Good day, and welcome to the SMA Solar Technology AG Analyst Investor Presentation, Financial Results Full- Year 2020. Today's conference is being recorded. At this time, I would like to turn the conference over to Ulrich Hadding, CFO. Please go ahead.
Thank you, Mariam, and welcome everyone. We very much appreciate you are taking this time for this investor and analyst call on the final 2020 results. You can find today's presentation on our investor relations website, ir.sma.de. This conference call is scheduled for 30 minutes. The replay will be available for seven working days. After the presentation, I will be happy to answer any questions you might have. I will start with a very short review of the 2020 financials before presenting you the necessary information to assess SMA's future prospects, and thereafter, in about 15-20 minutes, I will give an outlook on the full- year 2021. On slide four, you'll find a summary of SMA's key financials for 2020 for your quick orientation. I will provide you with more details on our sales, profitability, balance sheet, and cash flow in the next slides.
Therefore, let me direct your attention to just two items. First, you can see that our sales and results improved significantly compared to 2019. Second, the 2020 results were affected by both positive and negative one-timers, which are also affecting the gross margin, as you can see in our Q4 figure in the table in the bottom right corner. I will further elaborate on this one-off, but want to emphasize that without these one-timers, our 2020 gross margin would have been in the 19%-20% range, as I had communicated to the previous quarterly calls. As we continue to optimize our product portfolio and increase productivity, we expect gross margins to improve in 2021 and the next years continuously. Now, let's turn to the next slide, and I will provide you with insights regarding our sales performance.
In 2020, SMA delivered strong top-line growth, maintaining the momentum we had gained in the second half of 2019. Sales were only mildly affected by the COVID-19 crisis, and for the year, we grew our nominal inverter capacity sold by 26%, and revenues increased by 12%, exceeding EUR 1 billion as per our initial 2020 guidance, which had not accounted for the COVID-19 crisis. Our large scale & project solutions and home solutions segments increased revenues in 2020, while sales in our business solutions segment were slightly below prior year as a result of moderate price decline and effects from the COVID-19 pandemic. From a geographical point of view, EMEA performed well again in 2020 despite effects from COVID. Americas regained market share in our large-scale business and grew sales significantly compared to 2019. APAC experienced a decline in revenues, mainly due to COVID.
Let's now have a look on the sales per segment on the right side of the slide. home solutions, 10% higher sales reaching EUR 264 million. Germany, Benelux, and Australia contributed the most. Business Solutions, that was affected by moderate price erosion and lower customer demand as a result of the COVID-19 pandemic, so that sales remained approximately on the same level as in 2019. Germany, USA, and Singapore were top markets for our business segment. Revenues grew in the USA and Singapore. Finally, our biggest segment in term of sales, large scale & project solutions. Very strong year, growing by 24%. Performance was especially impressive in the USA, where we more than doubled our revenues. Let me explain our profitability. In 2020, SMA reached the higher end of our initial profitability guidance with an EBITDA of EUR 72 million and an EBITDA margin of 7%.
The EBITDA significantly improved compared to last year, driven by higher sales and the focus on higher margin products in our portfolio. Profitability was also affected by both positive and negative one-time effects in 2020. These included a double-digit million EUR compensation from a supplier related to quality issues in our large-scale business, which more than offset negative one -timers from warranty accruals and inventory provisions related to products which we are phasing out of our portfolio. For your modeling, please assume that on a pure operational level, meaning without the occurrence of said compensation from a supplier, EBIT and net result would have been about EUR 15 million lower and amount to EUR 13 million.
Regarding our segments, home solutions and large scale & project solutions increased profitability, while business solutions on EBIT level remained negative due to low sales volumes. One-time effects affected the three segments in different manners.
While on an adjusted basis, the profitability of home would be even higher, in large scale, it would be less. In the business segment, the losses would be smaller. Now, I will move on to net working capital and balance sheets. By the end of the year, we were able to decrease our inventories by EUR 24 million, and in spite of higher sales, we also decreased the trade receivables from EUR 145- EUR 120 million. These working capital improvements could not fully compensate for the decrease in trade payables from a high level of EUR 175 million at the end of 2019 to EUR 144 million at the end of 2020. The decrease in trade payables was a result of a downgrade of our credit rating early last year, which had been triggered by concerns related to the COVID-19 pandemic.
After our strong 2020 result, we expect our rating to improve in 2021, which would drive up our APs and increase our cash balance again. In the balance sheet, the most noteworthy changes in 2020 are related to the development of the net working capital positions, which I just explained, including the decrease in advanced customer payments, which is booked under other liabilities. In addition, the non-current assets increased by EUR 30 million, mainly from finance lease assets. Total cash decreased from the EUR 18 million at the end of 2019 to EUR 237 million at the end of 2020. The decreased balance of total cash is mainly a result of the increase in net working capital.
We're coming to the cash flow in a moment. Shareholders' equity increased from EUR 417 million at the end of 2019 to EUR 439 million, and thereby having an increase of the equity ratio to very solid 42%.
Let's walk on to cash flow. You can see the strong positive gross cash flow, which doubled compared to 2019. Due to the significant increase in net working capital, the cash flow from operating activities and the adjusted free cash flow were negative. That concludes my review of the 2020 financials. Let me briefly summarize that. In 2020, SMA grew its revenues again by double digits, and sales exceeded EUR 1 billion, driven by sales growth in our home and large scale segments. EBITDA significantly increased compared to 2019, reaching EUR 72 million, mainly driven by our increased revenues, as well as a net effect of approximately EUR 50 million from one-timers. Without this positive effect from one-timers, SMA results were still positive, also on EBIT and net result level, and much higher than in 2019.
Third, our balance sheet structure remains solid, with an equity ratio of 42%, a net cash balance of EUR 226 million, and a credit facility of EUR 100 million. SMA's debt-to-equity ratio of 1.39 also confirms our solid financial position. I now turn to the market and competition part of the presentation, starting with a look on the global PV installations in gigawatt. Despite the corona crisis, the global PV market grew by 23% to 137 GW in 2020. This was mainly due to strong growth in China, the U.S., and also Vietnam, which was rather unexpected. China alone grew by more than 50%. China's carbon neutrality target by 2060 will further drive growth in the coming years.
We also see a good two-digit growth for the EMEA region in the years to come, mostly driven by France, Germany, Italy, and Eastern Europe, as well as for the Americas region, with the main drivers U.S., Brazil, and Chile. Australia, Japan, and India will drive further growth in the APAC region after a small dip in 2021. Overall, this will lead to an average annual growth rate of 9% for the global PV market for the midterm. We look on the same picture in EUR terms, it's a little bit different. Due to the continuing price decrease, we will see a rather flattish development here. Because of the very low prices, China has a by far lower market share in Euros than in gigawatts.
The region with the highest growth potential in euros over the next years is EMEA, growing from EUR 1.4 billion in 2020 to EUR 1.6 billion in 2023. We expect further moderate price decrease for the commercial and residential segments, the comparatively higher price pressure is expected to continue in the utility segment due to competitive tenders. As mentioned, this graph refers to the PV inverter market only. On the next slide, we see the whole market addressable by SMA. This comprises of our core business, PV inverters, the battery inverter market, and digital energy and operations and maintenance services, both in selected countries addressable by SMA. The transition to a decentralized energy supply based on renewable energies proceeds globally, storage and digital energy services become ever more important and show the largest growth potential.
SMA is very well-positioned in these segments and will be able to profit from the expected growth. We estimate the annual growth rate in Euro terms for the whole market addressable by SMA until 2023 at 9%. On the next slide, we have gathered our long-term market outlook, which we have revised due to the current political developments. If we look on the period of the next 10 years, we expect the annual growth of global PV market of up to 14%. Main drivers here are digitalization and electrification of additional sectors such as heating and mobility, as well as green hydrogen. Electricity will become the main energy source in a world with growing energy consumption, and PV will become the main electricity source, as it is not only cost efficient and produced close to consumption, but also sustainable and climate friendly.
These aspects will even gain more importance over the coming years, as the majority of our society around the world sees the urgent need to implement effective measures against climate change. You see here that we have been, for a very long time, stick to the same long-term picture, but now have concluded that this doesn't hold water any longer, and that we have been very conservative and now having increased it by a large portion. In addition to the expected long-term PV market growth that I've explained, and that can still be called conservative, you can see here on this slide, the global growth market for three special fields. E-vehicles on the right side. Starting from very low numbers, e-vehicles will continuously replace conventionally powered vehicles over the coming years. The annual global market is expected to grow approximately tenfold.
Accordingly, the market for EV charging solutions, in which SMA is active, should see an average year-on-year growth of more than 30%. In the middle, you'll see the expected growth for battery storage and hydrogen, which comes with the developments shown to the left and right. The transition to highly decentral and renewable energy supply structures and the electrification of additional sectors. Let's come to the next slide. We will now give you, let's say, a few insights into what we deem to be, let's say, super interesting or important for our positioning and our short-term as well as mid-term prospects. I would like to start with green hydrogen or Power-to-Gas. Meanwhile, it is common sense that hydrogen will play a role in decarbonizing the industry.
What is not so known is that SMA started developing solutions for the power conversion into hydrogen application already five years ago. We can therefore, already today, leverage our technology as hardware is very much the same as in our utility scale PV applications. We can also profit from our high system knowledge and our grid integration competencies, because they are needed to optimize the performance and functionality of the electrolyzer, and thereby increase the economic feasibility of green hydrogen production. We have just started to tap into this new business field. Several projects with SMA solutions have already gone into operation around the world. Additional projects are currently being built. That is not fantasy, that is already reality. What I want to show you with the following slide is how much SMA is favored by current tailwinds.
Of course, you know all about the current regulatory initiatives, about the EU climate target, about the plans of the new U.S. administration. These developments are driving the market growth that I have already described before. PV and battery market growth, as well as the start of e-mobility and green hydrogen. The thing is that SMA has anticipated these trends and developments already a couple of years ago and has then started to position itself in all key areas, from PV and storage systems, grid integration and auxiliary services, to energy management and digital energy solutions, EV charging, and as just shown on the last slide, also with regard to hydrogen applications. All this together will place SMA as a major player in key areas of the global energy transition. Now let's talk about 2021, starting with current order backlog.
You'll see that on the right side of the next slide. A strong order backlog, which has increased by 12% since beginning of the year. Our order backlog for products remains on a good level with EUR 386 million at the end of 2020. As per March 24th, our backlog has decreased a little bit, but we have significant orders currently in the pipeline, and we will see an increase again over the next months. As you can see on the left side of this page, our large scale & project solutions order backlog remains very strong, and the Americas and EMEA regions continue to make up nearly 80% of our product order backlog. Putting this into context of our 2021 guidance, our current sales and product order backlog cover approximately 50% of our guided sales figures for this year, which is a good level for this early stage.
This brings me to our 2021 sales and earnings guidance. For the first quarter of 2021, our top line will not be on the same level as in Q1 2020. You might recall that last year we had the largest ever project in SMA's history in our books in Q1, a significant U.S. North American large scale project. Therefore, the comparison to the previous year is somewhat misleading. Because different than last year, this Q1, we will be profitable. The board expects Q1 2021 sales in a range between EUR 235 million and EUR 245 million, and the EBITDA between EUR 14 million and EUR 17 million. Given our strong product order backlog, especially for our large scale segment, we expect sales and profitability to be higher in the second quarter, and then again in the second half of this year.
At this point in time, we see neither the COVID-19 pandemic nor the increase of costs for raw materials as a hindrance for further growth. The SMA managing board confirms its sales and profitability guidance for the whole year 2021, as announced in early February. We expect revenues between EUR 1.075 billion and EUR 1.175 billion, and an EBITDA between EUR 75 million and EUR 95 million. Given that our business has only mildly been affected by the COVID-19 pandemic, the market continues to grow in all segments, and that we maintain a strong order backlog, we are confident to achieve our guidance again this year. Profitability improvement will continue to be driven by sales growth, productivity gains, and the optimization of our product portfolio. Regarding segments, management sees profitability for 2021 rising in all three segments. That ends my presentation.
Let me deviate from my script and add some more comments to Q1, because I think that this has been misinterpreted by the market, our Q1 outlook. We actually see that this is a typical Q1 quarter. The Q1 quarter is, for seasonality reasons, always a little bit lower than the other quarters of the year. In our core market for string inverters, meaning Central Europe, we had a very strong winter in January, February, where you could actually have two to three weeks where no installations were possible. That has filled up inventory in the distributors, which now leads to lower sales in March, the overall expectation is a little bit above what could have happened. That's something that happens from time to time. It has actually no weight in the assessment of our full- year capability. Q1 is fair and okay and profitable.
As we expect the following quarters to become even better, our overall prospect in 2021 is really positive. That ends my presentation, my comments, and I'm now happy to answer any questions you might have.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We'll take our first question from Jeff Osborne from Cowen and Company. Please go ahead.
Yeah. Good morning, Ulrich. A couple questions on my end. Just to clarify on the Q1 and seasonality, are you seeing any slowdown in projects just due to module price inflation? Seems like everything in the value chain for solar is going up, as well as interest rates. I was just curious if you're seeing any push-outs or if it's just seasonality as you referenced.
We have seen the module prices going up. So far, that has not affected the business. We, at this point in time, see ourselves not in the position to really assess any impact on the market. It might happen. With module prices, they are going up and down continuously. That's actually something that happens from time to time. I think that the more important issue is the raw material prices, because that is a continuous phenomenon already for quite some time. Here we haven't seen an impact on the market pull, and especially on our performance. Also because we have, let's say, secured our supply chain, and we have long-standing contracts, and are not just hopping on certain electronic components nowadays. Module prices, yes, it's an issue.
We are discussing that. We would not say that this is a major force already, which would explain the current situation. I would rather say that it's a seasonality issue. Of course, the pandemic takes its toll, especially in the business segment.
Makes sense. Just a couple other quick ones. I noticed in the ESG section of the Annual Report that the field failure rates were 1.48%, slightly up from 1.44%, I think last year, where you had several warranty provisions. Is that all just because of the lower gross margins in Q4? How do we think about reliability as we move into 2021? Have you resolved all these issues, or are there going to be lingering problems?
No, we had several field failure issues that are mostly linked to this one supplier that I already mentioned. The good thing is that we cleared all of that. The entire balance sheet is cleared from risks, and especially to these quality issues in the field. We came to an arrangement with the supplier, and we have made the necessary accruals. There is silence and peace upon that. We are totally satisfied with the situation like it is now. No more risks hidden.
That's good to hear. Just a housekeeping question. Could you share with us what the trading revenue was as a percentage of revenue as well as storage? Is there any meaningful movement in either of those line items?
Yes, I can. With regard to trading, it was about 15% by the end of the year, and storage was about 10%.
Got it. That's all I had. Thank you.
Thank you, Jeff.
We will now take our next question from Constantin Hesse from Jefferies.
Yes, hi there. Good day. Hi, Ulrich. Thank you very much for taking my question. I've got three.
My pleasure.
One would be, would you be able to talk a little bit about what you expect will be the main revenue drivers this year and here, really, what needs to happen to reach the top end of your guidance? If you can give us some color to understand the different dynamics across the divisions, it would be good, both in terms of volume and pricing. This would be my first question, please.
Okay. Yeah, let's walk through the three segments very quickly. With regards to large scale, I think we are already on the track to reach higher sales than originally expected. The order intake leads into that direction. The drivers for that are certainly batteries and the availability of batteries or storage devices in general, and the functionalities coming with the inverters. This market becomes more and more smaller with regard to the competitive landscape, and we are very successful in the U.S. as well in Australia. As you know, more and more share of renewables in the overall load makes it necessary to support the grid. The grid functionality that our machines have are certainly top of the notch, and therefore, this is running very well, actually. With regard to the commercial arena, our business solutions segment, here, very much depends on COVID-19.
You know that there are many mid-sized companies who have liquidity problems right now, and therefore are postponing investments or are even canceling investments. That affects the entire industry, not just us. The sooner this is over, the better this segment will perform. Also, we have some homework still to do with regard to business. We have a portfolio gap, again, that needs to be closed, which will happen in the beginning of Q3. If that is accepted by the market as we think, we will just get through the year as hoped. If the pandemic closes down, let's say, not by the end of the year, but even earlier, and this product is very well received, then we might also, let's say, have a better result, and that may then help us in reaching the upper end of our guidance.
With regard to our home segment, the residential area, here, I think we are already a little bit further down the road in the transition of the market from a pure inverter market to an energy management platform market. The convergence of sector here is already at advanced stage. Mostly due to the importance of EV charging that we nowadays see. Here, I think it is still an open game whose company's offerings will be more successful. I think I have explained that we see ourselves here very well-positioned, and currently, the order intake in Q1 matches our expectation for the entire year. I think it will still be interesting to see whose functionality, whose technology is going to really convince customers the most.
That will not be decided this year, but it is one of the factors that will contribute to even higher revenues further down the road.
That's great. Thanks. Just quickly on pricing, just to follow up on this. large scale, still fair to assume kind of the low double-digit, low teens, Commercial, high single-digit, low teens and residential. Is residential still flat or has it started coming down again?
I have been very frank in our Capital Market Days with regard to pricing, and have been told in the aftermath I shouldn't be so frank in telling the entire market what the prices are actually doing. What you just referred to is correct, with regards to home, we see still a price pressure in the market.
Okay, thanks. To my second question, can you just talk a little bit about market share in 2020 and, given the expected revenue decline in Q1, what are you expecting there? Is the entire market declining, or are you losing a bit of share there? Thank you.
As I already explained, the fact that our Q1 in 2021 sees less revenues than in the preceding year is totally attributable to the fact that we had last year, in large scale , a huge single order. That this year is coming out at a lower end is just affecting the large scale business. Here you see the next months may even change the picture. With regard to residential and commercial , Q1 isn't worse than last year. It is comparable, and therefore I don't see market share being lost in Q1. I certainly see that in 2020 we have gained market share because we outperformed the market in our growth rate, and we plan to do this again in 2021.
That is great. Thank you. Lastly, just on hydrogen. I'm really curious here, if you can talk a little bit more about the project that you're currently working on. Where exactly do you fit in there? What is the opportunity, and what are some of the competitors in this field? Thank you.
Okay. Perhaps, Nina, you can go back to the slide which shows this Power-to-Gas graph. Let me start to tap into that. For the electrolysis process, you need direct current, and therefore you need to convert the current you get from the grid, which is alternating current, into direct current. Here it is a converter that you need. Also, this converter needs to deliver a very, let's say, untechnically spoken, a very clear and stable flow of energy. That is something that is not just easily being made by every utility. You need special machines for that. The hardware you need for that is exactly what we sell for our large scale business. It is just doing the inversion process the other way around.
Therefore, it is not just that we have an inverter who is just perfectly sized, it is also that our converter technology possesses this distinctive ability to deliver these clear and stable flow of energy, which you need for the electrolysis. Therefore, we think that we are, per se, well-positioned. What makes us so interesting is that we have seen this coming already five years ago and worked on, let's say, on the product and on understanding not only the market, but also the technology behind that and trying to improve that. You might need our technology for just downgrading the power from the medium voltage net to the low voltage net in order to just then have the electrolysis happening. There are two points, and this is shown on the graph here, where the SMA technology may kick in, depending on what is happening.
What we are actually already delivering in are a variety of projects, usually from small utilities who are doing this on an experimental basis. I have seen videos of our people, let's say, installing them and actually producing hydrogen already. It is working. It is functioning. However, it is at a very early stage. We will see this developing over the next years. It will take some time until this really ramps off. Then, of course, it will be exponential. Until then, we will also, let's say, work to have special products, to have a special product platform for this application. We are already in the game. I think that we have a very advanced position here.
Okay. Thinking about, so basically for every electrolyzer, you would need a converter, which means that if Europe is planning on 500 GW installed base by, I think, 2030 or 2050, this is kind of how we can think about the opportunity there for you as well.
You need an inverter for the electrolysis, so it's the same as PV. For every PV, you need an inverter in order to change.
Yeah
DC into AC in order to feed it into the grid. Now it's the other way around. You need an inverter to use electricity from the AC grid in order to make the electrolysis. That is, per se, wonderful for inverter suppliers. The specialty is that we are very good positioned technology-wise, and others don't. You are right, you won't see that in our revenues very soon. It will take some time. Yeah.
Okay, great. Thank you very much.
Welcome, Constantin.
We will now take the next question from Guido Hoymann from Metzler.
Yeah, hi.
Hello.
Hello. Three questions. The first one would be, if you could provide me with a rough indication how much megawatt will be sold in Q1 about, just for me to have an idea about the ASP. The second one is, again, about the business solutions. I think you indicated that you are about to introduce a new product there. Still, what is actually the problem about this business? Is it fierce competition? Is it the customer's behavior? I understood that currently we have this COVID-19 problem on top, the liquidity problems. It seems to be a pretty tough segment to be in. What could you do here to improve profitability? The third one is on EV chargers.
I assume that you rely on your contacts or connections with the international installers when it comes to selling these products also abroad, but also in Germany, so via installers. What markets, which countries are you expecting, actually, to show strongest growth? I think this is a strong growth market. Where are you selling this product to? Am I right that you cooperate with the installers here? Maybe last but least, and maybe I should know it, but where would these sales appear, in which segment? That's it.
Okay. Understood. Yeah, thanks. With regard to your first question, in Q1, that was about 3.7 GW that we sold, 3,700 MW.
Okay, cool. Thank you.
With regard to the second question, the business segment, as you said, it is due to our product portfolio, which has a gap which needs to be closed. That will help. We are waiting for the pandemic to come to an end in order to revive customer demand and then have, let's say, higher productivity in our factory. That will immediately help regaining profitability. For many years, our business solutions segment has been the cash cow of the company, and now it's the other way around, and it is fed by the two other segments. We see that only as an intermediate for a short-term period. The sooner we will be able to increase sales, productivity will rise, and we will gain profitability. What would help is that we recover from some quality problems we had in the field.
Jeff was already mentioning that in Q4, we had higher warranty costs and quality costs. That is due to the fact that we were haunted by some quality issues in large scale, but also here in business. That needs, first of all, to be repaired. That's the first thing, but also then you need to regain the customers' trust. We have now, since two and a half years, since this management board is in office, a clear course to just have such products in our portfolio which have a high margin and a high-quality level. No more low-budget products. In business, we need this recovery from an earlier approach to really work out. The products that have caused these field failures are not being sold any longer.
Still, we are suffering from some, let's say, market recognition or fading market recognition due to these quality problems. Once we have overcome this, that will also help us. With regard to your third question, EV chargers, here it is quite easy. There's such a demand for EV chargers that we cannot fulfill demand right now. So we have long lead times, and therefore, we are selling in Germany only right now. We couldn't serve other markets because we can't even satisfy the demand here in Germany. Therefore, we have currently no plans to internationalize that. I haven't heard any discussions about that. With regard to the strong growth, which countries could be affected? All of them. You know that we have, let's say, with regard to renewables, we have some countries who are more developed than others.
We have certainly Korea, we have certainly some parts of the U.S. We also have the Benelux countries who are much more advanced than that. We have a very good infrastructure in Italy, where we also see a rising demand for batteries, for storage devices. Those are usually the countries that will also lean on EV charging or on EV vehicles, rather sooner than later. For now, SMA is concentrating on its home turf, because that is even more than we can supply.
The segment it's booked in too?
Sorry. That is in the home segment.
Oh.
We also have a business solution, so a business EV charger. Those revenues are booked into the business segment, but it is very low. It's still very low. Yeah. This year.
So are you-
It's-
Okay. Are you considering-
the current sales
your capacities?
Yes. We will. We have also, let's say, a share in a joint venture who's also dealing with EV charging on DC as well as on AC level and also on, let's say, in the residential and especially in the commercial sector. This business is going to increase, and we would extend our production the moment we have more raw materials at hand. Here it is really cut short by the availability of electronic components because we didn't see this demand coming. We ordered these, let's say, electronics a year ago, and now the demand is overwhelming. Therefore, we still have to get ahead of the wave in order to do that. As soon as we can, we will. Yes.
All right. Thank you. Very clear. Thank you.
Okay. Thank you.
As a reminder, to ask a question, please press star one. We will now take our next question from Lasse Stueben from Berenberg.
Hi. Just one final one from me. Most of them have been answered. You're going into the last year of your cost savings program. Can you just give some more information on sort of what to expect there? I think you already alluded to it in the commercial segment, maybe some final product portfolio, sort of phasing out. Maybe just some additional detail on what's expected there and where in the P&L can we sort of expect to see those cost savings? Is it mainly in sort of the gross margin level? Is there sort of also more general cost savings across the board through the organization? Thanks.
Certainly. Yes. As you probably mentioned, we have started a cost-saving program during our restructuring in 2018, which foresees that we will save EUR 40 million of recurring annual spendings. This program is, let's say, unfolding and is making progress, and by the end of the year, we will have even surpassed this amount. Current forecast sees it as about EUR 42 million of costs being saved on a recurring basis every year. The major bulk from this savings comes from gains in productivity. It also comes from digitalization efforts. It also comes from streamlining processes and lesser resource being used. This affects, to a large extent, the gross margin, which we can already see in the gross margin, which has climbed over the last quarters, with the exception of Q4 due to these one-offs.
If we adjust that, it would have been also, let's say, a 19.5% gross margin, and therefore would have been in line with the trend of prior quarters. We have seen that already in Q1. Q1 gross margin will be above 20%. For the remainder of the year, we also see gross margins of above 20%, and that is going to increase even further, a bit further. The saving programs also affect our structural costs, meaning administration costs, which are flat, although the increase in revenue is quite considerable. It also affected the R&D capacities. However, we are increasing our R&D budget related to the overall budget, so the R&D ratio is increasing. The only function that is not affected by cost savings right now is sales and service, because we are growing that much. We can't save much costs, much resources there.
Digitalization efforts also contribute. For instance, our service costs are going to be lowered due to more and more service offerings being directed to self-help and to remote maintenance, for instance, that we do that via our apps, et cetera. That is all contributing to this.
Great. Thanks. Very useful. That's all my questions.
You're welcome.
As there are no further questions, I would like to hand the call back over to your host for any additional or closing remarks.
Yes. Thank you, Marion. Thank you to all of you for listening in. That was an interesting call also for me. Again, let me point to the fact that our Q1 is not a bad Q1. It's a good Q1. It's the first good quarter in a very interesting year, 2021, where we will all together fight the pandemic and get out, let's say, victorious. SMA will continue to work on this path to be solid in its doing, keeping all the momentum and having a lot of interesting ventures before us. Therefore, I also trust that we will be able to conclude this year very much in the sense of last year. That is an improvement which is outperforming the market. Thank you very much, hope to see you soon in person again at any given time. Thank you. Have a great day.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.