Earnings Call: Q1 2018

May 9, 2018

Good day, and welcome to the SMA, Tula Technology AG, Analyst Investor Presentation Financial Raipur's Q1 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pierre Pascal Uborn. CEO. Please go ahead, sir. Thank you very much, and welcome to our call for the first quarter 2018. At the basis of this call, we would like to use our presentation that is available on vesselsrelations. Sma.de in the publication section. As always, we will be presenting the 3 parts during today's call and we'll then open up the discussion for your questions. I will begin with a strategic and financial highlights for the 1st 3 months of the year, followed by an update on the market development and SMA's positioning. I will then hand over to SMA's CFO, oil recording, for the financial discussion and the outlook for the full year 2018. Stephanie Pachenga from our Investors Relations team joined today's call. This conference call is scheduled for 90 minutes and will be recorded. We'll refer to the disclaimer on page 2 of our presentation. Following along on Page 3, we have summarized our strategic and financial highlights for Q1 2018. As announced during our Capital Markets Day, we introduced the Power Plus solution for North American markets. This solution comprises the Sunnyboinverterplusmodulelevelpowerelectronics. Power Plus is safer in case of emergency and compliant with NEC 20142017 rapid shutdown requirements. Power Plus elevates SMA to a unique position in the field of module level power electronics. In addition, our offering includes smart proactive service technology and can be retrofitted with energy storage anytime. The outstanding reliability of our products, the integration of the next generation of module level power electronics as well as our experience in the world of energy management and storage were key success factors to enter into a strategic agreement with San Juan, one of the top residential solar installers in the U. S. In Q1 twenty eighteen. We are in the ramp up phase and will increase our shipments in the course of the year. During the 1st 3 months we had exciting news in the commercial segment as well. We launched our new vertical energy management platform and XOS to connect EV systems to various technologies. However, it is still very difficult for installers and EPCs to manage the electrification of more things to provide the end customers with matching offers and to answer important questions for the investment decision. Therefore, we developed Sunny Design Pro. This tool allows a swift design of complex systems and delivers offerings that are tailored to the end customer's needs within minutes. We are pretty excited because this enabling software will help us to increase our share with solution business in the coming years. The official product introduction will take place during the intercellular ratio in Munich in June. In Q1, We also founded our new subsidiary, Kaniva, with a focus on provision of energy related services for private and commercial customers. Connieva already started to work on the first projects in the area of food retail. Also in Q1, SMA has crossed the 3 gigawatt mark for operations and maintenance contracts globally. Further latest GTM, O and M, an asset management report, SMA is now the 5th largest O and M provider in the world. Now I'd like to summarize the key financial highlights. During the 1st 3 months of the year, SMA shipped 1.8 gigawatt inverter power. This is 11% more than during the same period last year. Days increased by 5% to more than 1,000,000 and were in line with our guidance. Ulrichs will comment on the sales distribution by regions and segments in the financial discussion. Our order book remains pretty strong at the end of Q1. Business in April was good as well and the order backlog stood at 1,000,000 at the end of April. There nearly 40% for products. This is on the same level as the year before. On profitability, SMA generated an EBITDA of 1,000,000. The EBITDA margin stood at healthy 10%. Please keep in mind that last year's comparable EBIT figure of EUR 16,000,000 included a positive one off effect from the divestment of SMA's way way business. The one off effect had an impact in the magnitude of the high single digit €1,000,000 amount. Therefore, we are satisfied with the profitability reached during the 1st 3 months. All of which will comment on the profitability by regions and segments later as well. In light of current trading, our strong order backlog and our positive view for the coming months, we confirm the sales and earnings guidance for the fiscal year 2018. We expect a moderate sales and earnings growth for this year. Since many utility projects will be invoiced in the second half of the year, estimate stronger financials in Q3 and Q4. For the full fiscal year 2018, SMA's management team expect sales between 1000000001000000000 and an EBITDA between 1000000 and 1000000. S and A's profitability 2018 will be driven by the expected sales growth in all segments and to shift towards the commercial and residential segments. As a result of newly introduced products in each segment, cost improvement measures on existing products as well as lower warranty costs, we predict an increased gross margin. Depreciation amortization will amount to approximately EUR 50,000,000, thereof more than EUR 20,000,000 for R and D. Please assume a group tax rate between 25% 30%. SMA will generate a positive cash flow and will have a net cash position of more than EUR 480,000,000 by the end of 2018. SMA has a financial strength to execute the strategy 2020 and to expand into energy services. In addition, we are planning acquisitions particularly in the fields of Energy Management Technology And PhoneM portfolios. So let's move on to the financial summary on page 4. As I may change the reporting structure at the beginning of the year. The previous year's figures are adjusted to the new reporting structure. For your convenience, we included an overview of the changes in the appendix of this presentation and furthermore, always will provide you with more details later in this call. On Page 4, I would like to draw your attention to the gross margin development. SMA generated a gross margin of 21% in Q1 2018. Please keep in mind that the first quarter was impacted by supply shortages, particularly for residential and commercial products. SMA shipped more products with airfreight to serve customers as a best possible in the time in times of allocation. The higher transportation costs negatively impacted the gross margin in Q1. Due to the second sourcing of critical components, and firm supply commitments, we expect the shortage of power electronics to ease within Q2. However, The supply of components remains a critical success factor for the rest of the year and the coming years. And that is true not only for the solar industry, but also for other industries. In addition, the Q1 gross profit included higher warranty provisions for the Utility business. On a normalized level, the gross margin would be around 24% and therefore in line was the last 2 quarters 2017. The slower business and residential is mainly because we introduced the new Sunny Boy inverter in North America only at the end of Q1. This negatively impacted sales at the beginning of the year. Please turn to Page 6 Mega Trends are leading to a full transformation of the energy ecosystem. We are experiencing a change in the way energy is produced and consumed. Which is supporting existing markets by creating new ones. Overall, the growth of global energy demand will continue with an increasing share from renewable energies due to the climate targets. At the same time, decentralization and the electrification of many things are resulting in a structural change in to these changes and is creating value pools for technology oriented companies such as SMA. On page 7, we describe the impact of climate targets in more detail. Political targets such as those established in Paris in the Paris agreement at the end of 2015, would continue to drive decarbonization. Together, with the growth in primary energy demand, the adoption of renewable energy systems will further expand pushing the demand for PV installations and associated products and services. According to the expert from the Fraunova Institute and your PV capacity additions, could be up to ten times of the 2020 additions by 2040. In this breakthrough scenario, Basically, everything is electrical, heating, mobility, and power production. The share of decentralized energy in total energy generation capacity is expected to rise in most countries. For example, in Germany, to almost 30% from 15% today. The higher share of renewable implies an increasing volatility and requires means of capacity balancing and optimization. As such, storage systems are expected to grow by over 25% per year until 2040. While the solar industry was very much driven by subsidy programs in the past, the new energy market will be driven by technology. The electrification of many things. We call it sector convergence is complex and requires smart control and market mechanisms as well as high cyber security standards. The impact of the structural changes is shown on the right hand side of the presentation slide 8. With a higher share of renewables, we are experiencing a shift from the centralized control grid the supply matching demand to a locally controlled grid where energy distribution is decentralized and determined by the price at a given time. Digitalization offers the required analytical capabilities for decentralized applications and real time control of grid assets. The structural transformation of energy of the energy sector will create new business models in the future. On Slide 9, we illustrated the connection of the cloud platform with Edge Or Local Energy Management. Vertical platforms are very different compared to horizontal IoT platforms because they require a deep understanding of the relevant applications. SMA and XOS is an Edge Energy Management platform that will be applicable for many industry with a high energy demand such as retail, food, retail, data centers, or the agriculture sector. With our technology, the business owner has local control of the sensitive data. MXOS allows local optimization of various technologies, applies powerful analytics to drive smarter decisions and visualizes data in a meaningful dashboard. The entire system connects to the cloud to access marketplaces to generate economies of scale by connecting many local sites of 1 business owner and to get generic information. In order to capture the entire value of MXOS, we will collaborate with many different business partners to get faster access to food retail companies we tend to form a joint venture with dump of cooling. To trade excess electricity directly we partnered with the energy company and pop up to integrate electrical vehicles into the system and to understand the challenges resulting from autonomous driving SMA credit strategic alliances with Volkswagen and Audi. Many strategic partners choose to work with SMA because we have the application know how for decentralized power generation. With this exciting news, I want to turn to Page 10 for the market discussions. SMA's outlook has not changed since our last call at the end of March 2018. SMS core market, the PV inverter business is expected to grow in gigawatts and euro terms in the coming years. We estimate a volume growth of only 7 and 10% per annum until 2020. The volume growth in the EMEA and APAC regions is expected to continue. Here, growth rates are between 15% 25% per annum until 2020. China remains the largest market but with a rather flattish volume development, with less than 10 gigs of new installations in Q1 2018, we feel comfortable with our full year outlook of only about 50 gigs for China. This will put significant pressure on competitors who only do business in China because the price pressure in this market remains high and the next feed in tariff reduction is planned for July this year. Globally, we expect a nice volume growth, especially in the residential and commercial segments. Global demand in euro terms is expected to increase by only 2% in 2018 and by 5% per annum until 2020. We expect a strong decline of average selling prices for ground mounted PV projects due to tender processes and low PPA prices. In contrast, the price decline for residential and commercial rooftop projects is moderate. Those projects compete for the best size and are usually not tendered. Overall, we expect stabilization of prices towards 2020. Until then, the market consolidation is likely to accelerate. Many inverter players cannot afford the investment in new technologies that are necessary to drive down product costs and or the internationalization and to grow faster. SMA has no plans to acquire smaller inverter manufacturers due to our already good positioning in all markets and in all segments. The O and M market becomes important in light of declining equipment prices. In mature markets such as the U. S. And Europe, OEM is a business on its own. Independent service providers such as SMA are selected separately by EPCs to ensure data integration, analytics, and qualified PV inverter technicians. According to GTM market experts, investors and asset managers reject string inverters for large scale PV power plants due to the potential of slower outage response time and higher service costs. SMA estimates the global O and M market value between EUR 1,000,000,001,400,000,000 per year until 2020. SMA increased the PD plant under management by approximately 20% and crossed this 3 gigs mark by the end of the first quarter 2018. As a multi vendor O and M provider, we expect to grow organically, but also with acquisition of O and M portfolios. Petroist storage price reductions is the most important growth driver for Nano and micro grids. SMA expects storage prices of less than per kilowatt hour for residential and less than per kilowatt hour for utility applications by 2020. This is lower than expected before. However, the current price levels are already attractive because customers can address many use cases at the same time with battery storage. Today, the payback period for utility plants is normally below 3 years. We expect a market of up to 1,000,000,000 by 2020. Approximately half of the demand comes from utility scale battery projects. Since every application is different, significant customization is required. This offers huge growth opportunities for battery inverter experts such as SMA. The megatrends introduced in the previous section are creating new markets for energy solutions, which are emerging rapidly. 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 is expected to be only a fraction of the overall energy service market. To increase from 1,000,000 in 2018 to 1,000,000,000 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 and focus to approach the digital solution market. Overall, We expect the entire addressable market for SMA to grow by 14% per annum from 1,000,000,000 in 2017 to EUR 9,200,000,000 in 2020. Let's move on to SMA's unique positioning in the solar industry on Page 11, before I hand over to Ulricharding. SMA has excellent competencies to handle the complexity of utility scale power plants 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 technology allows a DCAC ratio of up to 200% thus allowing the over dimensioning of the PV Array in order to reduce the specific inverter costs. The entire equipment is integrated in a forty foot container and allows fast commissioning. The product is well received in all utility markets and can meet the requested price points. Since the beginning of this year, we offer our customers in selected markets a new product called profit plus solution. With this new offering, we ship CapEx to OpEx and back our quality promise with a contractual commitment. Customers in North America and Europe are excited because the amount they can they are paying depends on the actual uptime of the inverters. Our utility scale projects with a decentralized layout we are on track to offer the new SMA SolidQ and the Sunny Highpower peak 1 in H2 2018. The SMA solar Q is manufactured in China, while the Sunny High Power Peak 1, is produced in Europe. Both products have lower manufacturing costs up to 20% compared to the previous inverter platforms. Overall, we are optimistic with regard to our utility scale business. With our offering, we are competitive in mature markets like Italy or Australia. In both markets, we are the clear number 1. But SMA is also amongst the top players in price sensitive markets such as India. On Page 12, we described the use cases for residential and commercial applications. In those segments, it is far more important to use as much power as possible at the point of production to integrate the PV system in a comprehensive energy management system. In order to strengthen our core business, SMA has developed an all new communication platform. This gives us the possibility to connect the Tiger module optimizers without any additional equipment to our string inverters. Since the SMA power plus solution and that is a string inverter plus Tiger Optimosis, allows the customers only to optimize the models that require an optimization, we can generate higher yields with lower investment costs. In addition, our U. S. Power plus solution is safer for installers and firefighters in case of emergency. The built in module level output shutdown and de energizes stringing voltages to the safe limit of 30 volts or below to comply with NEC 20142017 rapid shutdown requirements. No other module level power electronics manufacturer as a comparable solution for the U. S. Residential and commercial market. It goes without saying that the SMA system can be retrofitted with energy storage at any time. To test the growth potential for of the residential and commercial storage market, we will introduce a new Sunnyvale storage inverter that works with all major battery brands. For the larger commercial applications, we introduced the new Sunny Drive Power Core 1 last year. The Core 1 comes with 6 maximum Powerpoint trackers and so does not require panel optimization. Therefore, our product is financially more effective compared to a PV system that relies on constantly operating panel optimizers. In addition, we included many new features to substantially reduce installation costs. The product is very well received by our customers in all key solar markets and demand is much higher than we had expected. We end the process to ramp up our production and supply chain and we'll be able to reduce delivery times within Q3 2018 for this product. Following along on Page 14, we have summarized our strategic approach for the Digital Solutions business. With our Munich based subsidiary Koneva, we focus on the provision of energy related services for private and commercial customers. Here, our white label offering can include, for example, energy monitoring, efficiency improvement, load management, marketing of flexibility and tariff management. We expect the first important deals to be signed within Q2 2018. We are entering the energy data field with our energy portal solutions through which we collect and analyze energy related data among others from PV installations to provide data related services. Here, our offering can include portal services, data analytics, and Energy Analysis And Energy Trading. Our unique selling proposition is based on our technology platform that is available across sectors and our access to a large data pool. Currently, we have access to data from more than 1,500,000 devices in 300,000 PV plants. As such, we are positioned as a first mover of its kind in this field who can build ahead of competition by designing service solutions for energy management and converting data into new services. Now I want to hand over to Ulricharding for the financial discussion. Thank you, Pierre. In the following, I will walk you all through our financial figures of the first quarter 2018 and provide you with an outlook for the remainder of this fiscal year. But before we get to the revenue situation, I would like to point out some features of our quarterly statement that need further explanation. First, as of the beginning of this year, we have added another segment to our reporting called Digital Energy. This segment includes the activities of our recently founded subsidiary, Koneva, which is offering energy services as well as our energy data business. 2nd, as already announced on our Capital Markets Day and within the last analyst call, our segment formerly named Other, which until 1 year ago, included our railway business, has been renamed into storage. It encompasses our business unit off grid and storage and our subsidiary SMA summed up. Which is offering large scale storage solutions as well as Michael Grinch and Ireland Electrification. 3rd, we do not longer have the former segment service, which was used to report on our aftersales business. The activities of this segment have been allocated to the segment's residential, commercial and utility. As this better reflects our approach to provide a distinguished solutions offering to our customers rather than mere components or systems. The figures for the segment's business in the first quarter of 2017 have been restated accordingly in order to be able to compare apples to apples. Another point due to a revision of the international financial reporting standard quarter, we provide you with additional information regarding our segment's sales volume. In the table on page 20 of our quarterly statement, you will find the total sales volume being split into revenues with products and revenues with services as well as the total volume. Products in the meaning of this table and Compassus inverters, storage systems, communication products, accessories, and spare parts. Services includes service operation and maintenance contracts, warranty extensions, commissioning, digital energy services, and operational management and monitoring. Services in that sense should not be mixed up with the revenues generated within our aftersales business, which we use to refer to as service. You will find a detailed description of what we refer to as products and services in the to our investors presentation. Installation of our net working capital. As of 2018, it includes advanced payments received from our customers. Again, the net working capital figures for 2017 given in this call and in the quarterly statement have been restated accordingly to ensure comparability. Now let's turn to the numbers and During our last analyst call, we gave an estimate of the expected Q1 figures. This foresaw revenues of EUR 118,000,000. As you can see, with EUR 183,000,000 total revenues, we even surpassed that prognosis. Comparison to the first quarter of 2017, we were able to increase the total sales volume by €10,000,000 or 5%. With regard to the different regions, we can see a decline in the Americas. Here revenue declined by 20 percent from 1000000 in the first quarter of 2017 to 1000000 this year. This is not attributable to one single segment but rather results from a general uncertainty in the U. S. Market due to regulatory changes. In the Europe, Middle East, and Africa region, we had a very positive development after sales of 1,000,000 in the 1st 3 months of last year. The first quarter of this year accounted for 1,000,000, which is an increase of 22%. Here, we are especially satisfied with the situation in the commercial and utility segments. We were also able to increase sales in the Asia Pacific region after 1,000,000 in 20 seventeen's first quarter, This year we recognized 1,000,000, which is equivalent to a 7% increase. Also in this region, commercial and utility, but also storage are on the right track. The rapid demand for our residential products has remained below dictation, partly due to supply shortages. So, overall, we see the share of the Americas region continue to line, but APAC and especially EMEA more than compensating this development. This of course shows one more time that SMA with its global footprint is well prepared to deal with geographical market shifts. Looking at the different segments, we see utility and storage with considerable growth, commercial flattish, and residential with a slight decrease of revenues. Let me briefly elaborate on that. After very strong sales in Q4 of 2017, the residential business is now affected by a slow start of the year in many regions. Furthermore, the late ramp up of our new Sunny Boy inverter in the U. S. Impacted Q1 sales as well. However, we expect the coming quarters to be more vivid Also we will introduce new product offerings later this year which will trigger additional demand. The commercial business is still affected by the supply constraints that we already reported several times. Those have already been contained and dealt with. Thus, we expect much higher revenues beginning by the end of Q2 This is also true for the North American market or SMA has just begun to be ranked number 1 commercial inverter supplier by GTM Research. In addition, what is true for residential is also true for commercial. We will have new product offerings this year. For example, the Sunny Highpower 75, which will foster stronger sales. Vutility has profited from a continuous pipeline of business opportunities in EMEA and APAC, especially in Australia. The challenging market environment in the U. S. Has been answered by a new product offering, which provides a 5.5 Megawatt Turnkey skid solution for large scale PV installations. We are now working on an even higher power class and planning to bring this to the market still within 2018. Overall, we expect tremendous growth for Utility in the APAC region. Continuous price pressure remains a challenge in this segment globally. The Storage segment in Q1 profited from a large order for Sunny Island inverters in the U. S. And therefore surpassed the revenues the 2017 Q1 result. I would like to note that we omitted the segment digital energy at this business not pricing, we did not generate revenues in Q1 and it's still too young to measure its profitability as the major started its activities in this new segment. So to sum up the sales situation, this quarter shows a pretty heterogeneous picture of the different segments in the different regions. Decreases in revenues in one place could be compensated and overcompensated in another place. We here see Again, this ability to be an important asset of the international sales structure that SMA possesses. Let's now have a short look on profitability. Our EBITDA guidance for the first quarter 2018 was 1,000,000, well, I have to admit we fell 1,000,000 short, but for 1,000,000, our profitability of this year's first quarter was much higher than in the previous this year. If you would deduct from the 16,000,000, the book gain from the sale of our rail over business last year, which was a high single digit million amount. Taking into account that the year's first quarter is not known to be the strongest quarter in our industry, we are satisfied with Q1 profitability. The EBITDA margin of 10% is already at a comparative level to hold 2017 and the strong quarters are still to come. Depreciation and amortization are on the same level as in the last quarter. It's nothing noteworthy here. Let us now turn to the different segments. Residential. What we could show you already was regarded the 2017 year end results can be seen here even more clearly. We managed to turn that business into profitability. Even if you take out the contribution margin by our aftersales business, Residential would still be positive. And with 5% EBIT margin, which translates to 1,000,000 it is where we expect it to be at least. With more than 1,000,000, our commercial segment's profitability in Q1 twenty eighteen also turned from red into black compared to the previous year. This is solidly attributable to a better gross margin of the inverter business, which is mainly the result of new products, improved contribution margin, especially our intersolar award winning Sunny Drive Power Call 1. The profitability effect of our aftersales business now being allocated as a commercial business is very low. The Utility segment's profitability was minus 1,000,000, mirrors the high price pressure in the market but is for the most part, the attributable to warranty provisions in the height of a medium single digit €1,000,000 amount that needed to be formed with regard to several preventive repair demands that accumulated in Q1 2018. We see the negative EBIT margin of 10% as a one time event and expect far better margins for the remainder of the year. As I already explained, we are continuously shifting our central inverter offerings to higher power classes. With regard to the storage segment, we see a very positive EBIT increase from 1000000 to 1000000, that is a 33% jump. I already mentioned the last the 1 large project that was served in Q1 Nevertheless, we see this result as confirmation of the development of the off grid and storage business it took in 2017. So far my comments to the different segments. Below the EBIT line in our P and L, you'll find a breakeven financial results and a tax rate of 34 percent, resulting in net result of 1,000,000. On comment to the tax rate, it is slightly higher than expected, as we had a few nondeductibles. For the whole year, we expect a tax rate in between 25% 30%. I'll now come the noteworthy deviations to the 2017 year end results are all related to the development of the networking capital on which I will concentrate. As I already explained at the outset of my remarks, as of this quarter, we are now calculating the net working capital, including customers advance payments. This brings the net working capital ratio below 20% to currently 19% and you can see that also in absolute figures it didn't change much to the end of 2017. But if we look at the inner structure, we will see that an increase in inventories from EUR 165,000,000 by 24 percent to EUR 205,000,000 is balanced by an improvement of our trade payables and especially our trade receivables position. I would like to note that the trade payables even surpasses the trade receivables position. The reason for the increase in inventories are to be found in the exceptionally high amount of revenues recognized in December 2017. The success of this month cleared much of our stock in the APAC region, which now has been refilled. Accordingly, we do not expect the finished goods inventories to increase further. With regards to raw materials, we might accept an in order to make us more One more comment to the balance sheet you find in our quarterly statement, there you might notice a decrease of cash and cash equivalents by 1,000,000. This reflects the investment into fixed deposits with a duration of more than 3 months. The corresponding line item in the balance sheet is other finance assets where you'll find an increase of 24,000,000. Last but not least, I would like to mention our net cash position, which was EUR 445,000,000 has kept its high level of the 2017 year end. To save any acquisitions, which we might be executed later this year, we expect this figure to increase. With regard to our cash flow as you can see on slide 18, we again compare the 2018 Q1 figures against the previous year's first quarter. With regard to the cash flow from operating activities, you can see that it is much lower than 1 year ago. The reason for this is Q1 result, which reflected a steep decrease in net working capital during the first quarter of 2017 in comparison to the fourth quarter of 2016 whereas in 2018, we increased our inventory level for residential products in particular due to an unexpected increase in demand in the following months. In total, net working capital in Q1 was kept at the same level securities and other financial assets. The increase in this position in comparison to 2017 Q1 figure leads to negative cash flow according to IFRS. The reason for the increase in net investments from securities and other financial assets are explained already in connection with the balance sheet. Here, we invested cash into fixed deposits. IFRS rules do deduct those 3 months deposits from the cash amount. With regard to the order backlog, we still distinguish between the product business on the one hand and our after sales business, once assembled in the segment service on the other hand. The reason for this distinction lies in the different realization areas that we can assess for products to be weeks months and for service in between 5 to 10 years. Overall, the level of our order backlog didn't change much since the end of 2017. With a higher product order backlog mainly driven by a commercial business, plus 1,000,000, largely offsetting for lower service order backlog. In comparison to the last year's first quarter of the order backlog increased by 4%. Noteworthy is the drop in the service order backlog of 1,000,000. This is due to the cancellation of one service contract with a single customer in the U. S. For which we received a corresponding cancellation fee. For the coming months, we the order backlog to remain on the same level or slightly increase. This is because the supply situation will ease in Q2 and thereafter. What I especially want to point out is that our Q1 twenty eighteen total sales together with the product order backlog already secure nearly 50% of our 2018 annual sales guidance, which brings me to saying our sales and profitability guide for 2018. Based on our strong order backlog and the market outlook that Pierre provided earlier, our guidance of full year sales and earnings remain unchanged. We expect sales to reach between 1000000001000000000, which is a moderate increase compared to last year. In terms of EBITDA, we estimate an increase to 1000000 to 1000000, with depreciations of about 1,000,000. Please keep in mind that those figures include costs for our new digital energy business of more than 1,000,000. Capital expenditures will also be at about 1,000,000, and we are certain to generate a positive cash flow in 2018. With our attractive new products and solutions, we will be able to further increase our market share, especially in APAC. The growth will come mainly from our commercial segment. In our Utility business, we see an attractive market potential, especially in APAC and EMEA. However, price pressure in this segment remains higher than in our other businesses. Last year, SMA delivered solid earnings for the 30 year in a row. Our net cash position is at 1,000,000, and the outlook for 2018 is positive. As a result, the Managing Board and the Supervisory Board have suggested to annual shareholder meeting a dividend payment of per share. This will translate to a payout ratio of 40%, which is at the top end of our self defined range of 20 to 40%. Going forward, we will distribute 30% to 60% of the group's net income to our shareholders. To sum up, SMA is uniquely positioned to further benefit from the growth to come in all segments but we also have a truly global presence to serve the strongest brands in the industry and about EUR 445,000,000 of net cash, we will be able to rapidly enter the higher margin business with digital solutions and applications for storage, especially with our new NXOS platform, managing complex integrated solutions. This is why if you trust solar, there's no way around SMA. Now here and I are ready to take your questions. You. European function, please turn off the rear signal to reach our equipment. Once again, it is star 1 We have a question from Arash Roshan Kamir from Barber Research. Please go ahead. Yes, good morning, gentlemen. Thanks for taking my question. My questions actually are on your new segment reporting. And then maybe 1st of all, on your EBIT split by segments and perhaps elaborate a little bit on the reconciliation line because according to your segment reporting, the reconciliation line contributed an EBIT result 6,000,000 in Q1. And I'm struggling a little bit in, to identify the reason for that. I understand that in the previous year, in the first quarter, you had a positive one up from the disposal of the railway technology, which resulted in a rather high reconciliation line in terms of EBIT, but perhaps you could elaborate a little bit why this line has shown an EBIT result of 6,000,000 in Q1? That's the first one. Yes, Arash, of course. Yes, as you say, the EBIT is not stemming from the segment, but from the consolidation line, which is the other operating income or the net result of other operating income and expenses in Q1, And that reflects a large variety of items, which are not attributable to a single segment, but still normal to our business. Among those effects, we have, for example, payments received by or paid to suppliers resulting from claims for defective components or the like Also, the valuation of our financial assets regularly triggers effects on the other operating income expenses, which finds its way into the consolidation line. Okay. Could you perhaps help us to understand what would be usually a normalized level of the reconciliation line on a quarterly basis or is it not really possible to give an indication? No, Arash, we can't give you a guidance on that. There are many effects that are impacting that line that is not possible. That goes up and down. But I think as a good guidance, you can take our full year guidance to see, okay, what do you want to achieve there? And I think with the first quarter, we are on good track to reach the full year guidance. Okay, understood. Maybe the second one on, on the changes to your segment reporting. I understand that you are now adding the after phase business to your core equipment business. And I was wondering if you could share with us the EBIT contribution from the after sales business in Q1? I can do that on a generic basis. And as you might have thought already, the contribution margin of this former service business is higher than this of a product business. Therefore, the profitability of all segments which are have been allocated with the former service business have been inflated a little bit. But even without the service business, the commercial and the residential segments would be positive. That's, I think, the most noteworthy, observation here. Utility of course is negative anyway. Okay. And maybe if I'll help you. Yes, a little bit. I'm just, because when I compare it to your previous reporting in last year, you showed us an EBIT contribution from the former service business of 2,200,000 And now it looks like the Digital Energy Business has been breakeven only last year in Q1. So does it mean that almost the entire EBIT contribution from the former service business actually came from spare parts and replacements. Would that be a fair assumption? Yes, Charles. And 1st of all, the Digital Energy business, yes? That did not exist last year. So there's no comparable figure last year. So that is brand new only in Q1. And second, yes, if you look into the appendix, you can see what is all included in service and services. And yes, we always make very clear also when we talked about our backlog, that when we talk about service, it is warranty extensions to a great extent. And that is the reason why we say Hey, we have to recognize that revenue over a period of 5 to 10 years. Yeah. So that is a lion's share that sits in the backlog, but also when it comes to services. But I think what is really what always said, I can only second orient on the comment. The key message for you is resi and commercial was positive, even without the reporting changes, even without the service. I think that is really something very insightful information. No, I agree. I totally agree with you. But if you just allow me one remark regarding these changes, I hope you're aware of the fact that this definitely makes it more difficult, at least for me to, model your equipment business going forward because obviously now I have to consider after sales business as well. And it just makes it more difficult, to more. Arash, I completely understand you. Honestly I expected that. What I would suggest is just as a call after this conference call and when we can talk about how can we basically create or work with your valuation model, how can we structure that But the reason why we why we included services in our reporting now is as a better effect if we go out to customers, we are not offering only components. We are offering everything the product plus service and that is the way we do business. And that's the reason why we want to reflect that in our reporting as well. And the responsibility of the business units is now product and service. So that's the reason why we do that. Yes. Okay. Understood. Thank you very much. Just to pick that up one more time. We didn't do this reallocation in order to pin the profitability of our segments. They are profitable anyway. We did that for operative for entrepreneurial reasons because our customers demand solutions business and this necessarily includes services. We have no questions at this time. All righty. Then I would say as always, praise for Sun Have a good day and talk to you soon. Bye bye. This will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.