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.