Earnings Call: Q1 2019

May 9, 2019

Good day, and welcome to the Analyst Investor Presentation Financial Report Quarter 1 2019 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Eurek Heading, Chief Financial Officer. Please go ahead, sir. Thank you, Van, and welcome, everyone. We very much appreciate you are taking the time for this investment call on the first quarter of 2019. You can find today's presentation on our Investor Relations website, ir. Sma.de. This conference call is scheduled for 16 minutes. A replay of the recording will be available for 7 working days. After the presentation, I will be As usual, the presentation will, out an executive summary, give an update on the market development and SMA's positioning. Followed by the financials for the first quarter. At the end I will give an outlook on the full year 2019. I refer to our disclaimer on page 2 and on page 4. We have summarized our strategic and financial highlights for you. And first to mention, that we have reached our sales and earnings guidance for the first quarter and successfully continued to implement our planned cost saving measures. In addition, we have started new product sales and custom initiatives. SMA sold PV inverters with a cumulated output of 1.8 gigawatt in Q1 twenty nineteen and was thus on par was the same period last year. However, with EUR 168,000,000 sales, were 8% below the same period last year. In addition to a price decline, this was mainly due to a weaker project business. While sales in the Home Solutions segment rose by 15%, sales in the Business Solutions and especially the Large Scale And Project Solutions segments were still below last year's levels. With an EBITDA of 1,000,000 SMA could after the very difficult year 2018, again reach breakeven on EBITDA level. Thereby realizing the upper end of the profitability prognosis we gave earlier this year. The implementation of our cost saving measures is progressing according to plan. Order intake was very good in all segments over the 1st month of the year. Based on this, the Managing Board expects significant sales and earnings growth in the second half of the year and confirms its fiscal year 2019 guidance with sales of 1000000 to 1000000 and EBITDA 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 first quarter of 2019. Our partner loyalty program SMA PowerUp, for installers has been successfully launched in Australia, and we will be rolling out and developing it in other countries over the coming months. In addition, we have started to sell complete system packages for residential and commercial applications in selected markets within Europe. We have also introduced SMA repowering packages, featuring customized solutions from modernizing PB power plants worldwide. The packages include state of the art hardware and software along with enhanced servicing and maintenance programs. Operators and investors stand to benefit from higher yields cutting edge technologies, additional operation capabilities and SMA warranties. To summarize, although SMA had a slow start into the year regarding sales, we had breakeven EBITDA in Q1, order intake was very good. All measures and initiatives to save costs and increase sales are well on plan, and SMA is on track to reach the sales and earnings guidance for the fiscal year 2019. On page 5, we summarize the key financials for the 1st 3 months of 2019. You will also find a quarter by quarter overview, I will give you more details on the financials later in this call. Let's now turn to the market discussion. Our market outlook until 2021 remains unchanged. SMA's core market, the PV inverter business, is expected to grow in gigawatts by 7% to 109 gigawatts in 2019. We expect the growth to continue in the coming years in all regions except China. Europe, Middle East and Africa is the most promising promising region with annual growth of more than 20%. This growth is also driven by increased photovoltaic demand in the countries in the Middle East And Africa. While Utility remains the largest segment globally, We expect the highest growth rates in the commercial and residential segments. Please turn now to page 8. Because price pressure will continue to largely erode volume growth, we expect global demand in euro terms to develop flattish until 2021. Overall, we expect a stabilization of prices towards 2021. Until then, the market consolidation is likely to accelerate. Many inverter players cannot afford the investments in new technologies necessary to drive down product costs and or expand internationally to grow faster. SMA has by the way no plans to acquire smaller players due to our already good positioning in all key markets and in all segments. Last year, the unexpected dramatic feed in tariff cuts in China impacted the global market, resulting in rapidly falling solar module prices. With solar modules accounting for 50% to 60% of the total investment in the PV system, project developers and investors postponed their projects waiting for prices to come down even further. This year, we expect the utility market to grow in volume as well as in revenue terms, in all regions except China where we anticipate a decline. With the continuing price pressure, solar will soon hit the critical inflection point where it will be cost competitive without subsidies in many more markets. In a market environment without subsidies, governments will lose the ability to control rates of deployment. The energy transition can then gain traction, which will also be supported by other technologies such as electric vehicles and batteries. Please turn to page 9. The megatrends for the solar industry are creating new markets for energy services and storage, which are rapidly evolving. On one hand, decentralized energy networks create demand for new solutions that manage flexibility and complexity. On the other hand, countless actors within these new energy networks generate an abundance of data, which can be used to tailor new solutions. The market addressable by a service provider such as SMA is expected to be only a fraction of the overall energy services market. We estimate the addressable market for us to increase from 1,000,000 in 2019 to 1,000,000,000 in 2021. To capture this value pool, the necessary technical solutions need to be redeveloped and rolled out throughout different markets. SMA has a clear understanding of the requirements for the digital energy market and can scale its go to market approach. Price reduction is the most important growth driver for battery storage in nano and micro grids. Battery Storage systems are gaining importance in European markets such as Germany, the UK, and Italy, as well as in North America. We expect a market of up to €800,000,000 by 2021. Approximately half of the demand comes from utility scale battery projects. Each utility application is different, significant customization is required. This offers a huge growth opportunity for battery inverter experts such as SMA. The O and M market is gaining importance considering declining the equipment prices. In mature markets such as the US and Europe, O and M is a business on its own. Independent service providers such as SMA are selected separately by the EPC to ensure data integration and provide both analytics and qualified PV inverter technicians. SMA estimates the global O 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 8% per annum from 1,000,000,000 in 2018 to 1,000,000,000 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 Now I would like to explain about SMA's positioning in the market just described. Let's start with a quick overview of our main business segments on Slide 11. SMA has a comprehensive portfolio of products and solutions for all system sizes and applications. Our broad portfolio in all market segments is a major distinguishing feature for SMA. To allow for even greater focus on customers and to structurally represent SMA's orientation as they provide our systems and solutions. The Managing Board made organizational changes as of January 1, 2019, that are reflected in the reporting structure, thus the former segment storage and digital energy were integrated into the remaining segments, now being renamed into Home Solutions, Business Solutions, And Large Scale And Storage Solutions. SMA has a relatively balanced revenue distribution across its segments. In the first quarter of 2019, Business Solutions segment made the largest contribution to sales, accounting for 39% of net sales. The large scale and project Solutions segment generated 34% and the residential segment 27% of SMA Group Sales. Please turn to Slide 12. SMA is the only inverter manufacturer with a portfolio that covers every stage of energy integration, starting from online energy monitoring and ranging to energy market integration with our direct marketing solution SMA SPOP. Based on our state of the art solar and battery inverters, and on our energy platform and XOS. We develop solutions that include energy Optimization, energy management, and the integration of different SMA to become a provider of systems and solutions. Let's now have a quick view on our product and solution pipeline for 2019 on Slide 13. As explained earlier, In the PB industry, it is vital to continuously launch innovative products. This is the only way to bring down products cost effectively. As mentioned, many of our competitors won't be able to afford the necessary investments in new technologies in the future. SMA, however, continues with a high rate of innovation in all segments also in 2019. For customers in our Home Solutions segment, we have launched the new Sunny Boy generation early in 2019. The product is now available in Europe, the U. S. And Japan, and uses a communication platform that allows us to integrate module level power electronics seamlessly. SMA has also expanded its strategic global storage partnership with BYD to address international growth markets such as the U S and Africa. Our joint technical solutions for home and business applications has been available in the U. S. Since January 2019. The new 3 phase inverter Sunny Tripower 8 to 10 kilowatt is aimed at home and small business applications. It combines top inverter performance with maximum ease and comfort for its users. With integrated services and shade solutions, it can meet any challenge found on roofs. System packages for home and business applications in selected markets within Europe. They feature perfectly matched hardware and software for PV, storage and energy management as well as service components. This makes business much easier for installers and addresses new customer groups. In our Large Scale And Project Solutions segment, We have launched an important all new inverter platform. The Sunny Highpower PEAK3 is SNA's first string inverter for large scale PV projects. It comes with up to 150 kilowatt power and is available for 10 1500 Golf technology. It implements Silicon Carbide Semiconductors to reduce costs and wait. The Sunny Highpower P3 is available since March 2019. Also in the months to come, we're going to use further innovations. Mangam is the upgraded medium voltage power station, which comes with a sunny central inverter was up to 4.6 Megawatt power that will be available in Q3. The SMA Global Salesforce already quotes this turnkey solution for utility scale projects that will be built in the second half of twenty nineteen or later. The feedback that we see from our customers is indeed very positive. You can see from this list of innovations and product launches that the PV inverter continues to be the core product of our portfolio. Now in the following, I will walk you through our financial figures of the first quarter 2019 and provide you with an outlook for the remainder of the fiscal year. But before we get to the revenue situation, I would like to point to some features of our quarterly statement First, as of the beginning of the year 2019, we have realigned our segments. As I already explained, we decided to organize our segments no longer with respect to products or technology, but in order to emphasize our willingness to put the customer and its needs into the center of our thinking, We, as of 2019, only have 3 segments: home, business, and large scale and projects. Those three segments do roughly translate to the market segment's residential, commercial and utility, but they include our storage and off grid business, as well as the services that we offer, starting with the after sales business, operation and maintenance and also the LNG management and data business. Within the three segments, we now combine all the offerings for our portfolio or the specific customer groups. With inverter still being the core product, but enhanced by monitoring and steering technology and software as well as different services. Thereby making apparent that SMA has effectively become a system and solution provider. The figures for the segment's business in the first quarter of 2018 have been adapted according in order to be able to compare apples with apples. Another point. Due to a revision of the international financial reporting standard number 16, as of this quarter, 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 turn to the numbers and have a look on the top line. During our last analyst call, we gave an estimate of the expected Q1 figures. This foresaw revenues of EUR 160,000,000 to EUR 170,000,000. As you can see, with EUR 168,000,000 total revenues, we ended at the upper end of that guidance. However, in comparison to the first quarter of 2018, this means a decrease of the total sales volume by 1,000,000 or 8 percent. With regard to the different regions, we can see strong revenue growth in Euro Middle East Africa, up 28% with 1,000,000 in the first quarter, as compared to 1,000,000 the first quarter of 2018. All segments developed positively in the EMEA region, with the most growth in the Home Solutions segment. In the Americas, revenues declined by 37% from 1,000,000 in first quarter of 2018 to 22,000,000 this year. All segments suffered from declining revenues in this region. Also in the Asia Pacific region, we had a slower start than in the first quarter of 2018. After achieving revenues of EUR 77,000,000 in 20 eighteen's first quarter, this year we recognized EUR 54,000,000 which is equivalent to a decline of 30%. So overall, we see the revenue share of the Americas and APAC regions decline, while the near region gained share with strong sales growth. Looking on the different segments, we see double digit revenue growth in our Home Solutions segment. While our Business Solutions segment and especially our Large Scale And Project Solutions segment declined compared to the first quarter of 2018. Let me briefly elaborate on that. The Home Solutions business started the year strong with double digit revenue growth in Q1. Achieving EUR 45,000,000 as compared to EUR 40,000,000 in the first quarter last year. Strong sales growth generated in the near region more than compensated for sales declines in the Americas and APAC regions in this segment. The Business Solutions segment achieved revenues of EUR 65,000,000 so far this year, slightly lower than Q1 2018 was EUR 71,000,000, as a result of price decline. Revenues in the Americas region were particularly low at the beginning of 2019 for all this segment. Sales in the Large Scale And Project Solutions segment decreased to EUR 58,000,000 in the first quarter of 2019. A sharp decline compared to Q1 twenty eighteen was $72,000,000. This segment was particularly impacted a weak demand in Australia and shifts of key projects in the U S and Australia into the next quarters. Which we will see in our increased product backlog later on. So to sum up the sales situation, This quarter showed positive development in the EMEA region, while both Americas and APAC regions were particularly affected by project components in the Large Scale And Project Solutions segment. That will, however, deliver higher sales in the second half of this year. Let's now have a short look on profitability. All prognosis for EBITDA in the first quarter 2019 was be negative to breakeven, which we slightly overachieved with a positive EBITDA of 1,000,000. Compared to the first quarter of 2018 was 1,000,000. Our profitability of this year's first quarter was much lower. Mainly a result of lower revenues in the first quarter this year as well as from positive currency effects in early 2018. Which were slightly negative in first quarter of this year. Taking into account that the year's first quarter is not known to be the strongest quarter in our industry, we are satisfied with the Q1 profitability. The next quarters are expected to deliver increased revenues and profitability. Depreciation and amortization is slightly lower than last year as a result of the R and D asset impairments booked in the fourth quarter of 2018, which are explained in our 20 and Year Results Call. Coming to the segments, Home Solutions, EBITDA was segment deteriorated to minus 1,000,000 compared to a slightly positive result in Q1 2018. This is the result of ongoing price pressure, which we will address this year with the launch of new cost improved products as explained earlier. Business Solutions. Our Business Solutions segment also faced price headwinds which resulted in lower revenues and EBIT compared to the first quarter of 2018, with EBIT breaking even so far this year. Also here, we expect to return to profitability through increased revenues with new cost optimized products in the next quarters. Larscale. EBIT in the Large Scale And Potex Solutions segment amounted to minus EUR 6,000,000 in the first quarter compared to minus EUR 7,000,000 in the same period of 2 2018. The minor improvement is mainly attributable to medium single digit warranty provisions booked in early 2018. While Q1 twenty nineteen did not include significant extraordinary effects. This business is especially sensitive to changes in revenue volumes, and we expect positive profitability in the second half of the year as key projects deliver higher revenues. Below the EBIT line in our P and L, you find a slightly positive financial results and effectively no taxes as a result of the operating loss in the quarter. I now come to the balance sheet. In the balance sheet, the noteworthy changes to the 2018 year end results are related for the implementation of IFRS 16 standard on leasing and the development of the networking capital positions. As I already mentioned, as of this quarter, we implemented the new international financial reporting standard number 16, and are now showing the financial liabilities and assets related to our leasing obligations worldwide. This reporting change has led to an increase in both non current assets and other liabilities of 1,000,000. Net working capital increased in absolute figures by 1,000,000 with higher inventories, mainly finished goods, largely offset by increased trade payables. As such, Our net working capital ratio increased slightly from 23% at the end of 2018 to 24% at the end of Q1 2019. And as such is on the high end of our target range for the year. The increase in inventories is related to the strong development of our product order backlog, including upcoming projects in our large scale business. Which I will explain to you in more depth shortly. Especially for our large scale business, we expect further key orders over the next month months, which will cause a short term increase in the finished goods inventories over the next month and then will be converted to sales later in the year. With regard to raw materials, we continue to build up stocks to mitigate shortages on the supplier side. Last but not least, I would like to mention our total cash position, which was EUR 307,000,000 remains solid but has decreased since the end of 2018, mainly as a result of a negative income in the first quarter. Cash flow. And with regard to our cash flow, we again compared the 2019 Q1 figures against the previous year first quarter. With regard to the cash flow from operating activities, you can see, as already mentioned, the effects from the operating loss of the first quarter of 2019. Our net CapEx of EUR 6,000,000 is slightly below Q1 last year and is split evenly between capitalized R and D expenses and investments into fixed assets. Also, you might notice the positive development regarding net investment from securities and other financial assets. Which is simply related to As you know, in 2018, we launched a comprehensive cutting program as SMA was affected not only by the continuous price pressure of our industry, but also by unforeseeable market turns. Therefore, I want to briefly comment on the progress of this program before we come to the outlook on fiscal year 2019. With our cost saving program, SMA will use its fixed costs by almost 1,000,000 per annum, while maintaining the ability to seize upcoming future opportunities. We thereby rely once more on our strength to adapt rapidly. To external market conditions. The and R and D science. By the end of Q1 twenty nineteen, we have already executed the most important two measures in that regard. The sale of our Chinese subsidiaries by a management buyout has been closed and will allow us to make optimal use of our development and production capacities at headquarters in Germany and our facility in Poland. Also, we were able to reduce our workforce in Germany by more than a 100 full time equivalents in a socially responsible way through a voluntary severance program. Overall, both these measures have led to a headcount reduction of around 4 25 full time equivalents. SMA will furthermore focus on its core competencies and continue its outsourcing and automating activities. This will trigger a further reduction of our product platforms as well as a streamlining Along with the sale of the Chinese companies, SMA will no longer directly serve the Chinese market. The consolidation and focusing activities will bring us the necessary room for internal and external optimization. That means automation of administrative processes will bring further reduction of complexity, and we will increasingly press ahead to drive future topics to develop the company into a systems and solutions provider and will continue to invest in the future oriented areas of energy management, storage integration, repowering, and digital business models. As you can see from the graphs on page 19, All these activities are well on track, and we expect the cost saving effects to become effective as planned. I now turn to the outlook on 2019. Once we're down to the order backlog, we're still distinguished between the product business on the one hand, our aftersales business once assembled under segment service on the other hand. The reason for this distinction lies in the different realization period that we can assess for products to be weeks months and for service in between 5 10 years. Overall, the level of our order backlog increased nicely with 7% more than at the end of 2018. And even more important for this year's revenues, the product order backlog grew by 33% with all segments experiencing increased order intake in the 1st month of the year with a particularly strong uptake in our Large Scale And Project Solutions segment. The service order backlog declined by 1,000,000 in the first quarter, a result of a scope reduction for one service contract extension with a customer in the U. S. For the coming months, we expect the order backlog to continue to increase. Particularly in the large scale business as orders will be placed for key projects, which have already been agreed to with customers. What I especially want to point out is that our Q1 twenty nineteen total sales together with the product order backlog already secured 50 percent of our 2019 annual sales guidance. In addition, over the last weeks, our order backlog increased further reaching now 1,000,000, the highest level since over 1 year, and showing growing demand for our products with a product related order backlog of 1,000,000, which is 74% more than at theendof2018. This brings me to our sales and profitability guidance for based on the very strong order backlog just described and the market outlook I provided earlier. Our guidance for the full year sales and earnings remains unchanged. We expect sales to reach between 1,000,001,000,000 This massive increase in sales in comparison to 2018 despite continuous strong price pressure, will result from strong business in EMEA and the regaining of our leading market position in the Utility business in North America. Also in all segments, our offerings for inverters combined with provincial solutions will contribute. In terms of EBITDA, we also confirm our guidance of 1,000,000 to 1,000,000. The depreciation amount is expected to be about 1,000,000 Capital expenditure will be at about 1,000,000, out of which 1,000,000 are related to the IFRS 16 effect. Finally, we strive to approach 1,000,000 net cash by the end of the year. To sum up, SMA is uniquely positioned to further benefit from the growth to come in all segments of the solar industry. Not only do we have a complete portfolio for all segments, but we have a truly global presence to serve all important PV markets. With the exceptional knowledge of our R and D team, our reduced cost base, the strongest brand in the industry and our bank ability. We will be able to answer to all demands of the market and our customers. This is why. If you trust solar, there's no way around SMA. Now I'm happy to take your questions. I'll repeat. It appears there's no questions on the audio. I would like to pass the call back to you, Mr. Heading, for any additional or closing remarks. Thanks, Ben, and thanks to all of you for taking the time to be with us this morning. I wish you all a very pleasant day and hope to see you soon anytime. Thank you. Have a great day. That concludes today's conference. Thank you everyone for your participation. You may now disconnect.