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Edited Transcript of S92.DE earnings conference call or presentation 8-Aug-19 7:00am GMT

Half Year 2019 SMA Solar Technology AG Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of SMA Solar Technology AG earnings conference call or presentation Thursday, August 8, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ulrich Hadding

SMA Solar Technology AG - Head of Finance, HR & Legal, Labor Director and Member of Management Board

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Conference Call Participants

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* Guido Hoymann

Metzler Equities, Research Division - Head of Equity Research

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Presentation

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Operator [1]

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Good day and welcome to the SMA Solar Technology AG Analyst Investor Presentation on the Half Year 2019 Financial Report. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Ulrich Hadding. Please go ahead, sir.

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Ulrich Hadding, SMA Solar Technology AG - Head of Finance, HR & Legal, Labor Director and Member of Management Board [2]

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Thank you, operator, and welcome everyone. I very much appreciate you are taking the time for this investor and analyst call on the first half of 2019, and my apologies for being slightly delayed. You can find today's presentation on our Investor Relations website, ir.sma.de. This conference call is scheduled for 60 minutes, and the replay 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 6 months. At the end, I will give an outlook on the full year 2019. I refer to our disclaimer on Page 2.

On Page 4, we have summarized our strategic and financial highlights for H1 2019. As expected, sales in H1 were still subdued, but order intake was extremely positive, especially in the Large Scale & Project Solutions segment. We successfully continue to implement our planned cost-saving measures. In addition, we have started new product sales and customer initiatives.

SMA sold PV inverters with a cumulated output of 4.0 gigawatts in H1 2019 and was, thus, below the same period last year. With EUR 363 million, also sales were 8% below the same period last year. This was mainly due to a weaker project business. While sales in the Home Solutions segment rose by 21%, sales in the Business Solutions and especially in the Large Scale & Project Solutions segments were still below last year's levels.

With an EBITDA of EUR 9 million, SMA was able to raise profitability by EUR 8 million in Q2 due to not only higher sales, but also to the successful implementation of cost-saving measures. The implementation of our cost-saving program, which we are executing under supervision of Roland Berger, is progressing according to plan.

Order intake was very good in all segments over the first half of the year. Based on this, the Managing Board expects 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.

Besides 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 half 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, the first 6 months of the year were in line with our expectations. Although sales were still below last year's level, we have positive EBITDA in H1, order intake was very good, all measures and initiatives to save costs and increase sales are well on plan and SMA is, therefore, on track to reach the sales and earnings guidance for 2019.

On Page 5, we have summarized the key financials for the first 6 months. You can also find a quarter-by-quarter overview, but I will give you more details on the financials later in this call.

Let's now, therefore, 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 regions 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 rates 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. However, from that time on, we expect a stabilization of prices. Until then, the market consolidation is likely to accelerate. Many inverter players cannot afford the investments in new technologies to drive down product costs and/or expand internationally to grow faster. By the way, SMA has 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-in 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 decline, 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 PV deployment. The energy transition can then gain more traction, which will also be supported by other technologies such as electric vehicles and batteries.

Please turn to Page 9. The mega trends for the solar industry are creating new markets for storage and also energy services, which are rapidly evolving.

First of all, storage. In order to integrate a battery into a PV system, you are in need of additional hardware. This is where SMA comes into play as provider of storage system technology, especially with storage inverters. Battery storage systems are gaining importance in European markets such as Germany, the U.K. and Italy as well as in North America, Australia and Japan. Price reduction and the rapid growth of renewable energies are the most important growth drivers. We expect a market of up to EUR 800 million for storage system technology 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.

Digital Energy solutions. 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 recently revised our estimate of the addressable market potential, which you see here on the left-hand side in red color.

Though we lowered the expectation and decided to focus on particular countries, we still expect the addressable market to double from EUR 300 million in 2019 to EUR 600 million in 2021. To capture this value pool, the necessary technical solutions need to be developed and rolled out throughout different markets. SMA has a clear understanding of the requirements for the digital energy market and can scale its go-to-market approach.

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 a 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 4% per annum from EUR 6.1 billion in 2018 to EUR 6.8 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 and SMA gaining additional market share.

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 segments 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 and allows us to be a sustainable market player.

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 Solutions.

SMA has a relatively balanced revenue distribution across its segments. In the first half of 2019, the Business Solutions segment made the largest contribution to sales, accounting for 37% of net sales. The Large Scale & Project Solutions segment generated 35% and the Residential segment 28% of SMA group sales.

Please turn to Page 12. SMA is the only inverter manufacturer with a portfolio that covers all stages of energy integration, starting from online energy monitoring and ranging to energy market integration with our direct selling solution, SMA SPOT. Based on our state-of-the-art solar and battery inverters and on our energy management 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.

Please turn to our product and solution pipeline for 2019 on Slide 13. As mentioned earlier, in the PV industry, it is vital to continuously launch innovative products as 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 and are, therefore, very likely to exit the market. 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 a communication platform that allows us to integrate module-level power electronics 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-volt and 1,500-volt technology. It implements silicon carbide semiconductors to reduce costs and weight. The Sunny Highpower PEAK3 is available since March 2019. The youngest addition to our portfolio in the segment is the DC-DC converter, which allows integration of utility-scale battery systems into PV systems without additional system technology.

We will introduce further innovations in the months to come. 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 quotes this turnkey solution for utility-scale projects that will be built 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.

In the following, I will walk you through our H1 2019 figures and provide you with an outlook for the second half of the fiscal year. But before we get to the revenue situation, I would like to explain some features on our half year statement to you. First, as of the beginning of this year, we have realigned our segments. Last year, we introduced a new segment, Digital Energy, in order to provide you with transparency on our business of energy management and energy data. However, this sometimes led to the misunderstanding that SMA would turn from a hardware supplier into a service provider.

Also, as we decided to organize our segments no longer with respect to products or technology, but to emphasize our willingness to put the customer and its needs into the center of our thinking, we, as of 2019, only have 3 segments: Home, Business and Large Scale & Project. 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.

With these 3 segments, we now combine all the offerings of our portfolio for the specific customer groups with the inverter still being the core product as part of our system and solutions offering, including monitoring and steering technologies and software as well as diverse services. The prior year figures for the segments' business have been adapted to our new 3 segment structure in order to be able to compare apples with apples.

Another point. Due to the revision of International Financial Reporting Standard #16, as of the beginning of 2019, 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. SMA recorded sales of EUR 363 million during the first 6 months of the year with 4.0 gigawatt of output sold. This is 8% less than the same period in 2018, mainly resulting from the shift of projects into the second half of 2019, which, as you will see later in our presentation, is substantiated by our strong product order backlog.

Looking at the geographical distribution, we continue to see strong revenue growth in Europe, Middle East and Africa of 20% with EUR 230 million in the first half of 2019 as compared to EUR 177 million in the first half of 2018. All segments developed positively in the EMEA region, with the most growth in the Home Solutions segment.

In the Americas, revenues were down by 15% from EUR 70 million in the first half of 2018 to EUR 59 million in H1 of this year. Revenues declined in all segments in the region in the first half.

The Asia Pacific region also decreased in the first half of '19. After achieving revenues of EUR 155 million in H1 2018, we recognized EUR 97 million of revenues in the first half of this year, which is a decline of 38%. Also, in this region, all segments fell below their prior year revenues.

So the trend we saw in the first quarter of this year has continued with increased revenue share of the EMEA region driven by strong sales growth and decreased revenue share of the Americas and APAC regions with lower revenues in H1 2019 compared to the first half of last year.

Looking at 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 half of 2018.

Let me briefly elaborate on that. The Home Solutions business kept its strong momentum from the first quarter with 21% revenue growth in H1, achieving EUR 102 million as compared to EUR 85 million in the first half of last year. In this segment, we have been able to convert orders to sales with short turnover times. We achieved strong sales growth in the EMEA region, which more than compensated for our sales declines in the Americas and APAC.

The Business Solutions segment achieved revenues of EUR 135 million in the first 6 months of this year, falling below H1 2018 with EUR 153 million, mainly as a result of price decline. Revenues in the Americas and APAC regions were particularly low in the first half.

The Large Scale & Project Solutions segment generated sales of EUR 126 million in the first half, also down compared to H1 2018 with EUR 157 million. This segment was particularly impacted by shifts of key projects in the U.S. and Australia into the second half of 2019, which we will see in our strong product order backlog later.

So to summarize the sales situation, the first half of the year showed strong growth in the EMEA region while both the Americas and APAC regions declined but are expected to improve in the second half of the year. The sales increase forecasted for H2 is substantiated by our strong product order backlog with a significant amount of orders for our Large Scale & Project Solutions segment.

Let's now have a look on profitability. With an EBITDA of EUR 9 million in the first half of 2019, our profitability was lower compared to the first half of 2018 with EUR 41 million. This is mainly a result of the lower revenue so far this year and price pressure. EBITDA in H1 2018 also benefited from several significant one-off effects while H1 2019 was only slightly and positively affected by extraordinary effects, which were all in the single-digit million range.

Depreciation and amortization are slightly lower than last year, a result of the R&D asset impairments booked in the fourth quarter of 2018, which I explained in our 2018 annual results call.

Now coming to the different segments. Home. EBIT for the segment improved in the second quarter with a positive result for Q2 2019, but remains negative in H1 with minus EUR 4 million. In H1 2018, the Home Solutions segment had a positive EBIT of EUR 30 million, including the positive onetime effect from the adjustment of general warranty accruals.

Business. Our Business Solutions segment achieved a positive EBIT also in the second quarter of 2019, but price pressure resulted in lower revenues and EBIT. Similar to the Home Solutions segment, the H1 2018 profitability for Business Solutions have been positively affected by the onetime effect from the adjustment of our general warranty accruals.

Large Scale. EBIT in this segment amounted to minus EUR 11 million in the first half of this year compared to minus EUR 19 million in the first half year of 2018. In 2018, this segment had been negatively affected by warranty accruals. The Large Scale business is especially sensitive to changes in revenue volumes, and we expect an improved profitability in the second half of 2019. Below the EBIT line in our P&L, you'll find a slightly positive financial result and effectively no taxes as a result of the operating loss in the reporting period. That concludes my comments on the financial performance.

And I now come to the balance sheet. In the balance sheet, the noteworthy changes since the beginning of 2019 are related to the implementation of IFRS 16 and the development of the net working capital positions. As I already mentioned, as of January 1, 2019, 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 approximately EUR 20 million.

Net working capital increased in absolute figures by EUR 7 million since end of 2018, with higher inventories largely offset by increased trade payables and advanced payments from our customers. The net working capital ratio has increased from 23% at the end of 2018 to 25% at the end of H1 2019. The increase is a result of the buildup of finished goods and raw materials inventories, which is related to the strong development of our order backlog, including projects in our Large Scale segment. Our total cash position with a balance of EUR 285 million at the end of H1 2019 has decreased since the end of 2018, which is mainly a result of the short-term buildup of inventories as just explained.

Looking at our cash flow. We, again, compare the figures from the first half of 2019 against H1 2018. The operating loss of minus EUR 14 million and negative cash flow from operating activities led to deterioration of our adjusted free cash flow in H1 2019. However, and this I want to highlight, despite the lower sales level, we were able to maintain a positive gross cash flow in H1 2019. The negative cash flow from operating activities is related to the buildup of inventories in the first half of the year, which, as I explained earlier, is necessary to fulfill our strong order backlog.

Our net CapEx of EUR 30 million is below last year's level and is roughly evenly split between investments into fixed assets and capitalized R&D expenses. Also, you might notice a positive effect from net investments from securities and other financial assets, which shows the movement of cash from fixed deposit accounts to cash and equivalents.

I now turn to the outlook for the second half of 2019. With regard to the order backlog, we continue to distinguish between the product business and our aftersales business. In past years, we have reported separately in the segment Service. The reason for the distinction lies in the different sales realization periods that we can assess for product orders to be weeks and months and for service orders, which are between 5 and 10 years.

Overall, the level of our order backlog increased to more than EUR 800 million in the second quarter of 2019, now with 42% more than at the end of 2018. The product order backlog, which is especially important for this year's revenues, grew by EUR 278 million or 158% in the first half of the year. All segments more than doubled their product-related order backlog in the first half of 2019.

Meanwhile, the service order backlog declined by EUR 37 million in the first half of the year, mainly a result of scope reduction when doing service contract extensions. In some cases, those have been replaced by orders for new products to replace the customer's older SMA inverters. What I especially want to point out is that our H1 '19 total sales, together with the product order backlog, already secure our 2019 annual sales guidance.

This brings me to our sales and profitability guidance for 2019. We continue to be confident that we can achieve our guidance for full year sales and earnings given the strong order backlog at the end of H1. We expect sales to reach between EUR 800 million and EUR 880 million for the year. The substantial increase in sales in comparison to 2018 despite continuous strong, very strong price pressure will result from maintaining our strong momentum in EMEA and winning back market share in the Large Scale business in North America in the second half of this year. With the orders already in our books, we are focusing on order fulfillment to deliver the sales increase in H2.

In terms of EBITDA, we also confirm our guidance of EUR 20 million to EUR 50 million with depreciation of approximately EUR 50 million. The expected profitability improvement in H2 will be driven by the increased revenues as well as structural cost savings from our ongoing cost-saving program being executed under the supervision of Roland Berger.

Capital expenditure will be at about the EUR 60 million, including the already mentioned effect from implementing the IFRS standard 16, which has no effect on the cash flow.

Finally, we continue to strive for about EUR 300 million net cash at the year-end.

So 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, 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's no way around SMA.

Now I'm happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question. It comes from Guido Hoymann from Metzler.

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Guido Hoymann, Metzler Equities, Research Division - Head of Equity Research [2]

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Two questions, please. The first one is referring to your order backlog. It's actually 2 on that. First of all, you mentioned the decline, obviously the decline in the service backlog. You mentioned scope reductions. Here, I would be interested if this is to continue or if this is something which could reduce the backlog, which is, I think, quite long duration in general, further over the coming quarters and years or if that has -- is done now, this adjustment.

The second question regarding the backlog is, do you see all capacities you need to fulfill on that in the second half available, so both your own capacities and [in councils], so staff, et cetera? But also, I'm referring also to the story we had last year, the shortage of components. Is that overcome already? So that's on capacity.

And the second thing is -- or the second item would be the price pressure you mention on Page 20. If I do my calculations, simply dividing sales in Q2 by the megawatts sold, then I derive actually a small increase in selling prices in Q2. So year-over-year, selling prices, doing the calculation as described, actually increased by some 4%. So can we -- or do you notice some sort of price stabilization? Or what am I doing wrong here?

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Ulrich Hadding, SMA Solar Technology AG - Head of Finance, HR & Legal, Labor Director and Member of Management Board [3]

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Yes. Yes. Understood. First, to your question regarding order backlog. With regard to the service order backlog, that's indeed something that we noticed, but we are not able to make that as a trend. First of all, there was one major service contract which we had to restructure and -- jointly with the customer, and we canceled the long-term period of the contract there, but in return, he acquired a lot of equipment.

Another point is that usually the attach rate, meaning that with a hardware buy, the customer also acquires a service contract, is much higher in the Americas than it is in Europe. And as we had a very poor Americas business in the first half year, then also this attach rate was, of course, going down.

Those are the 2 factors that are contributing to the decline in service order intake. But it is too early to call that a trend. We have, of course, recognized that and are analyzing that. But these 2 explanations, I think, at least give us -- pacify us on our concern that this might be something of a higher importance.

Your second issue with regard to the order backlog, whether we have the capacities to really fulfill everything so that we will reach our sales and earnings guidance. Yes, that is absolutely ensured. We are not going to confirm any orders that we cannot certainly deliver. And that also contributed to very long confirmation times right now, but everything we do confirm, we will be able to produce. We have the necessary capacities. Also, the shortage of components is much more eased in comparison to last year. With our central inverter business, we are running 3 shifts and we are sold out until Q1 2020 already.

Price pressure. Here, we have to distinguish between the string inverter business, Home and Business on one side, and the Large Scale business with central inverters on the other side. With regard to the string inverter business, the price pressure is not as strong as it has been in the last years. It's not the decisive factor.

With regards to the central inverter business, we see that in the order intake the price pressure is enormous and the price decline is really enormous. Why you don't see that so much in the first half year is that it is relatively poor share of central inverters. And on the other hand, we have an increased share of the battery inverter business, which comes with higher margins.

So that is the mix that contributes to this perception that you have that, which is correct, that there is no price pressure when you take just turnover by megawatt installed, but it is according to the product mix. And by the end of the year, 2019, we will see that in our Large Scale business, that there has been an enormous price decline. Does that answer your question?

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Guido Hoymann, Metzler Equities, Research Division - Head of Equity Research [4]

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Yes, indeed.

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Operator [5]

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There are no further questions in the phone queue at this time. (Operator Instructions)

Okay. There seems to be no further questions in the phone queue. At this time, I'd like to hand the call back over to you, Mr. Hadding, for any additional or closing remarks.

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Ulrich Hadding, SMA Solar Technology AG - Head of Finance, HR & Legal, Labor Director and Member of Management Board [6]

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Ladies and gentlemen, thank you very much for joining the call this morning. I really appreciate that you spent some time on SMA. And I wish you a very pleasant day and hope to talk to any of you soon. Again, thank you.

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Operator [7]

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This will conclude today's conference. Thank you all for your participation. You may now disconnect.