Earnings Call: Q3 2020

Nov 12, 2020

Good day, everyone, and welcome to the SMA Solar Technology AG Analyst Investor Presentation Financial Results Q3 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CFO, Ulrik Hadding. Please go ahead, sir. Thank you, Augusta, and welcome, everyone. We very much appreciate that you are taking the time for this investor and analyst call on SMA's Q3 2020 results. You can find today's presentation on our Investor Relations website, ir. Sma. De. This conference call is scheduled for 45 minutes. The replay will be available for 7 working days. After the presentation, I will be happy to answer any questions you might have. I will start with a review of the financials for the 1st 3 quarters of this year before presenting you our expectations regarding market developments and our outlook for the full year 2020. I refer to our disclaimer on Slide 2. And on our Slide 4, you'll find a summary of the key financials for the 1st 3 quarters. Since I will provide you with more details on our sales, profitability, balance sheet and cash flow in the next slides, I would only briefly comment on quarterly development in the table in the bottom right corner of this page. As you can see, we concluded yet another quarter of strong sales and EBITDA. And in Q3 2020, our gross margin remained on a good level with 20% of sales even with a high proportion of Large Scale and Project Solutions sales. Higher sales level and stable price levels in our Home Solutions and Large Scale and Project Solutions businesses contributed to the good gross margins. Now let's please turn to the next slide, and I will provide you with insights regarding our sales performance. Net sales for the 1st 3 quarters of 2020 grew by 23% to €774,000,000 and increased in terms of nominal inverter capacity sold by 42%. In the 1st 9 months of this year, all segments increased sales, and our Home Solutions and Large Scale and Project Solutions segments achieved double digit growth rates. Looking at the regions. EMEA remains our largest region in terms of revenues with €392,000,000 which represents 49% of SMA's global sales and an increase of 12% compared to the 1st 3 quarters of 2019. Region has been a consistent contributor for SMA's revenue growth since early 2019. And in the 1st 9 months of 2020, the Home and Business Solutions segments delivered double digit growth, while revenues in the Large Scale and Product Solutions segment declined slightly. Within EMEA, Germany and Benelux contributed the highest revenues and grew by double digits compared to the same period last year. SMAs Americas region nearly doubled its sales in the 1st 3 quarters of 2020 as compared to 2019. With €252,000,000 of revenues, the region represents 32% of our total sales. The substantial increase in sales compared to the 1st 3 quarters of 2019 is mainly driven by significant revenue growth in the U. S. Large scale business where we have regained market share. Our Asia Pacific region represented 19% of SMA's total sales. In the 1st three quarters, sales declined by 8% as business has been affected by strong local competition and to some extent by the COVID-nineteen crisis. Within the Asia Pacific region, Australia clearly remains SMA's largest market and revenues grew by high double digits in the Home and Business segments. Japan, which is our 2nd biggest market, and APAC, also grew revenues by double digits compared to the 1st 9 months of 2019. We saw sales decline in South Korea and Vietnam. In summary, we see double digit sales growth in the Americas and EMEA regions, while revenues in SMA's APAC region declined. Now looking at the sales per segment on the right side of this slide, you see that all segments increased revenues in the 1st 3 quarters as composed to the same period last year. Our Home Solutions segment continues to perform well and grew revenues in the 1st 9 months by 16%, reaching €204,000,000 Germany, Benelux and Australia delivered high revenues and high double digit sales growth for this segment. Our Business Solutions segment also increased its revenues, achieving €225,000,000 of sales, which represents an increase of 8% for the 1st 3 quarters compared to the same period last year. Germany and U. S. A. Remain our top markets for this segment and grew revenues compared to the 1st three quarters of 2019. South Korea, Singapore and Australia are also key markets for the segment. Now I come to our biggest segment in terms of revenues, SMAs, Large Scale and Project Solutions. It continues to deliver strong sales with €345,000,000 which is an increase of 40%, four-0 percent compared to the 1st 9 months of last year. In the U. S, revenues have more than tripled compared to the 1st 3 quarters of 2019. Australia and Japan are the next biggest regions for this segment. Revenues in Australia have declined in the 1st 3 quarters while Japan has nearly doubled the size of its large scale business. Now let me walk you through our profitability on a group level and by segment. For the 1st 3 quarters of 2020, SMA achieved an EBITDA of €41,000,000 and an EBITDA margin of 5%. EBITDA significantly increased compared to the same period of 2019, mainly driven by the strong sales growth achieved. In the 1st 3 quarters of 2020, there were no unplanned depreciations. It was slightly lower than in the 1st 9 months of last year due to the decreased level of capital expenditures over the last years. Also in the Q3 of 2020, SMA sold all its shares in Tygo Energy Incorporated, which due to earlier impairments, led to a positive one off effect benefiting our profitability. Other effects, positive as well as negative ones, were very small and almost balancing each other. Let's now have a look at the profitability by segment. Our Home Solutions segment was very profitable in the 1st 3 quarters of 20 20 with €19,000,000 The significant increase in profitability was driven by the strong sales achieved in combination with a stable price level and positive developments in our product portfolio as compared to the 1st 3 quarters of 2019. In the Business Solutions segment, EBIT was negative. There are several reasons for that. 1st, sales in Q3 were even weaker than in Q2. We see the commercial markets being particularly exposed to COVID-nineteen concerns of investors. 2nd, price decrease in Q3 was stronger than anticipated, about the same level as in the entire first half year. This is most likely a consequence of the current oversupply in the commercial markets, thereby also related to COVID-nineteen. 3rd, SMA had an unfavorable product mix in Q3. All this led to EBIT in our business segment falling behind the EBIT level achieved after Q3 in 2019. However, all three reasons mentioned as responsible for that development are of temporary nature. COVID-nineteen related drops in demand are already much softer than in Q2 and will eventually stop. Also, SMA in Q3 launched a new key product in the business segment, the Sunny Tri Power Core 2, which will improve the product mix. We therefore expect to see an uptake in sales and improved margins over the next quarters for this segment. The Large Scale and Project Solutions segment improved its profitability compared to the 1st 3 quarters of last year and had a profitable 3rd quarter. However, remained in the red for the 1st 9 months of 2020. Despite strong sales growth, profitability of the segment continues to be affected by strong price decline and unfavorable mix in the Q1. Now I will move on to the balance sheet and the networking capital. SMA started 2020 with a net working capital balance of €160,000,000 and a net working capital ratio of 17%. As I explained a few months ago during our 2019 annual results call, our net working capital was extraordinarily low at the end of last year as a result of a onetime advanced customer payment in Q4 2019, for which we delivered the product and booked the sales in Q1 2020. We therefore expected an increase in our net working capital. However, the level of €260,000,000 or a ratio of 25 percent is slightly above our normal level, mainly due to the COVID-nineteen pandemic as our inventories remain on a high level in order to mitigate supply risks. The decrease in trade receivables from €145,000,000 at the end of 2019 to €121,000,000 at the end of Q3 2020 was a result of good AR collection, but could not compensate for the decrease in trade payables from €175,000,000 at the end of 2019 to €123,000,000 at the end of September, another effect from the COVID-nineteen pandemic, which we expect to ease in 2021, then freeing additional cash. Now let's have a look on the group balance sheet on the right side of this page. In the balance sheet, the most noteworthy changes since the beginning of 20 20 are related to the development of the networking capital positions as just explained. This includes a decrease in advanced customer payments, which is booked under other liabilities. Total cash decreased from €318,000,000 at the end of 2019 to €206,000,000 at the end of September 2020. The decreased balance of total cash is mainly a result of the increase net working capital. Our equity ratio of 43% at the end of the 1st three quarters is very solid. The ratio increased from 38% at the end of 2019, driven by the positive results during this year and the significant decrease of nonfinancial liabilities in the 1st 9 months. Let's now turn to our cash flow profile on the next slide. In the 1st 3 quarters of 2020, SMA generated a strong positive gross cash flow, mainly driven by our net income compared to the same period last year. SMA is clearly delivering higher cash flows from its business operations. Our cash flow from operating activities is negative €83,000,000 for the 1st 3 quarters of the year and is mainly a result of a significant increase in net working capital, which, as mentioned earlier, was largely related to the settlement of liabilities from the end of 2019 and cash invested in our inventories to ensure our ability to supply customers throughout the COVID-nineteen pandemic. So in summary, SMA continued to significantly improve its business performance in the 1st 3 quarters of 2020 with strong sales growth, a solid level of profitability and a positive gross cash flow. Cash flow from operating activities and adjusted free cash flow in total were negative, mainly due to the increase of net working capital. This concludes the detailed review of our 20 20 financial. Let me briefly summarize the key figures. 1st, year on year SMA grew revenues by 23%. All segments contributed to that growth. 2nd, profitability year to date improved significantly. 3rd, SMA's financial position remained solid with an equity ratio of 43% and net cash balance of almost €200,000,000 a credit facility of €100,000,000 and a debt to equity ratio of 1.34. And now turn to the market and competition part of this presentation. Our market view, which we had adjusted in May due to the global impact of the current COVID-nineteen pandemic, remains largely unchanged. While the COVID-nineteen pandemic is currently taking a toll at the development, we expect markets to recover soon. For 2020, we expect a global market volume of 101 Gigawatt, which is 10% down on 2019 and 18% down on our pre COVID-nineteen market outlook. We expect the strongest downturn in APAC, where India plays an important role. Strict lockdown measures and difficulties in financing will have a strong negative effect on the Indian market this year. As a reminder, India is no key market for SMA, and we do only little business there. On the other hand, we expect little to no decisive negative impact from the COVID-nineteen pandemic on SMA's core markets in EMEA as well as in the Americas. Therefore, we expect those regions to mainly develop in line with 2019 in gigawatts. Next slide, please. On this page, you see the global market in euro terms. The lower annual growth rate in comparison to the market in gigawatt is due to the still prevalent price decline in all regions and markets. However, we expect price decline to ease off to 1 digit percentages over the next years. Slide, please. On this slide, we display not only PV business, but all those markets that SMA actually does address with its portfolio of components, systems and solutions. As a transition to a decentralized energy supply based on renewable energies proceeds globally, storage and digital energy services become ever more important. This transition also drives the further growth of O and M services for utility power plants. In addition to our core PV inverter business, SMA is very well positioned in these segments and will be able to profit from the expected growth. After a COVID-nineteen related dip in 2020, we expect a strong recovery for the whole market addressable by SMA. Therefore, on the next slide, we have gathered our long term market outlook. Long term market outlook for PV remains very strong, and we expect annual growth of 12% over the next 10 years. 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. Political initiatives such as the European Green Deal point in the right direction here. Now it is a matter of consistent implementation. SMA is ready and well prepared to help shape this with our comprehensive know how and our innovative and sustainable technologies, which brings me to our current developments and their impact on SMA. SMA is, of course, also feeling the effects of the coronavirus and experienced weaker demand in Q2 with a slight recovery in Q3. Nevertheless, as you have already seen in the financial slides, we were able to grow sales and earnings from January through the September 2020 compared to the previous year. This was possible only thanks to SMA's good IT infrastructure, modified processes, active supplier management, our continuous customer support and especially the great dedication and flexibility of our employees. Please also note that we did not have to use any government aid. We will continue to monitor the further development very closely and react accordingly. Another important development is Joe Biden's victory in the U. S. Presidential election. While solar capacity successfully grew under the Trump administration despite his focus on fossil fuels, we expect a boost from the Biden government, which has climate change high on its agenda. Mr. Biden's commitment to decarbonization targets and international treaties like the Paris Climate Agreement will foster a stable and supportive environment for renewable energies and especially for utility scale PV, which is one of the most cost efficient energy sources in the United States. In addition, individual U. S. States such as California have implemented their own renewable energy targets and programs, and more and more major U. S. Corporates are signing power purchase agreements to supply themselves cost efficiently and sustainably with solar energy from utility scale PV power plants. We expect this positive development to be accelerated by the Biden administration. As you may recall from earlier investors call this year, we usually try to inform you about current developments in our product portfolio, also with regard to technological features on new products. This time, we would like to point your attention to a field where SMA has long been active in, but you might not think of it in the first instance. Digitalization accelerates the global energy transition and enables new opportunities and business models in the energy industry. SMA uses this trend to develop into a provider of systems and solutions. Over the last couple of months, we have brought this SMA 360 degree app for solar professionals and the SMA Energy app for prosumers to market. With their comprehensive and unique features, the apps support solar professionals in nearly all areas of their daily work and visualize and optimize energy use for end customers, including EV charging. Those helpful apps thereby do not only strengthen our brand promise as sustainable quality provider, but deliver additional data, which data can be monetarized. But perhaps most importantly, SMA with its various digital activities can herewith show its ability to continuously accompany the global energy transition towards a decentral and renewable energy supply. Now I would like to share with you our outlook and guidance for 2020, starting with our order backlog. Looking at the right side of this slide, you can see that our total order backlog is solid and increased by 3% compared to the end of 2019. Focusing on our product backlog, which will be recognized as revenues within the next months, it is on a good level, and we do see positive developments in order intake over the last 3 months. In addition, in 2020, we continuously increased our order backlog for services to now €460,000,000 That reflects our success in building up a substantial portfolio with the operations and maintenance business in the U. S. As you can see on the left side of this page, our product order backlog for Large Scale and Project Solutions remains on a high level, and EMEA and Americas are the major regions for open orders. This brings me to our 2020 guidance on the next slide. Despite the COVID-nineteen crisis, SMA has achieved strong sales and solid profitability in the 1st 3 quarters of 2020. Our highly motivated organization has been working remotely in many countries worldwide and continue to deliver on key business milestones. Till the end of Q3 2020, sales and EBITDA were almost in line with our original expectations. And given our solid order backlog and our ability to mitigate supply chain issues, we remain confident to achieve more than €1,000,000,000 revenues for the full year. However, though we have coped with the challenges of the COVID-nineteen pandemic successfully, we do not expect Q4 making up for the revenue losses suffered in Q2 and Q3. Therefore, we expect revenues to end up most likely in the lower third of the guidance of €1,000,000,000 to €1,100,000,000 With regard to our EBITDA prognosis, we uphold the full spectrum of our guidance of €50,000,000 to €80,000,000 of EBITDA, expecting depreciations of almost €45,000,000 Let's turn to the last slide. To sum up why an investment in SMA is worthwhile. Real sustainability will become a significant topic for important stakeholder groups. SMA sustainability has been proven since the company's inception. Part of the sustainability are also our financial stability and focus on sustainable energy supply based on PV. With our comprehensive portfolio for all segments and applications and our global sales and service infrastructure, we can serve all customer groups around the world and thus profit from the whole potential of the global energy transition. This is why if you trust solar, there's no way around SMA. That ends my presentation. And now I'm happy to take your questions. Thank you, Mr. Hetting. The question and answer session will be conducted electronically. We'll go first to Konstantin Hesse with Jefferies. Sorry, I was on mute. Can you hear me? Yes, I can, Duncan. Okay, great. Fantastic. Hi there. Good morning. Congratulations on the strong results. So I have a few questions. The first one on margins and pricing. I was wondering if you can elaborate a little bit on the margin improvement driven by product mix or maybe elaborate a little bit on the product mix improvement that we saw in Q3 and also what the impact was of the sale of the share in Tygo? And on pricing, if you can just give us an update per segment where are where do we stand here, if it is at the same level we were in the first half or if this has somehow changed? Yes. With regard to margins, you know that we have had very comprehensive product portfolios in all three segments. And as a part of our chain strategy in that regard, moving away from offering every product in every segment, in every niche, in every part of the world, we have, over the last 2 years, concentrated on products with more profitable margins. However, that takes some time to, let's say, sort other products out. And we have seen that continuously. So for instance, in the Large Scale segment, Q1 still had some old products in its portfolio and margins were rather low. With regards to Business Solutions, there are also some products who are just discontinued by the end of this year and therefore had been burdening margins. For the Home segment, margins are already okay. We have already a very up to date portfolio here. For business, we really awaited the beginning start of production of the Sunny Tripower Core 2, which is now hitting the shelves of the distributors, which is now making an impact on business and margin. So overall, that increased. And with regards to the gross margin, it went well. As I have proposed, we are now, let's say, close to 20% and continuously improving. So that is probably the most important message in that regard. With regard to pricing, I would like to distinguish in between segments. Overall, pricing continues almost as Prouk knows by the end by the beginning of the year. Within large scale, meaning utility, we see the expected continued strong price pressure, although not as strong as last year. Last year, it was almost 20%. This year, we expect it to end up by the end of the year at low2 digit price decrease rates. So that went as expected. With regards to business, the price drop is less severe than in Utility. However, it is still quite strong, high single digit percentage and a little bit stronger than we anticipated, a little bit. With regard to our Home segment, it's the other way around. It is less severe than we expected. And right now, prices are stable. So there is no price decrease at all within our Home Solutions segment for the time being. And we expect this to continue until the end of the year so that we will have actually no price decrease in our Home Solutions segment. And your last question was with regard to Tygo. You know that has been a long awaited step in turning away from module level power electronics. We have turned away from selling optimizers and other MLPE. And in consequence of that strategic move, we also discarded our interest in Taiyo Energy. And as we had earlier devaluated our stakeholding here, the effect is still feelable. However, it is rather small. So that's for your calculation and modeling. You can just deduct the one off effect that we have shown here in the slide, and then you will be fine. That's great. Thanks. And Almost €2,000,000 yes. Perfect. If we can just maybe quickly talk about the order backlog. And with regards to the quality of the order backlog, have you seen an upward trend in margins in more recent orders implying the continuance of margin improvements in the coming quarters? And how is demand currently looking in Q4? Yes. In general, I can answer your question with yes. The order intake is developing well, especially September, October were looking good. Also October was looking good, and we see momentum. However, it is, as I already explained, different by segment. It is we like it with regard to Large Scale and Home. Within Business, we see still an oversupply in the market that will take some more time to actually open up. However, we do not really suffer under this, yes? We have some take back some slower movement within our stock and some slower demand, but not tremendously slow. However, still business is different than the other two segments. And price quality margins are improving or have improved. And also what we now see as order intake is clearly better than what we have seen in Q1. So that the profitability level we have achieved here in Q3 is, let's say, the basis of what we are going to see for the future. It becomes this or better. Okay. This is great. Thank you very much. With regards to I'm very curious with regards to market share clearly being a key thing here. Can you maybe elaborate a little bit more on the current dynamics here? And where have you gained market share and from whom? And is this sustainable in your view? Yes. With regard to market share, it's very difficult to really assess that throughout during the year, we will have more precise figures in Q2 next year. But the strong sentiment that we have is that we have gained market share in the large scale segment, especially in the U. S. Market, that's for sure, And that we have also gained some market share in the business with home and business applications on a global scale. I could not confirm that we have gained market share in home or business in the U. S. It is very difficult to say as we do not know really the COVID-nineteen implications on the U. S. Commercial market. Certainly, we have not grown any market share in home in the U. S. So what you might have in mind is, does our ShapeDix technology actually starts killing SolarEdge market share? I could not confirm this yet. The overall dynamics are still very much driven by Chinese competitors coming in with low prices And the run for on the technological side, who is going to deliver, let's say, the best features with regards to the transition of our component business into a systems and solutions business. And here, as you know, whenever there comes a new generation of products, this company picks up market share. And with aging products, you lose it again a few years later. So there is a continuous momentum in that. On the overall scale, we see a consolidation of markets, which helps SMA regaining market share on a global scale. That's great. Thank you. And just my last question then is on free cash flow. Taking another big hit clearly, primarily driven by working capital now. I'm just wondering, where do you expect to end the full year in terms of working capital? And what actions are you taking to improve this going forward? Yes. Thank you for asking. That allows me to deliberate a little bit on that. With regards to inventories, it is difficult because we see that high order intake, especially for large scale in the U. S, this is going to be manufactured in Germany. It is then shipped to Sicily for making a medium voltage station out of that, and it is then shipped to the U. S, East and West Coast. So the more order intake we have, the more revenues we can expect, the higher is our inventory with finished goods. But we see that, and we will not be able to reduce that due to the uptake in order intake. So as long as we grow sorry, with regard to raw materials, this is still a consequence of the COVID-nineteen pandemic. We have just secured more raw materials in order to secure a stable supply. That will eventually go down sometime middle of next year. With regard to ARs, we are fine. We are well on track. We have very low DSO. With regard to APs, it's difficult because in the during the pandemic, of course, all suppliers looked to just secure their AR business. And SMA is still regarded as a negative company due to the 2019 results. And also credit insurance companies rate SMA still as being a negative company. However, our good performance throughout 2020 has regained confidence also with the credit insurance companies, with which I'm in continuous contact. So we can expect of being risen or being raised in our credit worthiness on the basis of our 2020 results, which will then be positive. So then we can, let's say, work for longer payment terms with our suppliers in 2021 and thereby reduce APs in the first half year of 'twenty one. So that's a really feasible, tangible decrease of the net working capital ratio will most likely not happen before the middle of 2021. And as you know, there is a direct interconnection between net working capital and cash flow and net cash positions within SMA. It's only the only thing that consumes cash is our CapEx and the net working capital development. Yes, right. By the end of this year, we will have almost the same net working capital amount as we have now. We'll go next to Jeff Osborne with Cowen and Company. Hey, good morning, Ulrich. A couple of questions on my end. One in the outlook for 2021, I saw you lowered the EMEA outlook from 33 to 29 gigawatts and then you also lowered 2022. Can you talk about what's going on there in light of the Green New Deal? Yes. Let me just skip to some notes because Pamela actually told me why we have changed that. So what we have done since our last global outlook is we increased also the 2019 number for Asia by 2 gigawatt because we had new intel about that. And then with regard to 2020 EMEA, your question, we lowered that by 2 gigawatt because we see that the expected increase in business in Africa is not going to happen. The outlook on our core markets, which is Central Europe, is unchanged. So the 2 gigawatts being going down is for Africa. Got it. And with regard to 2021 as well? Yes. And with regard to 2020, Americas, U. S, we now see that 3 gigawatt higher than the last time. Therefore, 2 gigawatt more in utility, 1 gigawatt more in resi and commercial. So that's that has been the change in our model since last time. Okay. And then just in light of the cash flow commentary in the prior question as well as the guidance being now below $250,000,000 I assume it's a safe assumption that you're not anticipating any safe harboring that would bring in cash at year end and then have a strong Q1? No, we won't have the effect that we had last year, not to the extent. Actually, I'm quite uncertain what happens in December because due to COVID-nineteen, there are push outs. The construction site is sometimes not ready because you cannot people move people there, etcetera. So December business is somewhat in the midst this year, which is also the reasons why I'm very cautious with regard to the guidance. Usually, you could expect me to be more precise, but as December is still uncertain, I tend to be more open here. Yes. Makes sense. And the last were a couple of housekeeping questions. On the last earnings call 3 months ago, you talked about trading revenue, storage revenue and detach rates in Germany being about 60% for storage. Is there any shifts in any of those trends or just given the margin performance, can you talk about what trading revenue was in particular? Here, you can assume that these trends are unchanged. We have a trading share of our overall revenues of about 16%, And Service Business, including Operations and Maintenance, is about 8%. And then storage, that changes more from quarter to quarter, has now in Q3, year to date all 3 quarters be 9%. And the attach rates are unchanged. There is, of course, a growing trend, but I have no better figures than 60% attach rate for home applications in Germany. Great to hear. And my last question is just the tax rate is coming below expectations or at least our expectations here for Q3. How should we be thinking about Q4 and then into 2021 for the effective tax rate? Yes, very much depends on where we are going to make our revenues. For Q4, I wouldn't expect any large differences to that. For 'twenty one, it's too early to call. We are, of course, still working on DTA that we have, but I can't elaborate. I can't be more precise on that at this point in time. We are still working on 2020 modeling. Okay. That's all I had. Thank you. Welcome, Jeff. And Mr. Haddad, we have no other questions at this time. Right. And thanks to all of you. Thanks for spending some time with us this day. And I hope that you have enjoyed the call, and I hope to see you all someday in person again and wish you all the best in these very challenging and difficult times. Have a great day, and stay healthy.