Sma Solar Technology Ag

Thank you, Alan, and welcome, everyone. We very much appreciate that you are taking the time for this investor and analyst call on the results through Q3 2021. You can find today's presentation on our investor relations website, ir.sma.de. This conference call is scheduled for 40 minutes and will be recorded. The replay will be available for seven working days. After the presentation, I will be happy to answer your questions. I will start with a review of the financials before presenting current developments. At the end, I will provide you with an update on our expectations for the fourth quarter and full year 2021. I expect my presentation to last about 20 minutes. I refer to our disclaimer on page two, and here on slide four, you'll find a summary of the key financials for the first three quarters 2021. After three quarters, you can see that revenues in our home solutions and large scale and project solutions segments grew compared to the first three quarters of 2020. Business solutions revenues, which were affected by the COVID-19 crisis in the first half of this year, improved slightly in Q3 compared to Q2, but remain below last year's level and are hampered by material shortages, which affected all three segments in Q3. In total, SMA's revenues were a little below last year's level, but profitability continues to be much better compared to last year. I will provide you with more details on our financials for the first three quarters in the next slides. If you have a look at the table in the bottom right corner of this page, you can see that our Q3 2021 sales were higher than in Q1 and Q2, mainly driven by a strong quarter for our large-scale business. Q3 sales for our home solution segment were a bit lower than in the previous quarters, partly due to supply constraints, but also due to our portfolio gap, which we plan to close in 2022 with the launch of our hybrid inverter. Gross margins were slightly lower than in the first two quarters of this year due to the higher proportion of large-scale sales and higher material and freight costs. Let's please turn to the next slide, and I'll provide you with more insights regarding our sales performance. With net sales of 745 million euros, SMA's revenues were 4% lower than in the first three quarters of last year, which is attributable to effects from the COVID-19 crisis and material shortages. Our home solutions segment grew its revenues by 5% in the first three quarters, with sales growth in our EMEA and Americas regions more than offsetting for a decline in the Asia-Pacific region. Revenues in our business solutions segment declined, mainly due to postponed projects as a result of the COVID-19 crisis and material shortages. Our large-scale and project solutions segment increased sales year-over-year by 3%, despite effects from material shortages and projects shifted to next year. Looking at the regions, EMEA remained our largest region in terms of revenues in the first three quarters, with €386 million, which represents 50% of SMA's global sales. In this region, our home solutions achieved double-digit growth, while our business solutions and large-scale segments declined compared to the first three quarters of last year. Revenues in SMA's Americas region grew compared to the first three quarters of 2020, driven by strong growth of our large-scale segment in the US, With 258 million euros of revenues, the Americas region represents 34% of our sales. Our Asia-Pacific region represented only 16% of SMA's sales and revenues declined compared to the first three quarters of 2020. Now let me walk you through the sales per segment on the right side of the slide. Our home solutions segment, which has consistently delivered strong sales and profits achieved revenues of 240 million euros in the first three quarters, growing by 5% compared to the same period last year. For this segment, Germany and the US delivered the highest revenues and grew their revenues by double digits compared to the first three quarters of 2020. Revenues in our business solutions segment declined by 22% in the first three quarters as a result of COVID-19 effects and material shortages affecting several key markets. The top markets for the business solutions were also Germany and the US, while Italy, the third biggest country for this segment, more than doubled revenues compared to the first three quarters of last year. Incoming orders were much higher for this segment over the last months, but due to the difficult supply situation, our conversion of orders into sales takes longer than usual. Finally, our large-scale and project solutions segment grew revenues to €355 million in the first three quarters compared to €345 million in the same period last year. The US remains our biggest market for our large-scale business, representing more than half of the total segment sales, and grew revenues by 8%. Australia is the second largest market for this segment, and after a strong third quarter, sales are nearly three times higher than in the first three quarters of 2020. Now let me update you on our profitability over the first three quarters. For the first three quarters of 2021, the SMA generated an EBITDA of 53 million euros and an EBITDA margin of 7%. EBITDA was solid in Q3, and the gross margin of 20% remained on a good level despite the high proportion of large-scale sales and higher material and freight costs in the quarter. In the first three quarters of 21, SMA's results included both positive and negative one-time effects of low magnitude, and the net effect was approximately plus €1 million. Depreciation remained on the same level As for the first three quarters of last year, there were no unplanned depreciations in the first three quarters of 21. And now let's have a look at the segments in detail. Home Solutions. Our Home Solutions segment continues to be very profitable. EBIT in the first three quarters of 21 was 39 million euros, which represents a strong return on sales of 18% for this segment and EBIT twice as high as it was in the first three quarters of last year. The positive development continues to be driven by product portfolio improvements and stable prices in the residential market segment. In our business solutions segment, EBIT was negative in the first three quarters due to the low level of revenues as I already explained. The large scale and project solutions segment had a significantly improved third quarter, but results remained slightly negative through the first three quarters, mainly as a result of increased serial and freight costs. Now I will move on to the balance sheet and networking capital on the next slide. At the end of the third quarter of 21, our networking capital increased to 277 million euros, or a ratio of 28% as compared to a balance of 211 million euros and a ratio of 21% at the end of 2020. The increase is attributable to the increase in our inventories and trade receivables, as well as decreased trade payables per end of Q3. Going more into detail, you see that finished goods inventories increased by 19 million euros since the beginning of 21, and raw material stocks increased by 5 million euros. The build-up of finished goods is related to the strong order pipeline, especially for our large-scale and project solutions and business solutions segments. The increase in raw material stocks results from our efforts to mitigate effects of supply constraints. Trade receivables increased to 142 million euros at the end of September as a result of the increased level of sales over the last month. Trade payables of 126 million euros at the end of September are 18 million euros lower than at the end of last year. This is partly due to lower purchasing volumes over the last weeks due to delays in our supply chain and the normal development during the year since APs tend to be higher at the end of the year due to the holiday period. Now let's have a look on the group balance sheet on the right side of this page. In the balance sheet, the most significant changes since the beginning of this year are related to the development of the networking capital positions, which I just summarized. As a result of the increase of NWC, our total cash decreased to a balance of 178 million euros at the end of Q3. In Q4, we expect liquidity to increase, driven by optimization of our networking capital and positive one-offs, including VAT reimbursements. Our equity ratio of 43% at the end of September remained on a solid level and increased compared to the end of 2020 thanks to the positive results. The decrease in provisions since the beginning of 2021 is partly attributable to reduced general factory warranty accruals as a result of improved quality parameters for our product. Let's now have a look at our cash flows on the next slide. Over the first three quarters of this year, SMA generated a positive gross cash flow, which continues to outperform last year's level through the first three quarters. This is mainly driven by our positive net result adjusted for non-cash effects, such as depreciation and amortization. Despite the increase in net working capital, Our cash flow from operating activities was also positive, and our adjusted free cash flow was only slightly negative, which is a significant improvement compared to the first three quarters of last year. So let me now summarize our financial performance during the first three quarters of 2021 for you. Despite headwinds from COVID-19 and ongoing supply constraints, SMA delivered solid sales and increased its profitability. Our good results also produce a positive cash flow from operations. SMA's balance sheet structure remains solid with an equity ratio of 43% and net cash balance of 169 million euros and a debt equity ratio of 1.32. As mentioned in our last calls, SMA renewed its syndicate loan earlier this year, providing us with a credit line of up to 100 million euros if required. This concludes the detailed review of our financials for the first three quarters of this year. We are not going into market estimates and deliberations, as those have not very much changed since our last call, and we'll want to make you familiar with some current developments. As mentioned before, the supply situation for electronic components has worsened significantly in Q3, with cancellations of firmly promised delivery quantities. We expect this strained situation to continue over the next month. Although we are working closely with our suppliers to minimize the effects on our delivery capacities, we assume sales and profitability to remain below our initial expectations. As a result, the SMA Management Board had adjusted its full-year sales and earnings guidance in September. Looking ahead, SMA's long-term prospects are very positive. Current studies underline the enormous growth potential for the renewable energies. In order to decarbonize the global economy, we have to drastically reduce the burning of fossil fuels and to make electricity from renewable sources and green hydrogen our main energy sources. A prerequisite for this is the electrification of additional sectors, such as heating and mobility. The consulting company DNV predicts that electricity's share of global total energy demand will double from 19 to 38% within the next 30 years and that by 2050 solar and wind energy could account for 69% of grid-connected electricity power. Bloomberg New Energy Finance has calculated that To decarbonize the electricity sector, up to 455 GW of new PV capacity and up to 245 GW hours of battery storage capacity would additionally need to be installed annually on average by 2030. For PV installations alone, this would mean the current market size to triple. The political framework for decarbonization is currently negotiated at the UN Climate Summit COP26 in Glasgow. Current political developments are also very promising in our home market, Germany. The topic of climate change is high on the agenda of the three political parties that have expressed their will to form the new federal government until Christmas. They have proclaimed to make it their joint mission to drastically accelerate the expansion of renewable energies and to remove all obstacles and hurdles. According to our calculations, at least 15 GW of new photovoltaic power must be installed in Germany every year in order to achieve Germany's climate targets, three times the current amount. This brings me to our guidance and expected developments for Q4 2021 and 2022. Order backlog. Looking at the right side of this slide, you'll see that our order backlog increased to a very high level with 922 million euros at the end of the third quarter of 21. Our strong product order backlog of 430 million euros at the end of September includes key projects for our large scale business, as well as a good level of orders for our business solution segment. Our service order backlog remained on the same high level from the end of H1. On the left side of this page, you can see that our large scale and project solutions order backlog for products has increased to nearly 300 million euros. And our total product order backlog is well distributed across our three regions. The strong order backlog will be only partly converted to sales in Q4, in part due to the ongoing material shortages and projects postponements. As such, our product order backlog sets up lets us up well for the beginning of next year. This brings me to our 2021 guidance on the next slide. As demonstrated by our strong order backlog, demand for SMA's products remains strong, and we are working around the clock to mitigate the effects of the supply shortages on our revenues. Nonetheless, we expect fourth quarter sales to fall below the Q3 revenue level due to challenges from the supply situation and projects getting postponed to 2022 as a result of increased module prices. Based on this, the SMA Managing Board expects revenues in the lower half of the adjusted forecast of 980 million to 103 billion euros and EBITDA at the upper end of the adjusted guidance range of 50 million to 65 million euros for this year. We acknowledge that these figures are somewhat disappointing when compared to our original guidance. However, you will hopefully agree in the assessment that the reasons for the deterioration are foremost of external nature. Therefore, and despite planning for 2022 is not yet concluded, we want to give you already today a hint on our revenue expectation for next year. As I said earlier, the first half year of 2022 will still be affected by supply constraints and far from normal conditions in the logistics area. But for the second half, we expect the revenues level to recover and currently plan to grow revenues by about 10% for the full year and thereby to continue the development SMA has taken in the years 2019 and 2020. Now let's turn to the last slide of today's presentation. SMA is a truly sustainable investment, not only because we are operating in an industry that is key to decarbonizing our way of life, but also because we are doing business in a sustainable manner and have integrated the goal of holistic sustainability at the center of our corporate strategy. This is also mirrored in our excellent ESG scores. We receive recognition for our ESG performance in leading sustainability ratings. In addition, we have been nominated by an expert jury for the group of finalists for the German Sustainability Award 2022, the largest and most prestigious in Europe. And last but not least, with our business activities, we are contributing to nine of the 17 UN Sustainable Development Goals. This is why, if you trust SOLA, there's no way around SMA. Now, I am happy to take your questions.

All right, we'll take our first question from Konstantin Hasse with Jefferies.

Hi there, thank you very much for taking my question. Good afternoon, everyone. Three and a half questions from me. So the first one, just regarding Q4, can you maybe just elaborate a little bit on these on the key cost headwinds, and by that I mean the impact that you are seeing from these higher logistics costs and how many basis points this is really costing you, and to what extent you have been able to pass through these via pricing. So that's my first one, and let's just start with the first one.

Yeah, hi, Konstantin. With regard to the higher sourcing costs, that is, of course, material, especially for electronic components. but also freight costs and what we see now coming up is energy costs. Starting with the last one, that is actually neglectable. Energy costs do less than 1% of our overall cost base. So there is an increase, we manage that, we also hedge that to some degree. That's not really the problem. The freight costs are far from normal, as I already said. And we think that this is going to continue throughout Q4 and H1 of 2022. And this goes up to sometimes even 10%, but not on an overall comprehensive basis. It's just from time to time we are running into situations that are somewhat awkward. The same is true for the supply costs. Whenever you have something to order on short notice, the costs are much higher at this point in time. On an overall basis, up to even more than 5% higher. At this point in time, the market is penetrable with regard to giving that down the value chain. So price increases have been accepted by the market throughout the entire product range, and we have been able to manage the deterioration of our margins due to those higher sourcing costs to a minimum. Whether this is going to continue next year is the big question mark for 2022, which is also the reason why I'm not going to be more specific on our profitability expectation for next year at this point in time.

Just to confirm, did you say freight costs is about 10% of the cost base?

Yeah, sorry. The cost was 10%. Now, sometimes we see normal prices increase. If we look on the entire cost base, we see that to have increased meaning, including freight and sourcing costs at about 5%. Okay, perfect. Thank you.

The next question, just regarding the business segment. So looking at the order intake in Q3, it seems to have cooled off a bit compared to the increase in Q2. So maybe just Could you just share some words on that and when you actually plan to launch a new product in that segment? And a similar question to the order intake in the utility segment, right? The increase was actually pretty massive compared to the last two quarters. Do you actually see this as sustainable going forward? Thanks.

All right. With regard to the order intake in our business segment, we have seen the pattern that I already described in our last calls. Medium businesses are the least one to really go into new investments, are the most affected one by COVID. And that seems to recuperate now. at least to the last two months, show into that direction. We certainly expect another boost for our order intake in the business segment once our new product platform will be launched. It will hit the market in quarter two of next year. With regard to utility, we think that the order intake, which is especially noteworthy for the US and Australia, will continue to be on that level. With regard to Europe, our expectations have been somewhat frustrated and here we are not that sure whether we could hit higher numbers as originally thought. But on an overall level, we see that to be a continuously strong business for us.

Okay, moving on, we will take our next question from Guido Heumann with Metzler. Oh, sorry.

Konstantin, you had another question?

I'm sorry, we already moved on. Konstantin, if you would, please re-signal by pressing star one.

Okay, so can you hear me now? And yes, your line is open.

Okay, then we take Guido's questions first and get back to you, Konstantin, in a second.

Okay.

Herr Heumann.

Yeah. So three questions from me, please. First, on the positive ASP trend, do you think this is a reflection of the current scarcity? So is it just a supply-demand result? Or do you feel like competitors are starting to act more rational? Or Maybe last interpretation could be that you are actually, let's say, steering your scarce resources into the more profitable products, so improving your business mix, say, internally. So what would be your explanation for the ASP trend? And consequently also the question, do you think that could last

Understood. I think it's a mixture of all three. Certainly the flat prices and sometimes even increased ASPs that we see foremost in the residential area are not only the result of the higher sourcing costs leading to higher ASPs. They are also a consequence of of, as you put it, the market becoming more rational. And with regard to SMA, which does also see higher ASPs for the residential area for our home segment, it is also a consequence of internal optimization and the consolidation of our product portfolio. The question that you put up is how this is going to continue once the sourcing prices go down again or get normal again. And will we then hold this high level of ASPs, of flattish development? We believe that we won't, that the prices will go down again. However, at a pace that is less severe than it has been throughout 2020. For the other two segments, we also see rather stable prices. Utility is almost stable. Business segment is still going down, which is normal due to the overall market conditions. We see that the higher sourcing costs can be channeled through the value chains. We expect that to end the moment that especially freight costs are normalizing again. And we still believe that the market size will not allow to raise prices continuously from time to time in one region or for another product that may be possible. But on an overall scale, we see prices also in the other two segments to go down slightly in the years to come. However, at a more rational rate than we have seen in the past.

Okay. All right. Perfect. Thank you. And then maybe question two and three in one go. So the first one would be, I think you mentioned this potential tripling of the demand in the future, which I share with you and come to the same ratios. maybe we have to ask this question earlier, but again, what are your capacity or visibility on your capacity? So how wide could you expand your capacity, say, in a period of, say, two or three years' time? And the last one would be maybe a little bit obnoxious. So you're saying in your outlook that you would expect the shortage to last into H1 2022. So what makes you optimistic about things to change in H2? So do you have any indication or is that rather, say, you know, the general market view regarding freight rates, et cetera, chips, ship producers, or do you have specific indications for things to turn better in H2?

Yes, thank you. First of all, with regard to our capacity, we expect to produce about 13.5 to 14.5 gigawatt this year. We could, just by exploiting the full capacity of our currently installed resources, produce up to 21, perhaps even 22 gigawatt. So for the growth to come in the next two to three years, we are already supplied. We nevertheless already plan today to expand our production capacities in due time, and therefore we see at least for the inverter base not those many difficulties in hitting even tripling demands in the coming years. Whether this will be, let's say, true for all regions, looking on the distribution of the inverter manufacturer segment is something that I cannot answer for the entire industry. But for what we see as our market share and our addressable market in the future, we see no difficulties in meeting those demands. And with regard to your second question, it is, as you put it, rather the general market view that gives us the conviction that H1 will still be difficult. We are also, let's say, a little bit motivated by the fact that we will have product innovations coming up in the next year, starting especially in Q2 and then taking effect in the market in Q3 and Q4. But there are foremost driven by let's say the overall assessment that is more or less shared by the entire industry that H1 will still be heavily affected. But most importantly, the market demand does not deteriorate. Even in this difficult year, the overall market demand has stayed stable. So it is more a question of to manage supply chain and to manage the product portfolio and the availability of products, etc. Demand is always there and will increase also in the coming year. So that's, let's say, the overall environment in which we find ourselves. And our assessment led us to the fact that we will see pick up compensating demand and compensating business in Q3 and Q4 for a rather weak H1.

All right. Okay. Very good. Very clear. Thank you, Mr. Haring.

Thank you, Guido.

We will now go back to Konstantin Hess for that follow-up.

Hi there. Can you hear me?

Yes, I can.

Sorry about before I was muted and my question didn't come through. I was just going to do a follow-up very quickly just on the commentary you made that the utility orders were sustainable in the US and Australia, but less so in Europe. So I was just wondering how much of the order intake is actually US and Australia?

That's more than 80%. Yeah. So the European market is comparably of lower importance to SMA. Europe is our home base for the string inverter business, meaning for home and business, for residential and commercial. For large scale, our markets are the US and Australia. That's more important.

That's perfect. Thanks. And then just another one very quickly on the profitability for the next three quarters. I mean, looking at, based on your commentary, if we... If you deliver revenues on the low end of the sales guidance, but you reach the high end of the EBIT guidance, we're talking about margins of about 1.5%. Is that a fair assumption going forward, at least for the next three quarters because of these headwinds you're having, the profitability level? So about 1.5% at EBIT and about 5% at EBITDA.

I wish I could answer that question, Konstantin. Really, I wish, because it has never been more difficult to really predict how this market is going to unfold. For Q4, I think we have visibility, and that gives us confidence to tell you that we will end up at the upper end or in the upper range of our guidance. That is mostly due to, let's say, our cost-saving measures. And it's depending on how December is going to work. And December, nobody can really predict whether you have pushouts in the last weeks or whether you have all of a sudden opportunities in the last week, which give you 20 more million of revenues. That's depending on that. But beyond that, Q1 and Q2, it is really about... how is the market going to act? Guido Heumann talked about irrational behavior of the market competitors. Sometimes that is really to be seen. And if you have big margins, you can just count on having those big margins being eaten up by the higher sourcing costs and not passing that through to your customers. That would put us into a difficult situation in some markets. I am personally seen rather positively minded with regard to ASPs because SMA has a tradition of being too conservative in that regard. We seem to be, let's say, too not bullish enough when it comes to really challenging the market. And therefore, I think that we will be able to keep the level of profitability of Q4 into the overall profitability of 2022. Sorry, the profitability of this year into next year, despite the headwinds that we will have in H1. But how H1 will unfold in comparison to H2, it's too early to say.

That is absolutely fair enough. Thank you very much. Just lastly, maybe just a quick word on market share in Europe, US, and any words or any developments around shade fix in the US?

Yeah, no developments in that regard. We are still preparing our case with regard to more scientific evidence to be given to the market and are preparing, let's say, a comprehensive campaign regarding shade fix on the basis of our new a residential product which will be launched in about a year in the U.S. market. So don't expect us to be very noisy on that front end, but also no other developments. It's neither being embraced by the U.S. market nor it is rejected. It is just a matter of still being in discussion, and we certainly expect it to still do great things for us but once we more aggressively act on the U.S. market.

That's perfect. Okay. Thank you very much.

Welcome.

All right. We'll take our next question from Jeff Osborne with Cowden & Company.

Hey, good afternoon, Ulrich. A couple questions on my end. Just a few housekeeping here. Could you give us what the trading revenue was as well as storage for the quarter? Sure.

yeah good morning jeff thank you for joining us again at this early hour um for to your question with regard to the q3 um a business the part of our trading goods were just give me a second 11% with regard to trading goods in Q3. And 12% over the year. With regard to batteries and battery related products, I should rather say, because we don't have that much batteries at all. It has been 11, sorry, 8% in Q3 and 10% year-to-date.

That's helpful. Just a couple other ones. You mentioned the gap in the product portfolio around the hybrid inverter. Is that, you know, what you're referencing there, is that the integration of batteries, EV charging, and solar, you know, sort of the German equivalent of the Swiss Army knife for inverters and power electronics all in one? Or is it something else that you're referring to?

It's something else. It's not yet the fully integrated solution that I was talking about so many times. Hybrid inverter is a catch word for an inverter which is able to be used also as a battery inverter, but not necessarily so. Meaning you can call it also battery ready inverter, which becomes more and more the standard, especially in Germany, where you have an attach rate with regard to batteries of about 90%. So here more and more consumers tend to invest into a more costly hybrid inverter, which allows them to use a battery, but which could be used also without a battery. Whereas our approach to the market has been to provide a PV inverter and an additional battery inverter. So this trend has strengthened. We have embarked on that course as well, but let's say a little bit too late, and therefore we have this gap in the product portfolio, which will now be closed in the beginning of next year. Allow me a side remark in that regard. SMA has actually been the first company in the world who has introduced a hybrid inverter, but that was five years ago when the market was not ready. So our innovation strength is certainly undermined by that fact. However, we have not been, let's say, clever enough to uphold this advance.

Got it. That's helpful. I appreciate the back story there. And then you alluded to lengthening lead times. Can you just update us what normalized lead times were, say, pre-COVID for the different segments and what they are today?

Yes. Usually, our string inverter business converts into revenues in between four and eight weeks, and our large-scale project business converts into revenues in between six and 12 months. We have now seen several push-outs so that the lead time is, let's say, perhaps 9 to 15 months. I would see a three-month delay here in that time span. And with regard to string products, we have to distinguish in the residential area the situation is more or less unchanged if you do not look for specialty products like an EV charger or something. And in the CNI business, also the lead times have lengthened a little bit. So rather than four to eight, we would now see, let's say, six to ten weeks lead time in average. Some products are much longer due to supply constraints.

My last question is just on the semiconductor issues that everybody around the world is grappling with. Can you just articulate, do you believe it's getting better? I think you have, give or take, 10 different product lines. Are all of the product lines under production today, or have you had to shut down assembly lines because of particular shortages of particular bespoke components that are needed in individual products? Can you just maybe give us a bit more detail?

Sure. First of all, all product lines are under operation. We had a few of those 10 to 12 product lines being shut off for, let's say, a few days in between or to reuse it from two shift to one shift due to those supply constraints. But right now, all are under operation and we don't see shifts being canceled in the coming weeks. The outlook is, however, still somewhat uncertain. we have, as you know, usually booked well in advance, 12 months in advance, the critical electronic components. But if the market demand deviates from that estimate, we also have to look then on short-term demands, and that might put us into trouble. If everything unfolds as planned, we won't be affected by this at all, but history tells it never unfolds as planned. And therefore, we will still see some difficulties in age one, that becoming better in age two.

Makes sense. Perfect. That's all I had. I appreciate your insight.

Thank you, Jeff.

All right. And once again, everyone, that's star one. If you'd like to ask a question, next we'll go to Lasse Stoiven with Brandberg.

Hi, good afternoon. Thanks for all the details so far. Just two more from me, if I may. Just on the, you know, the large scale division, I was just quite surprised to see such a big jump in the order intake, just given what's going on in the US and the ITC and the delay there. Could you give some more color and sort of what's driving the market there and you know, how much visibility do you have on those projects? I mean, you already sort of just alluded to Jeff's question about the lead times, but just on the visibility of those projects would be helpful because I would have expected that to come down or not be as high as it has been historically in Q3 and also Q4. So that would be helpful. And then we can do the questions one by one.

Yeah. The visibility in that area is not that high. I have to admit that. And that is due to the fact that more and more customers are not only installing large ground mounted installations, but are thinking about combining that with stationary storage devices. And that needs much higher arrangements, preparations, et cetera. And it's at the same time the reason why we are sought after so, so well. Because that is, the more complex the situation becomes, the more you rely on SMA as the most experienced company in that regard. The... Situation right now is also characterized by it becoming less an amount of projects, but those becoming bigger the whole time. So the visibility is not really well. But I think what gives you the answer to your concern or to your question is, SMA is sought after due to its innovation strength and especially its offerings with regard to combining PV with stationary storage systems.

Super, that's helpful. Just to follow up on that, I mean, has there been a noticeable change in the competitive landscape? into the large scale projects and you've seen companies exiting this market. So I'm just wondering, you know, it still seems to be the, you know, the end market, which is still under most pressure on the pricing side, simply because of the volumes. But, you know, is that becoming less competitive in terms of also getting profitability in this division?

Yeah, it depends on the region. The US, which still does not allow Huawei to enter this even large-scale market, the situation is unchanged. You have SMA, you have SunGrow, and you have Power Electronics, and they all give and take year by year some market share to the others, lose or win, but they are always the same three. And here we do not see bigger changes. But with regard to Europe and APAC, we see Huawei grabbing considerable market share from the others, with the exception of Australia, which happens to be our second biggest market. So we are fine there as well. But with regard to the other countries, you have more and more string suppliers, especially Huawei, trying to get also into large installations, ground-mounted installations. So that is something to be considered and to be observed from our side.

Okay, super. And then just changing to the residential market. That just seems to be remaining at a very good level sort of across the board in the industry. I'm just wondering in terms of because of the supply chain and the component prices, what are the price increases that know the end customer is seeing you know if this you know supply chain situation continues you know well into next year i just wonder sort of on the demand side you know how willing are resi you know customers to pay higher prices if that's even the case um so i'm just wondering if you can give an insight on the magnitude of the increases in prices for the for the end user if you will yeah

Yeah, I think that is something I probably shouldn't answer because I can really talk only with regard to the inverter. And you know the inverter makes about 10% of the overall investment. The decisive factor are the module prices. And the module prices are up sometimes even 40% in comparison to last year, sometimes even higher. And that is certainly something that will be seen by the consumer. However, in this equation, let's say on the overall bill, the increased cost for the inverter are not noteworthy even. And there are certainly something that would not bring any customer to the decision not to buy this inverter but rather go for another inverter. The price will never be the issue here. It's always about the offerings, the features, etc. But the module price as such may lead to an overall and temporary decrease in demand in the home sector, waiting for the module prices to fall again.

Okay, understood. Yeah, that makes sense. And then just a final, just a small housekeeping question again. Just on the warranty provisions and the reversals there, I think I saw it in the report, but just to confirm, that wasn't really a noteworthy one-off in Q3, right? I mean, I think you said a low single digit in the report, or...?

Yeah, it's mid-single digit. Yeah, 6 million.

Okay. And that's all booked in Q3?

That was booked in Q2 already.

Oh, in Q2 already. Okay, sorry, I must have missed it. In Q2 already, yeah. Okay. Okay, so nothing additional in Q3. So that's just every six months at H1 in the four years? Yes, exactly. Perfect. Thanks a lot. That's all my questions.

Thanks, Lasse.

Okay, next question will be from Jan-Erik Schmidt with EBSIM.

Hi, thanks for taking my question. I'm just wondering about capital allocation, so maybe we can first start off with the CapEx. I think you're guiding for $55 million this year. The number is slightly elevated compared to the last year's. Just wondering, has there been some underspending in the past years or what can we expect in the future? What's kind of like a normalized level? Maybe you can give a little color on how much kind of like capacity actually costs. So if we assume further growth, how much effort is going to come?

Yeah. First of all, the higher capex this year is due to a higher amount of activated R&D projects, about 10 million more than last year. So that's the deviation from 21 to 20. And that will continue for the entire year. But still, we are on a general course to increase investments. You will certainly see that in 2022 and in 2023, that our capex, meaning investments into machinery and buildings, is going to increase. The overall amount of capitalized R&D projects will probably not increase any more over the coming years. Also, the capitalization, according to IRFS 16, meaning leasing obligations, is going to be at about the same level. But the things that are of interest to us the most, meaning investments into production equipment, etc., that is going to increase due to our efforts to prepare for the production of the next generation's machines, inverters, et cetera.

All right, so can you give a little color and then how much capacity actually costs? So how much would it cost to increase the capacity?

Yeah, if we just look about capacity, That is not that difficult because the machinery that we need could easily be rebuilt. That is not very capital intense. What we see is not just scaling up. What we see is new products coming to market, more integrated products in which you have the inverter the battery and perhaps an ev charging device and especially um skilled software smart home software all being integrated into new machines so that needs also new platforms and new production equipment and that will see additional capex for the coming years. We are talking about high double-digit investments over a streak of three to four years, meaning that the part that we put into equipment and buildings might double next year and also in 2023 remain at that high amount. will then go back again in 2024 and 2025. So the normal run rate we see is 2025 million. That may increase to 40 or even 50 million in the next two years and then reduce itself again. I hope that is what you had in mind.

Yeah, that helps a lot. Thanks. And then just wondering, looking at the higher capitalized R&D and the high spending on the machines that obviously lead to higher depreciation and monetization. Can that be compensated margin-wise or are we going to see a decrease basically in the EBIT margin?

Absolutely. No, no. That will still be compensated by higher EBITDAs.

Yeah, but on the EBIT level though,

Sorry, yes. The EBIT margin will not deteriorate due to those investments.

All right. Okay. All right. Thanks. And then just looking at your balance sheet, I mean, obviously having a net cash position is something rare. Just wondering, is there any plans to change the capital allocations? maybe going into M&A or, I don't know, buybacks, dividends or whatever.

You mean it's too high?

Yeah, I mean, you're basically on leverage. So I'm just wondering if to get a leverage level in and therefore having higher efficiencies capital-wise.

Yeah, absolutely understood. It's perhaps something that I'm have to embark on and to give you some background. SMA has, let's say, SMA is one of the few survivors of the early phase of the PB business. And the fact or the reason for SMA to survive as more or less the only German company from the last decade has been its high cash bolster. And that is why many stakeholders within SMA tend to have higher cash reserves than are actually needed. However, we are certainly aware of the market booming in the coming years, and of course we do not want to stay at the sidelines, but rather participate from that growth. And in order to participate in that growth, we will invest, and that will bring our liquidity down and will also leverage to a higher degree. So I would expect the equity ratio to go down in the coming years continuously.

And those investments would be M&A-wise, or is that just organic growth investments?

Both ways. We will, as I said, invest more into CapEx by building new machineries, etc., new factories, but we are also on an opportunistic course regarding M&A opportunities in several areas, not just operation and maintenance, which I usually mention in this context, but also other businesses which are about to unfold. Just think of power to gas as something that we are already tapping into. and doing some business at this point in time. That is something that will certainly, the market will rattle itself and will shape itself in the coming three to five years. And we want to be a part of that.

All right, great. Very helpful.

Thanks. All right, we'll take one last question from Richard Alderman with BTIG.

Hello. Just on that last point, could I just ask, are you implying then that you're trying to find a way into the green hydrogen revolution? Are you looking for a product source or some sort of structure that gets you into that? That would be my first question. I apologize for asking this question again, but I just wanted to sort of get a bit more color on the situation with the shortage on components. Is it, in your mind, mostly semiconductors and chips, or is it a broader number of components across your 10 product lines? And then lastly, on your 22 guidance, can I just check, have you made the assumption that the projects that have been delayed this year all come back in 2022? And if so, are they all weighted towards the second half, you know, the areas in business solutions, midsize developers, et cetera?

Okay, thanks. Let me first say it's great to hear from you, Richard. Great that you are, wonderful that you are on the call. With regard to green hydrogen, just to give you an idea, already this year, where everything with regard to green hydrogen is still in the pioneering phase, we already made, at this point in time, more than 6 million of revenues with regard to products into green hydrogen projects. And what is our offering here? It is a converter, meaning a machine that makes DC into AC. So Sorry, AC into DC, sorry, because you need DC for the electrolysis. So it's just the other way around the inverter is doing. And that is necessary for every electrolysis procedure. So the market that is going to unfold, which we see as almost as big as PV regarding sizes to unfold in the next decade, is something that SMA is already active on. And as an early mover... hopefully also as a sustainable player, is expecting considerable revenues already to start in 2023-24. So that is some color that hopefully helps you with regard to our appetite and our willingness to tap into that business. With regard to your second questions, it is not only semiconductors that we are lacking. It is also very ordinary, normal materials. And here we are still suffering under the COVID-19 pandemic in some countries where we have lockdowns of factories due to some infections in the workforce, et cetera, and other cases like that, that we are not supplied with necessary materials. cables, casing, etc. But the longer it takes, the more it concentrates on electronic equipment. And to your last question with regard to 22, we think that those postponed projects will unfold in Q1, but then we will have other investments being pushed out. And this development project then reducing itself in Q3 and back to rather normal business in Q4. But we do not see any cancellations so far. So that would mean those are not the same projects that will be pushed out into Q1 and then from Q1 into Q3, but it will be other projects that are then being delayed.

Okay, thank you. And then one follow-up question, if I may. Just trying to reconcile... your guidance for all the elements of guidance you've given us thankfully kindly so far in 22 sales outlook and the comments you made around margins. Looking at your exit run rate in Q4 where EBITDA margin is likely to go to it's going to be below 7% obviously it's been trending down through the year from above 8% to below 7% if I'm reading the guidance correctly. And therefore, if that trend continues through into the first half of 2022 with the issues that you've raised, it would imply a much higher margin in the second half of the year. you know, you're sort of implying sort of 60 to 65 million of EBITDA and roughly where consensus is now about 989, 90 million of revenue for full year 21. So your exit rate is going to be closer to 6% and I'm just struggling to reconcile the current consensus of about 7.5, 7.6% EBITDA margin on visible alpha with with what you're saying about the delay in the actual acceleration. You're essentially saying it's going to be a very strong second half unless I'm missing something, or are you assuming that you get another price rise in the first half of next year? Sorry, I'm rather gubbled, but if you know what I'm saying.

Absolutely. And actually, you put the finger right into the wound. That is, if I would really know whether the market is going to accept those increases in order to compensate for higher sourcing costs, I would be able to give you the clear-cut answers to your questions. As this is not the case, and we do not have made up our mind on how we should assess that, I cannot go into that much more. But your assessment has been absolutely accurate about the situation.

Okay. So it would be fair to say that there is a bit of risk there if you can't pass through price increases?

Yes. However, we consider this risk to be low. Okay. And then the reason for that is that the price increase we already made today, as of year to date, have been accepted by the market without any discussion. Right.

Okay. Thank you very much. You're welcome, Richard.

All right. And there are no further questions at this time, sir.

All right, then thank you very much for spending so much time with us today. I very much appreciate your interest into SMA and SMA's share and hopefully you will join us on that course which is going to be very exciting over the next years. Please take 21 as the year that it is and that is an exception. an exception to the course on which SMA has embarked in 2019 again, and that is a course of steadily increasing profitability and higher revenues on the basis of its technological innovation strength. That is also the path that we are going to continue to follow in 2022 and 2023 in order to be in the game of the coming years. Thank you very much and have a great day.