Austin Moeller: Okay. And just given the interest rates remain high, what trends have you started to see in core U.S. markets like California around leasing arrangements for rooftop solar?
Zvi Lando: So I think the general expectation for increase of lease versus loan is evident in the market. Again, it’s not a black and white and a complete switch, but we see that dynamic ourselves as well, as well as the entrance of new lease providers because of that trend and because of the tendency or the benefits that the IRA creates for third party ownership. So that is definitely evident, and it is more evident in the battery markets like California and Puerto Rico.
Austin Moeller: Excellent. Thanks for the details.
Operator: And we’ll take our next question from Kashy Harrison with Piper Sandler. Your line is open.
Kashy Harrison: Good evening and thanks for taking my question and apologies if this was covered as I joined late. But I was wondering if you could just share your thoughts on the four trajectory of the non-solar business. It looks like it lost roughly $12 mil in Q1, I believe, or just under $50 million annualized cell manufacturing is becoming a little bit more competitive. And so I’m just wondering how you think about the path to either getting towards breakeven operating income or selling the business or shutting it down and just focusing on the core solar business?
Ronen Faier: Sure, Kashy, and thanks for the question. So in general, I’ll start by maybe a little bit of dynamics, but then go into the heart of the question itself from a dynamic point of view. Usually the storage market, especially the market in which our storage division is active, is very much been back of the year, loaded with revenues. And that means that usually you see very low Q1 and relatively strong Q4 and in general, we do expect to see growth in the revenues and activity of this segment. So therefore, at least directionally, losses related to the storage division should go down as we move forward towards the second half of the year. Not a lot in the first half, but more in the second half. Now, directionally, about the segment itself, I think that there are two areas of the segment that we need to look at.
The first one is having a segment that is concentrated in making storage, whether collected to solar or not. And this is something that we see very great advantage of having this kind of capabilities. Even if we’re selling batteries that are not collected to PV, the knowledge, the development and the technology that we’re developing there is helpful for us. And we will continue to see multiple applications where you see storage without solar, by the way, just as an anecdote, we sell today, sometimes residential batteries without the PV, just for backup. So, in general, having this kind of an asset is something that we see a great value in. And here we invest. It’s basically a segment that is developing products. And like every development product, it takes a while.
The second part of the segment is actually owning the cell manufacturing that we have in Sella 2. As we mentioned before, our next generation of residential batteries will not use NMC cells. Given the dynamics in the market, to have LFP Chinese cells that are so cheap, we cannot compete with those and therefore, we understand that these cells will not be used in our residential batteries. However, there are niche applications that are very much suitable for NMC. And these niche applications are, first of all, large enough to cover much more than what we have today in Sella 2 and they’re actually very nicely profitable areas. So, in general, here again, we are developing the right products. We are moving towards selling more and more products into these niches that are related to frequency regulations and spinning control.
And we will see over time, the overall, I believe, profitability coming from this segment. It’s just a matter of how quickly we’re able to utilize Sella 2 and of course, how quickly we develop the product. So right now, we see value of having this segment, we see value in developing the technology. And of course, like everything that we do in our business, we have to evaluate it from time to time, and we will continue to do this.
Kashy Harrison: I appreciate that, Ronan, very helpful. And then just a quick follow up. I think you mentioned $950 million of cash is the low point for the year. Can you just walk us through some of the drivers to increasing that cash balance for the rest of the year, given that operating income should be negative still?
Ronen Faier: Of course, I think that the main reason for where we are today is the fact that it takes a while, when you’re a manufacturer, at least large volumes, it takes a while to stop manufacturing and to adjust it to the levels of selling that you see, by the way, as it’s painfully hard to grow the manufacturing capabilities into where you want them to be. And that means that over the fourth and first quarter, fourth quarter of 2023 and first quarter of 2024, it took us a while to break this train of manufacturing and to basically adjust the manufacturing layers other than what happens in the U.S., because in the U.S., we’ll manufacture as much as we can to the level of inventory. But this is something that already ended.
So we manufactured more than we sold. That means that we need to pay to our vendors for either components or for the manufacturing itself. And this is something that continued into Q1 and will, by the way, continue slightly into Q2. What happens in the meantime? First of all, we are collecting on our customer balances, and we did very good the quarter, when it comes to collection, we will continue to do this in Q2. And now most of the new sales that we’re doing outside of the United States are going to be revenues coming from inventories that we already have and already paid for. And this is the thing that will start to turn the cash flow to be positive, since in Q2 we will still see some payments related to the manufacturing. In Q1, we will see cash generation that will be in Q2 lower than in Q3.
And from Q3, Q4, we expect to be in relatively strong cash flow generation, both, by the way, on the operating, but also much less spending on CapEx or anything else.
Kashy Harrison: I Appreciate it. Thank you.
Ronen Faier: Thank you.
Operator: [Operator Instructions] We’ll move next to Jordan Levy with Truist. Your line is open.
Unidentified Analyst: Hey all, it’s Henry on for Jordan here. Thanks for taking my question. Just to start, can you just dig a little bit deeper into some of the pacing we can expect to see around the inventory reduction kind of over the next few quarters?
Ronen Faier: Can you just. I didn’t hear it well, sorry?
Unidentified Analyst: Yes. Can you hear me?
Ronen Faier: Yes. Now I do.
Unidentified Analyst: Yes. Hi, just to start, can you dig a little more into some of the pacing we can expect around the inventory reduction over the next few quarters?
Ronen Faier: Sure. So, in general, and I think it also relates to how we see the inventory clearing over time. It’s actually not just spacing, but it’s also the ratio of how much of the inventory we’re using, because right now, first of all, in the last two quarters, our sales into the United States were higher compared to the rates of sales into Europe over the last few quarters, again, because of the channel inventory there. So that means that if we are manufacturing in the United States, almost everything that we sell in the United States, the pacing of the inventory clearing is a little bit slower. Once we will start to see Europe growing again. And because of the fact that most of the European inventory is already manufactured, the pace is going to grow.
When it comes to the pace itself of finishing this kind of inventory, I would assume that of the finished good inventory that we started the year with, approximately two thirds will be cleared towards the end of the year. And of course, here the pace is going to be dependent on how quickly the market recovers. But of what we had at the end of the year as finished goods, about two thirds will be clearing this year. And you can linearly take it from like Q2 towards the end of the year in order to get there, because this is the assumption that we take.
Unidentified Analyst: Awesome. Thanks for that. And then just a quick follow up from me. Outside of California, and Puerto Rico, which you all mentioned, were there any other main U.S. regions that stood out to you all from a demand perspective on battery sales this quarter or has demand been relatively steady-state in the rest of the country? Thank you.
Ronen Faier: Yes, there wasn’t, other than Hawaii, but Hawaii is a different story. I can’t think of a state that has as high an attach rate as the two states that you mentioned. But there is definitely an increase at some level of battery take up also in Arizona and also to some extent in Texas probably.
Operator: And we’ll take our next question from Vikram Bagri with Citi. Your line is open.
Vikram Bagri: Good evening, everyone. I just wanted to follow up on the sell-through guidance that you gave for second quarter. I believe you said 15% to 20% up in 2Q. In middle of the quarter, I was wondering, like if you can highlight some markets where you’re seeing this trend? I imagine some markets are growing faster than that rate and some markets are sort of underperforming relative to that rate. If you can identify markets where you’re seeing that level of strength and some markets where you’re not seeing the impact of these promotions and price reductions that you’ve implemented?
