Earnings Call: Q3 2019

Nov 7, 2019

It's a, and welcome to the Analyst Investor Presentation Financial Report Q3 2019. Today's conference is being recorded. At this time, I would like to turn the conference over to CFO, Ulrich Heading. Please go ahead, sir. Thank you, Christian, and welcome, everyone. I very much appreciate you taking this time for this investor and analyst call on the 1st 9 months of 2019. You can find today's presentation on our Investor Relations website, ir. Sma. PE. This conference call is scheduled for 60 minutes. 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 January through September 2019. 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 Q1 through Q3 twenty nineteen. As per our expectations, sales increased substantially in the first quarter, so that revenues for 1st 9 months grew by nearly 10% compared to the same period last year. Order intake remained strong in the 3rd quarter, building a strong base for Q4 2019 at the start of next year. Furthermore, we continue to benefit from our planned cost saving measures, and also new product sales and custom initiatives that have been started. SMA sold PV inverters was a cumulated output of 7.5 gigawatts until the end of Q3 and with a strong performance in the third quarter, outputs sold increased by 21% over the same period last year. Revenues of 1,000,000 were 56 1,000,000 or, as mentioned, 10% higher than in the same period last year. Our Home Solutions segment continue to deliver strong sales growth now with 28 percent higher revenues compared to the 1st 3 quarters of 2018. Sales in the Business Solutions segment or below last year's level due to price erosion. The Large Scale And Telenex Solutions segment had a very strong third quarter. So that year to date revenues are now 30% above revenues during the same period last year. Productability improved significantly in the first quarter with an EBITDA of 1,000,000 in Q3, so that year to date EBITDA at the end of September reached 1,000,000 This was driven by the strong sales performance and by savings delivered by our cost reduction measures. Order intake remained on a good level in the first quarter so that the Managing Board is confident to achieve the fiscal year 2019 guidance with sales at the upper end of the range of 1000000 to 1000000 and EBITDA in the upper half of our range of 1000000 to 1000000. 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 1st 9 months. Our partner loyalty program SMA power up for installers has been successfully launched in key markets such as Australia and the U. S. 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, our residential and commercial applications in selected markets within Europe. We have also introduced SMA repowering packages, featuring customized solutions for modernizing TV power plants worldwide. Which include state of the art hardware and software, along with enhanced servicing and maintenance programs. Operators and investors plan to benefit from higher yields, cutting edge technologies, additional operational capabilities, and SMA warranties. To summarize, the 1st 3 quarters of the year were in line with our expectations. After a strong third quarter, sales are above last year's level and EBITDA increased to 1,000,000. Already above the lower end of our full year's profitability guidance. Quarter intake remained on a good level, and measures to save costs and increase sales remain well on plan. Based on this and our strong product order backlog, We expect to reach the upper end of our full year sales guidance in the upper half of our profitability guidance. On page 5, we summarized the key financials for the 1st 9 months of 2019 with the same period of 2018 shown for comparison. There is also a quarter by quarter overview of the last four quarters on the bottom right of the page. And I will walk you through the financials later in this call. Let's now turn to market discussion. We have revised our market outlook until 2021 because of the subdued development in China in 2019. SMA is not doing any business in China. SMA's core market for the PB inverter business is expected to decline slightly by 1% to 100 gigawatts in 2019. The expected decrease is exclusively caused by China where the newly installed PV base until the end of September amounted to only 16 gigawatts. In all regions outside of China, however, our view is unchanged we anticipate the market increase of 23 percent for the global market, excluding China, in 2019. We expect the growth to continue in the coming years. With Europe, Middle East and Africa is the most promising region, with annual growth of more than 20%. This growth is also driven by increased portable tape demand in the countries in the Middle East and Africa. Our utility remains the largest segment globally. We expect the highest growth rates in the commercial segment. Now please turn to HP. Because price pressure will continue to largely erode volume growth and because of the weaker Chinese market, we expect global demand in euro terms to decrease slightly by 1% from 2021. Again, SMA is not doing any business in China. From 2021 onwards, 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 expand internationally to grow faster. By the way, SMA has no plans to acquire smaller players into our already good positioning in all key markets and techniques. Last year, the unexpected, dramatic feed and tariff cuts in China impacted the global market resulting in rapidly falling solar module prices. With solar modules accounting to 50 to 60 percent 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 anticipated a client. 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 deployments. The energy transition can then gain more traction, which also will be supported by other commodities such as electric vehicles and batteries. In terms of Page 9. On this slide, we have compiled our market for the global market addressable by SMA. This includes the global TV inverter, battery storage, and OEM services markets in all regions except China and the digital energy market and the limited number of countries for SMA Digital Energy Solutions are available. The megatrends for the solar industry are creating new markets for storage and also energy services, which are rapidly evolving. Profitable storage. In order to integrate a battery into the PV system, you need additional hardware. This is where SMA comes into play as provider of storage system technology, especially with storage inverters. Petory storage systems are gaining importance in European markets such as Germany, the UK, and Italy, as well as in North America, Australia, and Japan. As reduction in the residual growth of renewable energies are the most important growth drivers. To 1,000,000 for storage system technology by 2021. Approximately half of the demand comes from the utility sale battery projects. Since each CTC application is different. Different customization is required, this offers a huge growth opportunity for battery inverter experts such as SMA. Digital Energy Solutions. On one hand, you can utilize energy networks create demand for new solutions that manage flexibility and complexity. On the other hand, countless actors within these new MDD networks generate an abundance of data, which can be used to take Market addressable by a service provider such as SMA is expected to be only a fraction of the overall energy services market. We've 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 1,000,000 in 2019 to 1,000,000 in 2021. To capture this value pool, the necessary technical solutions need to be developed and rolled out through our different markets. SMA has a clear understanding of the requirements for the digital energy market and can scale its go to market approach. O and M market is gaining importance, considering declining PV equipment prices. In mature markets such as the U S and Europe, O and M is a business on its own independent service providers, Participants in pain are selected separately by the EPC to ensure data integration and provide tools and analytics and 45 PD inverter technicians. SMA estimates a global O and M market value of 1,000,000,000 to 1,000,000,000 per year until 2021. Overall, we expect the entire addressable market for SMA to grow by 6% per annum from 1,000,000,000 in 2018 to 1000000000 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 an SMA gaining additional market share. Now I would like to explain about as an 8 positioning as the market just described. SMA is the inverter manufacturer with the longest experience in the market. We have developed groundbreaking technologies that have helped paving the way for PV to become a mass market technology that can compete with conventional power sources. We are now entering the next stage by developing systems and solutions for the future energy supply. Our technology is used in previous systems in more than 190 countries on all continents with accumulated power output that equals 70 nuclear power plants. With more than 1 gigawatt of installed battery inverter power, SMA is by far the global leader in battery system technology. For global sales and service infrastructure, gives us access to all customer groups. Now please turn to Slide 12 Here, you can see our global reach by regions. 18 gigawatt of installed power, 5 owned sales and service companies throughout the continent, with a market share of 12% in Gigawatt. SMA is among the top players in the Americas. In EMEA, the region with the strongest growth potential over the coming years, HMA has a market share of 21%. Making us the market leader in this region. In APAC, SMA is the only non Chinese and Virgin supplier that is among the top 5. With sales and service companies in Monday, Shanghai, Tokyo, and Sydney, we can cover the entire APIC market food in China, where we only serve project developers and investors that realize TV projects outside of China. Please turn to slide 13. As an A is the only inverter manufacturer was about that covers all segments and 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 and XOS. We develop solutions that improve 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. In the following section of the presentation, I will walk you through our figures through the third quarter of 2019 and informed on our expectations of finishing the fiscal year. Before I start with the figures, I would like to explain some features of our financial statements to you. As of the beginning of this year, we have realigned our segments Last year, you may recall that we introduced a new segment digital energy in order to provide transparency on our business of energy management and energy data. However, this sometimes led to the misunderstanding that FMA 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 the customer and its needs into the center of our thinking, we, as of 2019, only have 3 segments: home, business, and large scale projects. Those three segments do roughly translate at the market segment's residential, commercial and utility, that include our storage and off grid business as well as the services that we offer, starting with the aftersales business, operations and maintenance, and also the Energy Management And Data Business. These three segments, we now combine all the offerings of all for the specific customer groups of the inverter still being the core product as part of our system and solution offering including monitoring and steering technologies and software as well as diverse services. The prior year's figures for the segment's business have been adapted to our new 3 segment structure in order to ensure comparability. Another point. Due to a revision of the international financial reporting standard number 16, As of beginning of 2019, leased assets, which were previously reported as operating expenses, are now considered in our balance sheet as financial lease assets and liabilities. Now let's have a look on our revenue figures. SMA recorded sales of €631,000,000 during the 1st 9 months of the year. With 7.5 gigawatts of output sold. This is 21% more output than in the same period in 2018. Driven by strong growth of our Home Solutions business, sustained throughout the year and as expected, as strong increase of revenues in the first quarter for our large scale and project solutions segments as we converted part of the substantial order backlog from the first half of the year. Looking at the geographical distribution, we continue to see strong revenue growth in Europe, Middle East and Africa up 22% with 1,000,000 in the 1st 9 months of 2019 as compared to 1,000,000 in the same period of 2018. Segment's home solutions and large scale and project solutions delivered significant revenue growth in the EMEA region, while business solutions remained on prior year level. In the Americas, Revenues have grown by 23 percent from 1,000,000 in the first 9 months of 2018 to 1,000,000 in the same period of the year. Revenues grew in all segments in the region, thanks to a strong performance in the third quarter of this year. Sales in the Asia Pacific region declined in the 1st 9 months of 2019. It was 160 million of revenues in the 1st 9 months of this year as compared to 1,000,000 in the same period last year. All segments fell below their prior year revenues in the APAC region. In summary, in EMEA, we continued to increase revenue share through sustained sales growth. Revenues in Americas have also increased from cash in the same period last year. The revenue share decreased in the APAC region mainly due to slower uptake in the large scale and project solutions so far this year. Looking at the different segments, we see double digit revenue growth in our home solutions and large scale and project solutions segments. While our Business Solutions segment declined by 5% compared to the 1st 9 months of 2018. Let me briefly elaborate on that. The Home Solutions business continues to deliver strong revenue growth was 1,000,000 as compared to 1,000,000 in the same period of last year. That is a growth rate of 28%. Both the India and Americas regions achieved strong sales increases so far this year which more than compensated for lower 1st 9 months falling short of last year's sales level out of 3 quarters of $221,000,000 as a result of price decline. Revenues in the Americas grew in the middle single digit range, while sales in EMEA were flat and revenues in the APAC region fell short of the level achieved in the 13 months of last year. Labscale And Project Solutions segment generated sales of 1,000,000 in the 1st 9 months, which is 13% higher than the same period of last year. The sales of 1,000,000. This segment profitated strong from strong revenue growth in the Americas and EMEA regions in the 1st 9 months of 2019, while sales in the APAC region declined mainly due to slower uptake in Australia, compared to last year. So to summarize the sales situation, in total, sales grew by 10% in the 1st 9 months of this year, strong growth in EMEA and the Americas that was more than enough to offset for revenue declines in the APAC region. Let me now explain, on the profitability development. On an EBITDA of 1,000,000 in the 1st 9 months of 2019, our profitability was lower compared to the same period of 20 18 was 1,000,000. This is mainly a result of the price pressure effect on our gross margins. EBITDA in the 1st 9 months of 2018 also benefited stronger than this year from positive one off effects. Depreciation and amortizations are slightly lower than last year, the result of the R and D asset impairments booked in the fourth quarter of 2018, which I explained in our 2018 annual results call. Welcome to the different segments, Home Solutions. EBIT for the segment improved in the 3rd quarter and is now positive after the 1st 9 months with 1,000,000. In the 1st 3 quarters of 2018, The Home Solutions segment had a positive EBIT of 1,000,000, which, however, included the positive one time effect from the adjustment of general warranty accruals. Business solutions. Profitability of our business solutions segment was weak in the 3rd quarter mainly due to price pressure. So that the segment is now at EBIT breakeven up to the 1st 9 months. For the same period in 2018, the segment delivered an EBIT of 1,000,000 which were also partially affected by the adjustment of our general warranty accruals last year. EBIT in the Large Scale And Project Solutions segment amounted to minus 1,000,000 in the first three quarters compared to 1,000,000 in the 1st 3 quarters of 2018. In 2018, The segment has, that's negatively affected prior year accruals. One more information with regard to our P and L. Below the EBIT line, you find a positive financial result of 1,000,000 and tax expenses of 1,000,000 related to tax obligations in our current subsidiaries. I now move on to the balance sheet. In the balance sheet, the most noteworthy changes since the beginning of 2019 are related to the implementation of IFRS 16 and the development of the network and capital positions. As I already mentioned, as of January 1st this year, we implemented a new international financial reporting ended number 16 and are now showing the financial liabilities and assets related to our leasing obligations required. This reporting change has led to an increase in both non current assets and other liabilities of more than 1,000,000. Net would be capital increased in absolute figures by €30,000,000 since end of 2018. As a result, the net working capital ratio has increased from 23% at the end of 2018 to 25% at the end of Q3 2019. The increase is driven by higher inventories and increased trade receivables related to the uptake of oil sales in the last quarter. Which were only partly offset by increased trade payables and higher advance payments from our customers. The increase of finished goods and raw materials inventories is needed to continue to convert our product backlog to sales over the next months. Our total cash position was a balance of €275,000,000 at the end of Q3 has decreased since the end of 2018. Mainly as a result of the buildup of inventory as Josh explained. Looking at our cash flow, we can compare the figures of the 1st 3 quarters of 2019 against the same period of 2018. The operating loss of -1000000 and negative cash flow from operating activities netted deterioration of our adjusted free cash flow in the 1st 3 quarters of 2019. However, we continue to generate a positive gross cash flow in the first three quarters. The negative cash flow from operating activity is largely related to the buildup of inventories during this year, which as explained earlier, is necessary to continue fulfilling our strong order backlog. Our net CapEx of 1,000,000 is below last year's level and is nearly evenly split between investments into fixed assets and capitalized R and D expenses. A positive effect from net investments from securities and other financial assets represents movements of cash from fixed deposit accounts to cash and equivalents And now turn to our order backlog developments and the outlook for the last quarter of 2019. In our order backlog, we continue to distinguish between the product business and our after sales business, which in the past years would most reported separately in the signalling service. The reason for this distinction lies in the different sales realization periods that we can assess the product orders to be weak and month and for service orders, which are between 5 10 years. Overall, the level of our own backlog is 38% higher than at the end of 2018, despite the strong sales in the third quarter. Our product order backlog, which is especially important for revenues over the near term, grew by 144% in the 1st 9 months of this year. All segments increased their product related order backlog by roughly 100% or more in the 1st 3 quarters. Meanwhile, the service order backlog declined by 1,000,000 since end of 2018, mainly resulting from scope reduction or during service contract extensions, which in some cases have been replaced by orders for new products to replace the customer's older SMA inverters. This brings me to our sales and profitability guidance for 2019. Our revenues after 3 quarters combined with the confirmed product and order backlog for 2019 give us full confidence that we will be able to reach the upper end of our sale guidance and have revenues at year end of 1,000,000 to 1,000,000. A substantial increase in sales in comparison to 2018, despite continuous price pressure, will result from maintaining our strong momentum in EMEA and strengthening our share in the large scale business by continuing to convert our strong product order backlog into sales in the fourth quarter of this year. In terms of profitability, we expect to finish the year in the upper half of our original EBITDA guidance of 1000000 to 1000000. 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 TV markets. With the exceptional knowledge of our RNG team, our reduced cost base, the strongest brand in the industry and our visibility, we will be able to answer all demands of the market and our customers. It is why if you trust solar, there's no way around SMA. Now operator, I'm happy to take any questions. Please ensure that the new function is switched off to allow your signal to reach our equipment. If you find that your question is already been answered and you don't want to ask any further questions, To a pause for this moment to allow everyone to signal. Our first question comes from Mark Weber from KeyBanc. Please go ahead. Your line is open. Yes. Good morning. Thanks for taking the question. You've you've presented the 9 month figures, but in fact, within the 9 months, one gets the impression that there's a very different two parts, I. E. The first half in Q3, Can you help us understand by giving you some figures for Q3 for sales growth, order growth, the EBIT and net profit? Thank you. Yes, sure, Mark. I only refer to the turmoil in the market last year when prices were coming down tremendously in September, October 2018 due to the cut in and feed and chinos in China. This effectively brought the market for lapsed scale investments to a halt. And this hold was to be felt in the Q1 and Q2. Our string inverter business in the first half was actually quite well performing. It was only missing the addition of large scale business. That now kicks in, in Q3. That's the reason why we have, as you said, a fair, but not so exciting first half and now Q3, which is performing as expected. It's very well. So it was just the Alaska business kicking in in Q3 only. Can you give us a picture, please, of growth in Q3, order book expansion in Q3 at EBIT net profit, please. Book extension. I will have to get back to you, Mark, with the exact figures related to Q3 only. If you compare that to our H1 order book, you will see that the order book was actually going down in Q3, we accumulated everything in H1. You'll see that also in part for parts in the presentation, with regard to the exact EBIT, of Q3, do you find that also in, just a second? I was quarterly, report On page 20, you find it broken down for the Q3, regard segment. Which was 120,000,000 dollars, $121,000,000 for large scale in Q3, seventy four for business, and 73 for Home Solutions. We'll look at Second question, if I may, you've mentioned in the commentaries that about consolidation. Can you just help us understand a bit more what you what you mean by that in consolidation and how you see SMA solar's participation and consolidation of the players in the market? Yes, we as as you certainly know, we have had several players dropping out of the market and over the last years. Very prominently this year, ABB, selling to Italian competitor with FEMA. We also noted by the end of last year, the partial retreat of Schneider Electric which is no longer going to produce central inverters. And we have seen also the dropout of smaller competitors over the last months and years. And we see that as a natural consequence of the high price pressure that has been imminent in this industry for the last 10 years. And at one point in time, you just can't cope with this price pressure anymore if you don't have a necessary R and D capacity. So we see this trend continuing, especially in the Utility segment, where you effectively have only 3 to 4 big players left. Especially in the U S, you will see that to become a very interesting battlefield in the next year. With regards to the positioning of SMA, we are regaining market share in the utilities segment. We have lost market share in the residential area. And we have sustained or even improved our market share in the commercial arena. Great. Thank you very much. Our next question comes from with the hoist with the from Messer. Please go ahead. Your line is open. Actually, one question on regarding the average selling prices, the ASPs. I remember you mentioned that there's good development we have seen in H1 would not continue. So that's what we have seen now in Q3, high pressure on selling prices again. I think some 19%. I understand that the main reason is higher share of project So that's a large scale project business, but still, is that what we should also expect then for Q4 and also for the, yeah, whatever coming quarters now because your order backlog is mainly filled by these large scale businesses. And is this actually this 19% indicating that the price pressure has even accelerated because this is really a magnitude which I don't really recall you have ever seen before? Yes, we have to distinguish between the two segments. With regards to the large scale and projectiveness, the price pressure has been as big as we have expected it. So by the end of this year, we expect that the price decrease in the large scale business will be 25%. So the average top of the entire business, 25%. We have now reached the point where we are taking in orders, which actually are at this point in time. For the Q4, we will indeed see a low profitability with regards to this high order backlog volume for large scale? With regards to the string inverter business, meaning home and business, the situation is different. Pricing is not the most important differentiator anymore, whereas in the large scale business, the EPCs asked for pricing first in the string inverter business. The customers more and more tend to also take service, quality, brand recognition and other factors into account. And we see a slight easing of the price pressure. Not to be mis understood, it has still price decline, but it is not as severe as it has been, last year. We expect the price decline by the end of the year to reach about 1% perhaps in this in the second in these two segments? For the future, we, however, see the price decline softening anyway, as not only as a of the consolidation I just described in response to Mark's question, but also as we see that the innovation cycle time becomes longer and longer. The TV industry has been having very many innovations as being a very young industry. That becomes more and more difficult. Therefore, the ability to cope with the price pressure becomes more and more difficult. So therefore, we see the price declines softening in 21 latest. And probably we already see the beginning of that development. Here in the in the whole segment, especially. Would that help you? Yeah. Yeah. Definitely. But maybe maybe I may ask this maybe. That's the question. You know, if the pressure is so high in the large scale business, you're making losses, wouldn't it be reasonable not to take in parts of the orders or use this business? Well, I'll give you one more information that necessary to understand the entire future. We are different than a few years ago, SMA is not only selling inverters, but a lot of trading goods, like for instance, batteries, transformers, and medium voltage, beer, or other accessories. And those accessories come, of course, with a lower margin than our original core business, the inverter. However, if we would not offer these packages, we would probably not be able to compete in the market at all. So therefore, 2 things. First of all, our profitability goes down, our breakeven rises. You see, we now have much more turnover than in the years prior to 2018, but still electing profitability. That is due to the fact that we have a higher take of trading goods in our sales volume. And we may be having difficulties with these situation in the large scale segments this year, but this is due to the fact that more or less core business that we are doing in Q4 is not only inverter, but is a medium voltage package is a full station. That is quite unusual. Therefore, the negative outlook on the Utility segment is just for the time being, it is not a long term perspective. Especially due to the new product we have now launched in the late 2019. Our four point 6 Megawatt machine in the central inverter business, we will be able to compete also price wise in the future. That is also what's driving our order intake these days. So, we have we see a positive outlook for the large scale and projects segment in the future. Thank you. Mister Heading, we have no further questions on the phone at this time. I would like to return the call over to you for any additional or closing remarks. Ladies and gentlemen, thank you very much for dialing in this morning. And being interested in SMA. We have been very silent over the last months, and we will continue to not make much fuss about our figures. They are let's say the expression of what we did communicate throughout the year. SMA is back to normal. We do not have very good surprises. We do not have any bad surprises. We are just back in business and we are performing. And I hope I could deliver that message to you. Thank you very much and have a great day. Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may now disconnect.