Solaredge Technologies Inc (SEDG) 2020 Q2 法說會逐字稿

Welcome to the SolarEdge Conference Call for the Second Quarter ended June 30, 2020. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the event 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 expressed 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 conference over to Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Please go ahead.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2020, as well as the company's outlook for the third quarter of 2020. 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, 2020. Ronen will review the financial results for the second quarter followed by the company's outlook for the third quarter of 2020. 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 and 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 they provide the 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 U.S. GAAP.

Listeners who do not have a copy of the quarter ended June 30, 2020 press release or the presentation may obtain a copy by visiting the Investors section of the company's website.

Now I will turn the call over to Zvi.

Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. This is the third consecutive earnings call in which a key theme of our discussion is COVID-19 and its implications on our business. Unfortunately, the pandemic continues to spread globally, impacting the lives and livelihoods of millions. We hope and pray for the health of those affected and the success of those working on vaccinations and treatments.

Within this context, we have satisfied to report our Q2 results achieved thanks to the loyalty of our customers and dedication and hard work of our employees. In the second quarter, we are reporting revenues of $331.9 million at the top range of our guidance and slightly above revenues in the same quarter last year. Revenues for the second quarter in our solar business were approximately $310 million, also slightly above the same quarter last year. The decline in revenues compared to the first quarter of 2020 reflects, of course, the impact of the global pandemic that we have seen in certain regions. Overall, this quarter, we shipped 3.5 million power optimizers and 142,000 inverters.

During our last call, in our discussion of the business environment, we explained that in order to assess market dynamics, we are closely tracking installation rates of our products through our monitoring portal globally and per country. As I said last quarter, this provides part of the picture as it is not directly indicative of new solar system sales by our installers. However, we do think it is a helpful tool to foresee market demand. That data continues to be helpful this quarter, coupled of course with other indications we have, such as new order flow and point-of-sale data from our distributors. Based on these sources of information, I will discuss the momentum we are seeing globally.

Starting with the North American market. Revenues of $124 million from our solar business in the United States represented 40% of total solar revenues. While equivalent to the revenues in Q2 of 2019, this is a significant reduction relative to last quarter, though expected, considering that the United States has been heavily impacted by COVID-19. Having said that, since the end of April, we are seeing positive signs of increased orders and an increase in the installations in the United States connecting to our monitoring portal. This positive trend is also manifested in the sale out by our distributors, which, in the aggregate, grew consistently month-over-month since the end of April, resulting in decline of inventories with residential products at our distributors. At the same time, our data shows that the recovery of C&I installations in the United States is lower, and thus, inventory levels are still high relatively to the installation rate at this time. In summary, we are cautiously optimistic about the recovery of the U.S. market in the coming months.

Moving to Europe, where we have experienced a strong quarter of growth. Revenues in Europe this quarter were $144 million, up from $122 million last quarter. We attribute these positive results to 2 factors. The first is that while Europe has been impacted by the global pandemic, several countries in Europe have been quick to implement measures to keep the economy strong, including incentives in renewable energy. Second is our strong position in many countries in Europe, which enables us to serve our customers during these challenging times and grow our business with them. In particular, in Germany, our 3-phase residential storage inverter is gaining popularity, and we believe that with demand, we are increasing our share in the 3-phase residential European markets in Germany, Switzerland and others. Our positive momentum in Europe is not limited to the German residential market and also include increased revenues compared to last quarter in the Netherlands, Italy, Switzerland, Poland and France.

We are also happy with the positive momentum outside of the U.S. and Europe, where we are reporting the second consecutive record quarter, seeding some strength in sales in Australia, Israel and Taiwan. We see this momentum in both residential and the commercial segments. In Japan, beginning in June, we started selling our JET, J-E-T, certified inverter. And while these are still small quantities, it means that we are now able to address the residential and small commercial markets in this promising region.

On the product side, this quarter was characterized by production ramp of the recently released Energy Hub storage inverter for the U.S. market, which, together with our backup interface, enables in one inverter, full flexible home backup storage, EV charging and generator integration. For Europe, we continued the production ramp of the 3-phase residential storage inverters, and we also ramped production of the new, enlarged 3-phase commercial inverter. As mentioned, all of these products have been positively received in the market, and thousands of units of each are en route to the regions. We also released this quarter the ground mount version of the new 3-phase commercial inverter combined with a 4:1 optimizer, targeting the community solar ground mount segment in the United States. On top of these, we continued progress and development of our residential battery targeted for release later this year.

In our nonsolar business, our focus on investing and developing new product offerings continues as planned, including shipments of additional full electrical powertrain units for final preproduction validation by an automotive manufacturer. We are also happy to update that we have completed the construction of the Sella 1 manufacturing facility in Israel and are beginning to ramp our own manufacturing of inverters and optimizers with first commercial shipments expected later this month. As a reminder, our objective is to use this factory to supplement nontariff demand and, more importantly and especially during this period, to enable full qualification of quality production processes of new products prior to ramping at contract manufacturing sites.

In summary, we are proud with even under these challenging circumstances, we have successfully adjusted to the changing environment and are leveraging our proven execution capabilities to continue to deliver profits and generate cash while pushing forward our technology, innovation and investments in our future.

And with this, I hand it over to Ronen, who will review our financial results.

Thank you, Zvi, and good afternoon, everyone. As always, my review includes 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.

For the second quarter, total revenues were $331.9 million, a 23% decrease compared to $431.2 million last quarter and a 2% increase compared to $325 million for the same quarter last year. Revenues from the sale of solar products were $310.1 million compared to $407.6 million last quarter. U.S. solar revenues this quarter were $124.5 million and represented 40.2% of our solar revenues. These U.S. revenues included safe harbor revenues of $17 million. Solar revenues from Europe were $144.3 million or 46.5% of our revenues. Revenues generated from outside the United States and Europe this quarter were at a record of $41.3 million, representing 13.3% of our solar revenues this quarter. On a megawatt basis, this quarter, we delivered 404 megawatts to the United States, 748 megawatts to Europe and 290 megawatts to the rest of the world. Residential products represented 44% of our megawatt shipped, and commercial systems were 56% this quarter. This quarter, our top 10 solar customers represented 58.4% of our quarterly solar revenues, a decrease from the last quarter, and 1 distributor accounted for more than 10% of revenues. Blended ASP per watt of our solar products decreased this quarter by approximately 8% compared to the last quarter due to a change in the geographic mix and increased rate of revenues generated from commercial products. These 2 factors were slightly offset by the strengthening of the euro against the U.S. dollar. This quarter, revenues from our nonsolar products were $21.8 million, mostly related to the sale of lithium-ion batteries by Kokam.

GAAP gross margins for the quarter was 31% compared to 32.5% in the prior quarter and 34.1% in the same quarter last year. Non-GAAP gross margin this quarter was 32.4% compared to 33.6% in the prior quarter and 35.7% in the same quarter last year. Non-GAAP gross margin for the solar activity was 33.8% compared to 35% in the last quarter. This reduction is a result of a higher rate of sales in Europe that is traditionally characterized by lower gross margin due to heightened competition from European and Chinese inverter manufacturers and a higher portion of commercial revenues that are currently generating lower margins. In addition, the combination of reduced demand to our -- and our sufficient manufacturing capacity enabled us, for the first time in many quarters, to reduce air shipment expenses to an insignificant level. The inventory levels we have built will enable us to avoid substantial air shipments in the near future. Actual tariff payments on Chinese-made products imported to the U.S. decreased as well this quarter as a result of lower shipments to the United States and increased manufacturing in Vietnam. Non-GAAP gross margins for our nonsolar activity was 13.5% compared to 9% in the previous quarter. The increase was a result of an improvement in the margins on the sale of e-mobility powertrain units.

Moving to our operating expenses. In total, operating expenses for the second quarter was $73 million or 22% of revenue compared to $72.2 million or 16.8% of revenues in the prior quarter and to $65.3 million or 20.1% of revenue for the same quarter last year. On a non-GAAP basis, operating expenses for the second quarter were $61.1 million or 18.4% of revenue compared to $66.3 million or 15.4% of revenue in the prior quarter and $54.9 million or 16.9% of revenue for the same quarter last year. The second quarter was characterized by lower non-GAAP operating expenses due to COVID-19-related travel restrictions, which eliminated travel expenses and reduced marketing and trade-show-related expenditures. In addition, we reduced the base salaries of our executives and cash portion of our director compensation by 20%, renegotiated other expenses such as leases and other services, all of which contributed to the reduction of non-GAAP OpEx spending. Our non-GAAP solar operating expenses as a percentage of solar revenues were 16.2% compared to 13.5% last quarter as a result of lower revenues.

Our GAAP operating income for the quarter was $30 million compared to $67.8 million in the previous quarter and $45.4 million for the same period last year. Non-GAAP operating income for the quarter was $46.6 million compared to $78.6 million in the previous quarter and $61 million for the same period last year. This quarter, the nonsolar activity resulted in non-GAAP operating loss of $8 million compared to an operating loss of $9.3 million in the previous quarter, driven by continued investment in the critical power solutions, automation machines and e-mobility businesses, while the Kokam energy storage business continued to be profitable. Financial income for the quarter was $11.6 million compared to financial expenses of $16.6 million in the previous quarter and finance income of $0.8 million for the same period last year. This is a result of foreign currency changes resulted mostly from unrealized exchange rate fluctuations and the accounting treatment of intercompany balances and intercompany loans provided for the acquisitions in Korea and Italy. Tax expenses were $4.9 million this quarter compared to $8.9 million in the prior quarter and $13.2 million for the same period last year. Our non-GAAP tax expense was $8.1 million compared to $12.5 million in the previous quarter and $14.2 million for the same period last year.

GAAP net income for the second quarter was $36.7 million compared to a GAAP net income of $42.2 million for the previous quarter and $33.1 million for the same quarter last year. Our non-GAAP net income was $52.1 million compared to a non-GAAP net income of $50.7 million in the previous quarter and $49.3 million for the same quarter last year.

GAAP net diluted earnings per share was $0.70 for the second quarter compared to $0.81 in the previous quarter and $0.66 for the same quarter last year. Non-GAAP net diluted earnings per share was $0.97 compared to $0.95 in the previous quarter and $0.94 in the same quarter last year. Our nonsolar businesses generated a $0.20 non-GAAP diluted earnings per share loss.

Turning now to the balance sheet. As of June 30, 2020, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $592.7 million. During the second quarter of 2020, we generated $59.3 million in cash from operations. AR net decreased this quarter, reaching $181.7 million compared to $235.7 million last quarter. DSO this quarter in the solar business was 73 days, an increase from 62 days last quarter due to a small number of temporary payment extensions provided to certain customers, most of which have been repaid. Despite the substantial impact of COVID-19 on our business, we did not incur any substantial losses related to customer bankruptcies, and we continue to be very cautious in the way that we provide credit to our customers. As of June 30, 2020, our inventory level, net of reserves was at $264.5 million compared to $198.6 million in the prior quarter. Most of this increase is related to an increase in our finished goods inventory, which allow us to reduce the cost of expedited shipment and to be prepared for a possible upside in particular in the North American residential market. We have also increased the levels of safety stock of raw materials at our contract manufacturers to avoid possible supply chain disruptions due to COVID-19. Additionally, approximately $38.7 million of our inventory relates to the nonsolar inventory, the majority of which is raw materials held by Kokam and on par with the levels held last quarter.

Moving now to the guidance to the third quarter of 2020. We expect revenues for the third quarter of 2020 to be within the range of $325 million to $350 million. Revenues from the sale of solar products are expected to be within the range of $305 million to $325 million. We expect non-GAAP gross margins to be within the range of 32% to 34%. Non-GAAP gross margin from solar activities is expected to be within the range of 33% to 35%.

I will now turn the call over to the operator to open it up for questions. Operator, please.

(Operator Instructions) We'll hear first today from Mark Strouse with JPMorgan.

I wanted to start with just the U.S. market. And hopefully, you can give a bit more color on your commentary about your optimism about a recovery in that market over the coming months. Just what gives you the confidence in that? And thinking back to the last call, one of the things that seemed to be holding you back on being more optimistic was kind of uncertainty around cancellation rates. Can you just kind of give us an update on that metric as well?

So I think actually, that is where the optimism lies. So we, indeed in the early parts of the second quarter, experienced some level of cancellations and pushouts. And the rate of those declined throughout the quarter to a point -- or at the latter part of the quarter and the early parts of this quarter. We're not seeing any of that, practically any more of those types of pushouts and cancellations. And in parallel, as mentioned, we are seeing a gradual increase in order flow and in installation rates as well as in the point-of-sale data coming from our distributors. So combining those factors is where we see a clear indication of a recovery, albeit the rate of that recovery is questionable and that's why we are cautious in our predictions for the third quarter.

Okay. And then just as a follow-up on the supply side, can you talk about the capacity additions in Vietnam? When do you expect that to be fully ramped? And maybe talk about kind of the mix of business going -- or mix of shipments going into the U.S., when we can see the majority and then when we can see all of that supply becoming tariff-free.

So in general, Mark, what we see is that in Vietnam, the capacity that we have built is already in full capacity from the amount of products they are manufacturing. And what we are doing now is actually to shift more of, I would call it, product variety into these factories. Capacity of manufacturing in any factory is not just related to the amount of products that they can make but actually, the amount of products that they know how to make. And by definition, COVID and the restricted -- restriction of travel is making this a little bit more complicated. But that said, we do see an increase in the level of products and the amount of products coming from there. And we are working on this diversification. I believe that towards the end of this year, about 2/3 of our products will come from nontariff manufacturing areas. And I'm adding to this not just the Vietnam line but also the line that we have in Hungary and, of course, first shipments that will come from our Sella 1 factory in Israel. To go to a full, 100% nontariff products, I'm not sure when will be the time because you also have to look at the mix and how many products you want to have in -- concentrated in one single location. I believe the rate of 66% will continue to increase in 2021, but I'm not sure that we will be in a position where 100% of everything will come from nontariff areas, I would say, at least in the next year or so.

We'll hear next from Colin Rusch with Oppenheimer.

Guys, can you give us an update on the progress with energy storage product in terms of getting oral approval and preparedness to begin ramping and where we might see first product deliveries for that product.

I'm not sure I got the question correctly. The question is about our residential battery availability?

Correct, and getting the hardware approved and prepped so they can begin ramping and start shipping and timing around all of them.

Yes. And indeed, that's -- those are the 2 elements. There is the element of the R&D, which is progressing and -- as planned. And there is the element of certification that is more challenging these days to move the battery around together with the people for the certification labs in order to get all the required certifications. We are still on path for availability towards the end of the year. And as we've said in previous calls, we don't expect it to be a major revenue contributor this year. While in parallel, as I mentioned, the Energy Hub Inverter is ramping at a very high rate and it's continued to be installed with LG Chem batteries in a DC-coupled configuration and many other types of batteries in an AC-coupled configuration.

Okay. Great. And then as we look at the margin improvement quarter-over-quarter in the guidance, how much of that can be attributed to geographic mix? You talked about 2Q extra mix shipping to Europe being an issue on margins. But maybe just to unpack how much of the margin improvement is being driven by volume, how much is by mix from geographies, and any other indicators or variables that would impact that.

So in this case, since we do not yet see major shift in the geographical mix, I think that most of the improvement that we're going to see towards the third quarter, as we guided, will come from, first of all, additional cost reduction activities that we do. While the pandemic continues and maybe revenue levels are decreasing, we continue to invest all the time in R&D. And R&D is also directed, of course, towards cost reduction. And we're able to utilize these cost reductions in our net sales. And this is something that will continue and continue this quarter. We also see a little bit of improvement in the euro to U.S. dollar rate, which is -- of course, was something that hurt us a little bit in the previous quarters, and now we're benefiting from it. In general, I think that the mix itself is not continued -- not expected to be dramatically different over the next quarter at least, and therefore, most of these reductions will come from either our own activities or a little bit due to exchange rates.

We'll hear next from Maheep Mandloi with Crédit Suisse.

And just on Colin's question on gross margin, just building on that, could you guide to how should we think about gross margins for the residential business versus the commercial and the new products you're launching? How should we think about that in Q3 and going forward?

So here, again, I think that it's a little bit hard to take the margins that we will see in Q3 and reflect them to what we're going to see in a world where COVID-19 will bring back the, I would call it, more of a normal mix that we used to see before, where the U.S. is taking a more substantial part of our revenue. In general, when we're looking at a world, as we guided, by the way, in our Analyst Day, where approximately 50% of revenues are coming from the U.S., where both margins are usually higher and the ratio of residential and commercial more leans towards residential, in this case, this 36%, give or take 1%, that we guided is the number that we still see. And this is taking into account a blend of new products and older products that we are just releasing with our gross margins and then cost reductions that we do on the existing one. Today, what we see is that Europe, both being a little bit more competitive in the pricing and the fact that Europe and rest of the world are more inclined towards relatively large commercial systems that are at least today characterized with the lower gross margins given being slightly more newer products where cost reduction curve is still being handled and also where the competition is heightened, I do not think that you will see a lot of changes in at least Q3 and much into Q4 unless the shift of the U.S. sales will lean towards a higher portion of this amount. So in a world without corona, the 36%, give/take 1%, is exactly what we continue to see and the fact that prices are relatively stable, it's helping us to feel still comfortable with this kind of guidance for the long term.

Got it. And just a follow-up. Can you talk about the European market? In the remarks, you spoke about new incentives in the market. But how does that translate into higher demand or either pricing power for you guys this year or in the coming years?

So there are a few examples in various countries where, as part of the stimulus effort for the local economies, they are strengthening the incentives for installations of renewable energy systems. An example would be in Italy and a couple of other countries. So that is -- and these incentives have a window for the consumers to benefit from them. So that creates, similar to dynamics in other countries, a window of opportunity where customers want to install more solar systems. And being that our position in these markets to begin with is quite strong, we are the likely ones to benefit from this trend in the business. And this is happening also on the overall European policy for that -- across Europe as well as some local country incentives and policies.

From ROTH Capital Partners, we'll move next to Philip Shen.

First one is on the competitive dynamics in the U.S. I was wondering if you could speak to what you're seeing out there now and some of the work that we've done. It seems like Generac might be taking some share with storage. And as a result, I imagine that they're selling some inverters there as well. But I was wondering if you're seeing any of that as you compete? And then also, just overall, what are you seeing in general with the competition?

So without referring to one specific product versus the other, I think it's -- actually, the tendency and the time of the pandemic, I think it will be expected that people are kind of sticking to what they're used to. And I don't think we're seeing, at least in the last few months, to the extent that we see the market. And I'm sure that there are corners or parts of the market that we don't see clearly at any given moment. But generally, the competitive environment, to the best of our knowledge, has not changed significantly over the last 2, 3 months, at least nothing that we've noticed.

In terms of margins, I was wondering, for Q2, if you guys could share the commercial versus resi margin by geography. So for the U.S., I know the resi segment is likely higher. Commercial is likely lower than the corporate average, but then it would be useful to understand how the U.S. commercial margin compares with the European commercial margin and if you have any updates or any changes on that. And so if you can give us some specific data on the Q2 quarter, that would be great, and then what you might expect ahead for each item.

So we're usually not breaking the segment margins by product and regions. But as we mentioned, if you remember in the last quarter, at least at the end of Q1, the -- let's say on a product basis, the margin difference was approximately 400 basis points on each -- or I would say product-to-product comparison. This is something that got a little bit better during the last quarter mainly due to the fact that the euro evaluated against the U.S. dollar. And therefore, at least some of these 230 basis point erosion that we saw in the last 9 months that ended in Q1 were recovered, not all of it. So by definition, this difference was a little bit lower. I think that the only thing that we can say is that, a, margins in the U.S. are usually better for both residential and commercial compared to Europe and rest of the world because, as you see, rest of the world is taking bigger share of revenues every quarter. And the second thing is that in general, you do see that Europe and rest of the world portion of the overall commercial is a little bit bigger, and that means that there is a little bit more competition there. But other than this, I don't think that there's a lot that we can say.

We'll hear now from Jeff Osborne with Cowen and Company.

Most of the questions have been asked. But I was wondering if you could confirm that pricing on a like-for-like basis. It sounded like that, that was consistent or flat, but I just want to double check.

Yes. That's definitely the case.

And is that a similar expectation for the third quarter, Ronen?

No. I think that our expectation is not to see major changes there during the quarter. But by the way, one thing again to say is that at least in Europe, again, the dollar equivalent of everything that we sell is a little bit higher, but it's not the price that the actual customer is seeing and we do not expect major changes there.

And then any read-through in July about the C&I market in the U.S. recovering? You flagged that you still had some channel inventory there at distributors, but what are you seeing at the start of the quarter?

So there is a recovery but it is very mild, and I wouldn't jump to conclusion based on a 1-month data point. There's definitely more discussion. And customers that we know had projects in their pipeline and projects that have confirmed that they are intended to be installed with our technology and they've been silent for a couple of months. So those discussions have resumed and more designs are flowing through our designer tool, et cetera. So the rate of discussions has increased. The rate of installations has increased mildly in July.

We'll hear next from Mike Cikos with Needham & Company.

Just wanted to follow up on a couple of quick items. I know -- or I believe last quarter we were having our quarterly earnings call, there was a discussion that exiting Q2, the non-GAAP OpEx was going to be tracking around $58 million to $59 million a quarter. And I'm curious if revenue trends are better than what you guys expected. So maybe OpEx should be higher than that discussion that we had last quarter.

So actually, in the last quarter, what we said is that we believe that the cuts that will take us to this level is going to be fully affected during the third quarter actually due to the fact that in some cases, we reduced our head count in the -- usually, the effect takes a little bit longer because of notice periods that you need to give. With that said, what we see in the operating expenses is that, on one hand, we have a pretty good control over the operating expenses. We were able to renegotiate a lot of the terms that we had. We actually accessed almost every line on the operating expenses and tried to renegotiate it and then changed. At the same time, what we continue to do and we are leveraging on our strength is the fact that we do see, in certain areas, talents that are -- maybe we tried to recruit in the past and we were not able to do because at least in the areas where we are most effective in R&D, there was a big demand for engineers and now they are more available ones. And therefore, we are using this opportunity to either hire talent that we could not get before or strengthening areas that talent was more scarce.

So in a sense, the measures that allowed us to get to the $59 million were all taken. But now as we see, first of all and you can see it in the guidance for the next quarter, a kind of stabilization in the revenue level and our ability to assess a better -- what kind of resources and benefits we can get out of this situation, we are going to be wisely spending our operating expenses, knowing that we are profitable, we continue to generate cash, and we have the ability to strengthen certain areas. So all in all, very good control over the operating expenses, and we'll simply use our resources wisely to continue, as Zvi said in the script, to invest in technology and growth.

That's helpful. And I guess for a follow-up. I know it doesn't give as much attention just because these businesses are subscale in comparison. But for nonsolar businesses, I would just be curious how these acquisitions have been tracking versus your internal expectations. I know there's a lot of R&D and investments taking place in those businesses, and any color again would be helpful.

So I think the 3 areas. So the first is Kokam. And Kokam, as we reported in the past, is really based on the capacity that we have available. So the capacity that we have, for the most part, we sell and revenues are consistent. And that's what we've been projecting for the year because we know that the added capacity, which we are working on, will take time until that becomes available. In the 2 other areas of critical power and e-mobility, our expectation would be to -- was to be in the investment phase in 2020 in order to start seeing some results towards the end of 2020 and into 2021. And I think it's -- maybe we clarified that in the subject, but what we are able to do, as Ronen mentioned that thanks to the control of expenses and the revenue that we're seeing, is to execute those investments as planned. And we expect to start seeing some fruit there a couple of quarters from now, but really, it's a much longer-term play in terms of the investments and when the significant impact on the revenue will be.

We move on to Joseph Osha with JMP Securities.

I only have one. I'm wondering if you can discuss how the ramp of Kokam is going in relationship to your broader plans about storage.

So I think we discussed this also in the Analyst Day. So as I mentioned before, the current factory is pretty much fully loaded and capacity is being sold. Well, we presented a plan for building a much larger factory that will be ready for production in 2022. And we are on track for that -- with that schedule. But unfortunately, between now and then, what we have is what we can sell, and that's the quite consistent revenue run rate that we are seeing from the Kokam -- the current Kokam factory.

Okay. So you're -- essentially, there haven't been any additional pickups there in terms of output or anything? It just kind of is what it is.

Yes. We're -- I mean we're maximizing the capacity here and there. We might get a couple of more percent based on mix or some continuous-improvement-type projects, but the bottom line is that this factory is at its limit. And what we're able to produce, we're able to sell. And the new factory in 2022 will be 10x -- more than 10x larger, and then we'll be able to sell more than 10x the revenue.

And from Goldman Sachs, we'll move to Brian Lee.

I had several modeling ones, if I could squeeze you in. Just first one, Ronen, if I look at the pricing in the U.S. for solar, just taking the revenues you provide and then the megawatts, it looks like pricing was up over 15% versus Q1. What drove that?

So again, pricing -- there was a previous question about the one-to-one comparison between products. So it's not even only on a segment basis. So for instance, the Energy Hub Inverter that brings with it much more capabilities and it's more hardware, it's also more expensive, and that moves the ASP up. On top of that, if you remember, Brian, in the previous quarter, we mentioned that there was a lot of large volume for very large customers that has -- is part of the safe harbor during Q1 that tends to have a slightly lower ASP. So I would say that the increase in the ASP in the residential North America from Q1 to Q2 is around a bit of product mix and a bit of customer mix. But generally, the like-to-like pricing has been quite stable.

Okay. That helps. And then second question, if I strip out the safe harbor revenue from Q1 and Q2, your U.S. revenue came down about 45% from quarter to quarter, which is kind of toward the lower end of many of your customers have been talking about in terms of trends. Can you talk a bit about inventory in the channel? Where does the destocking cycle stand right now with respect to the U.S.? And then do you expect U.S. revenues to grow in Q3? And if that's the case, are we to assume that means non-U. S. decline? Just wondering what's driving the dynamics here in the near term if that's the trend.

Brian, can you try again? The question is coming in with a lot of interruptions, and I'm not sure that we understood it correctly.

Yes. I'll try to simplify it. Just wondering where inventory in the channel stands today, just kind of what your thoughts are around the destocking cycle.

Brian, I apologize, but we simply cannot understand. There's -- the line is completely broken.

Is this better?

Let's try.

Hello? Yes. So I'm going to take that maybe you can hear me now. Yes, just what's the status of the destocking cycle right now from inventory and a channel perspective? And then if I look at solar product revenue, the guidance for Q3 is relatively flat. So wondering, is U.S. up and non-U. S. is down? Or is U.S. still declining into the Q3 period?

We simply do not understand. The line is completely broken. I apologize if...

We'll have to pick it up, Brian, and...

We simply don't hear it. Sorry.

We'll comment to it later. Sorry.

So -- or can someone -- maybe if the question can be repeated and we'll be happy to answer as well. Erica, maybe?

(Operator Instructions) We'll go back to Brian. We'll see if you can hear him any better now.

Okay.

Sorry, guys. I'm not sure if it's my line or your line. Can you hear me better?

Yes.

Okay. Thanks for the patience. Just wondering, inventory in the channel, could you talk a little bit about where you think that stands today and where we are on the destocking cycle? And then with respect to Q3, the outlook for solar products revenue is relatively flattish from quarter to quarter. So I'm wondering, is U.S. up in Q3 and non-U. S. is down? Or is U.S. down again in Q3 and you're still growing outside of the U.S.? Just wondering what the geographic trend is here embedded in your Q3 solar products revenue guidance.

See -- so I'll try to answer it again. I hope that I heard everything correctly. What we basically see -- and I understand that you were referring that when you take the safe harbor inventory out of the -- or the safe harbor sales out of the regular sales in the United States, you see a reduction of about 45%. And therefore, the U.S. was going down. And then the question was whether this is related, I believe, to inventory in the channel and how do we see Q3. So I'll answer this, and if I did not pick it properly, please, let's do it in the -- after the call.

But in general, Zvi mentioned before that when the year started -- first of all, we started it with relatively higher inventories that came into the United States due to the safe harbor. By definition, some of the customers acquired more inventory that they need for the first and second quarter on a regular basis in order to enjoy this benefit. And this was in a year where the market was expected to grow compared to the last year. With COVID coming in and the safe harbor inventory coming into the United States, of course, the players that could allow themselves having these safe harbors did not need a lot of revenues because of the lower installation rates and the fact that they were sitting on inventories. So on that front, of course, whoever bought safe harbor would buy less in Q2, and this is obvious.

When we look at the overall distributors' inventory, the distributors are usually having a pattern where they build during Q1 inventory levels that will be sufficient for the strong 2 quarters that will follow in Q2 and Q3. And this year was no exception other than the fact that COVID came in March and affected the market. And therefore, some of the distributors found themselves with an inventory level that were not abnormally high, taking into account the regular year. But given the fact that the installation rates that they saw in April and May were so much lower compared to what they saw before, this was definitely more inventory than they wanted to have. And this is why, as we mentioned in the last call and as we actually did in Q2, whenever we saw a customer that was struggling with inventories, we were allowing customers to cancel orders or to basically reschedule those orders because we didn't want to get them stuck with too much inventory. What we do see in the last few weeks is that we -- the installation rates are growing. And therefore, the sell-through -- or the sellout of the distributors is growing. And therefore, the amount of inventories that the distributors are carrying is going down.

At the same time, by the way, they do see that us, other -- and I believe other players are building also inventories to support them, and we believe that there is a little bit more of a shift in the way that they are ordering their products in advance because they want to make sure that they're not sitting on too much. And therefore, the third quarter sales or expectations that we see to the U.S. are similar to what we believe that we saw in Q2 given the fact that they would not include any safe harbor. This, by definition, means that we're selling more into the United States of what we call fresh sales. And as Zvi mentioned before, we're cautiously optimistic based on the signs that we see, but we are still cautious on this regard. So I hope that it answered your question and then I got it right.

Yes. That's very helpful. So just as a follow-up, Ronen, does that mean non-U. S. -- by virtue of U.S. growing from Q2 to Q3 and the overall solar products revenue guidance being kind of flattish from Q2 to Q3, is non-U. S. declining again from Q2 to Q3? And what's driving that dynamic if that's the case?

So it's not necessarily the case. Again, when we're guiding, we're guiding based on projections. And therefore, they can move this way or another. But in general, what I can tell you is that usually, Q2 and Q3 are very strong in Europe and we see a very strong Europe right now. So that, by definition, doesn't imply that we expect a reduction there. In the Southern Hemisphere, of course, this is now winter. So you can see some seasonal effects. But in general, we do not see or do not forecast major decline in any of the regions. But at the same time, again, there is COVID outside and we're cautious in the way that we guide.

And at this time, I would like to turn things back to management for closing remarks.

Thank you. Thank you, Erica. And as we completed the hour, I'll take this opportunity to thank everyone for joining us tonight and wish you and your families, stay safe and stay healthy. Thank you.

Thank you very much.

And that will conclude today's conference. Again, thank you all for joining us.