Sma Solar Technology Ag

We also decreased the trade receivables from 145 to 120 million euros. These working capital improvements could not fully compensate for the decrease in trade payables from a high level of 175 million euros at the end of 2019 to 144 million euros at the end of 2020. The decrease in trade payables was a result of a downgrade of our credit rating early last year, which had been triggered by concerns related to the COVID-19 pandemic. After our strong 2020 results, we expect our rating to improve in 2021, which would drive up our APs and increase our cash balance again. In the balance sheet, the most noteworthy changes in 2020 are related to the development of the networking capital positions, which I just explained, including the decrease in advanced customer payments, which is booked under other liabilities. In addition, the non-current assets increased by €30 million, mainly from finance lease assets. Total cash decreased from €18 million at the end of 2019 to €237 million at the end of 2020. The decreased balance of total cash is mainly a result of the increase in networking capital. But we're coming to the cash flow in a moment. Shareholder's equity increased from 417 million euros at the end of 2019 to 439 million euros, thereby having an increase of the equity ratio to very solid 42%. Now let's walk on to cash flow. You can see the strong positive gross cash flow, which doubled compared to 2019. Nonetheless, due to the significant increase in net working capital, the cash flow from operating activities and the adjusted free cash flow were negative. That concludes my review of the 2020 financials. Now let me briefly summarize that. First, in 2020 SMA grew its revenues again by double digits and sales exceeded 1 billion euros driven by sales growth in our home and large scale segments. EBITDA significantly increased compared to 2019, reaching 72 million euros, mainly driven by our increased revenues, as well as a net effect of approximately 50 million euros from one-timers. Without this positive effect from one-timers, SMA results were still positive, also on EBIT and net result level, and much higher than in 2019. Third, our balance sheet structure remained solid with an equity ratio of 42%, a net cash balance of 226 million euros, and a credit facility of 100 million euros. SMA's debt-to-equity ratio of 1.39 also confirms our solid financial position. I now turn to the market and competition part of the presentation, starting with a look on the global PVV installations in gigawatt. Despite the Corona crisis, the global PV market grew by 23% to 137 gigawatts in 2020. This was mainly due to strong growth in China, the US and also Vietnam, which was rather unexpected. China alone grew by more than 50%. China's carbon neutrality target by 2060 will further drive growth in the coming years. We also see a good two-digit growth for the EMEA region in the years to come, mostly driven by France, Germany, Italy, and Eastern Europe, as well as for the Americas region with some main drivers U.S., Brazil, and Chile. Australia, Japan, and India will drive further growth in the APEC region after a small dip in 2021. Overall, this will lead to an average annual growth rate of 9% for the global PV market for the mid-term. We look on the same picture in euro terms. It's a little bit different. Due to the continuing price decrease, we will see a rather flattish development here. Because of the very low prices, China has a by far lower market share in euros than in gigawatts. The region with the highest growth potential in euros over the next years is EMEA, growing from 1.4 billion euros in 2020 to 1.6 billion euros in 2023. Whereas we expect further moderate price decrease for the commercial and residential segments, the comparatively higher price pressure is expected to continue in the utility segment due to competitive tenders. As mentioned, this graph refers to the PV inverter market only. On the next slide, we see the whole market addressable by SMA. This comprises of our core business, PV inverters, the battery inverter market, and digital energy and operations and maintenance services, both in selected countries addressable by SMA. As the transition to a decentralized energy supply based on renewable energies proceeds globally, storage and digital energy services become ever more important and show the largest growth potential. SMA is very well positioned in these segments and will be able to profit from the expected growth. We estimate the annual growth rate in Euro terms for the whole market addressable by SMA until 2023 at 9%. On the next slide, we have gathered our long-term market outlook, which we have revised due to the current political developments. If we look on the period of the next 10 years, we expect the annual growth of global PV market of up to 14%. 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. It is not only cost-efficient and produced close to consumption, but also sustainable and climate-friendly. These aspects will even gain more importance over the coming years as the majority of our society around the world sees the urgent need to implement effective measures against climate change. So you see here that we have been for a very long time stick to the same long term picture, but now have concluded that this doesn't hold water any longer and that we have been very conservative and now having increased it by a large portion. In addition to the expected long-term PV market growth that I've explained, and that can still be called conservative, You can see here on this slide the global growth market for three special fields. E-vehicles on the right side, starting from very low numbers, e-vehicles will continue to replace conventionally powered vehicles over the coming years. The annual global market is expected to grow approximately tenfold. Accordingly, the market for EV charging solutions, in which SMA is active, should see an average year-on-year growth of more than 30%. In the middle, you'll see the expected growth for battery storage and hydrogen, which comes with the developments shown to the left and right. The transition to highly decentralized and renewable energy supply structures and the electrification of additional sectors. Now, let's come to the next slide. We will now give you, let's say, a few insights into what we deem to be, let's say, super interesting or important for our positioning and our short-term as well as mid-term prospects. And I would like to start with green hydrogen or power to gas. Meanwhile, it is common sense that hydrogen will play a role in decarbonizing the industry. What is not so known is that SMA started developing solutions for the power conversion into hydrogen application already five years ago. We can therefore already today leverage our technology as hardware is very much the same as in our utility scale PV applications. We can also profit from our high system knowledge and our grid integration competencies because they are needed to optimize the performance and functionality of the electrolyzer and thereby increase the economic feasibility of green hydrogen production. We have just started to tap into this new business field. Several projects with SMA solutions have already gone into operation around the world. Additional projects are currently being built. So that is not fantasy, that is already reality. What I want to show you with the following slide is how much SMA is favored by current tailwinds. Of course, you know all about the current regulatory initiatives, about the UE climate target, about the plans of the new US administration. These developments are driving the market growth that I have already described before, PV and battery market growth, as well as a start of e-mobility and green hydrogen. And the thing is that SMA has anticipated these trends and developments already a couple of years ago and has then started to position itself in all key areas from PV and storage systems, grid integration and auxiliary services to energy management and digital energy solutions. EV charging, and as just shown on the last slide, also with regard to hydrogen applications. All this together will place SMA as a major player in key areas of the global energy transition. So now let's talk about 2021, starting with current order backlog. You'll see that on the right side of the next slide. A strong order backlog, which has increased by 12% since beginning of the year. And our order backlog for products remains on a good level, with 386 million euros at the end of 2020. As per March 24th, our backlog has decreased a little bit, but we have significant orders currently in the pipeline, and we will see an increase again over the next months. As you can see on the left side of this page, our large-scale and project solutions order backlog remains very strong, and the Americas and EMEA regions continue to make up nearly 80% of our product order backlog. Putting this into context of our 2021 guidance, our current sales and product order backlog cover approximately 50% of our guided sales figures for this year, which is a good level for this early stage. This brings me to our 2021 sales and earnings guidance. For the first quarter of 21, our top line will not be on the same level as in Q1 2020. But you might recall that last year we had the largest ever project in SMA's history in our books in Q1, a significant U.S. North American large-scale project. So therefore, the comparison to the previous year is somewhat misleading. Because different than last year, this Q1, we will be profitable. The board expects Q1 21 sales in a range between 235 and 245 million euros and the EBITDA between 14 and 17 million euros. Given our strong product order backlog, especially for our large-scale segment, we expect sales and profitability to be higher in the second quarter and then again in the second half of this year. At this point in time, we see neither the COVID pandemic nor the increase of costs for raw materials as a hindrance for further growth. Therefore, the SMA Managing Board confirms its sales and profitability guidance for the whole year 21 As announced in early February, we expect revenues between €1.75 billion and €1.175 billion and an EBITDA between €75 and €95 million. Given that our business has only mildly been affected by the COVID-19 pandemic, the market continues to grow in all segments, and that we maintain a strong order backlog, we are confident to achieve our guidance again this year. profitability improvement will continue to be driven by sales growth, productivity gains, and the optimization of our product portfolio. Regarding segments, management sees profitability for 2021 rising in all three segments. That ends my presentation. Let me deviate from my script and add some more comments to Q1. because I think that this has been misinterpreted by the market, our Q1 outlook. We actually see that this is a typical Q1 quarter. The Q1 quarter is, for seasonality reasons, always a little bit lower than the other quarters of the year. And in our core market for string inverters, meaning Central Europe, We had a very strong winter in January, February, where you could actually have two to three weeks where no installations were possible. That has filled up inventory in the distributors, which now leads to lower sales in March, so that the overall expectation is a little bit above what could have happened. But that's something that happens from time to time. It has actually increased. no weight in the assessment of our full year capability. So Q1 is fair and okay and profitable. And as we expect the following quarters to become even better, our overall prospect in 2021 is really positive. That ends my presentation, my comments, and I'm now happy to answer any questions you might have.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We'll take our first question from Jeff Osborne from Cohen Company. Please go ahead.

Yeah, good morning, Ulrich. A couple questions on my end. Just to clarify on the Q1 and seasonality, are you seeing any slowdown in projects just due to module price inflation? It seems like everything in the value chain for solar is going up as well as interest rates. And so I was just curious if you're seeing any pushouts or if it's just seasonality as you referenced.

We have seen the module prices going up. So far, that has not affected the business. And we, at this point in time, see ourselves not in the position to really assess any impact on the market. It might happen, but with module prices, they are going up and down continuously. That's actually something that happens from time to time. I think that the more important issue is the raw material prices because that is a continuous phenomenon already for quite some time. And here we haven't seen an impact on the market pull and especially on our performance. Also because we have, let's say, secured our supply chain and we have long-standing contracts and are not just hopping on certain electronic components nowadays. So module prices, yes, it's an issue. We are discussing that, but we would not say that this is a major force already, which would explain the current situation. I would rather say that it's a seasonality issue. And of course, the pandemic has taken its toll, especially in the business segment.

Makes sense. Just a couple other quick ones. I noticed in the ESG section of the annual report that the field failure rates were 1.48%, slightly up from 1.44% I think last year, where you had several warranty provisions. Is that all just because of the lower gross margins in Q4, or how do we think about reliability as we move into 2021? Have you resolved all these issues, or are there going to be lingering problems?

No, we had several field failure issues. They are mostly linked to this one supplier that I already mentioned. And the good thing is that we cleared all of that. The entire balance sheet is cleared from risks. And especially to these quality issues in the field, we came to an arrangement with the supplier and we have made the necessary accruals. And there is silence and peace upon that. We are totally satisfied with the situation like it is now. No more risks hidden.

It's good to hear. And just a housekeeping question. Could you share with us what the trading revenue was as a percentage of revenue as well as storage? Is there any meaningful movement in either of those line items?

Yes, I can. With regard to trading, it was about 15% by the end of the year, and storage was about 10%.

Got it. That's all I had. Thank you.

Thank you, Jeff.

We will now take our next question from Konstantin Hesse from Jefferies.

Yes, hi there. Good day. Hi, Ulrich. Thank you very much for taking my question. I've got three. So one would be, would you be able to talk a little bit about what you expect will be the main revenue drivers this year and here really what needs to happen to reach the top end of your guidance? If you can give us some color to understand the different dynamics across the divisions here would be good, both in terms of volume and pricing. This would be my first question, please.

okay yeah let's walk through the three segments very quickly with regards to a large scale I think we are already on the track to reach higher sales than originally expected the order intake leads into that direction and the drivers for that are certainly batteries and the availability of batteries or storage devices in general and the functionalities coming with the inverters. You know this market becomes more and more smaller with regard to the competitive landscape and we are very successful in the US as well in Australia as you know more and more share of renewables in the overall load makes it necessary to support the grid. And the grid functionality that our machines have are certainly top of the notch. And therefore, this is running very well, actually. With regard to the commercial arena, our business solution segment, here very much depends on COVID. You know that there are many mid-sized companies who have liquidity problems right now and therefore are postponing investments or are even cancelling investments. So that affects the entire industry, not just us. And the sooner this is over, the better this segment will perform. And also, we have some homework still to do with regard to business. We have a portfolio gap, again, that needs to be closed, which will happen soon. in the beginning of Q3. So if that is accepted by the market as we think, we will just get through the year as hoped. If the pandemic closes down, let's say not by the end of the year, but even earlier, and this product is very well received, then we might also, let's say, have a better result and that may then help us in reaching the upper end of our guidance. With regard to our home segment, the residential area, here I think we are already a little bit further down the road in the transition of the market from a pure inverter market to an energy management platform market. The convergence of sector here is already at advanced stage, mostly due to the importance of EV charging that we nowadays see. And here I think it is still an open game whose company's offerings will be more successful. I think I have explained that we see ourselves here very well positioned and currently the order intake in Q1 matches our expectation for the entire year. But I think it will still be interesting to see whose functionality, whose technology is going to really convince customers the most. And that will not be decided this year, but it is one of the factors that will contribute to even higher revenues further down the road.

That's great. Thanks. Then just quickly on pricing, just to follow up on this. So large scale,

still fair to assume kind of the low double digit low teens commercial high single digit low teens and residential is residential still flat or has it started coming down again we have I have been very frank in our capital market days with regard to pricing and have been told in the aftermath I shouldn't be so frank in telling the entire market what the prices are actually doing But what you just referred to is correct. And with regard to a home, we see still a price pressure in the market. Okay, thanks.

And then to my second question, can you just talk a little bit about market share in 2020? And given the expected revenue decline in Q1, what are you expecting there? Is the entire market declining or are you losing a bit of share there? Thank you.

Yeah, as I already explained, the fact that our Q1 in 2021 sees less revenues than in the preceding year is totally attributable to the fact that we had last year in large-scale segment a huge single order. And therefore, that this year is coming out at a lower end, is just affecting the large scale business. And here you see the next month may even change the picture. So with regard to residential and commercial, Q1 isn't worse than last year. It is comparable and therefore I don't see market share being lost in Q1. I certainly see that in 2020 we have gained market share. because we outperformed the market in our growth rate. And we plan to do this again in 2021.

That is great. Thank you. And then lastly, just on hydrogen, I'm really curious here, if you can talk a little bit more about the project that you're currently working on, where exactly do you fit in there? What is the opportunity and what are some of the competitors in this field? Thank you. Okay.

Perhaps Nina, you can go back to the slide which shows this power-to-gas graph. So let me start to tap into that. For the electrolysation process, you need direct current. And therefore, you need to convert the current you get from the grid, which is alternate current, into direct current. So here it is a converter that you need. And also this converter needs to deliver a very, let's say, untechnically spoken, a very clear and stable flow of energy. And that is something that is not just easily being made by every utility. You need special machines for that. And the hardware you need for that is exactly what we sell for our large scale business. It is just doing the inversion process the other way around. And therefore, it is not just that we have an inverter who is just perfectly sized. It is also that our converter technology possesses this distinctive ability to deliver these clear and stable flow of energy, which you need for the electrolysis. And therefore, we think that we are per se well positioned. What makes us so interesting is that we have seen this coming already five years ago and worked on, let's say, on the product and on understanding not only the market, but also the technology behind that and trying to improve that. Also, you might need our technology for just downgrading the product the power from the medium voltage net to the low voltage net in order to just then have the electrolysis being happening. So there are two points and this is shown on the graph here where the SMA technology may kick in depending on what is happening. What we are actually already delivering in are a variety of projects usually from small utilities who are doing this on an experimental basis. And I have seen videos of our people, let's say, installing them and actually producing hydrogen already. So it is working. It is functioning. However, it is at a very, very early stage. We will see this developing over the next years. It will take some time until this really ramps off. but then of course it will be exponential and until then we will also let's say work to have special products to have a special product platform for this application but we are already in the game and i think that we have a very advanced position here okay so thinking about so basically for every electrolyzer you would need a converter which means that if europe is planning on 500 gigawatt installed base by i think 2030 or 2050

This is kind of how we can think about the opportunity there for you as well.

You need an inverter for the electrolysis. So it's the same as PV. For every PV, you need an inverter in order to change DC into AC in order to feed it into the grid. Now it's the other way around. You need an inverter to use electricity from the AC grid in order to make the electrolysis. So that is per se wonderful for inverter suppliers. The specialty is that we are very good positioned technology-wise, and those others don't. And as you were right, you won't see that in our revenues very soon. It will take some time.

Thank you very much.

Welcome, Konstantin.

We will now take the next question from Guido Heumann from Metzler.

Yeah, hi. Hello. Three questions. The first one would be, actually, if you could provide me with a rough indication how much megawatt will be sold in Q1, just for me to have an idea about the ASP. The second one is, again, about the business solutions. I think you indicated that you are about to introduce a new product there, but still, what is actually the problem about this business? Is it fierce competition? Is it the customer's behavior? I understood that currently we have this corona problem on top, liquidity problems, but it seems to be a pretty tough segment to be in. What could you do here you know to improve profitability um and the third one is on ev charges um i assume that you you rely on on your you know on your contacts or connections with your you know with the international installers when it comes to selling these products also abroad but also in germany so um via installers um What market, which countries are you expecting actually to show strongest growth? Because I think this is a strong growth market. So where are you selling this product to? Am I right that you cooperate with the installers here? And maybe last but not least, and maybe I should know it, but where would the sales appear in which segment?

That's it. Okay, understood. Yeah, thanks. With regard to your first question, in Q1, that was about 3.7 gigawatt that we sold, 3,700 megawatt.

Okay, cool. Thank you.

With regard to the second question, the business segment, as you said, it is due to our product portfolio, which has a gap. which needs to be closed. That will help. We are waiting for the pandemic to come to an end in order to revive customer demand and then have, let's say, higher productivity in our factory. That will immediately help regaining profitability. For many years, our business solution segment has been the cash cow of the company and now it's the other way around and it is fed by the two other segments. But we see that only as an intermediate for short term period. The soon we will get, we will be able to increase sales, productivity will rise and we will gain profitability. What would help is that we recover from some quality problems we had in the field. Jeff was already mentioning that in Q4, we had higher warranty costs, quality costs. And that is due to the fact that we were haunted by some quality issues in large scale, but also here in business. And that needs, first of all, to be repaired. That's the first thing. But also, then you need to regain customers' trust. We have now since many years followed, not many years, but since two and a half years since this management board is in office, a clear course to just have such products in our portfolio which have a high margin and high quality level. So no more budgetary, low budget products. And in business, we need this recovery from an earlier approach to really work out. The product that have caused this field failures are not being sold any longer, but still we are suffering from some, let's say market recognition or fading market recognition due to these quality problems. Once we have overcome this, that will also help us. And with regard to your third question, EV charges, here it is quite easy. There's such a demand for EV charges that we cannot fulfill demand right now. So we have long lead times. And therefore, we are selling in Germany only right now. We couldn't serve other markets because we can't even satisfy the demand here in Germany. Therefore, we have no plans, currently no plans to internationalize that. I haven't heard any discussions about that. With regard to the strong growth, which countries could be affected? All of them. With regard to renewables, we have some countries who are more developed than others. We have certainly Korea. We have certainly some parts of the U.S., We also have the Benelux countries, who are much more advanced than that. We have a very good infrastructure in Italy, where we also see a rising demand for batteries and for storage devices. Those are usually the countries that will also lean on EV charging or on EV vehicles rather sooner than later. But for now, SMA is concentrating on its home turf because that is even more than we can supply.

And the segment, it's booked in too?

Sorry, that is in the home segment. We also have a business solution, so a business EV charger. Those revenues are booked into the business segment, but it is very low. It's still very, very low.

Are you considering the current sales capacities?

Yes. Yes, we will. You know, we have also, let's say, a share in a joint venture who is also dealing with EV charging on DC as well as on AC level and also, let's say, in the residential and especially in the commercial sector. So this business is going to increase and we would extend our production the moment we have more raw materials at hand. So here it is really cut short by the availability of electronic components because we didn't see this demand coming. We ordered these, let's say, electronics a year ago and now the demand is overwhelming and therefore we still have to get ahead of the wave in order to do that, but as soon as we can we will, yes.

All right. Thank you. Very clear. Thank you.

Okay. Thank you.

As a reminder, to ask a question, please press star one. We will now take our next question from Lasse Stuben from Bernberg.

Hi. Just one final one for me. Most of them have been answered. You're going into the last year of your cost savings program. Can you just give some more information on sort of what to expect there. I think you already alluded to it in the commercial segment, maybe some final product portfolio sort of phasing out. So maybe just some additional detail on what's expected there and where in the P&L can we sort of expect to see those cost savings? Is it mainly in sort of the gross margin level or is there sort of also more general cost savings across the board through the organization? Thanks.

Certainly. Yes, as you probably mentioned, we have started a cost saving program during our restructuring in 2018, which foresees that we will save 40 million of recurring annual spendings. And this program is, let's say, unfolding and is making progress. And by the end of the year, we will have even surpassed this amount. current forecast sees it as about 42 million euros of costs being saved on a recurring basis every year. The major bulk from this savings comes from gains in productivity, it also comes from digitalization efforts. It also comes from streamlining processes and lesser resource being used. This affects to a large extent the gross margin, which we can already see in the gross margin, which has climbed over the last quarters with the exception of Q4 due to these one-offs. But if we adjust that, it would have been also, let's say, a 19.5 gross margin and therefore would have been in line with the trend of prior quarters. And we have seen that already in Q1. Q1 gross margin will be above 20%. And for the remainder of the year, we also see gross margins of above 20%. And that is going to increase even further. a bit further. The saving programs also affect our structural costs, meaning administration costs, which are flat, although the increase in revenue is quite considerable. It also affected the R&D capacity. However, we are increasing our R&D budget related to the overall budget, so the R&D um ratio is increasing um the only function that is not affected by cost savings right now is sales and service not because we are growing that much so we can't save much costs much resources there but visualization efforts also contribute for instance our service costs are going to be lowered due to more and more service offerings being uh directed to to self-help and to remote maintenance for instance that we do that by our apps etc etc so that is all contributing to this right thanks very useful that's all my questions welcome

As there are no further questions, I would like to hand the call back over to your host for any additional or closing remarks.

Yes, thank you, Marianne. Thank you to all of you for listening in. That was an interesting call also for me. Again, let me point to the fact that our Q1 is not a bad Q1. It's a good Q1. And it's the first good quarter in a very interesting year, 2021, where we will all together fight the pandemic and get out, let's say, victorious. SMA will continue to work on this path to be solid in its doing and keeping all the momentum and having a lot of interesting ventures before us. And therefore, I also entrust I also trust that we will be able to conclude this year very much in the sense of last year, and that is an improvement which is outperforming the market. Thank you very much, and hope to see you soon in person again at any given time. Thank you. Have a great day.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.