SMA Solar Technology AG

…abrupt start We also decreased the trade receivables from €145 million to €220 million. These working capital improvements could not fully compensate for the decrease in trade payables from a high level of €175 million at the end of 2019 to €244 million at the end of 2020.

The decrease in trade payables was a result of the downgrade of our credit rating early last year, which had been treated by concerns related to the COVID19 pandemic. After our strong 2020 results, we expect our rating to improve in '21 which would drive up our APs and increase our cash balance again.

In the balance sheet, the most noteworthy changes in 2020 are related to the development of the net working capital positions, which I just explained, including the decrease in advanced customer payments, which is booked under other liabilities. In addition the noncurrent assets increased by €30 million mainly from finance lease assets.

Total cash decreased from €18 million at the end of €2019 to €237 million at the end of 2020 and the decreased balance of total cash is mainly a result of the increase in net working capital. I'll be coming to the cash flow in a moment.

Shareholder's equity increased from €417 million at the end of '19 to €439 million and thereby having an increase of the equity ratio to very solid 42%. Now let's walk on to cash flow, you can see the strong positive gross cash flow which doubled compared to 2019.

Nonetheless, due to the significant increase in net working capital, the cash flow from operating activities and the adjusted free cash flow were negative. That concludes my review of the 2020 financials.

Now let me briefly summarize that. First, in 2020 SMA grew its revenues again by double digits and sales exceeded €1 billion driven by sales growth in our home and logical segments.

Second, EBITDA significantly increased compared to 2019 reaching €72 million mainly driven by our increased revenues as well as a net effect of approximately €50 million from one timers. Without this positive effect from one timers, SMA results were still positive also on EBIT and net result level and much higher than in 2019.

Third, our balance sheet structure remains solid with an equity ratio of 42% and net cash balance of €226 million and a credit facility of €100 million. SMA's debt to equity ratio of 1.39 also confirms our solid financial position.

And now turn to the market and competition part of the presentation, and starting with a look on the global TV installations in gigawatt. Despite the Corona crisis, the global TV market grew by 23% to 137 gigawatt in 2020.

This was mainly due to strong gross in China, the US and also Vietnam, which was rather unexpected. China alone grew by more than 50%.

China's common utility target by 2060 will further drive growth in the coming years. We also see a good two digit growth for the EMEA region in the years to come, mostly driven by France, Germany, Italy and Eastern Europe as well as for the Americas region with the main drivers US, Brazil and Chile.

Australia, Japan and India will drive further growth in the APAC region after a small dip in '21. Of all this will lead to an average annual growth rate of 9% for the global PV market for the midterm.

We'll look on the same picture in Euro terms, it's a little bit different due to the continuing price decrease, we will see a rather flattish development here because of the very low prices China has by far lower market share in euros than in gigawatts. The region with the highest growth potential in euros over the next year is EMEA growing from €1.4 billion in 2020 to €1.6 billion in 2023.

Whereas we expect further moderate price decrease for the commercial and residential segments, the comparatively higher price pressure is expected to continue in the utility segment due to competitive tenders. As mentioned this graph refers to the PV inverter market only.

On the next slide, we see the whole market addressable by SMA. This comprises of our core business, PV inverter, the battery inverter market and digital energy and operations and maintenance services, both in selected countries addressable by SMA.

As the transition to a decentralized energy supply based on renewable entities proceeds globally, storage and digital energy services become ever more important and show the largest growth potential. SMA is very well positioned in these segments and will be able to profit from the expected growth.

We estimate the annual growth rate in euro terms for the whole market addressable by SMA until '23 at 9%. On the next slide we've given our long-term market outlook, which we have revised due to the current political developments.

On the period of the next 10 years, we expect the annual growth of global PV market of up to 14%. 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 that is not only cost-efficient and produced close to consumption, but also sustainable and climate friendly. These aspects will even gain more importance over the coming years as the majority of our society around the world sees the urgent need to implement effective measures against climate change.

So you see here that we have been for very long time stick to the same long-term picture, but now have compute that this doesn't hold water any longer and that we have been very conservative in how having increased it by a large portion. In addition to the expected long-term PD market growth that I've explained and that can still be called conservative, you can see here on this slide the global gross market for the three special fields.

EVehicles on the right side starting from very low numbers, eVehicles will continue to replace conventionally powered vehicles over the coming years. The annual global markets is expected to grow approximately 10 fold.

Accordingly the market for EV charging solutions in which SMA is active, should see an average year on year growth of more than 30%. In the middle, you see the expected growth for battery storage and hydrogen, which comes with the development shown to the left and right, the transition to highly de-central and renewable energy supply structures and the electrification of additional sectors.

Now let's come to the next slide, we will now give you let's say a few insights into what we deem to be let's say super interesting important for our positioning and our short-term as well as midterm prospects and I would like to start with green hydrogen or power to gas. Meanwhile it is common sense that hydrogen will play a role in de-carbonizing the industry.

What is not so known is that SMA started developing solutions for the power conversion into hydrogen application already five years ago. We can therefore already today leverage our technology as hardware is very much the same as in our utility scale PV applications.

We can also profit from our high system knowledge and our grid integration competencies because they are needed to optimize the performance and functionality of the electrolyte and thereby increase the economic feasibility of green hydrogen production. We've just started to tap into this new business field.

Several projects with SMA solutions have already gone into operation around the world. Additional projects are currently being built.

So that is not fantasy that is already reality. What I want to show you with the following slide is how much SMA is favored by current tailwinds.

Of course you know all about the current regulatory initiatives about the UV climate target, about the plans of the new US administration. These developments are driving the market growth that I have already described before.

PV and battery market growth as well as the start of Emobility and green hydrogen and the thing is that SMA has anticipated these trends and developments already a couple of years ago and has then started to position itself in all key areas for PV and storage systems, grid integration and auxiliary services to energy management and digital energy solutions, EV charging and has just shown on the last slide also with regard to hydrogen applications. All this together will play SMA as a major player in key areas of the global energy transition.

So now let's talk about 2021 starting with the current order backlog. You'll see that on the right side of the next slide, the strong order backlog which has increased by 12% since beginning of the year and our order backlog for products remains on the good level with €386 million at the end of 2020.

As for March 24, our backlog has decreased a little bit, but we have significant orders currently in the pipeline and we will see an increase again over the next months. As you can see on the left side of this page, our large scale imported solutions order backlog remains very strong and the Americas and EMEA regions continue to make up nearly 80% of all imported product order backlog.

Putting this into context of our 2021 guidance, our current sales and product order backlog cover approximately 50% of our guided sales figures for this year, which is a good level of this early stage. This brings me to our 2021 sales and earnings guidance.

For the first quarter of '21, our top line will not be on the same level as in Q1 2020, but you might recall that last year we had the largest ever project in SMA's history in our books in Q1 with significant US, North American large scale project. So therefore, the comparison to the previous year is somewhat misleading because different than last year, this Q1 we will be profitable.

The board expects Q1 '21 sales in a range between €235 million and €245 million and the EBITDA between €14 million and €17 million. Given our strong product order backlog especially for our large scale segment, we expect sales and profitability to be higher in the second quarter and then again in the second half of this year.

At this point in time, we see neither the COVID pandemic nor the increase of cost for raw materials as a hindrance for further growth. Therefore, the SMA managing board confirms it's sales and profitability guidance for the whole year '21 as announced in early February.

We expect revenues between €1.75 billion and €1.175 million and an EBITDA between €75 million and €95 million. Given that our business has only mildly been affected by the COVID19 pandemic, the market continues to grow in all segments and that we maintain a strong order backlog.

We are confident to achieve our guidance again this year. Profitability improvement will continue to be driven by sales gross, productivity gains and the optimization of our product portfolio.

Regarding segments, management sees profitability for 2021 rising in all three segments. That ends my presentation.

Let me deviate from my script and add some more comments to Q1 because I think that this has been misinterpreted by the markets our Q1 outlook. We actually see that this is typical Q1 quarter.

The Q1 quarter is for seasonality reasons always little bit lower than the other quarters of the year and in our core markets for string inverters meaning Central Europe we had very strong winter in January, February, where you could actually have two to three weeks where no installations were possible, that has filled up inventory in the distributors, which now leads to lower sales in March. So that the overall expectation is little bit above what could have happened.

But that's something that happens from time to time. It has actually no weight in the assessment of our full year capability.

So Q1 is fair and okay and profitable and as we expect the following quarters to become even better, our overall prospect in 2021 is really positive. That ends my presentation, my comments and I'm now happy to answer any questions you might have.

A couple questions on my end, just to clarify on the Q1 and seasonality, are you seeing any slowdown in projects just due to module price inflation, seems like everything in the value chain for sewer is going up as well as interest rates and so I was just curious if you're seeing any push outs or if it's just seasonality as you referenced?

We have seen the module prices going up and so far that has not affected the business and we at this point in time see ourselves not in the position to really possess any impact on the market. It can be -- it might happen but with module prices are going up and down continuously, that's actually something that happens from time to time, I think that the more important issue is the raw material prices because that is a continuous phenomenal already for quite some time and here, we haven't seen an impact on our -- on the market pull and especially on our performance also because we have let's say secured our supply chain and we have a long-standing contract and I'm not just hopping on certain electronic components nowadays.

So module prizes yes, it's an issue we are discussing that, but we would not say that this is a major force already, which would explain the current situation. I would rather say that it's a seasonality issue and of course the pandemic takes its toll, especially in the business segment.

Makes sense, just a couple of other quick ones, I noticed in the ESG section of the annual report that the fuel failure rates were 1.48% slightly up from 1.44% I think last year where you had several warranty provisions. Is that all just because of the lower gross margins in Q4 or how do we think about reliability as we move into 2021?

Have you resolved all these issues or are there going to be lingering problems?

No, we had several field failure issues that are mostly linked to this one supplier that I already mentioned and the good thing is that we cleared all of that. The entire balance sheet is removed from -- is cleared from risks and especially to these quality issues in the field we came to an arrangement with the supplier and we have made the necessary accruals and there is silence and peace upon that.

We are totally satisfied with a situation like it is now. No more risks hidden.

And just a housekeeping question, could you share with us what the trading revenue was as a percentage of revenue as well as storage? Is there any meaningful movement in either of those line items?

Yes I can, with regard to trading, it was about 15% by the end of the year and in the storage was about 10%.

I got three. So one would be, would you be able to talk a little bit about what you expect will be the main revenue drivers this year and here really what needs to happen to reach the top end of your guidance?

If you give us some color to understand the different dynamics across the divisions it would be good or both in terms of volume and pricing will be my first question.

Okay. Let's walk through the three segments very quickly.

With regards to large-scale, I think we are already on the track to reach higher sales than originally expected. The order intake leads into that direction and the drivers for that are certainly batteries and the availability of batteries or storage devices in general and the functionalities coming with the inverters.

This market becomes more and more smaller with regard to the competitive landscape and we are very successful in the US as well in Australia as you know more and more share of renewables in the overall load make it necessary to support the grid and the grid functionality that our machines have are certainly top of the notch and therefore, this is running very well actually. With regards to the commercial arena, our business solutions segment, here very much depends on COVID.

You know that there are many midsize companies who have liquidity problems right now and therefore are postponing investments or are even canceling investments. So that affect the entire industry, not just us and the sooner this is over, the better this segment will perform and also we have some homework still to do with business.

We have a portfolio gap again that needs to be closed, which will happen in the beginning of Q3. So if that is accepted by the market as we think, we will just get through the year as hoped.

If pandemic closes down, let's say not by the end of the year but even earlier and this product is very well received then we might also let's say have a better result and that may then help us in reaching the upper end of our guidance. With regards to our home segment, the residential area, here I think we are already a little bit further down the road in the transition of the market from the pure inverter markets to an energy management platform market.

The convergence of sector here is already at advanced stage, mostly due to the importance of EV charging nowadays and hear I think it is still an open game whose company's offerings will be more successful. I think I've explained that we see ourselves see very well positioned and currently the order intake in Q1 matches our expectation for the entire year, but I think it will still be interesting to see whose functionality, whose technology is going to really convince customers the most and that will not be decided this year, but it is one of the factors that will contribute to even higher revenues for the down the road.

Then just quickly on pricing as a follow-up and there is a large-scale still fair to assume kind of the low double-digit low teens commercial, high single-digit low teens and residential. Is residential still flat or has it started coming down again?

We have been very frank in our capital market days with regard to pricing and have been told in the aftermath I shouldn't be so frank in telling the entire market what the prices are actually doing, but what you just refer to is correct and with regards to home, we see still a price pressure in the market.

Okay. Thanks and then my second question, can you just talk a little bit about market share in 2020 and given the expected revenue decline in Q1, what are you expecting there?

Is the entire market declining or are you losing bit of share there, thank you?

Yes as I'm already explained the fact that our Q1 in 2021 sees less revenues than in the preceding year is totally attributable to the fact that we had last year in large-scale segment hue single order and therefore that this year is coming out at a lower end, is just affecting the large-scale business and here you see, the next month may even change the picture. So was regards to residential and commercial, Q1 isn't worse than last year.

It is comparable and therefore I don't see market share being lost in Q1. I certainly see that in 2020 we have gained market share because we outperformed the market in our growth rate and we plan to do this again in 2021.

Thank you and then lastly, just on hydrogen, I'm really curious here if you can talk a little bit more about the project that you are currently working on, where exactly do you fit in there? What is the opportunity and what are some of the competitors in this field, thank you?

You can go back to the slide which shows this power to gas graph. So let me stab and tap into that.

For the electric [ph] process you need direct current and therefore you need to convert the current you get from the grid which is altered current into direct current. So here it is converter that you need and also this converter needs to deliver very let's say un-technically spoken a very clear and stable flow of energy and that is something that is not just easily being made by every utility.

You need special machines for that and the hardware you need for that is exactly what we sell for our large-scale business. It is just doing the inversion process the other way round.

And therefore, it is not just that we have an inverter who is just perfectly sized, it is also that our inverter technology possesses this distinctive ability to deliver these clear and stable flow of energy, which you need for the electrolysis and therefore, we think that we are per se well positioned. What makes us so interesting is that we have seen this coming already five years ago and worked on let's say on the product and on understanding not only the market but also the technology behind that and trying to improve that.

Also you might need our technology for just downgrading the power from the medium voltage now to the lower voltage in order to just than have the electrolysis being happenings. So there are two points and this is shown on the graph here where the SMA technology depending on what is happening.

What we had actually already delivering in a variety of projects usually from small utilities. We're doing this on an instrumental basis and I have seen videos of our people say installing them and actually producing hydrogen already.

So it is working. It is functioning.

However, it is at a very, very early stage. We will see this developing over the next years.

It will take some time until this really ramps off, but then of course it will be exponential and until then we will also let's say work to have special products to have a special product platform for this application, but we are already in the game and I think that we have very advanced position here.

Okay. So thinking about basically for every electrolyze you would need a converter, which means that if Europe is planning on 500 gigawatt installed base by I think 2030 or 2050 this is kind of how we can think about the opportunity there for you as well.

You need to inverter for the electrolysis. So it's the same as PV and for every PV you need an inverter in order to change DC into AC, in order to fit into the grid.

Now it's the other way round. You need an inverter to use electricity from the AC grid in order to make the electrolysis.

So that is per se wonderful for inverter suppliers. The specialty is that we are very good position technology wise and those are others don't and as you were right, you won't see that in our revenues very soon.

It will take some time.

Three questions. The first on would be if you could provide me the rough indication of much they megawatt will be sold in Q1 about our just for me to have me to an idea about the ASP.

The second one is again about the business solutions, I think you indicated that you are about to introduce a new product there, but still what is actually about this, is it fierce competition, is it the customer's behavior? I understood that currently we have this CORONA problem on top liquidity problems, but it seems to be pretty tough segments to be in.

So what could you do here to improve profitability? And the third one is on EV chargers, I assume that you rely on your contact or connections with the international installers when it comes to selling these product also abroad also in Germany via installers, which countries are you expecting actually to show the strongest growth because I think this is strong growth market, where are you selling this product to and I right to cooperate with the installer here.

And may be last but least maybe I should know it but where would the sales appear in which segment?

With regard to your first question in Q1 that was about 3.7 gigawatt that we sold, 3700 megawatt. With regard to the second question, the business segment as you said it is due to our product portfolio, which has a gap which needs to be closed that will help.

We are waiting for the pandemic to come to an end in order to revive customer demand and then have let's say higher productivity in our factory that will immediately help regaining profitability. For many years our business solutions segment has been the cash call of the company and now it's the other way round and it is fed by the two other segments but we see that only as an intermediates for short term period.

The soon we will be able to increase sales productivity will rise and we will gain profitability. What would help is that we recover from some quality problems we had in the field.

Jeff was already mentioning that, in Q4 we had higher warranty costs, quality costs and that is due to the fact that we were haunted by some quality issues in large-scale but also via in business and that needs first of all to be repaired, that's the first thing, but also then you need to regain the customer's trust. We have now since many years followed, if not for many years, but since 2.5 years since this management board is in office, the clear course to just have such products in our portfolio which have a high margin and high quality level, so no more budgetary -- low-budget products and in business, we need this recovery from an earlier approach to really work out the product that have caused these fuel failures are not being sold any longer, but still we are suffering from some let's say market recognition or fading market recognition due to these quality problems.

Once we have overcome this, that will also help us. And with regards to your third question, EV charges here it is just quite easy there is such a demand for EV charges that we cannot fulfill the demand right now and so we have long lead times and therefore we are selling in Germany only right now.

We couldn't serve other markets because we can't even satisfy the demand here in Germany. Therefore, we have no plans, currently no plans to internationalize that and I haven't heard any discussions about that.

With regard to the strong growth, which countries could be affected, all of them. You know that we have let's say with regard to renewables we have some countries who are more developed than others.

We have certainly Korea, we have certainly some parts of the US. We also have the Benelux countries who are much more advanced than that.

We have very good infrastructure in Italy where we also see rising demand for battery for storage devices. Those are usually the countries that will also lean on EV charging on E vehicles rather sooner than later, but for now SMA is concentrating on its home turf because that is even more than we can supply.

And the segment, it's booked into?

Sorry that is in the home segment. We also have -- we also have a business solutions, so business in EV charger.

Once this has -- those revenues are booked into the business segment, but this is very low, it's still very, very low.

So are you considering the current sales capacities?

Yes, we will. You know we have also let's say a share in a joint venture who is also dealing with EV charging on DC as well as on the AC level and also on let's say in the residential and especially in the commercial sector.

So this business is going to increase and we would extend our production the moment we have more raw materials. So here it is really cut short by the availability of electronic components because we didn't see this demand coming.

We ordered these let's say electronics a year ago and now the demand is overwhelming and therefore we still have to get ahead of the way in order to do that, but as soon as we can, we will, yes.

Just one follow-up for me, your guided for the last year your cost savings program. So if you can just give some more information on what to expect there, you already alluded to the commercial segment maybe some final product portfolio for phasing out.

So maybe just some additional detail on what is expected there and where in the P&L can we sort of expect to see those cost savings into gross margin level or is there sort of also more general cost savings across the board for the organization, thanks?

Certainly yes, as you properly mentioned, we have started a cost-saving program during our restructuring in 2018, which we see that we will save €40 million of recurring annual spendings and this program is let's say unfolding and is making progress and by the end of the year, we will have even surpassed this amount. Current forecast sees that's about €42 million of costs beings being saved on a recurring basis every year.

The major bulk from this savings comes from gains in productivity, it also comes from digitalization efforts, it also comes from streamlining processes and that's a resource being used. This affects to a large extent the gross margin n which we can already see in the gross margin, which has climbed over the last quarters with the exception of Q4 due to these one offs, but if we adjust that it would have been also let's say a 19.5 gross margin and therefore would have been in line with the trend of prior quarters and we have seen that already in Q1.

Q1 gross margin will be above 20% and for the remainder of the year, we also see gross margins of above 20% and that is going to increase even further a bit further. The saving programs also affect our structural cost meaning administration costs, which are flat although the increase in revenue is quite considerable it also affected the R&D capacities.

However, we are increasing our R&D budget related to the overall budget. So the R&D ratio is increasing.

The only function that is not affected by cost savings right now is sales and service, not because we're growing that much. So we can't save much costs, much resources there, but digitalization efforts also contribute.

For instance, our service costs are going to be lowered due to more and more service offerings being directed to self-help and to remote maintenance for instance that we do that by our apps etcetera, etcetera, so that is all contributing to this.

Thank you to all of you for listening in. That was an interesting call also for me.

Again let me point to the fact that our Q1 is not impact Q1, it's a good Q1 and it's the first good quarter in a very interesting year 2021 where we will altogether fight the pandemic and get out let's say victorious. SMA will continue to work on its path to be solid in its doing and keeping all the momentum and having a lot of interesting ventures before us and therefore I also trust that we will be able to conclude this year very much in the sense of last year and that is an improvement, which is outperforming the market.

Thank you very much and hope to see you soon in person again at any point in time -- at any given time, thank you. Have a great day.