Sma Solar Technology Ag

We very much appreciate that you are taking the time for this investor and analyst call on our H1 2023 results. You can find today's presentation in our investor relations website. Also, please be informed that the analyst consensus is available on our investor relations website under share consensus as well. 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 your questions. Our agenda for today. First, I will start with an overview with some key financial highlights. After that, I will walk you through the figures for H1 2023, as well as for the outlook. I expect my presentation to last about 45 minutes. After the presentation, I'm happy to answer your questions. I refer to our disclaimer on page two. So let's move to page four, financial highlights for H1 2023. After a strong Q1, we successfully continued our growth course in Q2 2023. Group sales in H1 2023 increased by 65% to 779 million euros and were thus at the upper end of the sales range published on June 23rd. All three segments contributed to this very positive development. I'll come back to the individual segments later. EBITDA also increased significantly from 6 million euro in the first half to 125 million euro this year. Free cash flow was also very strong again with 81 million euro after end-order backlog is still on a very high level of about 2.5 million euro. Now let's go to page five, Health by Region and by Segment. On the left-hand side, you can see that EMEA, our biggest region again, increased from 57% to 75% end of H1 2023. Revenue share in Americas decreased from 27% to 27 due to the much stronger growth in the EMEA region. But revenues in America grew by 22%. In our APEC region, we continue to face challenging Asian competition and postponement of large-scale projects to next quarters. As such, the share of this region decreased from 16 to 5%. Now let me walk you through the sales per segment on the right side of the slide. As already said, all three segments contributed to this very positive revenue development. In our home segment, revenues grew exceptionally from €136 million last year to €327 million in the first six months 2023, with EMEA as the strongest region again. Reasons for this extraordinary revenue growth were better availability of components, helping us to process the order backlog more quickly than expected, and ongoing very high demand in EMEA. CNI achieved 194 million euros compared to 118 million euros last year, a plus of 64% after a very strong Q2, where the supply situation significantly improved. EMEA was the strongest region for this segment as well. Large-scale revenues increased by about 18%, from €218 million to €257 million in H1 2023, with Americas again the strongest region. Now let me provide you with some more information on H1 2023 profitability. Profitability for the group has grown substantially in the first six months from €16 million last year to €125 million in the first half of 2023. The positive development was driven by both the increase in revenues as a result of improved material supply and the associated fixed cost regression in production as well as a continued high margin product mix. Thus, EBITDA margin came in at 16% compared to 3% in the first half last year. All segments posted outstanding earning developments and significantly improved their profitability in the period under review. Similar to H1 2022, we received approximately 5 million euros of other income from customers cancellation fees as one-offs. With 90 million euros, depreciation was on last year's level. Now let's have a look at the segments in detail. Home solution. Our home solution segment, which has been, again, the most profitable segment, substantially grew its EBIT to 93 million euros, where the 17 million euros in H1 2022. This was mainly driven by sales growth, higher productivity, and fixed cost regression. This led to an EBIT margin of 28% compared to 13% last year. We are very happy about the earlier than planned EBIT improvement for CNI and large scale. Both segments are back in black and on call to deliver solid positive results for this year. CNI increased its EBIT from minus 11 million euros last year to positive 7 million euros this year, which is a positive earnings swing of 18 million euros. Main drivers were higher revenue and increased production utilization. EBIT margin therefore came in at about 3% compared to minus 9% last year. EBIT in the large-scale segment also improved significantly to positive 9 million euros after minus 6 million euros in the first half 2022, an improvement of 15 million euros. The increase in sales as well as slight recoveries of price levels compared to last year contributed to this. Thus, EBIT margin amounted to 3% compared to minus 3% in the first half of 2022. Now I will move on to the balance sheet and the network and capital development on the next slide. Network and capital, which is shown on the top of the left page, reached 251 million euros and is slightly above the year-end figure of 239 million euros. This resulted in a ratio of 18%, which is slightly below the management target corridor of 20% to 23%. Let me explain the networking capital development in detail. Inventories of H1 2023 were at 469 million euros and increased compared to end of 2022 with 309 million euros because of the high customer demand and the build-up of inventories to support our strong sales growth. Trade receivables. which increased due to the high sales in the first half, were offset by an increase in trade payables and an increase in advance payments received from our customers, driven by our strong large-scale project pipeline. Net cash position increased again by 39% from €220 at the end to 309 million euros, driven by significantly improved profitability compared to last year. In addition, we successfully concluded a new revolving credit facility line of 380 million euros, which with an expanded group of banks in June. This expansion of the revolving credit facility line clearly shows the confidence of our banks in SMA's business model and in our future prospects. With this credit line, we support the cause for further profitable growth. The credit line has a term of five years, with an extension option and replaces the previous syndicated credit line of 100 million euro. Currently, there is no need to draw this new credit facility, but it will give us the support for further profitable growth when needed. Now, let's have a look on the group balance sheet on the right side of the page. Our non-current assets increased to €415 million, mainly reflecting investments into our product pipeline in the form of capitalized R&D project costs, as well as an increase of our deferred tax assets. Shareholders' equity increased to €566 million, supported by the positive result of the first six months. Provisions increased to 171 million euros, mainly as a result of increased warranty provisions in line with the higher level of sales. Our liabilities grow to 467 million euros mainly from the strong uptake of advanced customer payments, which are considered in the networking capital. That concludes my explanations of the balance sheet. Let's now have a look at our summary of cash flow on the next slide. In H1 2023, SMA generated a growth cash flow of 143 million euros compared to minus 3 million the year before, driven by strong positive results in the first six months. Given our positive growth cash flow and a solid networking capital, cash flow from operating activities were also positive compared to last year reaching 113 million euros end of June 2023. The group invested 32 million euros in net capex in H1, which mainly composed of investments in our product portfolio, including capitalized R&D project costs and investments in fixed assets. Considering all these, our free cash flow for the first six months, 2023, significantly increased from minus 42 million last year to plus 81 million euros in the first half of this year. Let me summarize the first six months of 2023. SMA group sales increased significantly by 65% to 779 million euros with all segments achieving strong growth. Growth margin for H1 for the group achieved 30% after 20% in H1 2022. The improvement was preliminary driven by the higher sales growth in all segments and the improved utilization of our production capacities. C&I and large scale managed double digit sales growth and returned to profitability faster than planned. This once again underlines the market potential of both segments. EBITDA increased significantly to 125 million euros from 16 million euros in H1 2022 due to high demand, better utilization and productivity as well as improvements in our supply chain. As a consequence, net income increased also very positively to 104 million euros after minus 11 million euros last year as a result of the very good operating performance. The high level of profitability also contributed to a very positive free cash flow of 81 million euros for H1 2023. As you can see in our quarterly overview on the right side of the page, We continued on a growth path on both top and bottom line as expected. C&I and Large Scale also manage double digit sales growth, which underlines the market potential of both segments. That wraps up my summary of H1 Key Financials. Now let's take a look into the outlook and the guidance for 2023. Looking at the right side of the slide, you can see that our order backlog still remains on an extraordinary high level of up to 2.5 billion euros at the end of June. Product and order backlog is also stable on a high level of 2.1 billion euros at the end of H1. When you have a look at the left side of the page, you can see that our large-scale product order backlog is very strong with more than 1 billion euros, followed by CNI with 531 and Home Solutions with 500 million euros. In-home and CNI, our ability to deliver has caught up the strong demand. As such, we start to see a normalization of product order backlog as expected since the supply chain is getting closer to the market demand. With this, let's turn to our last page our guidance for 2023. As communicated on June 23rd, we once again raised our 2023 full year guidance for sales and EBITDA. This is based on our strong Q1 performance and a significant increase in delivery capabilities due to faster improvement in the supply situation and an improved earnings contribution from all three segments. Against this backdrop, we published an adjusted 2023 guidance with sales of 1.7 to 1.85 billion euros and ebitda of 230 to 270 million euros which we can confirm today for the second half of the year further sales growth will offset for higher costs related to build up of our organization for future growth and for changes in the product mix As such, we are convinced to deliver on the high profitability margin in our guidance. SMA is truly sustainable and a solid finance company. Resilience in a volatile market is the key. And we believe in our resilience. Why? First of all, financially. SMA is equipped with both a healthy capital structure and a credit facility of 380 million euros, which we have access to if needed. Second, the brand. of SMA is well known in all relevant markets. We have a solid positioning in the largest global developed markets like US and Europe. We have a strong presence in all three key segments. This brings us to third. This broader solution portfolio in all segments is an advantage compared to those with significantly narrow portfolio offerings, as it has become evident to the market recently. Our products stand for high quality, durability, and reliability. With our strategy of doubling our manufacturing capacities by 2025, we enhance our flexibility and expand our offering in the coming years. And in addition, we are able to cover all business dynamics given to our strong global customer base in both the distribution business and with EPC. And with the view to all SMA segments now contributing positive bottom lines, This will play out strongly for SMA. The drivers for demand have evolved and the biggest push now comes mainly from the society and it's more independent from political agenda than it was in the past. And at last, but not at least, SMA is truly sustainable company. which is reflected in our outstanding ESG ratings. Sustainability has been in our corporate mission since SMA has been founded. Our state-of-the-art production in Germany is already CO2 neutral, and we are a major contributor in the energy transformation. All this together is more important than ever to defend our value proposition, particularly in uncertain economic times, as it is currently the case. This is why we believe in SMA's resilience. With this, I conclude my presentation, and I'm happy to take your questions.

Our first question comes from . Please go ahead.

Yeah. Good morning. Here we go. Two questions then from my side. The first one would be on the order intake. Obviously, it has been down in comparing it with the previous three or four quarters. So how do you see this development? Is it a new trend? Do you see a slowdown in demand? So any explanation on that would be welcome. And the second question. is on the U.S. market. So where are your thoughts on the U.S. market and the IRA requirements and local content? Are there any conclusions you would like to share with us on that market?

Thank you very much, Mr. Heumann, for this very important question. Why is Q2 versus Q1 order intake weaker than or lower order intake has corrected itself since Q2 and will normalize over the coming months, which was fully expected by us because we ask our customers to place orders, especially in home and C&I business for 2023 until end of March so that we can look into the supplies and that we can steer our production capacities accordingly. Additionally, we see an increase of stocks on the distributors and installers side, but this has not been caused by structural decline in demand because it is absolutely normal development after continued supply constraints combined with increasing demand, which resulted in customer overstocking. All this was fully in line with our expectations. Our order backlog still remains on a very high level of 2.5 billion euros. And therefore, it covers our sales guidance, which we have given for 2020 through 2023 and beyond. Only to remind you and everybody in the line, in the times before the supply crisis came, Home and CNI had an average order backlog level, which covered around about three months. Currently, we are covering six to eight months. And large scale business in the past had an order backlog covering six months. Now we are talking about more than 12 months sales, which is covered by our order backlog. And this all means that in general, the development in our order intake is still in line with our expectations and is still in line to reach our guidance for 2023 and also beyond. Does this answer your question concerning order intake?

Can you maybe also give an indication how July and August developed or is that something you share with the market at this point of time?

It's currently too early to give a clear answer, but for our self-expectations, we are absolutely in line with our guidance and therefore also we see that especially in the second half of the year, end of the second half of the year in autumn time. The orders will also increase again when customers in CI and CNI and home business will start their order placing for 2024. For large scale, we already see continuously order income also ready for this and also for next year. So in large scale, we nearly booked out already for next financial year.

Okay. All right. Thank you. And on the U.S.?

Coming to your question concerning ERA. So first of all, it's a complex topic, and we are still investigating what is best for us. The decision will take into consideration such as contract manufacturing, collaboration with manufacturing partners, or establishing an own dedicated manufacturing facility in the US. But there is no disclosure currently, so we are still investigating and we take our time. We take our time until we have really a clear picture. And there isn't a clear picture currently seen, so it's nothing which we are postponing. It's something which we are really investigating and calculating seriously.

Work in progress, so to say.

Yeah, work in progress, right.

All right. Thank you. Very clear. Thanks a lot.

Yeah. Thank you.

The next question comes from the line of Konstantin Hesse with Jefferies. Please go ahead.

Hi there. Thank you very much for taking my questions. I would like to just quickly follow up on the order momentum. As I understood it correctly, you expect order intake to pick up again in home and CNI on the back of orders being placed towards, and so basically in autumn time. So fair to assume that the $31 million we saw in home and the $49 in CNI, you're obviously expecting that to pick up again to higher levels. Then maybe a little bit of a word on large scale, if you could share here as well. It came down, but it's still at very elevated levels at $300 million. So if we look at the momentum over the coming quarters that you're seeing, so, um, obviously you were seeing an improvement in home and CNI, but you know, how are you seeing large scale continues to develop at this point? So let's put it this way. Do you expect the order backlog to have peaked at this point, or do you expect the order backlog to continue going up?

Yeah. Thank you, Konstantin for this question. First of all, as you already repeated correctly for home and C&I, it is clear that after asking our customers to book the order intake and also to confirm order intake until March, there is a season now of low order intakes, which we have already expected. But from September, October onwards, They will start the new orders for next financial year because they have also to calculate and also to steer the capacities for next year. So, it's clear that we are then is we'll see increasing order intake from home and C&I again. For large scale, we have still a very positive development as also our Q2 order intake was more or less in line with our Q1 order intake in 2023. And we are currently sitting on an order backlog of 1 billion euros. So we have already booked a very huge and very important project. But additionally, we are also discussing and also booking frame orders and frame projects, which are not reflected in our order intake, but which will also drive our sustainable growth part for the large-scale business for the next year. So there is no... No downturn in demand. There are only maybe some postponements, but also order intake will increase in large scale. The average staying on a high level, and they will also increase at the end of the year again more steadily.

So fair to say that this order backlog decline is a temporary hiccup and you don't see orders peaking at this point. You do expect order backlog to tick up again.

Yeah, we absolutely see order backlog to come back again from home and C&I. But we also see that there is a kind of normalization in the lead time. As I already said, before crisis, order backlog covered everything. three months of home and C&I business. Currently, it covers six to eight months. So there will be no need to order so much time in advance in the future if we are able to supply on a steadily and on a very reliable level. So order backlog compared to sales will be more on a normalized level also for the future. It will be something between six and three months, but we expect that it will absolutely increase again. for next financial year because all this will flow in in autumn time for this segment.

That's great. Thank you. I just have two more, if I may, really quick ones. One is the profitability levels you achieved in large scale in CNI, so 5% in Q2 in large scale and 7% in CNI in Q2. Are these the levels that we should be thinking of going forward, or do you still expect an improvement from this level? That's the first question. The second question is if you have an in-house view that you could share concerning the announcement that was made yesterday in Germany concerning the subsidy package. Thank you.

Yeah, concerning profitability, first of all, we are happy that both segments are black and black. Earlier than planned, I already announced that we are reaching this target end of the year, but now they are earlier back. This is a very good development, and this also shows that our decision and our strategy to stay in three different segments is still valuable, and it is still in line with our strategy. five to seven percent is not the overall margin which we are expecting for the whole next financial year and for the whole group we are still stick on our target to show and to receive an ebit margin two digit positive so also cni and large scale have to contribute to this development Will they be able to achieve this directly in next financial year? This is too early to pronounce or too early now to say. We are investigating now in our budget planning process what is the possible target we are setting for them. But it's for sure that our overall profitability for next financial year EBIT-wise is set and targeted with two digit positive EBIT margins. and therefore large-scale NCI has to give their positive contribution to this. Coming to your question concerning the announcement yesterday, it is currently not so easy for us to give a complete answer. Yesterday, the German cabinet approved the draft 2024 economic plan for the Climate and Transformation Fund. by circulation. So the largest item, 18.8 billion, is the building subsidy followed by the financing of the EEG level in the amount of 12.6 million. So what is our takeaway? Currently, it's very early to give a complete answer. We are still investigating what does it mean for us. But clear is that the electrification of the power to gas heat and mobility sector is moving forward. So SMA solutions fit absolutely into the sector. And also our strategic development from a pure hardware production company, from a pure inverter company, more to a solution provider, also including this different aspect and different segments is absolutely on the right way. And the sector is happy about the long-term hedging of the EEG level to secure the solar expansion scenario until 2030. So, these are our first takeaways, but we will absolutely investigate this more in detail in the next days and weeks.

Thank you very much.

You're welcome.

The next question comes from the line of Lasse Stüben with Berenberg. Please go ahead.

Hi, good afternoon. I just wanted to come back to the improvement in profitability at large scale, sort of sequentially in Q2 versus Q1. Can you just clarify again what drove that? Because your revenues were up, I think, 10 million on the quarter. So it'd be good to hear sort of what's driving the big large improvement. And then the second question would be on pricing. If you could give some color on how pricing is developing, because it seems like There seems to be ample supply in the market currently, so I'm just wondering if that has an implication for pricing. Thank you.

Thank you, Mr. Stuben, for your questions. First of all, concerning profitability in our large-scale business, the fact is that in our large-scale business, each and every project is calculated individually. So therefore we currently see that we have positive impact from price development and absolutely see that stability, sustainability and possibility to deliver are more important in this large scale business than the question of final and detailed pricing. Price is an issue everywhere for sure, but the availability and to be stable and to be reliable is more important in the whole large-scale business than in the other ones. So this is one aspect. Additionally, we continued our productivity gains and especially the utilization in our production capacities. So that means that our fixed cost degression also had a positive impact in addition to the improved project pricing. So I think these are the most important aspects concerning large scale. And we also are very convinced that the positive margin development and the positive profitability development in the large scale business will also continue over the next month. As I said, delivery performance, reliability are the more important factors and driving this business also more important in addition to volume and production utilization. Coming to your second question concerning pricing, currently price decrease is not a topic for us. Of course, we are aware of the high price pressure on modules, but based on our past experiences, this has not such a significant effect on the inverter prices. And here you have to keep in mind that our solutions normally represent a small amount of the overall cost of a project for the end user. So in addition, the system approach also makes us more resilient against price changes. And this also means that with our development from a pure inverter producer, to a solution provider consisting of inverter, storage, data management, EV charging, our strategy is absolutely on the right way. And additionally, we are present in three segments. We are diverse and diverse globally. So this development also gives us more resilience compared short-term price erosion, which can maybe be seen in other segments.

Okay, thank you.

You're welcome. The next question comes from the line of Jeff Osborne with TD Cowen. Please go ahead.

Yeah, thank you. Just maybe following up on the pricing question, I was curious if the new bookings that you're adding to the backlog during the quarter are consistent, you know, margin profile. And then recognize, Barbara, that you had referenced you know, selling a solution, which certainly was on display at InterSolar. But I'm just curious your perspective on sort of what type of price premium you can capture versus some of the leading Asian vendors that are being a bit more aggressive in the past few months.

Thank you, Jeff, for this question. We have also discussed this very intensively with ourselves and segment responsibles in the last days and weeks. I can only repeat currently price decrease is not a topic. We do not see the price decrease currently. When we will start the new negotiation for next financial year, yes, there will be maybe some impact, but we are still very confident that we are more resilient. We have a lot of positive aspects in our brand, in our quality, in our possibility to deliver a solution which gives us more resilience to a pure price pressure coming from modules or coming from the pure inverter market. This is absolutely what is in line with our strategy. We are with our brand at the high price end and customers still are buying us and buying our products because of quality, reliability, And also because of the possibility to combine this with all these other aspects like storage and data management. And this is also what we see currently when it comes to the discussion. Are we more resilient than in the past? And we absolutely convinced that we are more resilient. So from the time being, so currently the price decrease is not a topic for us.

Got it. That's helpful. And then maybe just two other quick ones. On the distributor side, some of your leading customers in Europe, what are you seeing in terms of distress given the high-cost inventory that they're holding of modules given the prices come down? Is that an issue as they try to work down inventory and minimize the number of suppliers that they're dealing with?

So what we see and what we expect is when prices come down on modules, a whole project gets cheaper. And as we are only delivering a smaller part of the whole project, be it at the CNI, a home, or a large-scale business, if prices also decrease significantly on the modules, we have the positive impact that our prices are stable because our smaller amount of cost to the total project does not make sense, and also then the whole projects are getting cheaper. So therefore, for distributors and customers, we do not see that decreasing module prices will decrease demand. We will see that the whole package will be cheaper for the customer and therefore there could be positive impact. And yes, we're getting orders still currently on the current price level. And when we see currently that distributors or customers are sitting on high stocks and want to postpone maybe something to next year, we are also still able to save the current price level. So prices are then currently in our view still stable for our product and solutions.

That's great to hear. And just a housekeeping question. I was wondering if you could share with us what the tolling and storage revenue was for the quarter and then any preliminary outlook on CapEx needs for next year. given the credit agreement that you put in place. I would imagine that you want to prepare for future growth and maybe give us some insights on how much that might cost you.

I think I did not get the question correctly. Can you repeat it again, please?

Sure. I was asking on the tolling and storage percent of revenue for the second quarter would be helpful to have. And then given the credit agreement that you have put in place this quarter with the expansion, I'm curious what your CapEx needs might be for doubling that capacity there in Germany and potentially in the U.S., like what kind of capex figure we should be modeling for cash needs for that for next year?

Yeah, currently and also for the next years, all our capex will be financed out of our internal gained free cash flow. So this new line, This new line is only to financing networking capital volatation if necessary. So in our capex estimation, we estimated for this financial year roundabout 85, 90 million euros, where we have spent already the half of it roundabout in the first half of the year. And for next, it will be also more or less in this level, so 80, 90 million. maximum 100 million capex including also R&D. And this is currently all financed out of our own free cash flow. So no additional loans or no additional funding is necessary for this. This new revolving credit line is only to finance networking capital volatility when needed. So currently we also do not have the need to to take something out of this as our cash position is still stable and decreased again end of first half of the year. Therefore, there is no need currently to use the networking capital credit facility and for the next And also by financing the facility improvement and investments here in Kassel, it's all financed out of our cash flow. What would be needed if we then also starting or investigating to invest in the U.S. market? This is still under discussion. So I cannot give you figures, but clear is that the market, the banks, and the one who gives us external loans are absolutely convinced about our strategy. So to get money out of the financing market, we currently see only positive signals from the market. So when we are at the right point to say what we need for investing in the U.S., then we will start negotiating on external loans. And we're absolutely convinced, as it was a very good and positive success to negotiate the networking capital line, we are absolutely convinced that also getting long-term loans and long-term financing for additional investment abroad would be possible for us on very good and positive conditions and results.

And do you happen to have that tolling and storage revenue by chance for the second quarter? That was my last question.

I'm not sure if we have this. I do not have it under my eyes. Sorry. Maybe we can give it to you later.

Great. Thank you.

You're welcome, Jeff.

The next question comes from the line of Sebastian Grohe with BNP Paribas Exxon. Please go ahead.

It's good afternoon, everybody. Hi, it's Gregor. The first one is, and sorry for coming back to the order point, but just more on a sort of general and high level, I would be interested in you commenting on the status quo of any volume and price discussions with your distribution partners. It is mostly related then to solutions and C and I. And I guess the question is really, which can frame how these discussions typically unfold. So to what extent is the pricing then fixed? Are the index clauses included? But we just get a better understanding of your sort of visibility on the pricing side looking into 24. That would be the first one.

Yeah, so currently our order backlog is covering our self-guidance, as already said. under the pricing level which we had booked in end of Q1 this financial year and also for large-scale project by project. So the order backlog is all covered on the current price level. I didn't catch the second part of your question.

My understanding is simply that we have obviously, at least from the marketplace perspective, I heard your comments around that you can still sign contracts at similar prices as you have established those thus far, which I think was more comment related to the LSPS segment. And I do get the points around the more positive project margins if and when mobile pricing is coming down. But I think for what is the more sort of trading-oriented businesses, I may put it this way, the home solutions sector, and then also the commercial and industrial business, which is indeed a distributor, wholesaler business, there I would assume that pricing is, generally speaking, more volatile. So if what Constantine asked before, your pricing discussions are starting in autumn and we have a market price which is down like 20-30% year-to-date. I'm not talking your price, not the SMA price so far, but There must be some reference, I believe, to the market price. And my question is simply, how different these price negotiations for what then will be 24 might look like compared to what has been established during 23?

Yeah, okay. First of all, we are currently signing our contract at similar prices. And to be more precise, also in large scale, we were able to get on a better price level because we changed a little bit our pricing strategy. So this means that especially in the large scale market, which is driving our profitability and also our growth strategy, pricing is currently not an issue. It's more about sustainability and the performance to deliver. On the model price development, the drive down a total project price for our customers. So that means that currently if model prices are decreasing and the inverter is only 10 or 20% of the whole project price, then the prices for the whole project are decreasing and this gives the possibility for us to stay our prices on a stable base. So this should make projects financially more efficient and supporting also our volume growth. So this is exactly what we see currently in the large-scale business, where module prices are decreasing, the projects in total getting cheaper and driving then our growth strategy. There will be some pressure towards price end of the year. This is for sure. But large scale, it's not even next year. We are absolutely booked out. And due to the solution offers, we will keep any reduction as low as possible. And we are not commodity. So as I said already before, by our strategy to... changing from a pure inverter to a solution provider. This gives us more resilience also in the price development, and we are not serving the commodity market as others do.

Better to get, but obviously there is some reasons why there are so many questions asked around pricing. So the situation in 23 is as such that home solutions carrying a phenomenal margin of 25, 30% EBITDA. It's contributing about three quarters to group EBITDA, three quarters. So now there's a very high likelihood, I believe, that in 24, there will be a material shift and much higher contribution from LSPS. And I see all the points that you raised around LSPS improvement potential also for the margin. But still, that's the reason why so many questions are asked around the pricing, especially for the home solutions. Home solutions is the key earnings driver this year. So if there was a material decline in pricing, then that would have also a material impact on the group profitability going forward. So that's, I think, the reason. And for that reason, I was just asking, if you could help us better understand to what extent you can sort of be protected to these price discussions when it comes to especially the home solutions and let's leave LSP aside.

Yeah, I understand your question. What we always said is that for the first quarter and the first half of the year, we had a special situation where home solution was able to deliver earlier than the other segments. So now C&I and also large scale are increasing significantly their sales volume. And then they're also contributing positively EBIT due to the current sales growth. That does mean that, on the other hand, our home solution business is still profitable for this year now, and not only since 10, 22, and 23. So this will also be a positive contribute for the next years, but the shift in the mix will also mean that by increasing CNI and large-scale business, they will also contribute positively. By our investment in our additional capacities here at Kassel, we are increasing our capacity from 20 to 40 gigawatts. This is mainly driven to the fact that for the large-scale business, we see the growth market and growth strategy mainly in North America, where we currently see that our projects are running with a very well profitability and with a very well situation. also compared to others and also compared to our segments. So we are still fine with our decision, and we are absolutely clear that with our three segments, we are more resilient. There will be a mixed shift in the next year that the dominant character of home in the sales revenues will be lower, but as we are increasing volumes, This fixed cost regression will also be seen due to capacity utilization in large scale and C&I. The new mixed segment and the new mixed revenue will then also be very profitable compared to this financial year.

Okay, that is truly helpful. Thank you for all the color. And two very, very quick questions. The first one is a simple lesson. You said two-digit margin in 2024. Is this EBITDA or is this EBIT?

Yeah, I already said in, I think in May, that our target for next financial year, 2024, two-digit positive is EBITDA. and we are also targeting two-digit positive for EBIT for the whole group. But it is for the whole group, and then we will have a mixture in between. As I said already, home solution is already in this frame, but C&I and also large-scale are getting more and more profitable and are on the right track also to contribute. So two digit positive is meant for EBIT for next financial year for the group in total.

Okay, that's good. And then the very last one, because on one of the slides you've seen that there has been a special income of 5 million from cancellations. So, A, I would be interested in hearing what segment that refers to. And on a more general note, can you also give us a sense how these fees are calculated? Is this sort of the lost profit contribution from a given contract? Or should we think about this?

It was from large scale where we had a cancellation. And we have very different contract frames from each to other project. So we have normally conditions that if project canceled at a large point, there is a percentage based on the total project volume to be paid. So therefore, this was out of the consolation in the large scale business.

Okay, perfect. Thank you very much for this.

You're welcome.

We have a follow-up question coming from the line on Mr. Hesse with Jefferies. Please go ahead.

Hi. Sorry, I was muted. Sorry. I know we're already over the 60 minutes. I just have very quickly two questions. One, you referenced, so you were talking about the potential targets for the CNI at large scale that you're currently reviewing. Do you believe today, is there any chance that both these businesses could actually become two-digit EBIT margin businesses? Is that realistic? So that's the first question. And the second question is, Is there any holdback still from the lack of electronic components in the second half, or should we continue seeing utilization running up in the second half? Thanks.

First of all, it's not only a question about what is realistic. It's a question about what is our target. And if we take into consideration that each of our business also covers capital employed, covers networking capital, we have to set our target ambitiously. And the ambition is that for the future, every of our three segments have to gain two digit positive EBIT margin. Otherwise, they are not contributing positively to the added value of the group. Can they achieve this all already in 2024? No, but we are on the right track. We set the overall global target for the whole group. Home is already there. We see that large-scale and CNI will follow, but not immediately, directly in next financial year, but the target for each of the three segments is to gain a positive two-digit positive EBIT margin for the future. Okay, and your second question was concerning there are still some holdbacks. And therefore, we consider a realistic base on a high cell volume, but we are getting continuously less holdbacks.

Thank you very much.

You're welcome.

The last question is a follow-up from Mr. Grohe, BNP Paribas exam. Please go ahead.

I'm sorry for this, but there's obviously room for another question on how we're doing this. Again, to circle back to the visibility going into 2024, so when it comes to the distributed and wholesale level, if there's sort of any kind of general... framework base volume agreement and then it's depending on how much of this is going to be sort of called off or what is simply the visibility argument or visibility as such going into 24. Could there be a situation that the It's kind of the best of all worlds in 2023, and we really see also a decline in volumes in this particular part of the business. I see all the visibility arguments around LSPS, but I'm more nervous about the home solutions in C&I. Thank you.

So if we talk about frame agreements, we mainly talk about large-scale business. There we have long projects, there we have very, very huge customers and in the large frames agreement they also include penalties if the agreed volumes are not called up. The percentage of penalties and the amount of penalties normally depends on at what stage of the frame contract the volumes are called up and therefore and therefore this is very different from the different point where cancellation and calls up gain and it's also very different from the different negotiation project frames. Our customer also need to deliver on their project as such it is normally not in their interest to pull out of these agreements. So because this is also in line also with their whole value chain and therefore It's only an exception, and it's not normal business way that we are faced to this.

Okay, but I may phrase it a bit differently. So you would be comfortable, to the extent you want to comment on this one, comfortable with having at least the flat volume into 24 when it comes to these home solutions and CNI activities?

I'm comfortable with our target to increase our overall sales by 20%. This is what I also said a few weeks or a few months before. So our growth expectation and our target is to increase our overall sales volume by 20% for next financial year. And we are still investigating on our budget process what does it mean for the different What does it mean for the different projects and products? But in general, as we are increasing our portfolio also by batteries, also more and more hybrid inverter, large-scale business is increasing significantly. So therefore, in the mixed picture, I can confirm that our growth strategy and growth target for next financial year is to grow by 20% sales-wise.

Okay, that's perfect. Thank you very, very much.

You're welcome.

There are no further questions at this time. I hand back to Barbara Grego for closing comments.

Yeah, thank you very much for all participants and also for your interest. And please do not hesitate to contact us in case of any further questions. Thank you and auf Wiedersehen.