SMA Solar Technology AG

Thank you operator and welcome everyone. We very much appreciate that you are taking the time for this Investor and Analysts Call on the Q1 2020 Results of SMA.

You can find today's presentation on our Investor Relations website ir.sma.de. This conference call is scheduled for 60 minutes and will be recorded.

Replay will be available for seven working days. After the presentation, I will be happy to answer any questions you might have.

I will on the following -- follow the format of the 2019 annual results presentation that means we start with a full review of the Q1 financial, before presenting you our market positioning and expectation on market developments. At the end, I will explain our expectations for full year 2020.

I expect my presentation to last about 20 minutes before I get to the guidance. I refer to our disclaimer on page two.

And here on slide four, you find a summary of the key financials for Q1 2020. As usual, I will provide you with more details on our sales, profitability, balance sheet and cash flow in the next slide.

So on the page; I would only focus on quarterly development in the table in the bottom right corner, which shows how our sales and EBITDA have remained on significantly higher level during the last three quarters. Now, let's turn to next slide and I will provide you with insights regarding our sales performance.

Net sales for the first quarter of 2020 grew by 72% to €288 million, an increase in terms of nominal inverter capacity sold by 142%. All segments increase sales by strong double-digits in Q1 with the segment Large Scale & Project Solutions growing by 140%.

Looking at the regions, Americas became our largest region in terms of revenues with €126 million which represents 43% of SMA's global sales. The significant jump in sales compared to Q1 2019 is mainly driven by substantial growth in the U.S.

Large Scale business, which is stemming from regained market share, as well as strong sales growth in the Home and Business Solutions segments in the region. SMA's EMEA region continues to perform well, growing by 33%.

Revenues in EMEA was slightly lower than in Americas with €135 million, representing 42% of our total sales. In EMEA, the Home and Business Solutions segments grew sales by double-digits, while revenues and the Large Scale & Product Solutions segments declined.

Within EMEA; Germany, Benelux, and Spain continued with the highest revenues and grew by high double-digits compared to the same period last year. Our Asia-Pacific region represented only 15% or €44 million of SMA's total sales and with a decline in sales compared to Q1 2019, APAC became our smallest region.

Within this region, Australia remained SMA's largest market in Q1 and our revenues there grew by high double-digits. SMA's other key markets in Asia-Pacific are South Korea and Japan.

Those markets declined in revenues in the first quarter as compared to Q1 2019. In summary, SMA started the year with very strong sales growth in the Americas and EMEA regions, while in APAC, SMA's revenues declined compared to Q1 2019.

Now, looking at the sales per segment on the right side of the slide, you see that all segments significantly increased revenues in Q1 compared to the same period last year. Our Home Solutions segment which has consistently performed well since early 2019 grew revenues in the first quarter of 2020 by 57%, reaching €71 million.

Germany, Benelux, USA and Australia delivered high revenues and significant sales growth for this segment. Our Business Solutions segment also delivered solid growth with 21% highest sales in Q1 compared to the same period in 2019.

Germany and USA were also top markets for this segment, while Australia more than doubled its revenues in business solutions and became a key markets for this segment. Last but certainly not least, our Large Scale & Project solutions segment had a very strong first quarter with revenues of €138 million, which is a significant increase in revenues compared to Q1 of last year with a growth rate of 140%.

The U.S. delivered impressive sales growth for this segment in the first quarter and the Philippines, Malaysia and Australia were the next biggest markets, and all increase their sales significantly in Q1 2020.

Higher sales growth was achieved despite price decline for this segment. Now, let me explain to you how our profitability developed, thanks to our strong Q1 revenues.

In Q1 2020, SMA generated an EBITDA of €12 million and an EBITDA margin of 4%. The EBITDA significantly improved compared to Q1 2019, mainly driven by far higher sales.

Profitability was, however, slightly diluted by a high revenue share of low margin products and adversely affected by a negative exchange rate effect of approximately €2 million in Q1. For the remainder of this year, we expect our profitability to improve as demand shifts to newer higher margin products in our portfolio.

There were no unplanned to create depreciations in Q1, and our depreciation remained on the same level as in the first quarter of last year. Also, there were no significant extraordinary effects.

Let's now have a look at the segments in detail. Home Solutions.

EBIT in the Home Solutions segment was clearly in the black was €5 million driven by the strong sales in the first quarter and the stable price development. In the Business Solutions segment, EBIT was positive and slightly higher than in Q1 2019 as a result of higher sales achieved despite lower prices compared to early last year.

The Large Scale & Project Solutions segment also improved its profitability compared to Q1 last year, but remained in the red in Q1 2020. Despite strong sales growth, profitability of the segment was especially affected by price declines and unfavorable mix in the first quarter.

Now I will move on to the balance sheet and net working capital on the next slide. We started the year with a net working capital balance of €160 million and a net working capital ratio of 17%.

As you may recall from our 2019 annual results presentation, our net working capital was extraordinarily low at the end of last year, as a result of one-time advanced customer payments for which we deliver the products and book the sales in Q1. Therefore, at the end of Q1 now, our net working capital increased to €240 million or a ratio of 21%, which is on a normal level for our business.

A significant decrease of advanced customer payments, which I just explained was partly offset by decreases in a ARs, while our APs decreased to the usual level, and our inventories in total have remained flat. Putting more into detail, you'll see that finished goods inventories decreased by €17 million since the end of 2019.

This is mainly related to the completion of a key large project in Q1 which I alluded to earlier. This decrease was offset by an increase in raw material stocks and the first quarter, which is needed to fulfill our highest level of orders received and to derisk our supply chain in case of COVID-19 related to capacity constraints at our suppliers.

Trade receivables decrease from €145 million at the end of 2019 to €120 million at the end of Q1, 2020. This was a result of good AR collection work, which also reflects in our low number of days sales outstanding.

Trade payables of €160 million at the end of Q1 decrease from the very high level at the end of 2019 as expected. And as already mentioned, the advance payments from our customers, which are reflected in our balance sheet under other liabilities were extraordinarily high at the end of 2019, which was mainly related to a key project in our large scale segments, which was successfully completed in Q1.

Now let's have a look on the group balance sheet on the right side of this page. In the balance sheet, the most noteworthy changes since the beginning of 2020 are related to the development of the net working capital positions and the related change in our cash position.

Total cash decreased from €318 million at the end of 2019 to €257 billion at the end of Q1, mainly as a result of increase in net working capital, which I just explained. I will walk you through the cash flows in a minute.

Our equity ratio has returned to more than 40% at the end of the first quarter. That's a significantly higher liabilities due to short term one-time effect at the end of 2019 came down to a normal level by end of Q1.

Let's now turn to our cash flow profile on the next slide. In Q1 2020, SMA generated a strong positive gross cash flow, mainly driven by our net result in the quarter, adjusted for non-cash effects such as depreciations and amortization.

This is important, as it shows that we are able to drive positive cash flows from our business operations. Our cash flow from operating activities is minus €51 million in the first quarter, as a result of a significant increase in net working capital.

Well, in summary, SMA significantly improved its business performance in Q1 2020, which reflects in the positive gross cash flow. But our cash flow from operating activities and adjusted free cash flow in total were negative due to the increase of networking capital, which is mainly from the settlement of shorts term liabilities in Q1.

This concludes the detailed review of 2020 Q1 financials. Let me briefly summarize the key figures for you.

SMA grew significantly in the first quarter of 2020, with sales of €288 million, which are 72% higher than in Q1 of last year. All segments achieved strong revenue growth and our Large Scale & Project Solutions segment more than doubled in the revenue level from Q1 2019.

Our EBITDA improved significantly compared to the first quarter of 2019, reaching €12 million in Q1, mainly driven by the much higher sales. Our balance sheet remained solid with an equity ratio of approximately 40%, the net cash balance of €243 million and a credit facility of €100 million.

Our debt to equity ratio of 1.48 also confirms our sound financial position. I'll now turn to the market and competition part of the presentation.

Due to the global impact of the corona virus crisis, we have adjusted our market outlook. And we'll present you our brand new estimates on the following slides.

While the corona crisis will most likely take a toll on developments over the coming months, we expect markets to recover soon afterwards. By 2020, we now expect the global market volume of 100 gigawatts, which is 9%, down on 2019, 18% down on our pre-Corona market outlook.

We expect the strongest downtrend in APAC where India plays an important role. Straight lockdown measures and difficulties in financing will have a strong negative effect on the Indian market this year.

India however, is no key mark for SMA, and we do only level business there. On the other hand, we expect little to no decisive negative impact from the corona crisis on SMAs core markets in EMEA.

When it comes to segments, the corona crisis will take its strongest toll on the residential segment and to a certain extent on the commercial segment in all regions, due to investment restraints from private households and smaller businesses. Taking renewable energy goals into consideration and already permitted and finance project, PV development is expected to recover soon.

Growth will be at 18% per annum over the next two years. Let's have a look at the market development in euro terms on the next slide.

The expected demand is also reflected in the global investments in PV system technology, where we expect the downturn from €4.6 billion in 2019 to €3.7 billion in 2020, and a strong recovery of 11% per annum afterwards. Lower annual growth rate in comparison to the market in gigawatt is due to the still prevalent price decline in all regions and markets.

However, we expect price declines to ease off to one to two percentages over the next year. And due to Corona related delivery bottlenecks, price pressure may even become less than expected in the near future.

Let's turn to the next slide which shows the whole addressable markets for us today. As the transition to a decentralized energy supply, based on renewable energies, proceeds globally, storage and digital energy services become even more important.

This transition also drives the further growth of O&M services for utility power plants. In addition to our core PV inverter business, SMA is very well positioned in these segments, and will be able to profit from the expected growth.

After Corona related dip in 2020, we expect a strong recovery for the whole market addressable by SMA. Next slide we have gathered our long-term market outlook.

Long-term market outlook for PV remains very strong and we expect annual growth of 12% over the next 10 years. Main drivers here are digitalization and electrification of additional sectors such as heating and mobility, as well as green hydrogen.

Electricity will become the main energy source in a world with growing energy consumption and PV will become the main electricity source, as it is not only cost efficient and produced close to consumption, but also sustainable and climate friendly. These aspects will gain importance over the coming years.

As the majority of people, businesses, organizations and politicians around the world see the urgent need to implement the effective measures against climate change. Which brings me to SMA’s positioning.

And before we enter into the usual display of our products, we have an additional slide here, which we really want you to present. Since its inception back in 1981, SMA is doing business in a sustainable way.

I repeat that, since its inception in 1981, doing business in a sustainable way has been a core value for SME and its employees. Whereas most of our competitors are of the opinion that it is enough to sell technology for the production of renewable energy.

No matter how these products are manufactured, we are convinced that real sustainability goes far beyond. This is why we began early on to implement sustainability measures in all areas of the company.

For example, we have installed our first company-owned PV plant at our headquarters back in 2001. Over the years, our own PV capacity has grown rapidly, so that today, we can cover 38% of our energy consumption in Germany with self produced solar energy.

And of course, the remaining entities used is also renewable. In addition, we are constantly reducing our overall energy consumption, which we measure in energy use per kilowatt inverter power.

Over the last five years alone, the energy used to produce 1 kilowatt inverter power has decreased by 58%. As we take sustainability very seriously, we give 100% transparency to our stakeholders with our sustainability reporting based on the global reporting initiative standards, and which is also displayed in our annual report.

With our sustainably produced portfolio of products, services and software, we always have the whole energy system in view as well as the needs of our customers who are looking for fully integrated, dedicated solutions that fit seamlessly in today's and tomorrow's energy supply system. Components are still our core business, but those not only include PV inverters, but also battery technology, communication devices, et cetera.

The main aspect here is that we integrate all functionalities that our customers need from effective shape management to free inverter monitoring into our devices. This is good for our customers and for the environment as it saves material, energy and cost and makes the PV plants safer and more reliable.

We complement our component offering by extensive services such as O&M, plant monitoring, PV planning, grid integration, including grid studies, commissioning, et cetera. With the services, we support our customers over the whole lifetime of their PV plans as a reliable long-term partner on which they can always count.

On top of this come software and digital energy services, which will grow in importance and become a significant revenue stream over the coming years as digitalization and the energy transition will gain speed. An important future business field in which SMA has already established itself very well is battery storage technology, which you will see on the next slide.

On the left-hand side, you'll see the estimated global storage market growth by Bloomberg New Energy Finance. As battery storage systems make renewable energies available 24/7 and enable them to substantially contribute it with stabilization, battery storage will be an important pillar for the future energy supply system and thus grow exponentially.

SMA has developed battery storage system technology for more than two decades now, and has unrivaled experience and expertise in this field, offering comprehensive solution for all segments and applications, usable either in combination with or without PV, thereby opening up new customer groups to us. With these solutions, SMA has been the global market leader for battery storage system technology for several years now.

In 2019 alone, we have signed contracts for the delivery of more than 1 gigawatt of battery inverter capacity, thereby tripling the capacity sold in 2018. With sales and service companies in 18 countries on all continents, we serve customers in more than 190 countries around the world.

As we started off in Europe, West Germany having been the fore runner of renewable energies, most of our installed capacity is located in the EMEA region. But as you can see, we have made good progress in APAC and the Americas as well.

And these regions will also grow in the coming years with our sales and service forces on the ground. This global footprint makes us fairly independent of the development of individual markets.

Other residential and commercial markets, we have introduced SMA ShadeFix in our string inverters. This intelligent software makes so called module optimizers completely super fluid.

As with ShadeFix, effective shade management is already integrated in the inverter. So SMA customers don't need to invest an additional equipment to achieve maximum yield, even in puffy shaded PV arrays, which has also been proven by a recent study conducted by the Southern Danish University.

As part of our digitization strategy, we have also introduced the first of a series of apps for different customer groups to the international markets. The SMA 360 degree App supports installers in all areas of their daily business and in all stages of PV planning and operation.

None of our competitors has so far combined as many functions in one app, these reads from PV system simulation, planning, commissioning and monitoring through to automatic notification in case of service. As already mentioned, after this successful start, we are planning to introduce additional apps soon.

The SMA Power Plant Manager is an important new device when it comes to grid integration of renewable energies. It controls energy generation, storage and consumption with regard to the point of interconnection.

As a result, our plant operators can now ensure that regulatory requirements as for example regarding which stabilization are always met. Turning to next slide, so far the corona virus has -- had no serious negative impact on SMAs business development.

We have focused on prevention at an early stage, implementing appropriate measures such as travel bands, mobile working where possible and adjust means to manufacturing processes to keep up with the whole production capacities. We are thereby guaranteeing business as usual as far as possible, while protecting the health of our employees at the same time.

As a result at this point of time, there are no corona virus infections at SMA globally. We are working very closely and intensely with our suppliers, we are to be able to predict developments get through accurately.

We have activated second source suppliers in countries that are less affected by corona virus related restrictions. Order intake has also been positive in the first quarter and we have seen no impact here.

We expect a short dip in demand over the next few months with a strong recovery in the second tab of the year. We'll of course have to closely monitor the ongoing developments in relation to the corona virus and respond quickly and flexibly at all times.

However, we consider SMA well equipped to respond appropriately to all possible developments. This brings me to our guidance and expected future developments.

Looking at the right side of the slide, you can see that we are -- were able to continue to increase our order backlog in the first quarter of 2020. Our strong product order backlog decreased slightly to €376 million euros by the end of the first quarter as a result of the very high product sales in the quarter.

Nevertheless, we maintained a good level of order intake for products in the quarter and were able to significantly increase our order backlog for services to €421 million, including a O&M project, which we successfully acquired in the U.S. As you can see on the left side of this page, our large scale and project solutions pipeline remains on a high level and nearly half of our orders are for countries in the EMEA region.

With the strong revenues in Q1 and the high level of order backlog, we can confirm that 60% to 65% of our 2020 sales guidance are already covered by our year-to-date revenues and the current product order backlog. Now coming to the guidance on the next slide, SMA started the year strong into Q1 and we have been able to mitigate the effects of COVID-19 on our supply chain by our highly motivated teams continue to work remotely in several countries, which is keeping our business performance on-track.

For the first quarter of 2020, our sales and EBITDA were in line with our expectations and given our strong order backlog and our ability to mitigate supply chain issues, we remain confident to achieve more than €1 billion revenues for the full year. Although we expect a slight decline in market demand as a result of the COVID-19 crises, we remain confident to achieve our guidance by continuing to gain market share from competitors in our major markets, as well as by benefiting from slightly improved price levels in the markets compared to our previous estimates.

Therefore, the SMA managing board confirms its sales and profitability guidance for the whole year 2020, revenues of €1 billion to €1.1 billion and EBITDA of €50 million to €80 million. Closing; to sum up, why an investment in SMA is worthwhile?

Real sustainability will become a significant topic for important stakeholder groups. SMA sustainability has been improved since the company's inception.

Part of the sustainability are also our financial stability and our focus on a sustainable energy supply based on PD is our comprehensive portfolio for all segments and applications and our global sales and service infrastructure. We can serve our customer groups around the world.

And that's profit from the whole potential of the global energy transition. This is why, if you trust solar, there's no way around SMA.

Now, I'm happy to take your questions.

Hey. Good morning.

It's Jeff Osborne from Cowen. How are you?

Good morning, Jeff.

Just a couple questions. You mentioned there in guidance around seeing better pricing than prior expectations, and also share gains.

I was just wondering if you can give us a sense of which markets in which segments that you're seeing such developments.

First of all, Jeff thanks very much for getting up that early in the morning to join our call. Yes, with regard to the discrepancy between the overall markets shrinking and SMA’s revenues actually increasing.

There are several reasons to that. And as you said, better pricing and share gains are the two among them.

Two of them. We expect especially high -- very good development in EMEA, and regarding share gain in EMEA, and in the Americas, North and South America.

In APAC, we see a fierce battle over market share in Australia, where we will be able to sustain our market share despite heavy competition. We have certainly lost market share in already also in Q1 in Vietnam, but we have, as I mentioned now, better gain market share in other countries like the Philippines, Malaysia.

And we were also able to keep our market share this to the most extent in Japan, which is going to continue. So, share gains we will see in EMEA, all regions in EMEA, and in North and South America.

Pricing, you know, we have said that the price drops for the string inverter business we'll be in the single-digit area and for central inverters in the low-two-digit area. This is still the case for the whole year, the assumption.

However, if we look on the price development in the first four months of this year, we see that it doesn't drop as quick as calculated. It's a bit behind schedule, so to say, for -- well, we don't know the exact reasons, but it might have to do something with COVID-19 as demand is shrinking, and sorry -- as offerings are shrinking.

So that is the situation right now. It needs to be continually -- continuously monitored, but in the first time show that we have a better ASPs than expected in all regions and all countries sorry.

That's very helpful. And then one of the -- one of the themes of the last analyst day or the last two analyst days is sort of in the product refresh, and then the intended improvement in margins.

And it looks like you had some very strong developments in the North American markets, but with older products, as part of the safe harboring, and just a strong close to the year. I wanted to get a sense of what you're seeing with a strong order book for some of the newer products that hopefully could improve the gross margins by a couple hundred basis points.

Exactly, as you said. We are as part of our restructuring started in 2019, we are sorting out.

So to say, all products, which was low margins, we are walking away from our earlier point of view that we will have a complete portfolio for every customer everywhere in the world, which included also products, which were not that profitable. And now, we are sorting that out step-by-step, and step-by-step we are now shifting to newer products, or even accept holes in our portfolio, but thereby, improving margins and we will see that already in Q2 and Q3 that ASPs are better, especially in large scale where we have this one single order in the U.S.

as you mentioned, and that will continuously grow over the year.

That's excellent. I just had two other, hopefully, quicker questions.

One is, certainly with the COVID-19 crisis, there's a concern among investors of channel inventory. Can you just give us a sense of more in your residential and commercial sector, what visibility you have as a relates to inventory at key distributors both in the U.S.

and EMEA where you're the strongest? That was question one.

And then question two. Any early indications of uptick on the -- or adoption of ShadeFix your new software application for residential and small commercial as it relates to going after the optimizer market would be helpful?

Yeah of course. So with regard to channel inventory, that was of course also a concern that we had, and therefore we are in constant contact with our customers.

And we can say that after the very early initial reaction, which was panic struck, we came to very seriously lead and very cooperative exchanges over the -- our views of the market. And that shows that, we see for the major markets we are active in, which is EMEA that there will be a delay in demand.

Yeah, there will be a drop in demand, but it will be compensated within the year. So that's -- there maybe channel inventory right now building up, but it will be used later in the year, they'll be consumed later in the year.

The situation is different in the Americas, where we expect, especially for the string inverter business, resi and commercial to be -- the impact would be heavier. However, exactly in this area, our market share and those two segments is not the largest.

So we are not going to suffer as much as our competitors. Speaking of competitors, ShadeFix, so far we don't see an uptick in orders for our products.

But we see an enormous reaction in the market, as you would expect. Not only that our competitors are that some of our competitors which are using optimizers may have gotten on their, on their toes, but also a lot of customers have enormous interest.

We are holding webinars, which was three digit numbers of participants, who at the very beginning of the webinar have a certain perception of the idea of an optimizer. And if you ask them after the webinar, it changes.

It really changes within half an hour, just learning the facts about basics. So that this we are very positive stimulated by the first reactions in the field.

However, we do not see an uptick in order intake, yet.

Excellent. And then lastly, any thoughts or changes in battery development and attach rates there and any strength in Europe or in America or other regions of the world like Australia where it seems like things are going well?

No changes with regard to attach rates. What we see is that, it becomes -- continuously difficult to get batteries that there are shortages in the market, doesn't seem to be only the battle between mobility and stationary use of batteries, but also an overall difficulty to really get up to the numbers that the gigawatt factories had in mind of our planning.

It's not in any way harming the business, but it's feasible, but no major development with regard to attach rate.

Excellent. Thank you.

That's all I had. Appreciate it.

Thank you very much, Jeff.

Hello? Hello?

Yeah, Guido Hoymann from Metzler. Good morning.

Most questions have been actually asked, but maybe a few follow-ups to get things together. And I think your first quarter has been impacted by this large scale order.

I understand and the questions are, when I do my math and calculate the ASP, so dividing phase by volume, the price decline has been quite massive, around 30%. Yeah, I understand that this is mainly driven by this big project in large scale?

But do you have an indication how that would have been without this order? I think you gave some indications already but still?

Maybe the second question in this context would be, I think looking at the result in the large scale segment, you posted a loss there. So, is it fair enough to say that you acquire this project mostly for the sake of defending market share, or you know it doesn't look very rational to do this transaction given the impact on the segment's performance, and maybe also ASP?

Then maybe last part of this, also may potentially connected to that backlog. There we saw a shift or the services share increased the project size, IT.

So this jump let's say call it in services, is that now due to the -- let’s say inclusion of this project now into a service contract, actually all that impacted by this big transaction in first quarter, or is that another additional project you're on there, which increased the order backlog?

Okay. Thank you, Guido.

As you correctly mentioned, and also Jeff mentioned before, there's one single large order in Q1. That was, of course, the Safe Harbor triggered order.

However, we would have sold this capacity anyway. Our pipeline for large scale is filled.

We are running three shifts. And it happens now to be -- to have been a Safe Harbor U.S.

customer will be served in Q1. But if that customer wouldn't have been existing, we would probably have sold as much as this capacity for other customers, because we really have a very good pipeline here.

However, as you correctly stated. And that also contributes to what I told just a minute ago, this single large order shows the ASP decline, as you mentioned.

But that is going to disappear over the remainder of the year. So if that has been, as you calculated minus 30%, ASP, the ASP decrease we expect for the whole year, remains in the low, very low, two-digits area.

And the reason for this, why we acquired this project has not been so much sense of market share, it was actually related to a new product being introduced into the market, central inverter with a medium-voltage station. And we wanted to have this new product being introduced into the market in large scale, meaning in high numbers and high quantities.

Therefore, we're compromising on price. And also as sometimes the case we calculated pricing on the basis of certain assumptions even before the product was ready.

And that also contributed to this negative impact. For the future this product will gain better margins than it has in Q1.

And you're -- also related to that the jump in services, order intake is related to a different project. It's not the same.

So we have also acquired a huge O&M project, which is not the same where we deliver, at the central inverters into.

All right, perfect. Thank you.

Thank you.

Thank you all very much for spending time with us this morning. We all know that the world is clustered with information.

And it's very difficult and very demanding to distinguish between valid and superfluous information. We trust that you'll find SMA reliable partner in assessing the overall situation with regard to PV.

And very much appreciate your attendance. Thank you very much.

Stay healthy. And talk to you and hopefully, see you soon again.