Sma Solar Technology Ag

Thank you, Operator, and welcome, everyone. We very much appreciate that you are taking the time for this investor and analyst call on the Q1 2020 results of SMA. You can find today's presentation on our investor relations website, ir.sma.de. This conference call is scheduled for 60 minutes and will be recorded. Replay will be available for seven working days. After the presentation, I will be happy to answer any questions you might have. I will in the following follow the format of the 2019 annual results presentation. That means we start with a full review of the Q1 financials before presenting you our market positioning and expectation on market developments. At the end, I will explain our expectations for full year 2020. I expect my presentation to last about 20 minutes before I get to the guidance. I refer to our disclaimer on page two, and here on slide four, you'll find a summary of the key financials for Q1 2020. As usual, I will provide you with more details on our sales, profitability, balance sheet, and cash flow in the next slide. So on the page, I would only focus on quarterly development in the table in the bottom right corner, which shows how our sales and EBTA have remained on a significantly higher level during the last three quarters. Now, let's turn to the next slide, and I will provide you with insights regarding our sales performance. Net sales for the first quarter of 2020 grew by 72% to 288 million euros and increased in terms of nominal inverted capacity sold by 142%. All segments increased sales by strong double digits in Q1 with the segment large-scale and project solutions growing by 140%. Looking at the regions, Americas became our largest region in terms of revenues with 126 million euros which represents 43% of SMA's global sales. The significant jump in sales compared to Q1 2019 is mainly driven by substantial growth in the U.S. large-scale business, which is steaming from regained market share as well as strong sales growth in the home and business solution segments in the region. SMA's EMEA region continues to perform well, growing by 33%. Revenues in EMEA were slightly lower than in America, with 125 million euros, representing 42% of our total sales. In EMEA, the home and business solution segments grew sales by double digits, while revenues in the large-scale and product solution segments declined. Within EMEA, Germany, Benelux, and Spain contributed the highest revenues and grew by high double digits compared to the same period last year. Our Asia Pacific region represented only 15% or 44 million euros of SMA's total sales, and with the decline in sales compared to Q1 2019, APEC became our smallest region. Within this region, Australia remained SMA's largest market in Q1, and our revenues there grew by high double digits. SMA's other key markets in Asia Pacific are South Korea and Japan. Those markets declined in revenues in the first quarter as compared to Q1 2019. In summary, SMA started the year with very strong sales growth in the Americas and EMEA regions, while in APAC, SMA's revenues declined compared to Q1 2019. Now, looking at the sales per segment on the right side of the slide, you see that all segments significantly increased revenues in Q1 compared to the same period last year. Our home solutions segment, which has consistently performed well since early 2019, grew revenues in the first quarter of 2020 by 57%, reaching 71 million euros. Germany, Benelux, USA, and Australia delivered high revenues and significant sales growth for this segment. Our business solutions segment also delivered solid growth with 21% higher sales in Q1, compared to the same period in 2019. Germany and USA were also top markets for the segment, while Australia more than doubled its revenues in business solutions and became a key market for the segment. Last, but certainly not least, our large-scale and project solutions segment had a very strong first quarter with revenues of 138 million euros, which is a significant increase in revenues compared to Q1 of last year. a growth rate of 140%. The U.S. delivered impressive sales growth for this segment in the first quarter, and the Philippines, Malaysia, and Australia were the next biggest markets, and all increased their sales significantly in Q1 2020. A high sales growth was achieved despite price decline for this segment. Now let me explain to you how our profitability developed thanks to our strong Q1 revenues. In Q1 2020, SMA generated an EVTA of 12 million euros and an EVTA margin of 4%. The EVTA significantly improved compared to Q1 2019, mainly driven by far higher sales. Profitability was, however, slightly diluted by a high revenue share of low margin products and adversely affected by a negative exchange rate effect of approximately 2 million euros in Q1. For the remainder of this year, we expect our profitability to improve as demand shifts to newer, higher margin products in our portfolio. There were no unplanned depreciations in Q1, and our depreciation remained on the same level as in the first quarter of last year. Also, there were no significant extraordinary effects. Let's now have a look at the segments in detail. Home Solutions EBIT in the home solution segment was clearly in the black with 5 million euros, driven by the strong sales in the first quarter and a stable price development. In the business solutions segment, EBIT was positive and slightly higher than in Q1 2019 as a result of higher sales achieved despite lower prices compared to early last year. The large-scale and project solutions segment also improved its profitability compared to Q1 last year, but remained in the red in Q1 2020. Despite strong sales growth, profitability of the segment was especially affected by price decline and unfavorable mix in the first quarter. Now, I will move on to the balance sheet and networking capital on the next slide. We started the year with a networking capital balance of 160 million euros and a networking capital ratio of 17%. As you may recall from our 2019 annual results presentation, our networking capital was extraordinarily low at the end of last year as a result of a one-time advance customer payment for which we delivered the products and booked the sales in Q1. Therefore, at the end of Q1 now, our networking capital increased to 240 million euros, or a ratio of 21%, which is on a normal level for our business. A significant decrease of advanced customer payments, which I just explained, was partly offset by decreases in ARs, while our APs decreased to their usual level, and our inventories in total remained flat. Going more into detail, you'll see that finished goods inventories decreased by 17 million euros since the end of 2019. This is mainly related to the completion of a key large project in Q1, which I alluded to earlier. This decrease was offset by an increase in raw materials in the first quarter, which is needed to fulfill our high level of orders received and to de-risk our supply chain in case of COVID-19 related capacity constraints at our suppliers. Rate receivables decreased from 145 million euros at the end of 2019 to 120 million euros at the end of Q1 2020. This was a result of good AR collection work, which also reflects in our low number of days sales outstanding. Trade payables of 160 million euros at the end of Q1 decreased from the very high level at the end of 2019 as expected. And, as already mentioned, the advance payments from our customers, which are reflected in our balance sheet under other liabilities, were extraordinarily high at the end of 2019, which was mainly related to a key project in our large-scale segment, which was successfully completed in Q1. Now let's have a look on the group balance sheet on the right side of this page. In the balance sheet, the most noteworthy changes since the beginning of 2020 are related to the development of the networking capital positions and the related change in our cash position. Total cash decreased from 318 million euros at the end of 2019 to 257 million euros at the end of Q1, mainly as a result of increase in networking capital, which I just explained. I will walk you through the cash flows in a minute. Our equity ratio has returned to more than 40% at the end of the first quarter, as the significantly higher liabilities due to short-term one-time effect at the end of 2019 came down to a normal level by end of Q1. Let's now turn to our cash flow profile on the next slide. In Q1 2020, SMA generated a strong positive gross cash flow, mainly driven by our net result in the quarter, adjusted for non-cash effects such as depreciations and amortization. This is important as it shows that we are able to drive positive cash flows from our business operations. Our cash flow from operating activities is minus 51 million euros in the first quarter as a result of the significant increase in networking capital. In summary, SMA significantly improved its business performance in Q1 2020, which reflects in the positive gross cash flow, while our cash flow from operating activities and adjusted free cash flow in total were negative due to the increase of networking capital, which is mainly from the settlement of short-term liabilities in Q1. This concludes the detailed review of 2020 Q1 financials. Let me briefly summarize the key figures for you. SMA grew significantly in the first quarter of 2020, with sales of 288 million euros, which are 72% higher than in Q1 of last year. All segments achieved strong revenue growth, and our large-scale employee solution segment more than doubled in the revenue level from Q1 2019. Our EBTA improved significantly compared to the first quarter of 2019, reaching 12 million euros in Q1. mainly driven by the much higher sales. Our balance sheet remains solid with an equity ratio of approximately 40%, a net cash balance of 243 million euros, and a credit facility of 100 million euros. Our debt to equity ratio of 1.48 also confirms our sound financial position. I now turn to the market and competition part of the presentation. Due to the global impact of the coronavirus crisis, we have adjusted our market outlook, and we present you our brand new estimates on the following slides. While the corona crisis will most likely take a tall development over the coming months, we expect markets to recover soon afterwards. For 2020, we now expect a global market volume of 100 gigawatt, which is 9% down on 2019, and 18% down on our pre-corona market outlook. We expect the strongest downturn in APAC, where India plays an important role. Straight lockdown measures and difficulties in financing will have a strong negative effect on the Indian market this year. India, however, is no key market for S&A, and we do only little business there. On the other hand, we expect little to no signs of negative impact from the corona crisis on SMA's core markets in EMEA. When it comes to segments, the corona crisis will take its strongest toll on the residential segment and to a certain extent on the commercial segment in all regions due to investment restraints from private households and smaller businesses. Taking renewable energy goals into consideration, an already permitted and financed project PV development is expected to recover soon. Growth will be at 18% per annum over the next two years. Let's have a look at the market development in Euro terms on the next slide. The expected dip in demand is also reflected in the global investments in PV system technology, where we expect a downturn from 4.6 billion in 2019 3.7 billion in 2020, and a strong recovery of 11% per annum afterwards. The lower annual growth rate in comparison to the market in gigawatt is due to the still prevalent price decline in all regions and markets. However, we expect price decline to ease off to one-digit percentages over the next years, and due to corona-related delivery bottlenecks, price pressure may even become less than expected in the near future. Let's turn to the next slide, which shows the whole addressable market for SMA. As the transition to a decentralized energy supply based on renewable energies proceeds globally, storage and digital energy services become even more important. This transition also drives the further growth of O&M services for utility power plants. In addition to our core PV inverter business, SMA is very well positioned in these segments and will be able to profit from the expected growth. After a corona-related dip in 2020, we expect a strong recovery for the whole market, addressable by SMA. On the next slide, we have gathered our long-term market outlook. Long-term market outlook for PV remains very strong, and we expect annual growth of 12% over the next 10 years. Main drivers here are digitalization and electrification of additional sectors, such as heating and mobility, as well as green hydrogen. Electricity will become the main energy source in a world with growing energy consumption, and PV will become the main electricity source, as it is not only cost efficient and produced close to consumption, but also sustainable and climate friendly. These aspects will gain importance over the coming years, as the majority of people businesses, organizations, and politicians around the world see the urgent need to implement effective measures against climate change. Which brings me to SMA's positioning. And before we enter into the usual display of our products, we have an additional slide here which we really want you to present. Since its inception back in 1981, SMA is doing business in a sustainable way. I repeat that. Since its inception in 1981, doing business in a sustainable way has been a core value for SMA and its employees. Whereas most of our competitors are of the opinion that it is enough to sell technology for the production of renewable energy, No matter how these products are manufactured, we are convinced that real sustainability goes far beyond. This is why we began early on to implement sustainability measures in all areas of the company. For example, we have installed our first company-owned PV plant at our headquarters back in 2001. Over the years, Our own PV capacity has grown rapidly so that today we can cover 38% of our energy consumption in Germany with self-produced solar energy. And of course, the remaining energy used is also renewable. In addition, we are constantly reducing our overall energy consumption, which we measure in energy use per kilowatt inverter power. Over the last five years alone, the energy used to produce one kilowatt inverter power has decreased by 58%. As we take sustainability very seriously, we give 100% transparency to our stakeholders with our sustainability reporting based on the global reporting initiative standards, which is also displayed in our annual report. Let's turn to the next slide. With our sustainably produced portfolio of products, services, and software, we always have the whole energy system in view, as well as the needs of our customers who are looking for fully integrated, dedicated solutions that fit seamlessly in today's and tomorrow's energy supply system. Components are still our core business, but those not only include PV inverters, but also battery technology, communication devices, et cetera. The main aspect here is that we integrate all functionalities that our customers need from effective shade management to free inverter monitoring into our devices. This is good for our customers and for the environment as it saves material, energy and costs and makes the PV plants safer and more reliable. We complement our component offering by extensive services such as O&M, plant monitoring, PV planning, grid integration, including grid studies, commissioning, etc. With the services, we support our customers over the whole lifetime of their PV plants as a reliable long-term partner on which they can always count. On top of this come software and digital energy services, which will grow in importance and become a significant revenue stream over the coming years as Digitalization and the energy transition will gain speed. An important future business field in which SMA has already established itself very well is battery storage technology, which you will see on the next slide. On the left-hand side, you see the estimated global storage market growth by Bloomberg New Energy Finance. As battery storage systems make renewable energies available 24-7 and enable them to substantially contribute to grid stabilization, battery storage will be an important pillar for the future energy supply system and thus grow exponentially. SMA has developed battery storage system technology for more than two decades now and has unrivaled experience and expertise in this field, offering comprehensive solutions for all segments and applications. usable either in combination with or without PV, thereby opening up new customer groups to us. With these solutions, SMA has been the global market leader for battery storage system technology for several years now. In 2019 alone, we have signed contracts for the delivery of more than one gigawatt of battery inverter capacity, thereby tripling the capacity sold in 2018. With sales and service companies in 18 countries on all continents, we serve customers in more than 190 countries around the world. As we started off in Europe with Germany having been the forerunner of renewable energies, most of our installed capacity is located in the EMEA region. But as you can see, we have made good progress in APAC and the Americas as well, and these regions will also grow in the coming years with our sales and service forces on the ground. This global footprint makes us fairly independent of the development of individual markets. For the residential and commercial markets, we have introduced SMA ShadeFix in our string inverters. This intelligent software makes so-called module optimizers completely superfluous, as with ShadeFix, effective shade management is already integrated in the inverter. though SMA customers don't need to invest in additional equipment to achieve maximum yield, even in partly shaded PV arrays. This has also been proven by a recent study conducted by the Southern Danish University. As part of our digitization strategy, we have also introduced the first of a series of apps for different customer groups to the international markets. The SMA 360-degree app, supports installers in all areas of their daily business and in all stages of PV planning and operation. None of our competitors has so far combined as many functions in one app. These reach from PV system simulation, planning, commissioning and monitoring through to automatic notification in case of service. As already mentioned, after this successful start, we are planning to introduce additional apps soon. The SMA power plant manager is an important new device when it comes to grid integration of renewable energies. It controls energy generation, storage, and consumption with regard to the point of interconnection. As a result, power plant operators can now ensure that regulatory requirements, as for example regarding grid stabilization, are always met. Turn to the next slide. So far, the coronavirus has had no serious negative impact on SMA's business development. We have focused on prevention at an early stage, implementing appropriate measures such as travel bans, mobile working where possible, and adjustments to manufacturing processes to keep up our whole production capacities. We are thereby guaranteeing business as usual as far as possible, while protecting the health of our employees at the same time. As a result, at this point of time, there are no coronavirus infections at SMA globally. We are working very closely and intensely with our suppliers in order to be able to predict developments accurately. We have activated second-source suppliers in countries that are less affected by coronavirus-related restrictions. Water intake has also been positive in the first quarter, and we have seen no impact here. We expect a short dip in demand over the next few months with a strong recovery in the second half of the year. We will, of course, have to closely monitor the ongoing developments in relation to the coronavirus and respond quickly and flexibly at all times. However, we consider SMA well equipped to respond appropriately to all possible developments. This brings me to our guidance and expected future development. Looking at the right side of the slide, you can see that we were able to continue to increase our order backlog in the first quarter of 2020. Our strong product order backlog decreased slightly to 376 million euros by the end of the first quarter as a result of the very high product sales in the quarter. Nevertheless, we maintained a good level of order intake for product in the quarter and were able to significantly increase our order backlog for services to 421 million euros including a key O&M project, which we successfully acquired in the US. As you can see on the left side of this page, our large scale and project solutions pipeline remains on a high level and nearly half of our orders are for countries in the EMEA region. With the strong revenues in Q1 and the high level of order backlog, we can confirm that 60% to 65% of our 2020 sales guidance are already covered by our year-to-date revenues and the current product order backlog. Now coming to the guidance on the next slide. SMA started the year strong in Q1, and we have been able to mitigate the effects of COVID-19 on our supply chain, while our highly motivated teams continue to work remotely in several countries, which is keeping our business performance on track. For the first quarter of 2020, our sales and EBTA were in line with our expectations, and given our strong order backlog and our ability to mitigate supply chain issues, we remain confident to achieve more than 1 billion revenues for the full year. Although we expect a slight decline in market demand as a result of the COVID-19 crisis, we remain confident to achieve our guidance by continuing to gain market share from competitors in our major markets, as well as by benefiting from slightly improved price levels in the markets compared to our previous estimates. Therefore, the SMA Managing Board confirms its sales and profitability guidance for the whole year 2020, with revenues of €1 billion to €1.1 billion and EBITDA of €50 million to €80 million. Closing. To sum up why an investment in SMA is worthwhile. Real sustainability will become a significant topic for important stakeholder groups. SMA sustainability has been proven since the company's inception. Part of the sustainability are also our financial stability and our focus on a sustainable energy supply based on PV. With our comprehensive portfolio for all segments and applications and our global sales and service infrastructure, we can serve all our customer groups around the world and thus profit from the whole potential of the global energy transition. This is why, if you trust solar, there's no way around SMA. Now I'm happy to take your questions.

And we will take our first question.

Hey, good morning. It's Jeff Osborne from Cowan. How are you?

Good morning, Jeff.

Just a couple questions. You mentioned there in the guidance around seeing better pricing than prior expectations and also share gains. I was just wondering if you can give us a sense of which markets and which segments that you're seeing such developments?

First of all, Jeff, thanks very much for getting up that early in the morning to join our call. Yes, with regard to the discrepancy between the overall market shrinking and SMA's revenues actually increasing. There are several reasons to that, and as you said, better pricing and share gains are two among them, two of them. We expect especially a very good development in EMEA. regarding share gains in EMEA and in the Americas, North and South America. In APAC, we see a fierce battle over market share in Australia, where we will be able to sustain our market share despite heavy competition. We have certainly lost market share already, also in Q1, in Vietnam. But we have, as I mentioned, now... gained market share in other countries like the Philippines, Malaysia, and we were also able to keep our market share to the most extent in Japan, which is going to continue. So share gains we will see in EMEA, all regions in EMEA, and in North and South America. Pricing. You know, we have said that... The price drops for the string inverter business will be in the single-digit area, and for central inverters in the low two-digit area, this is still the case for the whole year assumption. However, if we look on the price development in the first four months of this year, we see that it doesn't drop as quick as calculated. It's a bit behind schedule, so to say. Well, we don't know the exact reasons, but it might have to do something with COVID-19 as demand is shrinking and, sorry, as offerings are shrinking. So that is the situation right now. It needs to be continuously monitored, but the first signs show that we have a better ASPs than expected in all regions and all countries. Sorry.

That's very helpful. And then one of the themes of the last analyst day or the last two analyst days has sort of been the product refresh and then the intended improvement in margins. And it looks like you had some very strong developments in the North American markets, but with older products, you know, as part of the safe harboring and just a strong close to the year. I wanted to get a sense of what you're seeing with the strong order book for some of the newer products that hopefully could improve the gross margins by a couple hundred basis points.

It's exactly as you said. We are, as part of our restructuring started in 2019, we are sorting out, so to say, old products with low margins. We are walking away from our earlier point of view that we will have a complete portfolio for every customer everywhere in the world, which included also products which were not that profitable. And now we are sorting that out step by step, and step by step we are now shifting to newer products or even accept holes in our portfolio, but thereby improving margins. And we will see that already in Q2 and Q3 that ASPs are better, especially in large scale where we have this one single order in the U.S., as you mentioned, and that will continuously grow over the year.

That's excellent. I just had two other hopefully quicker questions. One is, you know, certainly with the COVID-19 crisis, there's a concern among investors of channel inventory. Can you just give us a sense of more in your residential and commercial sector, what visibility you have as it relates to inventory at key distributors, both in the U.S. and EMEA? Were you the strongest? That was question one. And then question two, any early indications of uptick or adoption of ShadeFix, your new software application for residential and small commercial as it relates to going after the optimizer market would be helpful.

Yeah, of course. So with regard to channel inventory, that was, of course, also a concern that we had. And therefore, we are in constant contact with our customers. And we can say that after the very early initial reaction, which was panic struck, we came to very seriously led and very cooperative exchanges over our views of the market. And that shows that we see for the major markets we are active in, which is EMEA, that there will be a delay in demand There will be a drop in demand, but it will be compensated within the year. So that there may be channel inventory right now building up, but it will be used later in the year and will be consumed later in the year. The situation is different in Americas where we expect, especially for the string inverter business, resi and commercial, the impact to be heavier. However, exactly in this area, our market share in those two segments is not the largest. So we are not going to suffer as much as our competitors. Speaking of competitors, ShadeFix, so far we don't see an uptick in orders for our products, but we see an enormous reaction in the market, as you would expect. Not only that our competitors or that some of our competitors which are using optimizers have gotten on their toes, but also a lot of customers have enormous interest. We are holding webinars with three-digit numbers of participants who at the very beginning of the webinar have a certain perception of the idea of an optimizer, and if you ask them after the webinar, it changes. It really changes within half an hour. just learning the facts about shade fix. So we are very positive stimulated by the first reactions in the field. However, we do not see an uptick in odor intake yet.

Excellent. And then lastly, any thoughts or changes in battery development and attach rates there? Any strength in Europe or in America or other regions of the world, like Australia, where it seems like things are going well?

no changes with regard to attach rates. What we see is that it becomes continuously difficult to get batteries, that there are shortages in the market. Doesn't seem to be only the battle between mobility and stationary use of batteries, but also an overall difficulty to really get up to the numbers that the gigawatt factories had had in mind or were planning. It's not in any way harming the business, but it's feelable. But no major development with regard to attach rates.

Excellent. Thank you. That's all I had. I appreciate it.

Thank you very much, Jeff.

Thank you. Thank you. And as a reminder, ladies and gentlemen, please press star 1 to ask a question. And we take our next question. I'm sorry. That was a huge echo there on the line. Yeah, I will need to remove that question. Thank you. There are no further questions at this time. One second, let me just try the next one here. I'm not sure what phone he's using. Please pick up your handset to ask your question, otherwise you are feeding an echo into the call. Hello, your line is open. All right, it seems you are muted now.

Hello? Hello? Yes, hello. Yeah, Guido Heumann from Metzler. Good morning, Mr. Harding. Hello. Most questions have been actually asked, but maybe a few follow-ups to get things together. I think your first quarter has been impacted by this large-scale order, I understand, and the questions are, you know, when I do my math and calculate the ASPs, so dividing sales by volume, the price decline has been quite massive, you know, around 30%. Yeah, I understand that this is mainly driven by this big project in large scale. So do you have an indication how that would have been without this order? I think you gave some indications already, but still, maybe the second question in this context would be, you know, I think looking at the result in the large-scale segment, you post a loss there. So is it fair enough to say that you acquired this project mostly for the sake of you know, defending market share or, you know, it doesn't look very rational, you know, to do this transaction, you know, given the impact on the segment's performance and maybe also ASPs. Then maybe, last but not least, also make potentially connected to that, the backlog. There we saw sort of a shift or, you know, the services share increased, the project declined slightly. So is this jump, let's say, call it, in services, is that now due to the, let's say, inclusion of this project now into a service contract? So is it all, actually all that impacted by this big transaction in first quarter? Or is that another additional project you want there, which increased the order backlog? Okay, that's my question.

Thank you, Guido. As you correctly mentioned, and also Jeff mentioned before, this one single large order in Q1 was, of course, a safe harbor triggered order. However, we would have sold this capacity anyway. Our pipeline for large scale is filled. We are running three shifts and it happens now to be to have been a Safe Harbor US customer whom we served in Q1. But if that customer wouldn't have been existing, we would probably have sold as much as this capacity for other customers because we really have a very good pipeline here. However, as you correctly stated, and that also contributes to what I told Jeff a minute ago, this single large order shows ASP decline as you mentioned. But that is going to disappear over the remainder of the year. So if that has been, as you calculated, minus 30% ASP, the ASP decrease we expect for the whole year remains in the low very low two-digit area. And the reason for this, why we acquired this project has not been so much the defense of market share. It was actually related to a new product being introduced into the market, a central inverter with a medium voltage station. And we wanted to have this new product being introduced into the market in large scale, meaning in high numbers and high quantities. Therefore, we were compromising on price. And also, as sometimes, you know, the case, we calculated pricing on the basis of certain assumptions even before the product was ready. And that also contributed to this negative impact. for the future, this product will gain better margins than it has in Q1. And also related to that, the jump in services order intake is related to a different project. It's not the same. We have also acquired a huge O&M project, which is not the same where we delivered the central inverters into. Okay.

All right. Perfect. Thank you. Thank you.

Thank you. And as we have no further questions, I would like to turn the call back over to you for any closing or additional remarks. Thank you.

Thank you all very much for spending time with us this morning. We all know that the world is clustered with information and it's very difficult and very demanding to distinguish between valid and superfluous information. We trust that you find SMA a reliable partner in assessing the overall situation with regard to PV and very much appreciate your attendance. Thank you very much. Stay healthy and talk to you, and hopefully see you soon again.