Earnings Call: Q2 2018

Aug 9, 2018

Good day, and welcome to the analyst investor presentation financial report, H1 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pierre Pascal Orban, Chief Executive Officer. Please go ahead, sir. Thank you, and welcome to our call for the first half year twenty eighteen. Today, we will present results for the 1st 6 months as well as our outlook for the fiscal year 2018. As a basis of this call, we would like to use our presentation that is available on investorsrelations. Sma.de in the publication section. We will be presenting in three parts during today's call and we will then open up the discussion for your questions. I will begin with his strategic and financial highlights during the reporting period. Due to the most recent regulatory changes in China, I will spend a bit more time to give you an update on the market development and SMS positioning. Afterwards, I will hand over to SMA's CFO will be having both the financial discussion and the outlook of 2018. Stephanie Peshinger from our Investor Relations team is joining today's call. This conference call is scheduled for 90 minutes and will be recorded. To the disclaimer on page 2 of our presentation. Pulling along on page 3, we have summarized our strategic and financial highlights for the 1st 6 months 2018. Commercially, we had a strong focus on the continued expansion of our offerings across all segments and regions. For example, we received awards for our new Sunny Central Storage inverter and our Edge Energy Management Software And XLS. In the second quarter, we started to supply our North American partner San Juan with SMA products for the residential segment and are currently in the process to ramp up this business. SMS business in business unit utility partnered with Wilson Transformer Company, a leading Australian manufacturer of power and distribution transformers, to develop a century inverter solution specifically for the Australian utility escape market. The new power kit will be assembled in Australia and thus reduced delivery times significantly. This strategic alliance is important to protect our high market share of more than 70% in the Australian Utility segment. Our new digital business unit, Koneva, entered into a strategic collaboration with Munich City Utilities, to jointly develop an integrated energy management system. Munich City Utilities will use its smart meter infrastructure and capitalize on the functionality of SMS and XOS. This will allow households and commercial customers to generate and store their own electricity and optimize its use. SMA increased inverter shipments at 12% to over 4 gigawatts and saved by 4% to 1,000,000 compared to the same period last year. However, the safe development in the first half twenty eighteen was not as strong as expected due to a slower utility in commercial business in North America. The demand for MMA Utility in commercial products in Europe and in Asia Pacific as well as for residential product in North America developed nicely during the reporting period. SMS order intake slowed down during the last weeks of second quarter because we continuously reduced the delivery time of key product. Therefore, our distribution channel partners only ordered according to their specific current visibility. This is normally time frame of 4 to 6 weeks. On top, the upcoming vacation period in many countries impacted order intake. However, the order backlog as of June 30, 2018 stood at 1,000,000, thereof 1 third for products. The order backlog for products and the current trading covers already 2 thirds of our annual sales target. During our presentation of the financial results for the full year 2017, we gave more color on our full year guidance. We mentioned that part of the guided earnings is a result of a release of general warranty provisions. SMA booked this positive effect in Q2 2018. The effect was partly compensated by 2 negative extraordinary effects, that occurred during the reporting period. SMA's EBITDA stood at 1,000,000. Without the positive net effect, the EBITDA would have been 1,000,000. This decrease in EBITDA margin of 10% or 8%, respectively. With regard to our profitability, SMA reached a much better result than in the same period last year. This would be true even without the positive net impact of 8,000,000 from the extraordinary effects. AtMA's balance sheet remains very strong. We have a 50% plus equity ratio and nearly EUR 400,000,000 in net cash. SMA's property and modern buildings account for more than 10% of the balance sheet sum. This outstanding balance sheet structure is paramount in light of the increased volatility in our industry. SMA's management confirms the sales and earnings guidance for the fiscal year 2018. We expect sales of 1,000,000,000 to 1,000,000,000 and an EBITDA between 1,000,001,000,000. Based on current trading, order backlog and the market momentum, it will be difficult to reach the upper end of our sales and earnings guidance. Please keep in mind that SMA's earnings guidance includes expenses for more than 1,000,000 for our new Digital Energy business. Please assume depreciation and amortization of approximately 1,000,000 and a tax rate between 25% 30% this year. Our guidance is based on the assumption that we do not experience a further shortage in supply of electronic components and that solar projects are not shifted from Q4 into the next year to a larger extent due to the expected price reduction in solar modules. SMA's management expects higher sales in the second half of the year compared to the reporting period. For SMA's top line development, we confirm our positive view for the European and Asian solar markets. In those regions, we see a nice development for utility projects as well as a strong demand for SMA's commercial solutions. Our business outlook for North America is impacted by the regulatory changes and the general uncertainty resulting from import tariffs. It is certainly positive for SMA that the US administration intends to introduce a 25% import tariff on portable type inverters and NLP technology produced in China. Nonetheless, we expect lower sales in North America compared to last year, but remained positive for the North American market in general and SMS prospects to regain market share. Later this year, we would we plan to release new products for the residential and commercial segment that are based on our global platform but were adapted specifically to the special U. S. Requirements. Furthermore, SMA's power plus solution and the new Sunny Drive Power Car 1 are the first products to be compliant with the new NEC 2017 rules. This will help us to regain momentum in North America in the coming months and next year. SMA's profitability will be driven by the expected sales We expect a strong sales increase in the commercial segment as a result of newly introduced product In each segment, as well as cost improved measures on existing products, we predict a slightly higher gross margin. The new Digital Solution business will not contribute to SMA's profitability this year. SMA as a financial strength to execute this strategy 2020 and to expand into energy services. In addition, we are planning acquisitions in the fields energy management technology and operations and maintenance portfolios. Currently, we do not see the requirement to increase our 28% shareholding in Tygo Energy. SMA has a global exclusivity for Tygo's Optune Mazati is for us, until the end of Q1 twenty nineteen. In addition, SMA has a first right of refusal in case a strategic or financial investor intends to buy the company. First of all, SMA has an option to buy the remaining shares. I guess, it is a pretty strong position to protect SMA's interest in the field of module level power electronics and power rights in Tygo Energy. So let's move on to the financial summary on Page 4. See, I would like to draw your attention to the adjusted free cash flow on the left side of the page. With minus EUR 44,000,000, the adjusted free cash flow during the 1st 6 months 2018 was much weaker than last year. However, one must take into account that last year's cash flow was impacted by the cash inflow from the purchase price for the SMA Railway Technology. 2nd, higher inventory levels, high cash in the 1st 6 months of this year, and the cash outflow for tax payments was significantly higher compared to last year. However, we expect a positive cash flow for the full year 2018, all which we'll provide you with further details, especially on the extraordinary earnings effect in the financial discussion. Please turn to Page 6 and let me talk about our market outlook for the coming years. SMA has changed its global market forecast after the unexpected announcement of China's National Energy Administration and EA on May 31, 2018, the last day of the trade show NSF, FNAC in Shanghai. The notification released by the NEA stated that there will be quotas for certain PV applications above which new capacity will not receive subsidies. Furthermore, a feed in tariff cut was announced effective June 1, 2018. Based on this announcement, SMA has basically halved its forecast for the new installations in China to 25 gigs in 2018. Taking the new installations of approximately 20 gigs during the 1st 6 months 2018 in consideration, There will be not much left to install in the remaining months of 2018. The deals without saying that this dramatic change will impact the global market as well. In our eyes, it is very likely that solar module prices will decline significantly in order to ensure high utilization rates of the capital intense module manufacturing plant in China. This is basically good news for the end customers and investors because the solar module accounts for more than 50% to 60% of the total investment in the PV system. For this price drop, solar will soon hit the critical inflection point where it will be cost competitive without subsidies in many markets. The market environment without subsidies, governments will lose the ability to control rates of deployment. The energy transition can then become rapid and may also be supported from other technologies such electrical vehicles or batteries. Please note that in our market forecast, until 2020, we have not factored in an accelerated growth due to the improved cost competitive of solar. We mainly changed the new installations in China outside China rather stable. Until 2020, the annual growth rate drops from 5% to only 1%. The solar industry will come back to the last year's global installation levels of more than 100 gigs in 2020. At this time, with a much better distribution across regions. The collapse of the Chinese solar market will impact domestic inverter players in particular. Many pure domestic inverter players will probably exit the solar market. The very few larger Chinese solar inverter manufacturers generate approximately 70% to 80% of their sales in China. To penetrate international markets with specific products and service requirements will take time and require sizable investments in the local sales and service infrastructure. According to our experience, it takes 18 to 24 months to actually implement a sound go to market strategy abroad. To accelerate the internationalization, it is likely that Chinese embroider manufacturers will reduce the average selling price. This strategy is not a guarantee to win market share since the solar inverter market is a technology and relationship driven market. However, the new situation will most likely lead to a faster price decline than expected earlier this year. On page 7, you see our updated outlook on global demand for solar inverters in euro terms instead of gigawatts. Until 2020, we expect a decline of 7 percent to 1,000,000,000. During the next 3 years, this is combined 1000000000 or 25 percent less compared to the estimates we presented during our Capital Markets Day in January, or SMA's AGM in May. Twothree of the combined reduction is a result of the unexpected market in China. One third comes from the spillover effect to other countries and thus the expected higher price pressure. Please keep in mind that we calculated cautiously and did not factor in any assumptions on accelerated growth due to the improved cost compared business of solar. We maintain our view on a strong decline on average selling prices for ground mounted PV projects due to the tender process, the low PPA prices, and the overcapacity resulting from the decline in China. We have experienced this trend already during the 1st 6 months of this year. So far, prices developed as we have expected it. For residential and commercial rooftop projects, we have changed our view. In contrast to the former outlook, we expect higher price pressure for hardware used in those PV applications in the coming years. However, behind the meter PV plants compete for the best site. Therefore, the entire system, and that is the inverter, battery and energy management becomes more and more important. In other words, feed and tariff PV applications that only use a PV inverter place higher price pressure, and PV applications behind the meters that require a more system technology to increase health consumption and ensure direct marketing of excess power. Overall, we expect stabilization of prices towards 2020. Until then, the market consolidation is likely to accelerate. In better players with sales below approximately EUR 200,000,000 would probably have difficulties to invest in new technologies to drive down product costs and or to finance the international expansion in order to serve the more fragmented markets. Smaller manufacturer, more likely to experience interruptions interruptions in production due to the adaptation of electronic components such as Semiconductors or mechanical components, financing will become a bottleneck for many smaller inverter manufacturers. The solar business of larger conglomerates will come under pressure as well because the solar business requires high level of flexibility. On top, many larger conglomerates strive to break up the different business segments in order to improve the 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 conglomerate. The regulatory changes in China have an impact on global demand and value. However, the megatrends for the solar industry, climate targets, sector components, and distributed generation remain unchanged. Therefore, it is important to acknowledge the global value of operation and maintenance services, storage inverters and digital solutions. The O and M market becomes even more important in light of the declining equipment process. In mature markets such as the U. S. Or Europe, or an M, is a business on a dollar, independent service provider such as SMA are selected separately by the EPC to ensure data integration and to provide both analytics and qualified PBs. Inverter technicians. According to GTM, market experts, investors and asset managers reject string inverters for largest cadence power plant due to the potential of slower outage response time and higher service costs. SMA estimates a global on end market value between EUR 1,000,000,000 per year under 2020. SMA increased the PD plant under management to over 3.5 weeks in the meantime and is the 5th largest provider globally. As a multi vendor O and M provider, we expect to grow organically, but also with acquisitions of portfolios. Better storage price reduction is the most important growth driver for nano and microgrids. The current price levels are already attractive because the battery storage customers can address many use cases at the same time. Today, the payback period for a utility plant has normally been no 3 years. We expect a market of up to EUR 1,000,000,000 by 2020. Approximately half of the demand comes from utility scale battery projects. Since every application is different, the significant customization is required. This offers a huge growth opportunity for better inverter such as SMA. The megatrends for the Tula Industry, which we described during our Capital Markets Day, and SMA's AGM are creating new markets for energy services, which are rapidly emerging. On the one hand, decentralized energy networks create demand for new solutions that manage flexibility and complexity. On the other hand, countless actors and links within these new energy networks generate an abundance of data, which can be used to tailor new solutions. The market addressable by the service provider 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 EUR 400,000,000 to EUR 1,500,000,000 in 2020. To capture this value pool, the necessary technical solutions need to be developed and rolled out through different markets. SMA has a clear understanding of the requirements for the digital energy market and is able to scale its go to market approach. Overall, we expect the entire addressable market for SMA to grow by 7% per annum from 1,000,000,000 in 2017, to 7,600,000,000 in 2020. As explained earlier, we expect that smaller inverter manufacturers are not going to be able to benefit from this described growth rates. Therefore, the concentration level of the larger international solar inverter players will increase To make it plain, the faster the others play has access, the more is for the remaining player such as MMA. In order to gain market share, it's paramount to have global sales and service infrastructure as well as to offer customers the cost competitive product portfolio. Let's move on to Page 10 to discuss SMA's product roadmap. During the 1st 6 months, we had a strong focus on the continued expansion of our offering across segments. The impact of our innovations is only partly reflected in the financials presented today because some of the products were launched late in Q1 or are currently in the ramp up phase. 1 of the most important innovations in the coming months is a power upgrade selling high power Taiwan for Ground mounted PV projects. The next generation for this application will be launched early 2019, with the all new inverter platforms like high power fixed width. This next product generation, which will already display which we already displayed during trade shows as our full attention. We are on track with our development efforts and testing. This product will be a huge success for SMA. The customer feedback is excellent. Equally important is a new Sunnyvale generation, which will be launched early 2019 as well. The cost point of the new generation is significantly below the current model. The product will be available in Europe, US, and Japan. And uses a communication platform that allows us to integrate multi level power electronics seamlessly. The upgraded medium voltage power station comes with up to 8 megawatts power and will be available mid of next year. The SMA Global Salesforce already closed with turnkey solutions for utility scale projects that will be built in the second half of twenty nineteen or later. With a new product portfolio, SMA will improve its competitiveness even further. Our ability to innovate in a short period of time to drive down manufacturing costs with every new generation and a strong brand reputation gives us a confidence to gain market share in the future. For investors with a rather short investment horizon, I want to discuss the products but SMA will introduce within the next six months. Therefore, please turn to page 11. In Q3, SMA will launch the all new semi dry power that allows a seamless integration of module that will power electronics technology. The new product is significantly lighter and self comes with a cost to improve bill of material. The product is perfectly suited for residential and smaller commercial rooftop applications. Those behind the meter PV applications are designed to use as much solar power as possible as a point of production. Therefore, uptime of the inverter, monitoring and energy management are key decision criteria. SMA offers installers a new tools, Sonic Design Pro to optimize the design according to the customer's specific needs. Furthermore, We offer comfortable monitoring with our sunny portal and secure uptime with our smart connected package. The new Sunny dry power works perfectly together with the new Sunny Boy storage, which will be available in Q3 as well. So the size of the battery is normally different to the size of the PV system in commercial applications, SMA's AC coupled design concept the most economic solution for commercial customers. So following along on Page 12, we have summarized our new offering for larger commercial rooftop applications. In 4 last year, we launched the all new Sonicry Power co one. Customer demand exceeded our expectations by far. The product was sold out for many months. In Q4, we will introduce an update of this high runner product. The updated Sunny Tri Power Car 1 will be the 1st inverter in the U. S. That meets the rapid shutdown requirements for commercial applications. Due to the 6 maximum power point tracker, It does not make economic sense to use optimizers for the PD plants to increase the energy harvest. This gives us a wider competitive advantage compared to other players who only sell inverters with module level power electronics. Batteries are important for customers who want to reduce demand charge, monetize the gap between different time of use, electric, electricity tariffs or to optimize the self consumption by shifting energy. Those customers want to dimension the battery according to their specific needs. In general, the battery size is different compared to the PV system. SMA is in the process to launch its new semi tripe power storage for commercial applications. This product works perfectly together with the semi truck power core 1 and SMS, Edge Energy Management Software and XLS. In Germany, customers can buy the SMA spot product as well, which allows the direct marketing of electricity at any given point of time. Please turn to Page 13. SMA has excellent competencies to handle the complexity of utility scale power plant, with a centralized layout. In the second half of this year, we will offer our customers a new 6 megawatt complete medium voltage turnkey solution. Our technologies allows a DCAC ratio up to 200% so it's allowing the over dimensioning of the PB array in order to reduce the specific inverter costs. The entire equipment is integrated in a forty foot container and allows a fast commissioning In order to drive down cost, drive down the specific cost per kilowatt, as a main will offer an even higher power class of 8 megawatts with 1500 volts of technologies mid-twenty 19, as mentioned before. Since the beginning of this year, we offer our customers in selected markets and new product called Process Plus. With this new offering, we shift CapEx to OpEx and back our quality promise with a contractual commitment. Customers in North America and Europe are excited because the amounts they are paying depends on the actual uptime of the inverter. For utility scale projects with a decentralized layout, we will offer the Sunny Highpower pick 1, and the Sunny High Power PEAK3. Those products have much lower manufacturing costs compared to the previous MMA inverter platforms. Overall, we will improve the competitiveness of our portfolio for utility scale projects over the coming months. Furthermore, we will capitalize on our design competency to grow our retrofit business. We particularly focus on markets with a large installed base of inverters from manufacturers who exited the market already. Please turn to Page 14. In a tougher market environment, it is important to increase in market entry barriers for competitors. Over the last years, the SMA engineers systematically protected our intellectual property. Today, we have more than 1100 patents and nearly 1000 trademarks. We have our own team to enforce our rights to give you a feel for the impact of IP protection, we closed the license income for the first time. Only 2018, our competitors had to pay EUR 500,000 to us or licenses. This is pretty impressive result. In addition, we see the upcoming NEC standard in the U. S. As a huge chance to gain market share. With our strategic investment in Tiger Energy and our strong contractual position with the company, we have access to module level power electronics. The IP portfolio of SMA and Tiger Energy represents a huge market entry barrier for newcomers in the MLPE segment. Furthermore, SMA can meet the new rapid shutdown rig clients in the U. S. With our new power plus solution which comprises the SMA inverter plus Tiger optimizers plus automatic replacement services. Our solution is perfectly suited for the repowering of residential and commercial starts as well, as well, and self offers as a huge access to a growing market. With this exciting news, I want to turn the presentation to early having for the financial discussion. Thank you, Pierre. Ladies and gentlemen, in the following, I will comment on the H1 2018 figures, and we'll then focus on the outlook for the second half of the fiscal year. Regarding sales, SMA recorded sales of 1,000,000 during the 1st 6 months of the year. Is an increase of almost 4% compared to the same period in 2017. Our shipments increased by more than 12% to 4.3 Gigawatt. Looking on the geographical distribution, this positive development resulted mainly from our excess in the EMEA as well as in the APAC region. APAC generated sales of more than EUR 150,000,000, which was 12% more than last year, about 39% of SMA's total sales come from this region. Especially Australia developed very nicely and became our biggest national market in the first half of twenty eighteen, driven by an impressive growth of our utility sales. With 44% or more than EUR 117,000,000, The biggest share of total sales was generated in EMEA. Sales grew more than 14% year on year, especially since the European markets were very strong and showed high growth rates in our commercial and utility segments. In contrast, the sales share of Americas declined to 17% due to the expected slowdown of the US market resulted from a general uncertainty about regulatory changes and ongoing customs discussions. Bising sales in the residential segment, could not compensate for significant decline in the commercial and utility business in North America. However, we did see continuous growth in Central And South America. These markets will certainly become more important for SMA in the coming years. In summary, APAC and especially EMEA were more than compensating the decline in America. Therefore, we are satisfied with the overall sales development and the reporting period. Before we are going to look on the different segments, let me remind you of some major changes in our quarterly statements, which I explained in detail on the last analyst call. We no longer have a segment service, but the activities of this segment have been allocated the segment's residential, commercial, and utility. Also, due to a revision of the International Financial Reporting Standards 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 are used to refer to as service. It includes 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 look the sales figure for the different segments. In our residential business, sales declined to about 1,000,000, mainly due late demands from wholesalers in Germany and Australia, which were still reducing high inventories that created at the end of 2017. In addition, demand for our Power Plus solution has not yet picked up as expected. However, we are very satisfied with the higher sales of the segments in North America, For the second half of twenty eighteen, we remain optimistic, especially since we will introduce some new attractive products in the segments later this year. In the last quarters, our commercial segment was heavily affected by supply constraints that resulted in longer delivery times. These problems have been mostly overcome at the end of the second quarter, which is one of the reasons why sales increased by 6% to more than EUR 130,000,000. Sales were especially strong in Germany, but also in Asian countries like South Korea and Japan. We are confident to see further significant sales growth in the second half of twenty eighteen when new products like the Sunny High Power Peak 1 will be available. The Utility segment was our biggest technical sales of about 1,000,000. This is an increase of 23% compared to the previous year, given period. For success, we are very proud of. In addition to the already mentioned positive development in APAC and there, especially in Australia, The European markets for Utility have also been developing very well. As we plan to introduce new product offerings with higher power classes, still within 2018, we expect the growth for Utility to continue. Growth was also recorded in the Storage segment where sales rose to EUR 29,000,000. We expect the full year sales of this segment to reach about the same level as last year. As I already mentioned in our last call, the Digital Energy segment will not generate noteworthy sales this year. Let's now take a look on profitability on Slide 17. We are happy to announce that SMA significantly increased profitability compared to the same period last year. During the 1st 6 months of 2018, we generated an EBITDA of EUR 41,000,000 which is 40% more than in the first half of twenty seventeen. The EBITDA margin went up from 7.7 to more than 10%. Despite the ongoing price pressure, our gross margin improved to almost 25% in the reporting period. The increased profitability reflects our sales success and the impact of our improved cost base. That was also significantly influenced by the adjustment of warranty provisions and the devaluation of inventories. And the following, I would like to provide you with some details on this. In March this year, when Pierre and I presented to you the full year figures of 2017, I announced that in 2018, we would revisit our general warranty provisions. We at SMA have been making great progress with respect to the quality of our products in recent years. At the same time, we have more and more data available to provide us with statistical information on failure rates and reasons. That's why we started a project and have used a new model for provisions for general voluntary risks this year, which were supposed to replace the previous calculation logic. This project was successfully completed in q 2 already. With a new model, we can now estimate the costs of problems occurring within the warranty period in a much more differentiated manner. This allows us to calculate the provisions for voluntary cases way more adequately than before. Further details can be found on Page 34 of our quarterly statement. This new method of calculation resulted in a positive effect due to being more than 1,000,000. Our residential and commercial segments benefited from this while the effect was negative for utility and storage. The second major effect on our EBITDA came from higher than usual devaluations on inventories. S Pierre and I already pointed out A lot of new products will be launched already within the remainder of this year. Due to these product changes and end of production of discontinued products, Evaluations maintained our residential and commercial business totaled 1,000,000 within the 1st 6 months of 2018. We expect no significant further evaluation of inventory in the second half of twenty eighteen. 3rd, we had to increase the provisions for individual warranties, mainly in Utility, by about EUR 11,000,000 in the 1st 6 months of this year. There is not a sign of recurring issues behind this, but we are facing several unrelated individual issues at once. These combined effects resulted in a positive effect on our EBITDA of EUR 8,000,000, all included in the cost of goods sold. If you compare the EBITDA of H1 2018 with the first half of twenty seventeen, please remember that H1 2017 was positively effect by high single digit €1,000,000 book gain due to the sale of our railway division. So to sum up, even adjusted for all these effects, The financial results of H1 2018 is significantly better compared to the same reporting period last year. Let's now take a definitely increased its profitability to an EBIT margin of 90%, up from minus 4% in the first half of twenty seventeen. The drivers for this margin improvement were the positive effect from our new calculation model for general voluntary provision, as well as new and cost improved costs. By contrast, reevaluation on inventory due to product changes had a negative impact. The same goes for our commercial segments, higher sales after resolving supply problems and the introduction of new products like our intersolar award winning Sunny tripod core 1, also led to higher EBIT. Besides that, This segment was also positively affected by the effect from the new estimate of general voluntary risk. After being only breakeven, in the first half of twenty seventeen, our commercial segment now contributed EUR 21,000,000 to SMA's total results which translates into an EBIT margin of 16%. Despite the sales growth in APAC Engineering, the EBIT margin of our Utility business deteriorated to minus 12%. In addition to the ongoing price pressure, that has to do in particular with increased provisions. 1st, while the segment, the recalculation of our general voluntary provisions turned out to have a negative effect. 2nd, the increased provisions for individual warranties have had a severe impact on the result. Strawbridge was also impacted negatively by the new calculation of our general warranty provisions. Therefore, the EBIT was slightly negative. Let's now turn to the development of our net working capital and the balance sheet in general on Slide 18. SMA's net working capital increased to EUR 187,000,000 coming from EUR 168,000,000 at the end of 2017. This represents a net working capital ratio of about 21%, which is well within our full year guidance of 19% to 23%. Please keep in mind that we modified the calculation of our net working capital as of the beginning of 2018. Our net working capital now includes advanced payments received by our customers. The net working capital figures for 2017 given in this call and in the quarterly statement have been adapted accordingly to ensure comparability. If we look more closely at the reasons for the increase of net working capital, it becomes clear that this is mainly due to an increase in inventories. In comparison to the end of 2017, this position increased by about 25% to 1,000,000. As you may remember, we had to deal with some supplier issues in recent months, which is why we are not yet focusing on an optimized networking capital but on ensuring our ability to deliver. We therefore raised our stock on raw materials unfinished and finished goods. In order to be able to end of 2017 and we'll continue to do so by the end of 2018. While account payables remained unchanged and under the amount of advance payments fell slightly, we were able to significantly reduce accounts receivable by EUR 29,000,000. And with that, at least, partially offset the effect of increased inventories. Our balance sheet remains very strong with an equity ratio of more than 52%. Our total cash came to EUR 430,000,000 at the end of H1 2018. This is a very solid number, although it represents a reduction by 12% in comparison to the end of 2017. Since we only have EUR 19,000,000 in financial liabilities, our net cash totaled 1,000,000, down from 1,000,000 at the end of 2017. The main reasons for this development were our increased net working capital. Also, we had to pay additional taxes retrospectively, For the end of 2018, we expect the net cash position to reach up to €500,000,000. Additionally, SMA still holds a €100,000,000 credit facility. These strong financial figures underlying the ability and financial health of SMA. There are no other major deviations within the balance sheet line items with the exception of the provisions, of course, which were reduced by the new calculation of our general warranties. Let's now turn to our cash flow profile. SMA generated a negative cash flow from operating activities in the 1st 6 months of this fiscal year. There are two main reasons for this. First, we had to pay taxes of about EUR 20,000,000, largely related to prior tax periods, which was a decrease of EUR 24,000,000 compared to year H1 2017. Where we got a tax refund instead. 2nd, as I already mentioned, SMA focus is currently on improving our ability to deliver. Our customers expect fast deliveries, and we are working hard to meet these expectations. We therefore increased our inventories, which reduced our cash flow from operating activities by about EUR 55,000,000 which is EUR 39,000,000 more than in the same period last year. These effects will not occur again in the second half of twenty eighteen, We therefore are certain that both the cash flow from operating activities as well as the free cash flow will be positive by theendofthisyear. Coming to the order backlog, our order backlog remains solid and totaled EUR 580,000,000 by the end of H1. Thereof, 32% from product business that will turn into sales shortly. This means that about 60 5 percent of our full year sales guidance for 2018 is already covered with H1 sales under current order backlog. However, in comparison to the end of Q2 last year, our order backlog declined by 14%. This reduction came entirely from our backlog for product, whilst the order backlog for service remained stable year on year. The decline for products was due to a variety of reasons. An important reason is the uncertainty in the market as to what effect the U. S. Import duties on imported solar cells and modules and the reduction of the feed in tariff in China and the associated Chinese over capacities will have on price developments. In addition, we have gotten a handle on most of the delivery problems in our commercial segment in the last quarter which in turn allows our customers to lower their ordering volumes. Furthermore, product changes are imminent in all core segments. Of our customers are already waiting for the announced new product and are therefore reluctant to place orders right now. Last but not least, there are regulatory changes ahead in Australia. As you can see, all these reasons are of a temporary nature. Thus, for the coming months, we expect the order backlog to remain on the same level or even increase slightly. And then with these figures, we are well on track to reach our full year sales objectives, which brings me to the next slide. Based on our order 18 with sales exceeding EUR 500,000,000. Therefore, the Managing Board confirms the full year sales and earnings guidance for 2018. We expect sales of 900,000,000 to €1,000,000,000 and an EBITDA between 90,000,001,000,000. However, to reach these numbers will become anything but easy. Based on current trading, order backlog and the market momentum, we might not reach the upper end of our sales and earning guidance. Our guidance implies that we don't face any new major supply shortages and now continuous phenomenon which hits now and then every use of electronic devices, not only the manufacturers of photovoltaic inverters. And It implies that no solar projects are shifted from Q4 into the next year due to the expected price reduction of solar modules. Depreciation will amount to approximately 1000000. Capital expenditure will also be at about 1000000, and we are certain to again generate a positive cash flow. Please keep in mind that those figures include costs for our new digital energy business of more than 1000000. 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 segment offers huge opportunities for technology driven companies such as SMA. SMA Financial are solvers, and our shareholder structure is stable. SMA is an investment grade company as a bankable partner. With the exceptional knowledge of our R and D team and about EUR 400,000,000 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's no way around SMA. Now Pierre and I are ready to take your questions. Thank will now take our first question from Arash Roshan Zamir of Warburg Research. Please go ahead, sir. Good morning, gentlemen. Thanks for taking my question. I have 2, if I may. The first one on the releases of warranty provisions, you already disclosed that you had a positive effect of roughly 1,000,000 in the first half of the year. I was wondering if we should expect further positive effect from releases of provisions in the second half of the year? And if so, what could be the magnitude of the positive effect? And that will be the first question. Josh, so as we expect no such effects in the second half of twenty eighteen. And, second, the 8,000,000 is, let's say, the the net effect of all the extra load effects that we have in H1. And that just in order to not mix that up. As I mentioned, the effect from the release of the general warranty provisions alone is more than 1,000,000. Understood. So there won't be any from today's point of view, at least there won't be any, positive or negative one off effects in the second half of the year. Oh, I just have to kinda exclude okay. I cannot exclude anything happen. But with regards to the 3 extraordinary effects that I described, which is the release of dermal launching provisions and the devaluation of inventories, there will be no such things in in hh2. Yes. That's right. Okay. Understood. And then maybe the second one, on your, product order backlog and the fact that it actually declined by, I guess, roughly 1,000,000 in the second half of the year. I'm just wondering, why you're so confident that you will be able to achieve your revenue guidance of at least 1,000,000, considering the fact that visibility has declined quite dramatically for you guys. So what makes you so confident. And also with respect, to the EBIT EBITDA target, because during the presentation, you elaborated on, on, on the negative effects from the fit cuts in China and that this potentially could trigger, heavy pricing pressure. And then again, why why are you so confident that you will be able to make I guess, roughly 90,000,000 of EBITDA if if the it looks like from today's perspective, there will be heavy headwinds. Well, Ashish, it's it's this is Pierre. With regard to the product backlog and and and the change in our visibility, I think what happened particularly over the last 12 to 18 months is that, we had for higher runner products in resi and in commercial in particular, quite some long returns. And customers, our distribution partners, in particular, therefore, ordered well ahead, just to make sure that they receive an appropriate allocation of product And, basically, they placed ordered well above their visibility, yeah, just to make sure that they have, products available. Now we worked hard on the supply situation and we could see the first improvements in Q2 already. So we came down with delivery times for those high runner products. But right now, there is no reason for a distribution channel partner to basically place orders beyond his visibility. And that is normally 4 to 6 weeks plus there is a bit reluctant just to take inventory during the summer period, where there's a lot of vacation and therefore installation is slow. And normally, business picks up August, September, you can see that, businesses or new installations pick up And that is the reason why we believe yet, auto backlog is down, but auto backlog was down. Because it was artificial high, and and and, and customers placed well ahead. So if you now think about normal run rates, we come back to a normal level. We have initiated a campaign in the U. S, in Europe and in Asia to promote our products as those campaigns are pretty well received. And that is one of the reasons why we believe that. 2nd, I think that should not be underestimated. We come with up with a think you're in commercial with new product, in the second half of the year. And you can see that in our presentation, in the short term horizon, the long term horizon of new product And if there's a kind of change in the product, a mix or a generation, And our distribution partners first try to deploy the old version and then they ask for the new one. And we are right now actually in the middle of that kind of process, and and that is also impacting order intake. So you can see us not as heavily concerned about the order backlog situation. That is not the case. The other point that you raised is what happened with the price pressure. First of all, It is indeed good news for the entire industry because solar module prices will come down significantly. And you can already see that in the discussion with EPCs and project developers, that this happens And this makes affordable take even more attractive. We are already hit the inflection point in many countries with a new price development, we can add a a bunch of of additional countries, which is good. So that gives you basically growth opportunities. You're right. There are very few players who have an international footprint from China. They would, of course, try to go into international markets, but just get real. If you want to do project business, you have a development cycle between 12 18 months. Yeah. So you're not going to, you know, to increase your sales volume overnight only because you reduce price. Yeah. So that has a longer, it has a time lag. And in, in the distribution channel, it is all the question about, can you really manage the channel? And that has to do a lot with how do you deal with installers? And there, I would say it takes me a long time just to establish a a sound go to market strategy. So I'm not scared about that situation, particularly not in light of the new products that we bring into market, particularly for resi and commercial. However, that will lead to a kind of accelerated price pressure. But just do a calculation on the back of the envelope. If you just say we have a high concentration right now in our industry. So that means maybe the top 5 players account for 60, 70% of global demand. And all of that are a few Chinese competitors. So first of all, they will drop out because they lose a significant part of of their revenue because it is a domestic business. So that's basically, I would doubt that they come into the top 10 league. And all those smaller players, they have difficulties for me to serve those fragmented markets and to come up with cost competitive products. So in other words, what we will see is a huge number of smaller players that still accounts for 30, 40% of global demand. They would probably disappear rather sooner than later. And there's more for those remaining players. And therefore, we regard ourselves, Patixio was our financial strength and the portfolio that we have. And the brand that we have in our industry, we have a flagship, we see there are actually more opportunities for us going forward. Understood. And it's it's, Arush, and it's not happening within a quarter or 2. This takes longer time, that kind of, of, of change in the market structure. And my concern is, or my doubt is that players will only concentrate on a certain market and maybe even have debt on that book or a state owned, but they really have the horsepower to survive the kind of transition. No. I I definitely agree with you that, there will be potentially a market consolidation that SMA solar will will be potentially winner out of the situation. However, I'm I'm just worried if there could be some short term pain a similar situation like in q3 2016 when, heavy pricing pressure also took its toll on on on SMA, but, seems like We can't rule it out, ours. We we we we certainly can't rule out that this will be an effect. And one risk that we highlighted in our presentation and also in our in our speech here to the presentation, if, EPC's project developers start to ship projects into the next year because they see a significant drop in module prices. We have seen this before that that somehow customers start to say, I'd rather pay the penalty and buy new modules that is still more attractive for me. And if I have to leave the team my project to shift it a bit, that is still an attractive case for me. We don't have we haven't seen that in a significant, amount so far, but it's not ruled out. Alright. It's lovely, darling. Understood. Many things gentlemen. There are no further questions in the queue at the moment. We have another question now from Mark Webb of Quero. Please go ahead, sir. Yes. Good morning. Just had a a question on, on the indication for cash levels. I just wanted to understand the figure that you gave of, around 900 around 500,000,000 net cash for 2018 is actually net cash or gross cash? So the assumption is that it is up to EUR 500,000,000 and that relates to net cash. Net cash, thank you very much. As there are no further questions over the back to your host for any additional or closing remarks. Okay. Thanks everybody for your questions and your time to listen in. And as always, pray for some. Bye bye. This concludes today's call. Thank you for your participation. You may now disconnect.