SMA Solar Technology AG
XETRA:S92
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SMA Solar Technology AG
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Good day, and welcome to the SMA Solar Technology AG Analyst Investor Presentation Financial Report Q1 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pierre-Pascal Urbon, CEO. Please go ahead, sir.
Thank you very much, and welcome to our call for the first quarter 2018. As a basis of this call, we would like to use our presentation that is available on [ investorrelations.sma.de ] in the publication section.As always, we [ will ] presenting the 3 parts during today's call, and we'll then open up the discussion for your questions. I will begin with the strategic and financial highlights for the first 3 months of the year, followed by an update on the market development and SMA's positioning. I will then hand over to SMA's CFO, Ulrich Hadding, for the financial discussion and the outlook for the full year 2018. Stephanie Paschinger from our Investor Relations team joins today's call. This conference call is scheduled for 90 minutes and will be recorded. We will refer to the disclaimer on Page 2 of our presentation.Following along on Page 3, we have summarized our strategic and financial highlights for Q1 2018. As announced during our Capital Markets Day, we introduced the Power+ Solution for North American markets. This solution comprises the Sunny Boy inverter, plus module-level power electronics. Power+ is safer in case of emergency and compliant with NEC 2014 and 2017 rapid shutdown requirements. Power+ elevates SMA to a unique position in the field of module-level power electronics. In addition, our offering includes smart corrective service technology and can be retrofitted with energy storage any time. The outstanding reliability of our product, the integration of the next generation of module-level power electronics as well as our experience in the world of energy management and storage were key success factors to enter into a strategic agreement with Sunrun, one of the top residential solar installers in the U.S. in Q1 2018. We are in the ramp-up phase and will increase our shipments in the course of the year. During the first 3 months, we had exciting news in the Commercial segment as well. We launched our new vertical energy management platform, ennexOS, to connect PV systems to various technologies. However, it is still very difficult for installers and EPCs to manage the electrification of more things, to provide the end customers with matching offers and to answer important questions for the investment decision. Therefore, we developed [ Sunny Design Pro ]. This tool allows a swift design of complex systems and delivers offerings that are tailored to the end customers' needs within minutes. We are pretty excited because this enabling software will help us to increase our share with solution business in the coming years. The official product introduction will take place during the Intersolar Trade Show in Munich in June.In Q1, we also founded our new subsidiary, coneva, with a focus on provision of energy-related services for private and commercial customers. Coneva already started to work on the first projects in the area of food retail. Also in Q1, SMA has crossed the 3 gigawatt mark for operations and maintenance contracts globally. [ So the ] latest GTM on O&M asset management report, SMA is now the fifth largest O&M provider in the world.Now I would like to summarize the key financial highlights. During the first 3 months of the year, SMA shipped 1.8 gigawatt inverter power. This is 11% more than during the same period last year. Sales increased by 5% to more than EUR 180 million and were in line with our guidance. Ulrich will comment on the sales distribution by regions and segments in the financial discussion.Our order book remains pretty strong at the end of Q1. Business in April was good as well and the order backlog stood at EUR 635 million at the end of April, thereof nearly 40% for products. This is on the same level as the year before. On profitability, SMA generated an EBITDA of EUR 17.5 million. The EBITDA margin stood at healthy 10%. Please keep in mind that last year's comparable EBIT figure of [ EUR 16 million ] included a positive one-off effect from the divestment of SMA's Huawei business. The one-off effect had an impact in the magnitude of the high single-digit million euro amount. Therefore, we are satisfied with the profitability reached during the first 3 months. Ulrich would comment on the profitability by region and segment later as well. In light of current trading, our strong order backlog and our positive view for the coming months, we confirm the sales and earnings guidance for the fiscal year 2018. We expect a moderate sales and earnings growth for this year.Since many utility projects will be invoiced in the second half of the year, we estimate stronger financials in Q3 and Q4. For the full fiscal year 2018, SMA's management team expect sales between EUR 900 million and EUR 1 billion and an EBITDA between EUR 90 million and EUR 110 million.SMA's profitability 2018 will be driven by the expected sales growth in all segments and the shift towards the Commercial and Residential segments.As a result of newly introduced products in each segment, cost improvement measures on existing products as well as lower warranty costs, we predict an increased gross margin. Depreciation and amortization will amount to approximately EUR 50 million, thereof more than EUR 20 million for R&D. Please assume a group tax rate between 25% and 30%.SMA will generate a positive cash flow and will have a net cash position of more than EUR 480 million by the end of 2018. SMA has a financial strength to execute the strategy 2020 and to expand into energy services. In addition, we are planning acquisitions, particularly in the fields of energy management technology and O&M portfolios.So let's move on to the financial summary on Page 4. SMA changed the reporting structure at the beginning of the year. The previous year's figures are adjusted to the new reporting structure. For your convenience, we included an overview of the changes in the appendix of this presentation. And furthermore, Ulrich will provide you with more details later in this call.On Page 4, I would like to draw your attention to the gross margin development. SMA generated a gross margin of 21% in Q1 2018. Please keep in mind that the first quarter was impacted by supply shortages, particularly for Residential and Commercial products. SMA shipped more products with airfreight to serve customers at the best possible time -- in times of allocation. The higher transportation costs negatively impacted the gross margin in Q1. Due to the second sourcing of critical components and firm supply commitments, we expect the shortage of power electronics to ease within Q2. However, the supply of components remains a critical success factor for the rest of the year and the coming years, and that is true, not only for the solar industry, but also for other industries.In addition, the Q1 gross profit included higher warranty provisions for the Utility business. On a normalized level, the gross margin would be around 24% and, therefore, in line with the last 2 quarters 2017.The slower business in Residential is mainly because we introduced a new Sunny Boy inverter in North America only at the end of Q1. This negatively impacted sales at the beginning of the year.Please turn to Page 6 for the market discussion. Megatrends are leading to a full transformation of the energy ecosystem. We are experiencing a change in the way energy is produced and consumed, which is supporting existing markets by creating new ones. Overall, the growth of global energy demand will continue with an increasing share from renewable energies due to the climate targets. At the same time, decentralization and electrification of many things are resulting in a structural change in the energy market. Digitalization acts as a facilitator for new solutions to these changes and is creating value pools for technology-oriented companies such as SMA.On Page 7, we describe the impact of climate targets in more detail. Political targets, such as those established in Paris and the Paris agreement at the end of 2015, will continue to drive decarbonization. Together with the growth in primarily energy demand, the adoption of renewable energy systems will further expand, pushing the demand for PV installations and associated products and services. According to the experts from the Fraunhofer Institute, annual PV capacity additions could be up to 10x of the 2020 additions by 2040. In this breakthrough scenario, basically everything is electrical -- heating, mobility and power production. The share of decentralized energy in total energy generation capacity is expected to rise in most countries, for example, in Germany, to almost 30% from 15% today. The higher share of renewable implies an increasing volatility and requires means of capacity balancing and optimization. As such, storage systems are expected to grow by over 25% per year until 2040. While the solar industry was very much driven by subsidy programs in the past, the new energy market will be driven by technology. The electrification of many things, we call it sector convergence, is complex and requires smart control and market mechanisms as well as high cybersecurity standards. The impact of the structural changes is shown on the right-hand side of the presentation Slide 8. With a higher share of renewables, we are experiencing a shift from the centralized control grid to the supply matching demand, to a locally controlled grid, where energy distribution is decentral and determined by the price at a given time. Digitalization offers the required analytical capabilities for decentralized applications and real-time control of grid assets. The structural transformation of the energy sector will create new business models in the future. On Slide 9, we illustrated the connection of the cloud platform with Edge of local energy management. Vertical platforms are very different compared to horizontal IoT platforms because they require a deep understanding of the relevant applications. SMA's ennexOS is an Edge energy management platform that will be applicable for many industry with a high energy demand, such as retail, food retail, a data centers or the agriculture sectors. With our technology, the business owner has local control of the sensitive data. EnnexOS allows local optimization of various technologies, applies powerful analytics to drive smarter decisions and visualizes data in a meaningful dashboard. The entire system connects to the cloud to access marketplaces, to generate economies of scale by connecting many local sites of one business owner and to get generic information.In order to capture the entire value of ennexOS, we will collaborate with many different business partners. To get faster access to food retail companies, we intend to form a joint venture with Danfoss Cooling. To trade excess electricity directly, we've partnered with the energy company [ MVV ]. To integrate electrical vehicles into the system and to understand the challenges resulting from autonomous driving, SMA created strategic alliances with Volkswagen and Audi. Many strategic partners choose to work with SMA because we have the application know-how for decentralized power generation.With this exciting news, I want to turn to Page 10 for the market discussion. SMA's outlook has not changed since our last call at the end of March 2018. SMA's core market, the PV inverter business, is expected to grow in gigawatt and euro terms in the coming years. We estimate a volume growth of only 7% in 2018 and 10% per annum until 2020. The volume growth in the EMEA and APAC regions is expected to continue. Here, growth rates are between 15% and 25% per annum until 2020.China remains the largest market, but with a rather flattish volume development. With less than 10 gigs of new installations in Q1 2018, we feel comfortable with our full year outlook of only about 50 gigs for China. This will put significant pressure on competitors who only do business in China because the price pressure in this market remains high and the next feed-in tariff reduction is planned for July this year. Globally, we expect a nice volume growth, especially in the residential and Commercial segments. Global demand in euro terms is expected to increase by only 2% in 2018 and by 5% per annum until 2020. We expect a strong decline of average selling prices for ground-mounted PV projects due to tender processes and low PPA prices. In contrast, the price decline for residential and commercial rooftop projects is moderate. Those projects compete for the best sites and are usually not tendered. Overall, we expect a stabilization of prices towards 2020. Until then, the market consolidation is likely to accelerate. Many inverter players cannot afford the investment in new technologies that are necessary to drive down product cost and/or the internationalization -- and to grow faster. SMA has no plans to acquire smaller inverter manufacturers due to our already good positioning in all markets and in all segments.The O&M market becomes important in light of declining equipment process. In mature markets, such as the U.S. and Europe, O&M is a business on its own. Independent service providers such as SMA are selected separately by EPCs to ensure data integration, analytics and qualified PV inverter technicians. According to GTM market experts, investors and asset managers reject string inverters for large-scale PV power plants due to the potential of slower outage response time and higher service costs. SMA estimates the global O&M market value between EUR 1 billion and EUR 1.4 billion per year until 2020. SMA increased the PV plants under management by approximately 20% and crossed this 3 gigs mark by the end of the first quarter 2018. As a multi-vendor O&M provider, we expect to grow organically but also with acquisition of O&M portfolios.Battery storage price reductions is the most important growth driver for nano and micro grids. SMA expects storage prices of less than EUR 700 per kilowatt hour for residential and less than EUR 200 per kilowatt hour for utility applications by 2020. This is lower than expected before. However, the current price levels are already attractive because customers can address many use cases at the same time with battery storage. Today, the payback period for utility plants is normally below 3 years. We expect a market of up to EUR 1 billion by 2020. Approximately half of the demand comes from utility-scale battery projects. Since every application is different, significant customization is required. This offers huge growth opportunities for battery inverter experts such as SMA. The megatrends introduced in the previous section are creating new markets for energy solutions, which are emerging rapidly. On the one hand, decentralized energy networks create demand for new solutions that manage flexibility and complexity. On the other hand, countless [ actors ] and links within these new energy networks generate an abundance of data, which can be used to tailor new solutions. The market addressable by a service provider such as SMA is expected to be only a fraction of the overall energy service market. We estimate the addressable market for us to increase from EUR 400 million in 2018 to EUR 1.5 billion in 2020. To capture this value pool, the necessary technical solutions need to be developed and rolled out throughout different markets. SMA has a clear understanding and focus to approach the digital solution market. Overall, we expect the entire addressable market for SMA to grow by 14% per annum from EUR 6.2 billion in 2017 to EUR 9.2 billion in 2020.Let's move on to SMA's unique positioning in the solar industry on Page 11 before I hand over to Ulrich Hadding. SMA has excellent competencies to handle the complexity of utility-scale power plants with a centralized layout. In the second half of this year, we will offer our customers a new 6 megawatt complete medium-voltage turnkey solution. Our technology allows a DC:AC ratio of up to 200%, thus allowing the over-dimensioning of the PV array in order to reduce the specific inverter costs. The entire equipment is integrated in a 40-foot container and allows fast commissioning. The product is well received in all utility markets and can meet the requested price points.Since the beginning of this year, we offer our customers in selected markets a new product called Profit+ solution. With this new offering, we shift CapEx to OpEx and back our quality promise with a contractual commitment. Customers in North America and Europe are excited because of the amount they can -- they are paying depends on the actual uptime of the inverters. For utility-scale projects with a decentralized layout, we are on track to offer the new SMA Solid-Q and the SUNNY HIGHPOWER PEAK1 in H2 2018. The SMA's Solid-Q is manufactured in China while the SUNNY HIGHPOWER PEAK1 is produced in Europe. Both products have lower manufacturing costs of up to 20% compared to the previous inverter platforms. Overall, we are optimistic with regard to our utility-scale business. With our offering, we are competitive in mature markets like Italy or Australia. In both markets, we are the clear #1. But SMA is also amongst the top players in price-sensitive markets such as India.On Page 12, we describe the use cases for residential and commercial applications. In those segments, it is far more important to use as much power as possible at the point of production and to integrate the PV system in a comprehensive energy management system.In order to strengthen our core business, SMA has developed an all-new communication platform. This gives us the possibility to connect the Tigo module optimizers without any additional equipment to our string inverters. [ Since the ] SMA Power+ Solution, and that is a string inverter [ plus fiber optimals ], allows the customers only to optimize the modules that require an optimization, we can generate higher yields with lower investment costs.In addition, our U.S. Power+ Solution is safer for installers and firefighters in case of emergency. The built-in module level output shutdown and de-energizes string and voltages to the safe limit of 30 volts or below to comply with NEC 2014 and 2017 rapid shutdown requirements. No other module level electronics manufacturer has a comparable solution for the U.S. residential and commercial market. It goes without saying that the SMA system can be retrofitted with energy storage at any time. To test the growth potential for also residential and commercial storage markets, we will introduce a new Sunny Boy Storage inverter that works with all major battery brands.For the larger commercial applications, we introduced the new Sunny Tripower CORE1 last year. The CORE1 comes with 6 maximum power point trackers and so does not require panel optimization. Therefore, our product is financially more attractive compared to a PV system that relies on constantly operating panel optimizers. In addition, we included many new features to substantially reduce installation costs. The product is very well received by our customers in all key solar markets and demand is much higher than we had expected. We are in the process to ramp up our production and supply chain and will be able to reduce delivery times within Q3 2018 for this product.Following along on Page 14 (sic) [ Page 13 ], we have summarized our strategic approach for the digital solution business. With our Munich-based subsidiary coneva, we focus on the provision of energy-related services for private and commercial customers. Here, our white label offering can include, for example, energy monitoring, efficiency improvement, load management, marketing or flexibility and tariff management. We expect the first important deals to be signed within Q2 2018.We are entering the energy data field with our energy portal solutions through which we collect and analyze energy-related data, among others from PV installations, to provide data-related services. Here, our offering can include portal services, data analytics and energy analysis and energy trading.Our unique selling proposition is based on our technology platform that is available across sectors and our access to a large data pool. Currently, we have access to data from more than 1.5 million devices in 300,000 PV plants. As such, we are positioned as a first mover of its kind in this field who can build ahead of competition by designing service solutions for energy management and converting data into new services.Now I want to hand over to Ulrich Hadding for the financial discussion.
Thank you, Pierre. In the following, I will walk you all through our financial figures of the first quarter 2018 and provide you with an outlook for the remainder of this fiscal year. But before we get to the revenue situation, I would like to point out some features of our quarterly statement that needs further explanation. First, as of the beginning of this year, we have added another segment to our reporting called Digital Energy. This segment includes the activities of our recently founded subsidiary, coneva, which is offering energy services as well as our energy data business.Second, as already announced on our Capital Markets Day and within the last analyst call, our segment, formerly named Other, which until 1 year ago included our Railway business, has been renamed into Storage. It encompasses our business unit Off-grid and Storage and our subsidiary SMA Sunbelt, which is offering large-scale storage solutions as well as micro grids and island electrifications.Third, we do no longer have the former segment Service, which was used to report on our after-sales business. The activities of this segment have been allocated to the segments Residential, Commercial and Utility as this better reflects our approach to provide a distinguished solutions offering to our customers rather than mere components or systems.The figures for the segments business in the first quarter of 2017 have been restated accordingly in order to be able to compare apples with apples.Another point. Due to a revision of the International Financial Reporting Standard #15, as of this quarter, we provide you with additional information regarding our segment sales volume. In the table on Page 20 of our quarterly statement, you will find the total sales volume being split into revenues, which is products and revenues with services as well as the total volume. Products in the meaning of this table encompasses inverters, storage systems, communication products, accessories and spare parts. Services includes service operation and maintenance contracts; warranty extensions; commissioning; Digital Energy services; and operational management and monitoring. Services in that sense should not be mixed up with the revenues generated within our after-sales business, which we used to refer to as Service. You will find a detailed description of what we refer to as product and services in the annex to our investors presentation.And, last but not least, we have also modified the calculation of our net working capital. As of 2018, it includes advanced payments we see from our customers. And again, the net working capital figures for 2017 given in this call and in the quarterly statement have been restated accordingly to ensure comparability.Now let's turn to the numbers and have a look at the top line.During our last analyst call, we gave an estimate of the expected Q1 figures. This foresaw revenues of EUR 180 million. As you can see, with EUR 183 million total revenues, we even surpassed that prognosis. In comparison to the first quarter of 2017, we were able to increase the total sales volume by EUR 10 million or 5%.With regard to the different regions, we can see a decline in the Americas. Here, revenues declined by 20% from EUR 44 million in the first quarter of 2017 to EUR 35 million this year. This is not attributable to one single segment but rather results from a general uncertainty in the U.S. market due to regulatory changes. In the Europe, Middle East and Africa region, we had a very positive development. After sales of EUR 61 million in the first 3 months of last year. The first quarter of this year accounted for EUR 74 million, which is an increase of 22%. Here we are especially satisfied with the situation in the Commercial and Utility segments.We were also able to increase sales in the Asia-Pacific region. After EUR 72 million in 2017's first quarter, this year, we recognized EUR 77 million, which is equivalent to a 7% increase.Also in this region, Commercial and Utility but also Storage are on the right track. The [ resi ] demand for our residential products has remained below expectations, partly due to supply shortages. So overall, we see the share of the Americas region continue to decline but APAC and especially EMEA more than compensating this development. This, of course, shows one more time that SMA, with its global footprint, is well prepared to deal with geographical market shifts.Looking at the different segments, we see Utility and Storage with considerable growth, Commercial, flattish and Residential with a slight decrease of revenues. Let me briefly elaborate on that. After very strong sales in Q4 of 2017, the Residential business is now affected by a slow start of the year in many regions. Furthermore, the late ramp-up of our new Sunny Boy inverter in the U.S. impacted Q1 sales as well. However, we expect the coming quarters to be more vivid. Also, we will introduce new product offerings later this year, which will trigger additional demand.The Commercial business is still affected by the supply constraints that we already reported several times. Those have already been contained and dealt with. Thus, we expect much higher revenues beginning by the end of Q2. This is also true for the North American markets, where SMA has just been ranked #1 commercial inverter supplier by GTM Research. In addition, what is true for Residential is also true for Commercial. We will have new product offerings this year. For example, the SUNNY HIGHPOWER 75, which will foster stronger sales.Utility has profited from the continuous pipeline of business opportunities in EMEA and APAC, especially in Australia. The challenging market environment in the U.S. has been answered by a new product offering, which provides a 5.5-megawatt, turnkey [ skit ] solution for large-scale PV installations. We are now working on an even higher power class and planning to bring this to the market, still within 2018. Overall, we expect tremendous growth for Utility in the APAC region. Continuous price pressure remains a challenge in this segment globally. The Storage segment in Q1 profited from a large order for Sunny Island inverters in the U.S. and therefore surpassed the revenues of the 2017 Q1 result. I would like to note that we omitted the segment Digital Energy as this business, not surprisingly, did not generate revenues in Q1 and is still too young to measure its profitability. SMA just started its activities in this new segment.So to sum up the sales situation, this quarter shows a pretty heterogeneous picture of the different segments in the different regions. Decreases in revenues in one place could be compensated and overcompensated in another place. We here see again this ability to be an important asset of the international sales structure that SMA possesses. Let's now have a short look on the profitability. Our EBITDA guidance for the first quarter 2018 was EUR 18 million. Well, I have to admit, we fell EUR 500,000 short. But with EUR 17.5 million, our profitability of this year's first quarter was much higher than in the previous year if you will deduct from the EUR 16 million the book gain from the sale of our Railway business last year, which was a high single-digit million amount. Taking into account that the year's first quarter is not known to be the strongest quarter in our industry, we are satisfied with Q1 profitability. The EBITDA margin of 10% is already at a comparative level to whole 2017, and the strong quarters are still to come.Depreciation and amortization are on the same level as of last quarter, so nothing noteworthy here. Let us now turn to the different segments. Residential. What we could show you already with regard to the 2017 year-end results can be seen here even more clearly. We managed to turn that business into profitability. Even if you take out the contribution margin by our after-sales business, residential would still be positive. And with 5% EBIT margin, which translates to EUR 2 million, it is where we expect it to be, at least.With more than EUR 1 million, our Commercial segment's profitability in Q1 2018 also turned from red into black compared to the previous year. This is solely attributable to a better gross margin of the inverter business, which is mainly the result of new products, improved contribution margin, especially our Intersolar award-winning Sunny Tripower CORE1. The profitability effect of our after-sales business now being allocated to Commercial business is very low.The Utility segment's profitability, with minus EUR 6.5 million, mirrors the high price pressure in the market but is, for the most part, attributable to warranty provisions in the height of a medium single-digit million euro amount that needed to be formed with regard to several prevented repair demands that accumulated in Q1 2018. We see the negative EBIT margin of 10% as a onetime event and expect far better margins for the remainder of the year. As I already explained, we are continuously shifting our central inverter offerings to higher power classes.With regard to the Storage segment, we see a very positive EBIT increase from EUR 15 million to EUR 20 million, that is a 33% jump. I already mentioned the one large project that was served in Q1. Nevertheless, we see this result as confirmation of the development of the Off-grid and Storage business it took in 2017.So for my comments for the different segments. Below the EBIT line in our P&L, you will find a break-even financial result and a tax rate of 34%, resulting in net result of EUR 2.8 million. One comment to the tax rate, it is slightly higher than expected as we had a few nondeductibles. For the whole year, we expect the tax rate in between 25% and 30%.I will now come to the balance sheet. In the balance sheet, the noteworthy deviations to the 2017 year-end results are all related to the development of the net working capital, on which I will concentrate. As I already explained at the outset of my remarks, as of this quarter, we are now calculating the net working capital, including customers' advanced payments. This brings the net working capital ratio below 20% to currently 19%. And you can see that also in absolute figures, it didn't change much to the end of 2017. But if we look at the inner structure, we will see that an increase in inventories from EUR 165 million by 24% to EUR 205 million is balanced by an improvement of our trade payables and especially our trade receivables position. I would like to note that the trade payables even surpasses the trade receivables position. The reason for the increase in inventory are to be found in the exceptionally high amount of revenues recognized in December 2017. The success of this month cleared much of our stock in the APAC region, which now has been refilled. Accordingly, we do not expect the finished goods inventories to increase further. With regards to raw materials, we might accept an increase in order to make us more independent from the shortages on the supplier side.One more comment to the balance sheet you'll find in our quarterly statement. There you might notice a decrease of cash and cash equivalents by EUR 90 million. This reflects the investment into fixed deposits with a duration of more than 3 months. The corresponding line item in the balance sheet is other finance assets, where you will find an increase of EUR 24 million.Last but not least, I would like to mention our net cash position, which with EUR 445 million, has kept its high level of the 2017 year-end. Save any acquisitions which we might be executing later this year, we expect this figure to increase.With regard to our cash flow, as you can see on Slide 18, we again compare the 2018 Q1 figures against the previous year's first quarter. With regard to the cash flow from operating activities, you can see that it is much lower than 1 year ago. The reason for this is to be found in the 2017 Q1 result, which reflected a steep decrease in net working capital during the first quarter of 2017 in comparison to the fourth quarter of 2016. Whereas in 2018, we increased our inventory level for Residential products, in particular due to an unexpected increase in demand in the following months. In total, net working capital in Q1 was kept at the same level as in the previous quarter. Also, you might notice the development regarding net investment from securities and other financial assets. The increase in this position, in comparison to 2017 Q1 figure, leads to negative cash flow, according to IFRS. The reason for the increase in net investments from securities and other financial assets are explained already in connection with the balance sheet. Here we invested cash into fixed deposits. IFRS rules do deduct those 3 months' deposits from the cash amount.With regard to the order backlog, we still distinguish between the product business on the one hand and our after-sales business, once assembled under segment service, on the other hand. The reason for this distinction lies in the different realization periods that we can assess for products to be weeks and months and for service, in between 5 to 10 years. Overall, the level of our order backlog didn't change much since the end of 2017, with a higher product order backlog mainly driven by Commercial business, above EUR 10 million, largely offsetting for lower service order backlog. In comparison to the last year's first quarter, the order backlog increased by 4%. Noteworthy is the drop in the service order backlog of [ EUR 14 million ]. This is due to the cancellation of one service contract with a single customer in the U.S., for which we received a corresponding cancellation fee.For the coming months, we expect the order backlog to remain on the same level or slightly increase. This is because the supply situation will ease in Q2 and thereafter. What I especially want to point out is that our Q1 '18 total sales, together with the product order backlog, already secure nearly 50% of our 2018 annual sales guidance, which brings me to [ say ], our sales and profitability guidance for 2018.Based on our strong order backlog and the market outlook that Pierre provided earlier, our guidance for the full year sales and earnings remain unchanged. We expect sales to reach between EUR 900 million and EUR 1 billion, which is a moderate increase compared to last year. In terms of EBITDA, we estimate an increase to EUR 90 million to EUR 110 million, with depreciations of about [ EUR 50 million ]. Please keep in mind that those figures include costs for our new Digital Energy business of more than EUR 10 million. Capital expenditures will also be at about EUR 50 million, and we are certain to generate a positive cash flow in 2018. With our attractive new product and solutions, we will be able to further increase our market share, especially in APAC. The growth will come mainly from our Commercial segment. In our Utility business, we see an attractive market potential, especially in APAC and EMEA. However, price pressure in this segment remains higher than in our other businesses.Last year, SMA delivered solid earnings for the third year in a row. Our net cash position is at EUR 445 million, and the outlook for 2018 is positive.As a result, the Managing Board and the Supervisory Board have suggested to the Annual Shareholder Meeting a dividend payment of EUR 0.35 per share. This will translate to a payout ratio of 40%, which is at the top end of our self-defined range of 20% to 40%. Going forward, we will distribute 30% to 60% of the group's net income to our shareholders.To sum up. SMA is uniquely positioned to further benefit from the growth to come in all segments of the solar industry. Not only do we have a complete portfolio for all segments, but we also have a truly global presence to serve all important PV markets. With the exceptional knowledge of our R&D team, the strongest brands in the industry and about EUR 445 million of net cash, we will be able to rapidly enter the higher-margin business with digital solutions and applications for storage, especially with our new ennexOS platform, managing complex, integrated solutions. This is why, if you trust solar, there is no way around SMA. Now Pierre and I are ready to take your questions.
[Operator Instructions] We have a question from Arash Roshan Zamir from Warburg Research.
My questions, actually, are on your new segment reporting and maybe, first of all, on your EBIT split by segments. Perhaps you could elaborate a little bit on the reconciliation line because, according to your segment reporting, the reconciliation line contributed an EBIT result of EUR 6 million in Q1, and I'm struggling a little bit to identify the reason for that. I understand that in the previous year, in the first quarter, you had a positive one-off from the disposal of the Railway Technology, which resulted in a rather high reconciliation line in terms of EBIT. But perhaps you could elaborate a little bit why this line has shown an EBIT result of EUR 6 million in Q1? That's the first one.
Yes, Arash, of course. Yes, as you say, the EBIT is not streaming from the segment but from the consolidation line, which is the other operating income -- or the net result of other operating income and expenses in Q1. And that reflects a large variety of items, which are not attributable to a single segment but still normal to our business. Among those effects, we have, for example, payments received by or paid to suppliers resulting from claims for defective components or the like. Also, the valuation of our financial assets regularly triggers effects on the other operating income expenses, which finds its way into the consolidation line.
Okay. Could you perhaps help us to understand what would be usually a normalized level of the reconciliation line on a quarterly basis? Or is it not really possible to give an indication?
No, Arash, we can't give you a guidance on that. There are many effects that are impacting that line, that is not possible to do.
That goes up and down and -- yes.
But I think as a good guidance, you can take our full year guidance and see, okay, what do we want to achieve there. And I think, with the first quarter, we are on good track to reach the full year guidance.
Okay. Understood. And maybe the second one on the changes to your segment reporting. I understand that you are now adding the after-sales business to your core equipment business, and I was wondering if you could share with us the EBIT contribution from the after-sales business in Q1?
I can do that on a generic basis. And as you might have thought already, contribution margin of this former Service business is higher than this of the product business. Therefore, the profitability of all segments, which have been allocated with the former Service business, have been inflated a little bit. But even without the Service business, the Commercial and the Residential segments would be positive. That's, I think, the most noteworthy observation here. Utility, of course, is negative, anyway.
Okay. And maybe ...
Did that help you?.
Yes, a little bit. I'm just -- because when I compare it to your previous reporting in last year, you showed us an EBIT contribution from the former Service business of EUR 2.2 million. And now it looks like the Digital Energy business is -- has been breakeven only last year in Q1. So does it mean that almost the entire EBIT contribution from the former Service business actually came from spare parts and replacements? Would that be a fair assumption?
Yes, Arash. First of all, the Digital Energy business, yes, that did not exist last year, yes? So there is no comparable figure last year. And so that is brand new only in Q1. Second, yes, if you look into the appendix, you can see what is all included in service and services. And yes, we always made very clear also, when we talked about our backlog, that when we talk about service, it is warranty extensions to a great extent. And that is the reason why we say, "[ Hey ], we have to recognize that revenue over a period of 5 to 10 years." Yes? So that is a lion's share that sits in the backlog but also when it comes to service. But I think what is really -- Ulrich said -- I can only [ second Ulrich ] on the comment. The key message for you is [ Resi ] and Commercial was positive even without the reporting changes, even without the service. I think that is really something -- very insightful information.
No, I agree. I totally agree with you, but if you just allow me one remark regarding these changes. I hope you are aware of the fact that this definitely makes it more difficult, at least for me, to model your equipment business going forward because, obviously, now I have to consider after-sales business as well, and it just makes it more difficult to model.
Arash, I completely understand you and hear you. Honestly, I expected that. What I would suggest is, just have a call after this conference call and when we can talk about how can we basically create or work with your valuation model, how can we structure that. But the reason why we included services in our reporting now is, as a matter of fact, if we go out to customers, we are not offering only components, yes, we are offering everything, the product plus service. And that is the way we do business. That's the reason why we want to reflect that in our reporting as well. And the responsibility of the business unit is now product and service. So that's the reason why we do that.
Just to back that up one more time. We didn't do this reallocation in order to [ pimp ] the profitability of our segment. They are profitable anyway. We did that for operators for entrepreneurial reasons because our customers demand solutions business, and this necessarily includes services.
Yes.
[Operator Instructions] We have no questions at this time.
All righty. Then, I would say, as always, pray for [ Sun ]. Have a good day, and talk to you soon. Bye-bye.
This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.