Earnings Call: Q4 2018

Mar 28, 2019

Day, and welcome to the Analyst Investor Presentation Finance Report Full Year 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doctor. Juergan Reiner, Chief Executive Officer. Please go ahead, sir. Thank you, and welcome for joining us on today's conference call for the full year 2018. Today, we will present detailed results for 2018 as well as our outlook for fiscal year 2019. In addition, we will provide you with sales and earnings financial highlights during the reporting period and give you an update on market development, strategic highlights and our product portfolio. Afterwards, I will hand over to SMA's CFO, Ulrich Heading, who is also in charge of investor relations for an update on our restructuring initiatives to reduce fixed costs, the financial discussions, and the outlook for 2019. After our presentation, we are happy to answer your questions. The presentation of this analyst call is also available on our website at ir. Sma. PE. This conference call is scheduled for 90 minutes and will be recorded. The replay will be available for 7 working days. We refer to the disclaimer on page 2 of our presentation. After this call, we will hold our annual press conference. So following along on Page 4, we have summarized our strategic and financial highlights for the fiscal year 2018. SMA generated sales of 761 1000000, 15% below the same period last year. The sales decline is mainly due to accelerated price pressure as a result of the market decline in China. Polish will comment on the sales distribution by regions and segments in the financial discussion. EBITDA in 2018 was -1000000, was negatively impacted by net extraordinary effects of minus 1,000,000. In addition, 2018 EBIT is affected by extraordinary impairment of R&D intangible assets of minus 1,000,000. SMA is on track with the implementation of our restructuring program. For 2019, we expect sales of 1000000 to 1000000 and an EBITDA of 20 to 1,000,000. In quarter 1, 2019, we expect sales of 1000000 to 1000000 and EBITDA of -5000000 to 1000000. For your convenience, we have summarized the key financial figures on slide 5 of this presentation. Please turn to Page 7 and let me talk about our market outlook for the next coming year. Our market outlook until 2021 remains unchanged since first published on our Capital Markets Day and a January this year. SMS core market, the PV inverter business is expected to grow in gigawatt by 6% to 109 Gigawatt in 2019. We expect the growth to continue in the next coming years in all regions except China. China remains the largest market but will with a rather flattish volume development. Europe, Middle Eastern Africa is the most promising region with annual growth of more than 20%. This growth is driven by increased photovoltaic demand in the countries in the Middle East and Africa. While Utility remains the largest segments globally, we expect the highest growth rate in the commercial and residential segments. Please turn to Page 8. After a drop from 2017 to 2018 by approximately 10% We expect global demand in euro terms to develop flattish until 2021. We expect price pressure to continue to largely erode volume growth. Overall, we expect the stabilization of prices towards 2021 until then the market's consolidation is likely to accelerate. Many inverter players cannot afford investment in new technologies to drive down product costs and or the international expansion to grow faster. Last year, we unexpected dramatic FIT cut in China impacted the global market resulting in rapid falling solar module prices. With solar modules accounting for 50% to 60% of the total investment in a PV system, project developers and investors, postponed their projects waiting for prices to come down even further. The good news is that with this price drop, 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 the 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 solar industry, which we described in detail during our Capital Markets stay 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 access with these new energy networks generate an abundance of data, which can be used to tailor new solutions. The market addressable by service providers such as SMA is expected to be only a fraction of the overall energy service market. We estimate the addressable market for us to increase from 1000000 to 1000000 in 2019 to 1000000000 in 2020 to capture this value pool, the necessary technical solutions need to be developed and rolled out throughout different markets. SMA has a clear understanding of the requirements for the digital energy market and can scale its growth to market approach. Price reductions and the most important growth is the most important growth driver for battery storage in nano and micro grids. Metry storage systems are gaining importance in European markets, especially in Germany, UK, and Italy and in North America. We expect the market of up to EUR 800,000,000 by 2021. Approximately half of the demand comes from utility scale battery projects. Since each utility application is different, Significant customization is required each time. This offers a huge growth opportunity for battery inverters experts such as SMA. The O and M market is gaining importance considering declining PV equipment prices. In mature markets such as the U. S. And Europe owned M as a business on its own. Independent service providers such as SMA are select it separately by the EPC to ensure data integration and provide both analytics and qualified PV inverter technicians. SMA estimates that global owned end market value between 1,000,001,000,000,000 per year until 2021. Overall, we expect the entire addressable market for SMA to grow by roughly 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 rate. Therefore, we expect the market consolidation Before I turn to our products in more detail, I will provide you with a quick overview of our main business segments on Slide 11. SMA has a relatively balanced revenue distribution across its main segments. The Utility segment again made the largest contribution to sales in 2018, accounting for 35% of gross sales. The commercial segment generated more than 30% and the residential segment almost 25% of SMA's group sales. At the beginning of the year, storage was integrated into the former utility, residential and commercial segment. In 2018, it generated almost 10% of SMS group sales. Starting 2019, the reporting structure will compromise the home solutions, business solutions, and large scale and project solutions segments. Service, repowering and storage will be integrated into these segments to structurally reflect SMA's strategy to become a provider of systems Please turn to Slide 12. SMS is the only inverter manufacturer with a portfolio which covers every stage of the energy integration, from energy monitoring to energy market integration with SMS direct marketing solution SMS spot. Annex is SMS new energy management platform. With Annexos, we are expanding to energy Optimization, Energy Management, and finally to solutions that allow integration of different actors such as prosumers and consumers. We thus gradually put our vision of a holistic Cross Sector Energy Management into practice. Please turn to our product pipeline for 2019 on slide 13. In product development, we are pursuing a platform strategy aimed at systematically reducing product costs. All our new products enter the market with an improved cost point, As earlier, as explained earlier, many inverter players cannot afford the investment in new technologies needed to drive down product costs year on year. SMA continues with a high rate of innovation in all segments in 2019. In residential, we will launch the new Sunny Boy generation early in 2019. The product has actually launched already. The product will be available in Europe, USA, and Japan, and uses the communication platform that allows us to integrate module level power electronically seamlessly. SMA also expands its strategic global storage partnership with BYD to address international growth markets such as the U. S. And African markets. Our technical solution increases the availability of batteries for our customers in the U S since January 2019. In commercial, we already launched an important all new inverter platform sunny high powered peak 3 in quarter 1, 2019. This next generation for ground mounted PV projects comes with up to 150 kilowatt power and is available for a 1000 volts and 1000 500 volt technology. It implements Silicon Carbide Semiconductors to reduce costs and weight. In Utility, the upgraded medium voltage power station comes with a Sunny Central inverter now with up to 4.6 Megawatt power and will be available in Q3 this year. 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 they receive from our customers is indeed very positive. On Slide 14 of this presentation, you see a picture of 1 off SMS system package that proves that SMA can already offer more than just inverters. SMA can provide installers and end customers with a modular hardware, software, and service system tailored to their needs and from a single source. We do not only tell our customers that the inverter works together with a battery, but deliver the hardware TV and storage inverters plus battery, together with energy management, software, These customized intelligence systems are one aspect that differentiates SMS from its competitors. With these news, I will now hand over to Ulrich Heading for an update on our restructuring measures as well as the financial discussion. Thank you, Kieran. Ladies and gentlemen, and the following, I will walk you through our financial figures for the full year 2018. And we'll then turn to our outlook for the first quarter of 2019 as well as our guidance for the entire fiscal year. As you know, 2018 was a terrible year for SMA, although we were able to tie last year's record in deliveries, with 8.5 gigawatts of nominal and vertical capacity being sold. This turned into revenues of only EUR 761,000,000. Which is a minus of 15% year over year and gives you an indication of how serious the overall price decline was in 2018 affecting all segments. From a geographical point of view, EMEA was once more of a stronger region with 48 percent of SMA's total sales, which is equal to revenues of 1,000,000. Before sales reductions, which met our expectation and especially the residential and commercial segments were performing quite well in EMEA. Within this region, Germany, Israel, and the Benelux Countries contributed the biggest revenues for SMA. Germany was once more our worldwide largest market in 2018. The Asia Pacific region was able to generate 3% or EUR 259,000,000 of SMA total sales and in service our 2nd largest region. Within the APAC region, Australia was in 2018, the largest market for SMA before Japan and South Korea. Coming now to Americas. Americas generated 19 percent or 1,000,000 of SMA's total sales and fell there was short of the expectations we had by the beginning of 2018. Among the reasons for this result, for the general uncertainty about regulatory changes and ongoing discussions about possible import tariffs in the U. S. The expectation of an improved SMA inverter for residential applications in the first quarter 2019, as well as a postponement of projects and anticipation of further price declines. This spurred all our segments in the Americas. In a nutshell, EMEA was performing well and contributed most of our sales, but APAC and especially Americas fell short. Before we are going to look on the different segments, let me remind you of some changes in our financial statements which I explained already in detail in the last analyst calls. We no longer have a segment of service. But the activities of this segment have been allocated to the segment's residential, commercial and utility. Also, due to a revision of the international financial reporting standard number 15. In our financial statements, we now show the total sales volume being split into revenues with products and revenues with services. Services in that sense should not be mixed up with the revenues generated within our after sales business, which we used to refer to as service. The sense of Firegrass, we understand services to include our service or operations and maintenance contracts warranty extensions, commissioning, digital energy services, and operational management and monitoring. Product on the other hand encompasses inverters, storage systems, communication products, accessories, and spare parts. Let's now have a look on the sales per segment on the right side of the slide. As you can see, revenues of all our segments decreased compared to 2017, especially residential has fallen by 22% on a year by year basis to about 1,000,000. This decline is mainly due to the shortage of electronic components such as semiconductors for Sunny inverters comparatively high inventories held by our customers and increased price pressure in the APAC and the near regions. Commercial segment has been heavily affected by shortages of some key components in the first half of twenty eighteen, and a declining market in the U. S. And Japan. Nevertheless, especially Germany was performing very well and is now our largest market in this segment, before Japan and the USA. The Utility segment continues to remain our largest segment was 1,000,000 of sales for 2018. Nevertheless, the Utility segment decreased in sales in comparison to the previous year by 8%. As a result of the significant decline in prices and, as already mentioned, postponement of projects. The APAC region accounted for 43% of the segment sales in Australia is now our largest market for the utility segment in 2018, even before the U S, Israel and Germany. Storage. In 2018, external sales in the storage segment decreased by 37% to EUR 61,000,000. Major reason for this decline is the lack of large scale projects in 2018, different than in 2017 and also different than in 2019, again, where we see many of those large scale projects, combining central inverters with batteries. This happened in part due to the limited availability of batteries. Sales Bottlenecks with the battery manufacturers have now been successfully countered with SMA entering into strategic partnerships with battery manufacturers, like for example, BYD. As I already mentioned in our last calls, the Digital Energy segment did not generate noteworthy sales in 2018. Let's now take a look on our profitability. 2018 SMA generated an EBITDA of minus EUR 69,000,000 and an EBITDA margin of minus 9%. EBITDA is heavily impacted by negative extraordinary effects of 1,000,000, which I would like to comment in more detail. Cost saving measures. As you know, we started to set up a program to allow our fixed cost in Q3 twenty eighteen already. I will come back to this later in my presentation. In consequence of that, we had to build accruals and the amount 1,000,000 to cover related measures, including accruals for severance payments. Depreciations due to the difficult market environment and therefore SMA failing to achieve its sales targets, and also due to some bad luck in form of insolvency of customers, we had to depreciate working capital. Inventories and account receivables and the total amount of 1,000,000. Warranty provisions. As I already explained in our last calls of 2018, SMA reviewed its calculation of general warranty obligations, and as a result, could, in total, release accruals of EUR 33,000,000 in Q2 2018. On the other hand, SMA had to build additional approvals for individual warranty claims of 1,000,000. In addition to the further extraordinary effect of EUR 11,000,000, mainly related to the depreciation of tax reimbursement claims with authorities in Italy and Romania. Let's turn now to the segments in detail. Residential EBIT in the Residential segment turned negative to almost minus EUR 17,000,000, primarily due to a decline in sales. But also affected by negative one offs from the depreciation of inventories and extraordinary impairment losses on capitalized development costs. Part, those extraordinary effects were offset by the change in estimates and recalculation of general warranty obligations which I have reported already to you in our last call. EBIT in the commercial segment decreased to minus 1,000,000. Mainly due to high price pressure. Also here, the results include negative one offs from the depreciation of inventories due to product ranges and extraordinary impairment losses on capitalized development costs and were only in part offset by positive effects from the change in estimates and recalculation of general warranty applications. EBIT in the Utility segment deteriorated to almost minus 1,000,000 as a result of poor price quality in individual markets and as well one off items. Those included provisions for individual warranty claims and impairment losses on capitalized development costs. Contrast to the commercial and residential segments, utility had no positive one off effect from the change in estimates and recalculation of foreign geplication. EBIT in the storage segment amounted to minus EUR 5,600,000 and was as well affected by a new calculation of general warranty provisions. And extraordinary impairment losses on capitalized development costs. Let's now turn to the balance sheet and net working capital. Coming from 1,000,000 at the end of 2017, S and P's network capital increased by about EUR 9,000,000 to EUR 177,000,000. This represents a net working capital ratio of about 23 0.3%, which is slightly above our full year guidance of 19% to 23%. We go more into detail We see that this is due to an increase in inventories of about 1,000,000, mainly attributable to high stocks of finished goods, built up during the year to shorten lead times for key residential and commercial products. You may remember from our last calls and mentioned today as well, we have to deal with some supplier issues in recent months, which is why we were not focusing so much an optimized networking capital, but on ensuring our ability to serve our customers. Nevertheless, the risk from producing finished goods in advance partly led to depreciations at the year end. For 2019, the SMA management team will therefore put a strong emphasis on optimizing networking capital. The trade receivables reduced significantly from 1000000 to 1000000 and were there was even below the amount of trade payables of 111,000,000. Now let's have a look on the group balance sheet on the right side of this page. Non current assets went down year on year by 21%, and ended up at 1,000,000. This is mainly driven by the impairment of R&D intangible assets. Partly a result of the decision to optimize our product portfolio, one of the measures of our cost cutting program. In addition, deferred tax assets recognized for loss carry forwards of SMA Solar Technology were also depreciated amounting to 1,000,000. Total cash decreased from 2017 to 2018 by 146 1,000,000 to a level of now 1,000,000. Consequence of the weak annual results increased inventories and one off cash flow effects, including tax payments for prior years. Shareholders' equity decreased by 31 percent from 1,000,000 to 1,000,000 due to the negative net earnings and net in 2018. As a result, equity ratio decreased from 50% at the end of 2017, to 43% at the end of 2018. Let's now turn to our cash flow profile on the next page. In 2018, SMA generated a negative cash flow from operating activities of -1,000,000. In addition to the fact that revenues were below our expectations, SMA increased as already mentioned hit inventories to serve our customers. And SMA had to pay taxes related to prior years of more than 1,000,000. The cash level in 2019 will not be affected by dividend payments as the management and the Supervisory Board agreed to suggest to the annual general assembly not to pay any dividend for 2018. This ends my comments on 2018, a year in which SMA was fact that not only by the continuous price pressure of our industry, but also by our foreseeable market turns and various self inflicted negative effects which made it impossible to stay in the black. In consequence of that, we launched comprehensive countermeasures to return to profitability as quick as possible Allow me to comment on the content and progress of this program before we come to the outlook on 2019. With our cost saving program, SMA will reduce its fixed costs by 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. Managing reduction of fixed costs will, to the most part, come from a consolidation of core production and R and D sites. As already announced, SMA is selling its Chinese subsidiaries by our management buyout and will make optimal use of its capacity at headquarters in Germany and its facility in Poland. Overall, this will lead to a headcount reduction of around 425 full time equivalents, thereof around 300 in China. SMA will furthermore focus on its core competencies and continue its outsourcing and automating activities. Will trigger a further reduction of our product platforms and as well as the streamlining of S And A's product portfolio to create momentum and simplify that's enabled access to Chinese market. The consolidation and focusing activities will bring us the necessary room for internal and external optimization. That means more customer centricity and market focus will bring value from closer consistent collaboration between sales, service and our business units. Automational administrative processes and the downsizing of overhead will bring further reduction of complexity. Also, we will increasingly press ahead to drive future topics to develop the company into assistance and solutions provider. And will continue to invest in the future oriented areas of energy management, storage integration, repowering and digital business models. All these activities mentioned here are well on track made to secure SMA success in the long and short term and supporting our overall strategy. And now turn to the outlook on 2019. Q1 of 2019 showed so far an increase for the residential business in comparison to last year. Commercial and utility are slightly behind our budget. We therefore expect sales in a range between 100 and 1,000,001,000,000 for the first quarter of 2019. The expected EBITDA will be slightly negative up to the balance. To have a look on the right side of this slide, you will see a promising product order backlog development for Q1 2019 across all segments. If we compare today's order backlog to our figures per the end of 2018, We see a slightly decreased backlog for our long term after sales business, but have an increase of nearly 40% in the product order backlog. This portion of our backlog will be converted into sales within this year. Let me highlight, therefore, that a 50% of our guided sales figures for 2019 are already covered by our year to date revenues and the current 2019 product order backlog. Which brings me to the full year guidance. For 2019, the SMA Managing Board confirms its sales and profitability guidance for 2019 announced by end of January this year. We expect revenues in between 1000000 and 1000000 and an EBITDA between 1000000 and 1000000. As explained during our Capital Markets Day in January, the growth in sales will be reached by striving to increase market share, by taking advantage of strategic partnerships and introducing cost to improve products as well, offering system packages which ease the job of installers. To sum up, SMA is uniquely positioned to further benefits from the growth to come in all segments of the solar industry. SMA can offer a complete portfolio and has a great team on the ground. The digital transformation of the energy sector offers huge opportunities for technology driven companies such as SMA. SMA's financials are still solid and our travel structure is stable. As an A is an investment grade company and a bankable partner. The exception of knowledge of our R and D team and about 1,000,000 of total cash, we will be able to rapidly enter the higher margin business with digital solutions and applications for storage. This is why if you trust in solar, there is no way around SMA. Now, you and I are happy to take your questions. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our There appears to be no telephone Thank you very much. Have a nice day and a great week. Thank you. Bye bye from Ulrich and Jurgen. Thank you. Bye bye. Bye bye. This concludes today's call. Thank you for your participation. Ladies and gentlemen, You may now disconnect.