because basically giving one on every kilowatt under this initiative means that they need, I don’t know, like four instead of five. But that basically means that now they can sell a full system with an inverter that they have a little bit quicker. So these kind of, the initiatives are simply helping to clear the inventory a little bit faster as of the time and time to clear. This is very much different between various distributors. And actually it’s also very much different sometimes between various products with those distributors. I can tell you that some of the distributors, for example, that ordered a lot of commercial inverters, just given the fact that we didn’t have enough in 2023, have many, maybe too many of them, and one other distributor that didn’t order so much, have a little bit of lack of those inverters.
In average, what we do see, we see a much long lower inventory levels that reflect one year. And we believe that as the year will continue, we will see gradual runoff of some of the products from the shelves. And not just, you know, that one day, across the board, all products will be finished. So we will continue to see gradual increase in revenues, gradual increase in shipment, and gradual clearing of the inventories. But again, we do not expect in most of the cases, to see a year worth of inventory in total on the shelves in Europe.
Philip Shen: Okay, thank you for all that color. Shifting over to a housekeeping question here on the Q2 guide, can you talk to us about what you expect the ratio of inverters and optimizers to be in Q2 two? Thanks.
Ronen Faier: So we do not give it yet simply because of the fact that, again, we haven’t shifted in those numbers. Every small difference is, or shipment is making a big difference. In general, we do expect to see a higher ratio of optimizers to inverters these quarters this quarter, and I would say even in the upcoming quarter. So I would say that we expect it to be higher than the normal one to 24 but again, it’s a very volatile environment. So I may not be surprised that there is a little bit of diversion here, but directionally, more than one to 2024 or 2024 to one.
