Earnings Call: Q3 2018

Nov 8, 2018

Good morning and thank you for joining us on today's conference call to discuss SMA's third quarter 2018 results. First of all, let me shortly introduce myself as this is my first analyst call as a new CEO of SMA. Some of you may already know me from the Capital Markets Day. I've been with SMA since 2011 and was appointed to the management board in 2014. With responsibility at that time for technology and operations. I will now also lead sales and service. I must say I'm both excited and honored to take over as CEO of SMA. On the call today, I will start off with strategic and financial highlights during the reporting period and give you an update on market development, strategic highlights, and our planned restructuring initiatives to reduce fixed costs. Afterwards, I will hand over to SMA's CFO, Ulrich Heading, who is also in charge of investor relations, for the financial discussion and the outlook The presentation of this analyst call is also available on the website at ir.sma.de. 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. Now please turn to page 3 of the executive summary. From January to September 2018, we increased inverter shipments by 6% to over 6 gigawatts and generated sales of EUR 575,000,000, slightly 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. All rich will comment on the sales distribution by regions and segments in the financial discussion. On profitability, SMA generated an EBITDA of 1000000 in quarter 1 to quarter 3 2018. The figures do not include restructuring provisions because the measures are currently being discussed where the workers' council and no decisions have been made yet. We adjusted our market outlook mainly due to the higher installation in China. The FIT cuts in China caused accelerated price pressure in international markets and many project delays. As a result of that order intake lag significantly behind expectations. We adjusted our guidance for the current fiscal year end of September and announced structural adjustments to lower the fixed cost base. We now expect sales between 1000000 and 1000000 and break even to break even to slightly negative EBITDA after one off effects from restructuring. For 2019, we anticipate sales growth and positive EBITDA. Our key strategic highlights in quarter 3 the expansion of our global storage partnership with BYDIM to jointly address additional markets with a high growth potential such as the USA And African markets. With this partnership, we will jointly develop end market technical solutions and improve availability of battery systems for residential and commercial customers. For your convenience, we have summarized the financial figures on Slide 4 of this presentation. Please turn to page 6 and let me talk about our PV inverter market outlook for the coming years. We adjusted our market outlook 2018, mainly because of higher than expected installations in China. National Energy Administration of China NEA announced new PB installations of 35 Gigawatt until September 2018. Installations in June July were higher than initially anticipated because the NEA allowed a grace period for projects under construction as of May 31, The day the drastic FIT reductions were announced. When the FIT cuts became fully effective in August September, new installations declined dramatically to less than 2 gigawatt per month. Accordingly, we increased our market outlook 2018 for China from 25 to 39 gigawatts. The unexpected dramatic FIT cuts in China impacted the global market as well. Solar module prices started to decline rapidly at the end of August only. With solar modules counting for roughly 50% to 60% of the total 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. 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 gain traction, which will also be supported by other technologies such as electric vehicles and of course batteries. At the beginning of November, the NAA indicated to still support solar. It is planned to increase solar targets of the 13th 5th year plan to probably 250 to 270 gigawatts. Accordingly, we adjusted also our guidelines for 2019 2020. Estimate for China. On Page 7, you see our updated outlook on global demand for solar inverters in euro terms. The FIT cuts in China also impacted pricing of PV inverters in the international market. To accelerate their internationalization, the Chinese inverter manufacturers reduce the average selling price. And please note that this strategy is not a guarantee to win market share since the Solar inverter market is a technology and relationship driven market. Never let us, the new situation led to a faster price decline than expected earlier this year. Until 2020, we expect a rather stable market volume reaching 1,000,000,000. Please keep in mind that we calculated cautiously and did not factor in any assumptions on accelerated growth due to improved cost competitiveness for solar. We maintain our view on strong decline of average selling prices for ground mounted PV projects due to the tender processes, the low PPA prices and the probable continuing internationalization of Chinese inverterment suppliers. We also expect the stabilization of prices towards 2020 until then, the market consolidation is likely to accelerate. Inverted players with sales below approximately EUR 200,000,000 will probably have difficulties to invest in new technologies to drive down product costs and or to finance international expansion in order to serve the more fragmented markets. Smaller inverter manufacturers are also more likely to experience interruptions in production due to the allocation of electronic components such as semiconductors or mechanical components. The solar business of larger conglomerates will come under pressure as well because the solar business requires really high level of flexibility. On top, many larger conglomerates strive to break up the different business segments in order to improve performance In many larger conglomerates, the solar business has not the critical mass and is therefore likely to be discontinued in a tougher market environment. We have seen this development many times with European and American electrical conglomerates. To summarize, the regulatory changes in China had an impact on global demand and value for mainly 2018. However, the megatrends for the solar industry, climate targets, sector convergence and distributor generation, they remain unchanged. On page 8, you will find that our market outlook for our own end services, storage inverters, and digital solutions remain unchanged. The O and M market is gaining importance in light of declining PV equipment prices and in markets such as, U. S. And Europe, own MS business on on its own. Independent service providers such as SMA are select separately by the EPC to ensure data integration and provide both analytics and qualified PV inverter technicians. SMA estimates a global owned M market value between 1,000,000,001,300,000,000 per year until 2020. Petry storage price reductions is the most important growth driver for nano and micro grids. We expect the market of to €1,000,000,000 by 2020. Approximately half of the demand comes from utility scale, battery projects. Since each utility application is different, significant customization is always required. This offers a huge growth opportunity for battery inverter with such as SMA. The megatrends for the solar industry, which we described in detail during our Capital Markets Day in SMA and SMS AGM are creating new markets for energy services, which are rapidly evolving. On one hand, decentralization, decentralized energy networks create demand for new solutions that manage flexibility and complexity. On the other hand, countless actors 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 addressable market for us to increase from EUR 400,000,000 in 2018 to EUR 1,500,000,000 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 of the digital energy market and is able to scale its go to market approach. Overall, we the entire addressable market for SMA to grow by 7% per annum from 1,000,000,000 in 2017. To billion in 2020. As explained earlier, we expect that smaller invertermanufact are not going to be able to benefit from the described growth rates. Therefore, we expect the market consolidation of inverter manufacturers to accelerate. In order to structure, as well as to offer customers a cost competitive product portfolio. Let's move on to page 10 to discuss SMA's product road map. During the 1st 9 months, we have had a strong focus on the continuous advancement of our offerings across all segments. The impact of our innovations is only partly reflected in the financials presented today because some of the products were launched late in first half year or are currently in the ramp up phase. In Q3, we launched our all new Sunny Tri Power that allows seamless integration of MLPE Technology. The new product is significantly lighter than the predecessor, uses components from other SMA inverter platforms and thus comes with a bill of material cost improved by more than 25%. The product is perfectly suited for residential and smaller commercial rooftop applications. The new Sunny Tri Power works perfectly together with a new Sunny Boy storage, which is available since Q3 as well. Since the size of the battery is normally driven sorry, different to the size of the PV system in commercial applications, SMA's AC coupled design concept is the most economical and also flexible solution for commercial customers. With a new planning software, Sunny Design Pro installers are, for the first time, able to optimize and really design for their customer's whole energy system across all sectors according to the customer's specific needs. In addition, we are in the process to launch an update of our Sunny Drive Power Core 1, which will be the 1st inverter in the USA that meets the rapid shutdown requirements under NEC 2017 for commercial applications. Due to its maximum power point trackers, sorry, the 6 maximum power point tracker, trackers in the core 1, it does not make economic sense to use optimizers for PV plants to increase the energy harvest even further for these commercial applications using the core 1. This gives SMA quite a competitive advantage compared to other players who only sell inverters with module level power electronics. SMS Tri Power Core 1 was perfectly together with a new Sunny Tri Power storage for commercial applications, which is also launched in Q3 2018. Together with SMS Energy Management Platform, AnnexOS, customers can monitor power generators and electrical appliances, as well as battery solution for direct marketing of electricity To offer our customers the best system solutions regarding both technology and economic efficiency, in all market segments and regions, we selectively calibrate with strong partners. As part of this, it is our strategy to integrate the most attractive and available batteries into SMA storage solutions. In the 1st 9 months of 2018, battery demand was higher than supply. Our customers were not able to purchase enough batteries to match their order intake. In this perspective, I'm very glad to announce that SMA expands the strategic global storage partnership with BYD to address international growth markets such as the USA and also African markets. We are developing technical solutions as well as driving joint marketing for these solutions to increase the availability of batteries for our customers. The solutions are aimed at the residential and commercial energy storage market and will be available in the USA in January 2019. E by D is one of the leading lithium ion battery manufacturers and storage solution supplies worldwide and they send out for superior technology and ease of installation. Let me point out that this strategic partnership is not exclusive. Our strategy to partner with all leading battery manufacturers remains unchanged. Our higher rates of product innovations in all segments will continue in 2019. In residential, we will launch the new Sunny Boire generation early in 2019. The product will be available in Europe, USA, and Japan and uses a communication platform that allows us to integrate module level power electronics seamlessly. In commercial, we will launch the equally important all new inverter platform sunny high power peak 3 with up to 150 kilowatt power, the next generation for ground mounted PV project. It will be available with both 1000 volt and 1500 volt technology. And implement Silicon Carbide Semiconductors to reduce costs and weight of the inverter. In utility, the grid medium voltage power station comes with a sunny central inverter with up to 4.6 Megawatt NAND and will be available in quarter 3 next year. 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. With a new product portfolio, SMA will continue to drive down manufacturing costs and further improve its competitiveness. I met some of our major customers during the last weeks, and the feedback I received on our new products was indeed very positive. Please turn to page 11. In the market chapter, I explained that the impact of the FIT cuts in China in international markets were twofold. Firstly, accelerating price pressure due to Chinese inverter manufacturers trying to enter the international markets against the background of rapidly declining home market And secondly, PV projects being postponed due to rapidly falling module prices caused by overcapacity from China. These spillover effects from the Chinese FIT cuts started to impact international markets in August, September. We, the management board of SMA Solar recognized at an early stage that our variable cost reduction with a new product would not be enough to protect SMA's profitability. Therefore, at the end of September, we announced that we will launch restructuring initiatives to drive down our fixed COI cost base as well. We are currently negotiating planned measures with a workers council and expecting to be able to decide on final measures before the end of this number 1, the reduction of complexity in R&D And Production. SMA operates today sites in Germany, Poland and China, And going forward, SMA will consolidate its footprint to lower fixed costs and complexity. Secondly, the adjustment of service concept SMA operates field service teams and contact centers in all key regions. And going forward, we will outsource certain activities to improve efficiency. Thirdly, the adjustment of our portfolio. We serve all segments and regions. And going forward, SMA will streamline the portfolio to reduce complexity. Restructuring of overhead, is the 4th point and SMA will adjust processes and Workscope to increase efficiency across all functions. I want to stress that our unique positioning in our strategy 2020 remains intact We will continue We will also continue to expand our service activities to capitalize on our installed base of more than 70 gigawatts. And will further invest in energy services and to benefit from the transition in the energy sector. With regard to our tight schedule, we, the Managing Board, We'll negotiate the restructuring measures with the workers council until the end of 2018. Implementation is planned for 2019. The EBIT effectiveness of the restructuring measures measures will amount to an upper double digit €1,000,000 figure. The level of extraordinary effects depend on the outcome of the negotiations with the Workers Council, of course. Before I turn the presentation to Ulrich Hadi, for the financial discussion, I want to emphasize that we will finalize the restructuring plans with a long term perspective and a special focus on reducing fixed costs while at the same time enhancing SMA's ability to cease opportunities wherever they arise. This will include closer integration of SMA Sales And Technology Organizations to further increase our customer from the positive perspective Thank you, Jurgen. In the following, I will briefly walk you through our financial figures the 1st 3 quarters of this year and then turn to the outlook for the last quarter. During the 1st 9 months of the year, SMA shipped product with a nominal output of 6.2 gigawatts, which is a 6% increase compared to the same period in 2017. Revenues amounted to EUR575,000,000, minus 3% year over year. Looking on the geographical distribution of our sales, EMEA continued to be strongest region and accumulated revenues 1,000,000, which is about half of all sales year to date prior to sales deductions. Within this region, the country with the highest revenue figures were Germany, the Benelux States, and Israel. The Asia Pacific region stands for a third of SMA's total sales, thereby being our 2nd largest market, having generated sales of 1,000,000. Within APAC, China fell short on sales as expected due to the cut on public subsidies for solar plants. But the Australian market developed nicely and it's now the biggest market for SMA in APAC before Japan. In the Americas, the expected slowdown of the US market, which results from a general uncertainty about regulatory changes and ongoing customs discussions, Highlighted already in the last quarterly conference call has continued. We therefore see compared to the same period last year, a drop in the total sales attributable to the region of the Americas by 30% to 1,000,000 representing about 18% of the overall sales volumes. In a nutshell, EMEA was performing above expectations that Americas and APAC fell short on sales. Segments, let me remind you of some changes in our quarterly statements, which I explained as well in detail on the last analyst call. We no longer have a segment called 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 quarterly 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 aftersales business, which we used to refer to as service. In the sense of IFRS, we understand service to include our service or operations and maintenance contracts warranty extensions, commissioning, digital energy services, and operational management and monitoring. Products on the other hand encompasses inverters, storage systems, communication products, accessories, and spare parts. Let's now take a closer look at the sales of our different segments. The sales level in the residential is primarily characterized by the generation change for U. S. Inverters in the first quarter. The shortage of Semiconductors or Sunny Boy inverters and the comparatively high inventories held by distributors. Residential generated, therefore, on 1st 9 months of 2018, sales of not more than EUR 131,000,000, which is a decrease of around 23% compared with the same period in 2017. Our segment commercial has been heavily affected by problems with some key suppliers, but still managed to deliver a slight increase compared to the same period last year. Especially the newly introduced Sunny Tri Power Core 1 could significantly contribute the consistent performance of this segment totaling in 1000000 sales in the 1st 9 months of 2018. The utilities segment is still our biggest segment and generated EUR 206,000,000 in the 1st 9 months, which is an increase of 8.4 percent compared to the same period last year. This is primarily driven by continued strong demand in the APAC and the EMEA regions. In our storage segment, sales increased until the end of Q3 by about 4% totaling in €46,000,000. As the price pressure in this segment is very high, it is noteworthy that looking on the nominal inverter capacity, we shipped year to date The increase is much higher with almost 22%. As I already mentioned in our last call, the Digital Energy segment will not generate noteworthy sales this year because it is still in the stage of development. Let's now have a look on profitability. During the 1st 9 months of 2018, SMA generated an EBITDA of EUR 51,000,000 and an EBITDA margin of 9%. Despite the continuing price pressure, our gross margin improved to more than 23% in the reporting period, which is an increase of percentage points compared to the same period last year. This profitability reflects our sales success in a difficult market environment, and the impact of our improved cost base that was also influenced by the adjustment of general and special warranty provisions and the devaluation of inventories done by the end of the second quarter and having a positive net effect of EUR 8,000,000, all included in the cost of goods sold. If you compare the EBITDA of the 1st 3 quarters of 2018 with the 1st 3 quarters of 2017, Please remember that the same period last year was positively affected by a high single digit €1,000,000 book gain due to the sale of our railway division. Therefore, the EBITDA of the 1st 9 months 2018 is almost at the same level as the EBITDA of the same reporting period last year. Let us now have a look onto the different segments on the right side of this page. Residential. In the 1st 9 months, the EBIT of the residential segment improved significantly year on year to almost 16% up from 0% compared to the same period last year. This 16 percent are equivalent to 1,000,000 and resulting from the launch of new product and the already mentioned positive one time effect as a result of the recalculation of warranty provisions. In contrast, the devaluation of inventories due to product changes had a negative impact. The commercial segment improved as well in the reporting period and achieved an EBIT margin of 11%. A few new products like our intersolar award winning sunny dry power 41 promoted the results as well as a positive effect from the new estimate of general warranty risks in this segment. The Utility business reached an EBIT margin of minus 11%. In addition to the ongoing price pressure, this is all so due to the increased provisions for this segment. 1st, the recalculation of our general warranty provisions turned out to have a negative effect 2nd, the increased provisions for individual warranties had a severe impact on the result. Storage. In this segment, the EBIT was also negatively impacted by the new calculation of our general warranty provisions. Therefore, the EBIT was slightly negative was about minus 1% margin. Before I explain the development of our networking capital and the balance sheet, let me highlight that our equity ratio increased to more than 53%. S and a has, like in the past, a strong equity base and a very solid balance sheet structure. Networking capital coming from 1,000,000 at the end of 2017, SMA's net working capital increased to 1,000,000, which represents a net working capital ratio of almost 24%. And as there was slightly above our full year guidance of 19% to 23%. If we go more into detail, we see that this is mainly due to an increase in inventories of more than 30 percent to 1000000 in comparison to the end of 2017. As you may remember from our last calls and mentioned today as well, we had to deal with some supplier issues in recent months which is why we were not focusing on an optimized networking capital, but on ensuring our ability to deliver to our customers. We therefore raised our stock on raw materials to 1,000,000 and finished goods to 1,000,000. In addition, of course, we had very strong sales in November December last year, which reduced our inventories at the end of 2017. The trade receivables reduced significantly from 1000000 to 1000000 and are now almost in balance with trade payables of 112,000,000. Let's now have a view on the group balance sheet on the right hand side of this page. Besides the decrease in provisions, which I already explained, you will notice a reduced cash position. In comparison to the end of 2017, we have a reduction by 90% although our total cash is still a very solid number with EUR 392,000,000 at the end of Q3 2018. Let me highlight in addition that we only have 1,000,000 in financial liabilities. Our net cash totaled, therefore, at 1,000,000 The main reason for this drop being the increase in inventories. Another reason were higher advanced payments on corporate taxes demanded by tax authorities. As we see an increase in sales in the last quarter, thereby a reduction in inventories, we expect the net cash to be at almost 1,000,000 by the end of this year. Let's now turn to SMA generated a negative cash flow from operating activities in the 1st 9 months of this fiscal year. In addition to the fact that revenues in the 1st 9 months were below expectations, SMA had to pay taxes of about 1,000,000 largely related to prior tax periods and we had to increase our inventories as already mentioned. This is, as you can see, reduced our cash flow from operating activities to 1,000,000. I want to highlight that the gross cash flow which does not consider the effects due to changes in net working capital is positive and will remain positive in 2018. On the next page, we are talking about order backlog. On the right side of this page, you can see that our order backlog decreased in comparison to the same period last year by 26%. Remained strong with EUR 549,000,000. 29 of this EUR 449,000,000 come from our product business, and most of this product backlog will turn into sales shortly. There are various reasons for order backlog. First, the uncertainty in the market as to what effect the U. S. Import duties on imported solar cells and modules the reduction of the feed in tariff in China and the resulting Chinese over capacities will have on price development. 2nd, the delivery problems in our commercial segments in the first half year. Furthermore, but not with the same importance, product changes are imminent in all core segments. Some of our customers are waiting for the announced new products and are therefore reluctant to place orders right now. All these issues are of a temporary nature and for this reason, we expect the order backlog to increase As you may recall, the end of SMA Management board had put its last sales and earnings guidance under the premises that SMA is not hit again by supply shortages or project postponements due to the expected price reduction of solar modules. Unfortunately, this is exactly what happened in September this year and led to the revision of this guidance on September 27. Beginning by end of August prices for module prices decreased rapidly. In consequence, most market participants relied on a wait and see position which resulted in a steep decline We don't curator of between 1000000 and 1000000. Furthermore, we had to realize that the price drop triggered by the overcapacity of Chinese competitors now trying to shift volumes into overseas markets, couldn't be hope with by our regular and ongoing design improvements and cost out measures. Therefore, SMA also announced a restructuring of the company in order to bring down fixed costs and levy further structural potential. This restructuring will trigger 1 off costs that will negatively affect SMA's earnings, thus lowering the earnings guidance to breakeven to slightly negative EBITDA for 2018. Based on our current order backlog and sales volumes, as well as the latest market intelligence, we expect to reach the revised sales guidance. However, we might not reach the upper end expectation of a sales increase and positive EBITDA in 2019. Depreciation will amount to approximately 1,000,000, capital expenditure will also be at about 1000000. Please keep in mind that those figures include costs for our new In summary, SMA is uniquely positioned to further benefit 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 of the huge opportunities for technology driven companies such as SMA. Our financials are solid and our shareholder structure is stable. SMA is an investment grade company and a bankable partner with the exceptional knowledge of our R and D team and about 1,000,000 of total cash we will be able to rapidly enter This is There appears to be no telephone questions at this Okay. There are no further questions. Then thank you very much for this call, and goodbye. Have a very great day. Thank you. Thank you. Bye bye.