SMA Solar Technology AG

XETRA:S92

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the Analyst/Investor Presentation Financial Report Quarter 1 2019 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ulrich Hadding, Chief Financial Officer. Please go ahead, sir.

[Ulrich Hadding]

Thank you, Ben, and welcome, everyone. We very much appreciate you are taking the time for this investor and analyst call on the first quarter of 2019. You can find today's presentation on our Investor Relations website, ir.sma.de. This conference call is scheduled for 60 minutes. The replay of the recording will be available for 7 working days. After the presentation, I will be happy to answer any questions you might have.As usual, the presentation will, after an executive summary, give an update on the market development and SMA's positioning followed by the financials for the first quarter. At the end, I will give an outlook on the full year 2019. I refer to our disclaimer on Page 2, and on Page 4, we have summarized our strategic and financial highlights for you.And first to mention that we have reached our sales and earnings guidance for the first quarter and successfully continued to implement our planned cost-saving measures. In addition, we have started new product sales and customer initiatives. SMA sold PV inverters with accumulated output of 1.8 gigawatt in Q1 2019, and was thus on par with the same period last year.However, with EUR 168 million sales, we're 8% below the same period last year. In addition to price decline, this was mainly due to a weaker project business. While sales in the Home Solutions segment rose by 15%, sales in the Business Solutions and especially the Large Scale & Project Solutions segments was still below last year's levels With an EBITDA of EUR 0.6 million, SMA could, after the very difficult year of 2018, again reach breakeven on EBITDA level, thereby realizing the upper end of the profitability prognosis we gave earlier this year. The implementation of our cost-saving measures is progressing according to plan. Order intake was very good in all segments over the first months of the year. Based on this, the Managing Board expect significant sales and earnings growth in the second half of the year and confirms its fiscal year 2019 guidance with sales of EUR 800 million to EUR 880 million and EBITDA of EUR 20 million to EUR 50 million.Beside introducing new products in order to increase sales and tap into new fields of business, we have also started several strategic initiatives in the first quarter of 2019. Our partner loyalty program SMA PowerUp for installers has been successfully launched in Australia, and we will be rolling out and developing it in other countries over the coming months.In addition, we have started to sell complete system packages for residential and commercial applications in selected markets within Europe. We have also introduced SMA Repowering packages, featuring customized solutions for modernizing PV power plants worldwide. The packages include state-of-the-art hardware and software along with enhanced servicing and maintenance programs.Operators and investors stand to benefit from higher yields, cutting-edge technologies, additional operational capabilities and SMA warranties. To summarize, although SMA had a slow start into the year regarding sales, we had breakeven EBITDA in Q1, order intake was very good, all measures and initiatives to save costs and increase sales are well on plan and SMA is on track to reach the sales and earnings guidance for the fiscal year 2019.On Page 5, we summarized the key financials for the first 3 months of 2019. You will also find a quarter-by-quarter overview. I will give you more details on the financials later in this call. Let's now turn to the market discussion. Our market outlook until 2021 remains unchanged. SMA's core market, the PV inverter business, is expected to grow in gigawatts by 7% to 109 gigawatt in 2019. We expect the growth to continue in the coming years in all regions except China.Europe, Middle East and Africa is the most promising region with annual growth of more than 20%. This growth is also driven by increased photovoltaic demand in the countries in the Middle East and Africa. While Utility remains the largest segment globally, we expect the highest growth rate in the Commercial and Residential segments.Please turn now to Page 8. Because price pressure will continue to largely erode volume growth, we expect global demand in euro terms to develop flattish until 2021. Overall, we expect a stabilization of prices towards 2021. Until then, the market consolidation is likely to accelerate. Many inverter players cannot afford the investment in new technologies necessary to drive down product costs and/or expand internationally to grow faster.SMA has, by the way, no plans to acquire smaller players due to our already good positioning in all key markets and in all segments. Last year, the unexpected dramatic feed and tariff cuts in China impacted the global market, resulting in rapidly falling solar module prices. With solar modules accounting for 50% to 60% of the total investment in a PV system, project developers and investors postponed their projects waiting for prices to come down even further.This year, we expect the utility market to grow in volume as well as in revenue terms in all regions, except China where we anticipate a decline.With the continuing price pressure, solar will soon hit the critical inflection point where it will be cost competitive without subsidies in many more markets. In a market environment without subsidies, governments will lose the ability to control rates of deployment. The energy transition can then gain traction, which will also be supported by other technologies such as electric vehicles and batteries.Please turn to Page 9. The megatrends for the solar industry are creating new markets for energy services and storage, which are rapidly evolving. On one hand, decentralized energy networks create demand for new solutions that manage flexibility and complexity. On the other hand, countless actors 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 services market. We estimate the addressable market for us to increase from EUR 800 million in 2019 to EUR 1.8 billion in 2021. To capture this value pool, the necessary technical solutions need to be redeveloped and rolled out throughout different markets. SMA has a clear understanding of the requirements of the digital energy market and can scale its go-to-market approach.Price reduction is the most important growth driver for battery storage in nano and micro grids. Battery storage systems are gaining importance in European markets, such as Germany, the U.K. and Italy as well as in North America. We expect a market of up to EUR 800 million by 2021. Approximately half of the demand comes from utility scale battery projects. Since each utility application is different, significant customization is required. This offers a huge growth opportunity for battery inverter experts such as SMA.The O&M market is gaining importance considering declining PV equipment prices. 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 the EPC to ensure data integration and provide both analytics and qualified PV inverter technicians. SMA estimates the global O&M market value of EUR 1.1 billion to EUR 1.2 billion per year until 2021. Overall, we expect the entire addressable market for SMA to grow by 8% per annum from EUR 6.3 billion in 2018 to EUR 8 billion in 2021.As explained earlier, we expect that smaller inverter manufacturers are not going to be able to benefit from the described growth rates. Therefore, we expect the market consolidation of inverter manufacturers to accelerate.Now I would like to explain about SMA's positioning in the market just described.Let's start with a quick overview of our main business segment on Slide 11. SMA has a comprehensive portfolio of products and solutions for all system sizes and applications. Our broad portfolio in all market segments is a major distinguishing feature for SMA. To allow for even greater focus on customers and to structurally represent SMA's orientation as a provider of systems and solutions, the Managing Board made organizational changes as of January 1, 2019, that are reflected in the reporting structure. Thus, the former segments Storage and Digital Energy were integrated into the remaining segments, now being renamed into Home Solutions, Business Solutions and Large Scale & storage (sic) [ Project ] Solutions.SMA has a relatively balanced revenue distribution across its segments. In the first quarter of 2019, the Business Solutions segment made the largest contribution to sales, accounting for 39% of net sales. The Large Scale & Project Solutions segment generated 34% and the Residential segment, 27% of SMA group sales. Please turn to Slide 12. SMA is the only inverter manufacturer with a portfolio that covers every stage of energy integration starting from online energy monitoring and ranging to energy market integration with our direct marketing solution SMA SPOT. Based on our state-of-the-art solar and battery inverters and on our energy platform, ennexOS, we develop solutions that include energy optimization, energy management and the integration of different actors into the energy market.We thus drive the development of SMA to become a provider of systems and solutions. Let's now have a quick view on our product and solutions pipeline for 2019 on Slide 13. As explained earlier, in the PV industry, it is vital to continuously launch innovative products. This is the only way to bring down product cost effectively. As mentioned, many of our competitors won't be able to afford the necessary investments in new technologies in the future. SMA, however, continues with a high rate of innovation in all segments also in 2019.For customers in our Home Solutions segment, we have launched the new Sunny Boy generation early in 2019. The product is now available in Europe, the U.S. and Japan and uses communication platform that allows us to integrate module-level power electronic seamlessly. SMA has also expanded its strategic global storage partnership with BYD to address international growth markets, such as the U.S. and Africa. Our joint technical solutions for home and business applications have been available in the U.S. since January 2019. The new 3-phase inverter Sunny Tripower 8 to 10 kilowatt is aimed at home and small business applications. It combines top inverter performance with maximum ease and comfort for its users. With integrated services and shade solutions, it can meet any challenge found on roofs.We have also started to sell complete system packages for home and business applications in selected markets within Europe. They feature perfectly matched hardware and software for PV, storage and energy management as well as service components. This makes business much easier for installers and addresses new customer groups. In our Large Scale & Project Solutions segment, we have launched an important all-new inverter platform. The Sunny Highpower PEAK3 is SMA's first string inverter for large-scale PV projects. It comes with up to 150-kilowatt power and is available for 1,000- and 1,500-volt technology. It implements silicon carbide semiconductors to reduce costs and weight. The Sunny Highpower PEAK3 is available since March 2019.Also in the months to come, we will introduce further innovations, among them is the upgraded medium-voltage power station, which comes with a Sunny Central inverter with up to 4.6-megawatt power that will be available in Q3. The SMA global sales force already closed this turnkey solution for utility scale projects that will be billed in the second half of 2019 or later. The feedback they received from our customers is indeed very positive.You can see from this list of innovations and product launches that the PV inverter continues to be the core product of our portfolio. Now in the following, I will walk you through our financial figures of the first quarter 2019 and provide you with an outlook for the remainder of the fiscal year. But before we get to the revenue situation, I would like to point to some features of our quarterly statement that need further explanation. First, as of the beginning of the year 2019, we have realigned our segments. As I already explained, we decided to organize our segments no longer with respect to products or technology. But in order to emphasize our willingness to put the customer and his need into the center of our thinking, we, as of 2019, only have 3 segments: Home, Business and Large Scale & Projects. Those 3 segments do roughly translate to the market segments Residential, Commercial and Utility, but they include our Storage and Off-grid business as well as the services that we offer, starting with the after-sales business, operation and maintenance and also the [ energy ] management and data business.Within the 3 segments, we now combine all the offerings for our portfolio for the specific customer groups with the inverter still being the core product but enhanced by monitoring and steering technology and software as well as different services, thereby making apparent that SMA has effectively become a system and solution provider.The figures for the segments' business in the first quarter of 2018 have been adapted accordingly in order to be able to compare apples with apples.Another point. Due to a revision of the International Financial Reporting Standard #16, as of this quarter, lease assets, which were previously reported as operating expenses, are now considered in our balance sheet as financial lease assets and liabilities. Now let's turn to the numbers and have a look on the top line.During our last analyst call, we gave an estimate of the expected Q1 figures. This foresaw revenues of EUR 160 million to EUR 170 million. As you can see, with EUR 168 million total revenues, we ended at the upper end of that guidance. However, in comparison to the first quarter of 2018, this means a decrease of the total sales volume by EUR 15 million or 8%.With regard to the different regions, we can see strong revenue growth in Europe, Middle East, Africa of 28% with EUR 94 million in the first quarter as compared to EUR 74 million the first quarter of 2018. All segments developed positively in the EMEA region with the most growth in the Home Solutions segment.In the Americas, revenues declined by 37% from EUR 35 million in the first quarter of 2018 to EUR 22 million this year. All segments suffered from declining revenues in this region. Also in the Asia Pacific region, we had a slower start than in the first quarter of 2018. After achieving revenues of EUR 77 million in 2018 first quarter, this year we recognized EUR 54 million, which is equivalent to a decline of 30%. Also in this region, all segments fell below their prior year revenues. So overall, we see the revenue share of the Americas and APAC regions declined while the EMEA region gained share with strong sales growth. Looking on the different segments. We see double-digit revenue growth in our Home Solutions segment while our Business Solutions segment and especially our Large Scale & Project Solutions segment declined compared to the first quarter of 2018. Let me briefly elaborate on that.The Home Solutions business started the year strong with double-digit revenue growth in Q1, achieving EUR 45 million as compared to EUR 40 million in the first quarter last year. Strong sales growth generated in the EMEA region more than compensated for sales declines in the Americas and APAC regions in this segment. The Business Solutions segment achieved revenues of EUR 65 million so far this year, slightly lower than Q1 2018 with EUR 71 million as a result of price decline. Revenues in the Americas region were particularly low at the beginning of 2019 for this segment.Sales in the Large Scale & Project Solutions segment decreased to EUR 58 million in the first quarter of 2019, a sharp decline compared to Q1 2018 with EUR 72 million. This segment was particularly impacted by weak demand in Australia and shifts of key projects in the U.S. and Australia into the next quarters, which we will see in our increased product backlog later on.So to sum up the sales situation, this quarter showed positive development in the EMEA region while both Americas and APAC regions were particularly affected by project postponements in the Large Scale & Project Solutions segment. That will however deliver higher sales in the second half of this year. Let's now have a short look on profitability. Our prognosis for EBITDA in the first quarter 2019 was slightly negative to breakeven, which we slightly overachieved with a positive EBITDA of EUR 1 million. Compared to the first quarter of 2018 with EUR 18 million, our profitability of this year's first quarter was much lower, mainly a result of lower revenues in the first quarter this year as well as from positive currency effects in early 2018, which were slightly negative in the first quarter of this year.Taking into account that the year's first quarter is not known to be the strongest quarter in our industry, we are satisfied with the Q1 profitability. The next quarters are expected to deliver increased revenues and profitability. Depreciation and amortization is slightly lower than last year, a result of the R&D asset impairments booked in the first quarter of 2018, which I explained in our 2018 annual results call. Coming to the segments. Home Solutions. EBIT for the segment deteriorated to minus EUR 5 million compared to a slightly positive result in Q1 2018. This is a result of ongoing price pressure, which we will address this year with the launch of new cost-improved products as explained earlier.Business Solutions. Our Business Solutions segment also faced price headwinds, which resulted in lower revenues and EBIT compared to the first quarter of 2018 with EBIT breaking even so far this year. Also here, we expect to return to profitability through increased revenues with new cost-optimized products in the next quarters.Large Scale. EBIT in the Large Scale & Project Solutions segment amounted to minus EUR 6 million in the first quarter compared to minus EUR 7 million in the same period of 2018. The minor improvement is mainly attributable to medium single-digit warranty provisions booked in early 2018 while Q1 2019 did not include significant extraordinary effects.This business is especially sensitive to changes in revenue volumes, and we expect positive profitability in the second half of the year as key projects deliver higher revenues.Below the EBIT line in our P&L, you find a slightly positive financial results and effectively no taxes as a result of operating loss in the quarter. I'll now come to the balance sheet.In the balance sheet, the noteworthy changes to the 2018 year-end results are related to the implementation of IFRS 16 standard on leasing and the development of the net working capital positions. As I already mentioned, as of this quarter, we implemented the new International Financial Reporting Standard #16 and are now showing the financial liabilities and assets related to our leasing obligations worldwide.This reporting change has led to an increase in both noncurrent assets and other liabilities of EUR 21 million. Net working capital increased in absolute figures by EUR 4 million with higher inventories mainly finished goods, largely offset by increased trade payables. As such, our net working capital ratio increased slightly from 23% at the end of 2018 to 24% at the end of Q1 2019 and as such is on the high end of our target range for the year.The increase in inventories is related to the strong development of our product order backlog, including upcoming projects in our Large Scale business, which I will explain to you in more depth shortly. Especially for our Large Scale business, we expect further key orders over the next month, which will cause a short-term increase in the finished goods inventories over the next month, and then will be converted to sales later in the year. With regards to raw materials, we continue to buildup stocks to mitigate shortages on the supplier side. Last but not least, I would like to mention our total cash position which, with EUR 307 million, remains solid but has decreased since the end of 2018, mainly as a result of a negative income in the first quarter.Cash flow. With regard to our cash flow, we again compared the 2019 Q1 figures against the previous year first quarter. With regard to the cash flow from operating activities, you can see, as already mentioned, the effects from the operating loss of the first quarter of 2019. Our net CapEx of EUR 6 million is slightly below Q1 of last year and is split evenly between capitalized R&D expenses and investments into fixed assets. Also, you might notice the positive development regarding net investments from securities and other financial assets, which is simply related to the movement of cash from fixed deposit accounts to cash and equivalents.As you know, in 2018, we launched a comprehensive cost-cutting program as SMA was affected not only by the continuous price pressure of our industry, but also by unforeseeable market turns. Therefore, I want to briefly comment on the progress of this program before we come to the outlook on fiscal year 2019.With our cost-saving program, SMA will reduce its fixed cost by almost EUR 40 million per annum while maintaining the ability to seize upcoming future opportunities. We thereby rely once more on our strength to adapt rapidly to external market conditions. The mentioned reduction of fixed cost will, for the most part, come from the consolidation of our production and R&D science. By the end of Q1 2019, we have already executed the most important 2 measures in that regard: the sale of our Chinese subsidiaries via a management buyout has been closed and will allow us to make optimal use of our development and production capacities at headquarters in Germany and our facility in Poland. Also, we were able to reduce our workforce in Germany by more than 100 full-time equivalents in a socially responsible way through a voluntary severance program. Overall, both these measures have led to headcount reduction of around 425 full-time equivalents.SMA will furthermore focus on its core competencies and continue its outsourcing and automating activities. This will trigger a further reduction of our product platforms as well as a streamlining of SMA's product portfolio to create momentum and simplify our processes.Along with the sale of the Chinese companies, SMA will no longer directly serve the Chinese market. The consolidation and focusing activities will bring us the necessary room for internal and external optimization. That means automation of administrative processes will bring further reduction of complexity, and we will increasingly press ahead to drive future topics to develop the company into a systems and solutions provider, and we'll continue to invest in the future-oriented areas of energy management, storage integration, repowering and digital business models.As you can see from the graphs on Page 19, all these activities are well on track, and we expect the cost-saving effects to become effective as planned. I now turn to the outlook on 2019.With regard to the order backlog, we still distinguish between the product business on the one hand and our after-sales business, once assembled in the segment service, on the other hand. The reason for this distinction lies in the different realization periods that we can assess our products to be weeks and months, and for service, in between 5 and 10 years. Overall, the level of our order backlog increased nicely with 7% more than at the end of 2018.And more important for this year's revenues, the product order backlog grew by 33% with all segments experiencing increased order intake in the first months of the year with a particularly strong uptake in our Large Scale & Project Solutions segment. The service order backlog declined by EUR 16 million in the first quarter, a result of a scope reduction for one service contract extension with a customer in the U.S. For the coming months, we expect the order backlog to continue to increase particularly in the Large Scale business as orders will be placed for key projects which have already been agreed to with customers.What I especially want to point out is that our Q1 '19 total sales together with the product order backlog already secured 50% of our 2019 annual sales guidance. In addition, over the last weeks, our order backlog increased further reaching now EUR 691 million, the highest level since over 1 year and showing growing demand for our products with a product-related order backlog of EUR 305 million, which is 74% more than at the end of 2018.This brings me to our sales and profitability guidance for 2019. Based on the very strong order backlog just described and the market outlook I provided earlier, our guidance for the full year sales and earnings remain unchanged. We expect sales to reach between EUR 800 million and EUR 880 million. This massive increase in sales in comparison to 2018 despite continuous strong price pressure will result from strong business in EMEA and the regaining of our leading market position in the Utility business in North America. Also, in all segments, our offerings for inverters combined with storage solutions will contribute. In terms of EBITDA, we also confirm our guidance of EUR 20 million to EUR 50 million. The depreciation amount is expected to be about EUR 50 million. Capital expenditure will be at about EUR 60 million, out of which EUR 25 million are related to the IFRS 16 effect. Finally, we strive to approach EUR 300 million net cash by the end of the year.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 have a truly global presence to serve all important PV markets. With the exceptional knowledge of our R&D team, our reduced cost base, the strongest brand in the industry and our bankability, we will be able to answer to all demands of the market and our customers. This is why: If you trust solar, there is no way around SMA. Now I'm happy to take your questions.

[Operator]

[Operator Instructions] It appears there is no questions on the audio. I would like to pass the call back to you, Mr. Hadding, for any additional or closing remarks.

[Ulrich Hadding]

Thanks, Ben, and thanks to all of you for taking the time to be with us this morning. I wish you all a very pleasant day and hope to see you soon anytime. Thank you. Have a great day.

[Operator]

That concludes today's conference. Thank you, everyone, for your participation. You may now disconnect.