SMA Solar Technology AG

Welcome, everyone. We very much appreciate that you are taking the time for this investor and analyst call on the H1 2022 results. You can find today's presentation on our investor relations website, ir.sma.de. This conference call is scheduled for 60 minutes and will be recorded. The replay will be available for seven working days. After the presentation, I will be happy to answer any questions you might have. Before we dive into the figures of the first half of this year, I would like to start with a personal introduction. This is the first conference call that I run as CFO of SMA. I was appointed to this role on June the 1st and will remain in it until our new CFO, Barbara Greger, steps in on December the 1st. You might think that this is a difficult time to step into the role of entering CFO at SMA, but I have a slightly different view. Bear with me while I briefly explain why. I will be honest with you. The figures could, of course, look better, and you will see what I mean in a minute. But if we take a closer look, the picture changes, in my view. Yes, the material supply shortages remain the challenge, and there are disruptions in the supply chain and other factors that continue to have a negative impact on the business. But we see an unprecedented political support for renewable energies in all our markets. The war in Ukraine But the global pandemic has shed the spotlight on the vulnerability of our supply chain and the huge dependency of the solar industry on components from China and Taiwan. The most recent developments in Taiwan have further accelerated the sense of urgency. In addition to the political climate, we see a continuous rise in orders. Solar power is not only a political choice, but also a choice that many customers make every day for their homes, their business, and their large-scale projects. It feels like the perfect storm and now we need to set sail. And we did. We adapted our business strategy to increase our focus on our customers and markets. We are continuously implementing measures to improve our operational excellence. And we are working relentlessly to secure the materials needed for our business. Given this and the strong commitment of the entire organization, I strongly believe we will come out of this storm even better. And now back to the H1 figures. I will start with a review of the financials of the first half year of 2022, then give you an update on current developments and on our expectations for the full year. I expect my presentation to last approximately 20 minutes. So as announced at our Capital Markets Day in May, the first half of 2022 and Q2 did not develop as well as last year, as our ability to convert the high level of market demand and customer orders to revenues was significantly impacted by global supply constraints. Our total revenues were a bit below last year's level and profitability declined due to underutilization effects, which also resulted from the supply shortages. These effects explain also the lower gross margins in H1 of this year. I will provide you with more details on our H1 financials in the next slides, so let me now point your attention to the table in the bottom right corner of the slide. As you can see, our Q2 sales were more than 10% higher than Q1, with all three segments above Q1. This is mainly driven by the strong uptake in demand and slight improvements in the supply situation last quarter. As already mentioned, our profitability in the second quarter suffered heavily from the underutilization effects and a higher portion of trading goods sold. Now let's please turn to the next slide, and I will provide you with insights regarding our sales performance. As explained, the year-on-year decline in sales was primarily due to the strained supply situation for electronic components, mainly semiconductors, which has been affecting our business since the middle of last year. All segments were affected by this, and as such, our total net sales slightly declined by 3% compared to H1 last year. Looking at the regions, EMEA continues to be our largest region in terms of revenues in H1, with 278 million euros, which represents 57% of SMA's global sales. In EMEA, our large-scale and project solution segment achieved strong double-digit growth Our CNI segment had low double-digit growth, and our home solutions sales declined compared to H1 last year. Revenues in Americas declined in H1, mainly as a result of project shifts in the US due to uncertainties, and the module supply situation after the Biden administration announced anti-dumping investigations early in the year. The anti-dumping duties were then suspended for a two-year period in June, and since then, our large-scale project pipeline in the US has gained strong traction. However, given the longer lead times in this business, only a very small part will be converted to sales within this year. With 130 million euros of revenues, the Americas region represents 27 of our H1 sales. Our large-scale segment makes up the majority of our sales in this region, with nearly 80% of total revenues in H1 this year. With 79 million euros of revenues, the APEC region represented 16% of our sales in the first half year. In this region, our large-scale business achieved strong double-digit growth compared to H1 last year. Now let me briefly walk you through the sales per segment on the right side of this slide. Our whole solution segment continues to be impacted by material shortages. As a result of this, revenues in the first half of 2022 declined by 8% compared to H1 last year, with 136 million euros of sales. However, boosted by the launch of our new product, the SDP Smart Energy, at the beginning of this year, order intake has been approximately three times higher than our average sales in H1, and puts us in a position to achieve strong growth, but the supply situation gradually improves. EMEA has been the major contributor for revenues and incoming orders for whole solutions in the first half year. Our commercial and industrial solution segment also continues to be affected by material shortages, and despite very strong demand for our products, confirmed by incoming orders, which were twice as high as revenues in age one, Revenues only slightly grew by 2% in H1 to €118 million of sales. Similar to home solutions, the EMEA region is by far the largest in terms of revenues and order intake for our CNR business. Finally, our large-scale and project solution segments slightly declined compared to H1 last year due to projects shifted back in the US, as already explained. The sales in this segment amount to 280 million euros and declined slightly by 3% compared to H1 last year. As mentioned, revenues and order intake in the US, which is the biggest market for our large-scale business, was weak in H1 this year, but our project pipeline is quickly gaining momentum over the last few weeks, and this will position the segment for strong revenues later this year and in 2023. The H1 sales decline in the Americas region was partially offset by double-digit sales growth in our large-scale business in APEC and EMEA. Now let me explain to you how our profitability developed in the first half of this year. In H1, SMA generated an EBITDA of €60 million, which translates to an EBITDA margin of 3%. The EBITDA was significantly down compared to H1 last year, mainly because of the lower level of sales and effects from the underutilization of our production capacities. H1 2022 profitability included the positive one-off effect in our large-scale segment of approximately 5 million euros in Q1, which was explained in the last analyst call and was related to a compensation for a late customer cancellation. Our depreciation was slightly lower than in H1 last year as a result of the lower level of investments in fixed assets over the last years. Now let's have a look at the segment in detail. Home solutions. So mainly due to the decline in sales, the underutilization effect as well as the less favorable product mix, EBIT in home solutions fell below the strong result in H1 last year. However, with an EBIT of 70 million euros, the segment still delivered a solid return on sales of 13% EBIT margin. The CNI solution segment continued to fall short of break-even as a result of lower than planned sales volumes and defects from the underutilization of production capacities. After achieving a slightly positive result in our large-scale and project solution segment in Q1, which benefited from the one-time income from a project cancellation as already explained, Q2 profitability was negative. The poor Q2 result for the segment was due to low utilization and production and low single-digit million negative effect from the adjustment of warranty provisions in June as a result of the regular half-yearly re-evaluation of warranty provisions for products already sold. Now I will move on to the balance sheet and networking capital on the next slide. At the end of H1, our networking capital balance increased to 278 million euros, which represented a high networking capital ratio of 29%. The increase compared to end of 2021 is mainly due to the ongoing buildup of inventories to mitigate effects from the supply constraints as much as possible. As a result, we increased our inventories by 60 million euros in the first half of this year. In H1, our trade receivables slightly increased to a balance of 145 million euros, which represents a slightly higher DSO ratio than we targeted, but this can be explained by the high amount of sales achieved at the end of June. Trade payables of 128 million Euros at the end of H1 decreased by 6 million euros since the end of last year. Advanced payments from our customers, which are reflected in our balance sheet and the other liabilities, increased from 24 million euros at the end of 2021 to 28 million euros per end of H1 and are related to our pipeline of large-scale projects. The increase in net working capital was just explained in combination with a payment related to the early exit of our onerous O&M contract, and our negative results in the second quarter led to a decrease of our net cash position to 176 million euros at the end of H1. Let's now turn to our cash profile on the next slide. In H1, SMA generated a negative gross cash flow resulting from our negative operating results in the first half of this year. In addition, we invested liquidity into building up raw material stocks, as explained earlier, and as such, our cash flow from operating activities, as well as our adjusted free cash flow, were negative in H1. Improving the free cash flow is our highest priority in the second half of this year. Now let me summarize what we have seen so far. The demand for our products and solutions in the market is high. In the first half of this year, we have seen the highest order intake over the last 10 years. There were no significant customer order cancellations until now, confirming that our high order backlog is robust. Like the whole industry, we are facing an ongoing shortage of electronic components, and this causes longer lead times for order fulfillment and sales achievement. We are, however, confident to be able to fulfill the high order backlog within the next 12 months. Our profitability was impacted by the lower level of sales due to the above-mentioned ongoing supply constraints, as well as underutilization in production and increasing purchasing prices, which we could not fully pass on to our customers. Also, we do see substantial increases in material, labor, and logistic costs. Given the strong market and order situation, revenues and profitability will certainly improve as the supply situation gradually improves. Despite the decrease of net cash, we continue to have sufficient liquidity to finance our operations, and we are implementing measures to further improve our cash position. Finally, SMA's equity ratio remains robust and confirms our financial stability. This concludes the detailed review of our H1 2021 financials. Now let me briefly provide you with some insights on the current developments. We currently see that all manufacturers in Europe continue to be negatively affected by the global shortage of electronic components. Of course, SMA is no exception to this. In addition, the war in Ukraine and lockdowns like in China are strongly disrupting the global supply An end of the war in Ukraine, as well as the global pandemic, is currently not in sight. And finally, we have seen many larger projects being postponed in H1 because the market is facing limited availability of solar modules and high prices. At the same time, let's come back to the perfect storm I described in the introduction. Because the situation is not as gloomy as one might think, the demand for our products and solutions is higher than ever. One of the reasons for this is an additional political push regarding renewable energies, which we have seen as a result of the war in Ukraine. This is true for many countries, especially in Europe once, but most recently also in the US. To be able to meet this demand, we must secure the needed electronic components. And here we see that the tight supply situation should start to improve in the second half of this year. So what actions have we taken from our side to be ready to make use of the circumstances? Or in other words, what have we done to set sail in this storm? We have initiated several measures to increase our ability to deliver according to the high demand we see in the market. We are tightening the collaboration with key component suppliers further, which currently results in the realization of even more long-term supply agreements. Where we see additional needs, we secure components at the spot market. And we also have already started to redesign products to be able to substitute scarce components as much as possible. These measures are the main reason we are confident that the supply situation will start to improve in the second half of this year. In addition to this, we will continue to launch new products and solutions to gain market shares and improve profitability. And of course, We in the management team keep a very close track of cutting operational and capital expenditures even further in 2022 to protect liquidity and improve profitability. Let's have a look at the order backlog on the next slide. Our order backlog for products increased significantly to 861 million euros at the end of H1. This reflects the high demand for SMA's products, as I explained earlier. The product order backlog for our home solutions and C&I segments has even increased by triple digits in the first half of this year. SMA's order backlog more than secures the 2022 sales guidance, but due to the ongoing supply challenges, the management board expects that nearly half of the current product order backlog will only be realized as revenue in 2023. Nevertheless, we remain very confident that our top-line guidance for 2022 will be achieved. Okay, let's come to the guidance. So, the H1 sales and EBITDA are within our expectations, as we already also mentioned during our Capital Markets Day in May. The market and customer demand remains very strong, and our unconstrained sales potential for 2022 is above 1.5 However, the ongoing supply constraints continue to limit our ability to convert this high order backlog into revenue and we remain in a highly volatile environment. We do see a slight improvement in the supply chain in the second half of the year, which we believe will increase sales, profitability and improve liquidity. As I mentioned earlier, the whole organization is working together to manage the ongoing challenges and achieve the best possible result for this year. As such, we remain confident to achieve both the sales and EBTA guidance for this year. And again, I strongly believe that we have taken impactful measures that will make sure we weather the storm. And now I will be happy to take your questions.

First question is from the line of Jeff Osborne from Cowan and Company. Please go ahead.

Yeah, good morning. A couple questions on my end. I was wondering just with the semiconductor situation where it is now, if you can touch on the supply that you have for next year, would you envision 15 to 20% growth as possible or not?