SMA Solar Technology AG

Welcome, everyone. We very much appreciate that you are taking the time for this Investor and Analyst Call on the H1 2021 Results.

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.

The replay will be available for 7 working days. After the presentation, I will be happy to answer any questions you might have.

I will start with a review of the H1 financials before presenting you an overview on our market and competitive landscape, followed by current developments. At the end, I will provide you with an update on our expectations for the full year 2021.

I expect my presentation to last less than 30 minutes. I refer to our disclaimer on Page 2 and go to Slide #4.

Here, you find a summary of the key financials for the first half of ‘21. At a glance, you can see that our Home Solutions and Large Scale & Project Solutions segments grew their sales compared to H1 2020.

While our Business Solutions segment was affected by a price decline and the COVID-19 crisis. Our total revenues were a little below last year’s level, but profitability increased significantly compared to last year.

I will provide you with more details on our H1 financials in the next slide. So let me now point your attention to the table in the bottom right corner of this page.

As you can see, our Q2 2021 sales were higher than in Q1, and our profitability was on a good level in the quarter again, with a gross margin of 22% of sales. EBITDA was slightly lower in Q2 compared to last quarter, mainly as a result of higher accruals for variable compensation, which are linked to our higher level of profitability.

Now, please turn to the next slide and I will provide you with more insights regarding our sales performance. With net sales of €488 million, SMA’s H1 sales were 5% lower than in the first half of last year.

But this is completely attributable to effects from the COVID-19 crisis and price decline in our Business Solutions segment, which led to the sales decline for the segment in H1. Home Solutions segment grew its revenues by 6% in H2 – in H1, with EMEA contributing solid year-over-year sales growth for this segment.

And as you may recall, in Q1 2020, SMA completed a major project in our large-scale segment, which resulted in significantly higher sales in that quarter. By this extraordinarily high level of sales in H1 last year, our Large Scale & Project Solutions segment this year increased revenues year-over-year by 3%.

Looking at the regions, EMEA remained our largest region in terms of revenues in H1, with €251 million, which represents 50% of SMA’s global sales. Region, our Home Solutions and Large Scale & Project Solutions segments achieved low single-digit growth, while our Business Solutions segment declined compared to H1 last year.

Revenues in SMA’s Americas region increased slightly compared to H1 2020. Our Large Scale & Project Solutions segment was the main sales contributor again for this region.

With €179 million of revenues, the Americas region represents 36% of our H1 2021 sales. Our Asia-Pacific region represented only 14% or €71 million of SMA sales in the first half of this year, and revenues declined compared to H1 2020 due to COVID-19 related effects as well as quality issues in our Business Solutions segment.

Now, let me briefly walk you through the sales per segment on the right side of this slide. Our Home Solutions segment, which continues to be our consistent strong performer, delivered revenues of €148 million in the first half of 2021, growing by 6% compared to H1 last year.

For this segment, Germany, the Benelux states and the United States delivered the highest revenues, and Germany and the U.S. grew their revenues by double digits compared to H1 2020.

Our Business Solutions segment declined by 26% in H1 2021 compared to the first half of last year as a result of COVID-19 effects and price decline in several key markets. Germany and the U.S.

remained the top markets. And in Italy, the third biggest country for Business Solutions sales, we more than doubled our revenues compared to H1 last year.

Finally, our Large Scale and Project Solutions segment grew revenues to €224 million in H1 compared to €270 million in H1 last year. The U.S.

– the U.S. remained our biggest single market for our Large Scale business.

And after a strong second quarter, Australia regained its spot as the second largest market for this segment, with nearly triple the level of sales compared to H1 2020. Chile and France also contributed significant sales in H1, and both countries more than doubled their sales compared to H1 2020.

Now let me explain to you how our profitability developed in the first half of this year. In 2021, SMA so far generated an EBITDA of €38 million and an EBITDA margin of 8%.

EBITDA was on a good level again in Q2, mainly driven by the high gross margin of 22%, which was on the same level as in Q1. For H1 2021, our higher gross margin reflects our continuously improved product mix, especially in our Home Solutions segment and ongoing cost optimization in our operations.

In the first half of 2021, SMA’s results included both positive and negative onetime effects of low magnitude, and the net effect was approximately 0. Depreciation remained on a similar level compared to the last quarters, and there were no unplanned depreciations in H1 2021.

Now let’s have a look at the segments in detail. Home Solutions, profitability in our Home Solutions segment has been consistently good and continuously improving since early 2020.

EBIT in H1 this year was €30 million for this segment, which represents a strong return on sales of 20%. In absolute terms, profitability was nearly 3x higher than in H1 of last year.

Positive development has mainly been driven by continuous improvements in our product portfolio and stable prices in the residential market segment over the past 2 years. In our Business Solutions segment, EBIT was negative in H1 due to the low level of sales as a result of COVID-19 effects in several key markets and related price decline.

Income in orders, were much higher for this segment over the last months, and we expect sales to pick up in the second half of this year. And as such, we expect profitability for Business Solutions to improve in the second half.

The Large Scale and Project Solutions segment also had a negative result in the first half of the year, but profitability improved in Q2 compared to the first quarter. And given the strong project pipeline for H2, we expect this segment to get back into the black by the end of the year.

Now I will move on to the balance sheet and net working capital on the next slide. At the end of 2020, our net working capital balance was €211 million, which represented a net working capital ratio of 21%.

At the end of the first half of 2021, our net working capital increased to €280 million or a ratio of 28%, which is mainly attributable to the increase in our inventories. Moving more into detail, you see that finished goods inventories increased by €42 million in H1.

The buildup of inventory is mainly related to the strong order pipeline for our Large Scale and Project Solutions business and an increase of safety stocks to ensure our ability to supply during the COVID-19 crisis and the ongoing situation regarding material shortages. Trade receivables increased to €137 million as a result of a strong month of sales in June.

Trade payables of €134 million at the end of June are €10 million lower than at the end of last year, but this is normal development since APs tend to be higher at the end of the year due to the holiday period. Now let’s have a look on the group balance sheet on the right side of this page.

The balance sheet the most significant changes since the beginning of this year are related to the development of the net working capital positions, which I just explained. Other assets decreased from €100 million – €108 million at the end of 2020 to €92 million at the end of June.

This decrease was mainly related to an income tax reimbursement payment in the U.S., which we received in the first quarter of this year. This positive cash flow helped to partially offset for cash outflows related to our increase in net working capital.

A result of the increase in net working capital, mainly related to the buildup of inventories, our total cash decreased to a balance of €180 million in the first half of ‘21. Mentioned earlier, given the current material shortages, we willingly accept that a trade-off of liquidity for our ability to supply customers is currently necessary.

Our equity ratio of 42% at the end of June 2021 remained on a solid level and slightly increased compared to the end of 2020. Let’s now turn to our cash flow profile on the next slide.

In H1 ‘21, SMA generated a positive gross cash flow, which was higher than in H1 last year. This is mainly driven by our positive net result in the first half of the year, adjusted for non-cash effects, such as depreciation and amortization.

We also benefited from a tax reimbursement in margins here, which I mentioned already. Despite the increase in net working capital, our cash flow from operating activities was positive in H1, and our adjusted free cash flow was only slightly negative.

So let me now summarize H1 for you. SMA delivered a strong first half of 2021 with an increased level of profitability, which also brought us a strong positive gross cash flow.

Our revenues were slightly below our expectations, mainly due to ongoing challenges in our Business Solutions segment as a result of the COVID-19 crisis. Material shortages also affected Q2 sales, but only to a minor degree.

SMA’s balance sheet structure is solid with an equity ratio of 42% and net cash balance of €170 million and a debt-to-equity ratio of 1.36. As mentioned in our Q1 call, SMA recently renewed its syndicate loan, providing us with a credit line of up to €100 million, if required.

This concludes a detailed review of our financials for the first half of this year. As we did not host an Investors event on the Intersolar Europe Fair this year, we haven’t had the opportunity to provide you with further market analysis as we promised to do in our Capital Markets Day at the beginning of this year.

Therefore, we have prepared a few slides for you regarding our market expectation and market shares. And I would gladly like to walk you through those.

Beginning with global PV installations in gigawatt terms, despite the ongoing coronavirus crisis, we expect a further global PV market growth to 155 gigawatts this year and an average growth of 12% per annum until 2023. A small dip in ‘21, the APAC region will rebound in the years to come.

In the Americas region, the extension of the ITC will drive strong growth in the U.S. market.

Brazil and Chile are further growth markets in the region. With an expected average annual growth rate of 17%, the EMEA region has the highest potential until 2023.

Here, Germany, Italy and Eastern Europe will provide the strongest growth. In euro terms, this doesn’t look much different.

Here, you see the expected market development of our core business in Europe. Although the continuous price pressure in all segments and regions will make the market growth in euro terms stay below the growth in new PV installations, we now see after quite some years, a positive midterm perspective for the PV core market also in euro terms.

After still flattish development in 2021, we expect an annual average growth rate of 6% for the PV market in euro terms until ‘23. Of course 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 years is EMEA, growing from €1.6 billion in ‘21 to €1.9 billion in ‘23. Let’s have a look at the long-term market potential in SMA’s core and future business fields.

Over the next 10 years, we expect average annual growth of the global PV market of up to 16%. 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. In addition, you can see the global growth market for e-vehicles on the right side of this slide.

Starting from very low numbers, electric vehicles will continually replace conventionally powered vehicles over the coming years. The annual global market for electric vehicles is expected to grow approximately tenfold over the next years.

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

Now let’s turn to SMA’s market position. On this slide, we have compiled the breakdown of a global PV market by manufacturer in gigawatt.

The inner circle shows the 2019 breakdown, the outer circle refers to 2020. As you can see, the inverter industry continued to experience a consolidation.

The top-6 players covered around 75% of the global PV inverter market last year. Up, Chinese inverter suppliers were able to increase their global market share due to the strong growth in their domestic market where SMA does not do any business.

SMA maintained its overall global number three market position and increased its market share outside of China from 14% to 16%. This concludes already our short market brief.

Now, let me please provide you with an update on current developments. As I’ve already mentioned in the financials part, the global COVID-19 pandemic has taken its toll on demand in the business segment in the first half of this year.

Sales declined here because companies facing financial uncertainties were reluctant to invest in commercial PV systems. However, order intake improved over the last months, and we expect demand to accelerate in all segments over the next months as more and more people get vaccinated and economic uncertainties decline.

Another challenge is the ongoing global shortage of electronic components. So far, we have been able to prevent any major disturbance of our supply chain and production capacities.

At the same time, we have to assume that there will be delivery capacity constraints in the months to come despite the countermeasures that we have taken. But looking beyond those short-term challenges we see much tailwinds supporting our business.

The latest political developments continue to support our positive long-term prospects. With its Fit for 55 Package, the EU commission has introduced comprehensive measures to get the EU on track to meet its 2030 carbon reduction target.

In Germany, the federal government has finally adjusted its 2030 electricity consumption forecast, which should lead to higher installation targets for renewable energy sources. Also, the already mentioned extension of the ITC in the U.S.

will further boost demand for our products. This brings me to our guidance and expected developments for H2 2021.

Looking at the right side of this slide, you can see that our order backlog remained on a high level with €852 million at the end of the first half. Our strong product order backlog of €361 million at the end of June includes key projects for our Large Scale business as well as a good level of orders for our Business Solutions segment.

Our service order backlog continued to grow in H1, mainly driven by acquisitions of projects for our operations and maintenance business. Next side of this page, you can see that our Large Scale & Project Solutions order backlog for products remains above €200 million, and our total product order backlog is distributed relatively evenly across our three regions.

Our H1 revenues and high level of order backlog for product secures approximately 80% of our 2021 sales guidance. And this eventually brings me to our guidance on the next slide.

SMA sales were slightly below our expectations in H1, yes. But given our strong order backlog for the second half of the year, we remain confident to achieve our top line guidance for the full year.

Profitability was on a good level in H1. And given the expected uptake of sales for the second half of the year, we are also confident to reach the annual guidance for EBITDA as well.

As such, the SMA Managing Board confirms our 2021 sales and profitability guidance, which we rendered at the beginning of the year for seeing revenues of $1.075 billion to €1.175 billion and an EBITDA between €75 million and €95 million. As we continue to navigate the challenges from the COVID-19 crisis and deal with supply shortages for some components, I would advise you to be conservative with your estimates for 2021.

Given the mentioned challenges, we currently expect our sales and profitability to be at the lower end of our guidance range. Now let’s turn to the last slide of today’s presentation.

To sum up, why is an investment in SMA worthwhile? First and foremost, real sustainability will become a significant topic for important stakeholder groups.

At SMA, sustainability has been a core value since the company’s inception. Part of the sustainability, are also our financial stability and our focus on a sustainable energy supply based on PV.

With our comprehensive portfolio for all segments and applications, our global sales and service infrastructure, we can serve all customer groups around the world and thus profit from almost the whole potential of the global energy transition. Our Strategy 2025 forms the basis for our further development into a systems and solutions provider with perfectly fitting answers in all key areas of future energy supply.

This is why if you trust solar, there is no way around SMA. Now, I am happy to take your questions.

Hey, good morning Ulrich. Thanks for all the helpful detail on the call.

I had a few questions. With the backlog growth that you are seeing which is great to see, is there any sense of cadence that you have with the large scale projects in commercial?

Are they weighted more to the fourth quarter versus the third quarter, just as we think about modeling the rest of the year?

Yes, good morning Jeff. Indeed, we have seen postponement of large scale business throughout the year and to some degree, that is going to continue.

We foresee a very strong Q3 and high Q4, but a little bit less than in Q3. It’s rather even – it’s almost evenly split between Q3 and Q4, but Q3 should be a little bit higher than Q4.

Got it. That’s helpful.

And then you mentioned the project delays obviously, commercial has been slow to recover because of COVID. Can you specifically articulate what’s going on with utility scale solar, in particular, in the United States and other key markets for you?

Yes. The situation in the U.S.

has – with regard to large scale has of course been affected by the extension of the ITC, because the deadline has gone, let’s say, the pressure is out of the market, that contributed to the postponement of project and let’s say longer lead times of the business that we are taking in and executing. So we see the same amount, the same bulk of business lying before us.

The pipeline has not changed. It has increased continuously, but it will not be all done in 2021.

We won’t see the rally that we originally expected. So, some revenues are, let’s say, being postponed into 2021.

That explains also to some degree why we are going down in our expectations. But the business as such seems healthy.

What we see is that the share of projects that also include storage applications is growing continuously. Otherwise, the situation within the market, you see we have there only three to four competitors left is almost unchanged.

And prices are still under pressure. However, so far, we could see a rather stable ASP this year.

Got it. That’s great to hear.

I just had two other questions. One, can you give us an update on the shipping and freight, given that you make everything in Europe and are exporting around the world?

What is the impact of freight for these very large inverters in terms of ocean vessels and the associated costs with that? And then also, can you just give us an update on what current lead times are and how that might change in the second half given the component shortage that you referenced?

Yes. With regard to transport times, we are really in extraordinary times.

It’s not only that we ship out of Europe, and therefore, have long lead times for our major utility markets in the U.S. and in Australia, it’s also that the, let’s say, the logistics times in the harbors itself have extremely lengthened over the last months.

And therefore, the time in between shipping and recognizing revenue has extended even more and even has become even longer. But so far, we have managed to supply every project in time, have not seen any major difficulties in fulfilling any project that we have supplied and seen no consequences beyond what I already explained and that there are project postponements which lead to later execution points.

The fact that we are delivering out of Europe is in so far contained by the fact that our major markets are still the string inverter markets in Europe. It’s only really for the Large Scale business in the U.S.

and Australia that we are affected by these long transportation times. But as I mentioned, so far, we could keep the negative consequences to a minimum.

Also, cost-wise, we were able to compensate for those additional costs by, as I said, not much lowering our prices for some components. I don’t want to go into too much detail, but the ASP has been almost stable also for this segment this year.

With regard to the other two segments, the situation is different. In home, the ASP is rather stable.

In business, there is a hard price pressure – a strong price pressure to be seen. We had four warehouses at the beginning of the year due to a lack of demand last year, difficult installation situations in Q1.

Now this changes. We see rising insulation rates, we see bigger order intakes in Q2 also for the business segment, but the situation in end of 2020 and beginning of ‘21 has put a lot of – a lot of pressure on the price front.

So here, we have a strong price decrease in the ASP. I hope that is what you…

Excellent. That’s’ all I had.

That’s perfect. Thank you so much.

Yes. Hello, I think it’s two or three questions.

First would be on the prices for battery inverters, any observation there? Are they still rather stable or do they follow the pattern depending on where they get delivered for residential business or large scale?

So anything – any details on that potentially? And the second question would be on the – on your expectations.

I think that was on Page 12 regarding the declining price pressure in the coming years. I think if I read it right or I understand it right, you expect some – or this implies about, whatever, 6% price pressure.

So annually, your prognosis, that then mean, given that we have currently relatively stable prices in residential and in Large Scale that there we should get some price pressure back, and on the other side, in business, the price pressure to soften a little bit or is that maybe too nitty-gritty, by approach? And maybe last, but not least, what about the new products, EV chargers or inverters for electrolyzers?

Is that already playing a role in your sales? And maybe also on pricing there, if you have any relevant details, please?

Yes, of course. First with regard to prices for battery inverters, here, the development is, to my knowledge, not different from the overall price development that we have seen.

As you know, the margin for battery inverters is better than for the pure PV inverters. The trend goes very much to have hybrid inverters, which we are also reflecting in our product portfolio with new hybrid products coming up these days and also in next year.

But apart from that, I think the same that I said for the different segments also applies with regard to battery inverters. Then with regard to the declining price pressure on an overall global scale that we refer to on Page 12, when you see the €1 billion of the euro terms and in comparison to the gigawatt terms.

That is, let’s say, that is pure PV inverter business on a global scale. And that is going to continue a business of mass production with the Chinese participants playing a major role in it, where SMA and other market competitors are going to make more and more revenues of, will not be just that core PV inverter business, but more to a higher and higher degree coming from what you already mentioned, EV charging, storage, especially services, the system approach that we are all following right now.

And by those additional components and products in our offering, we can compensate for, let’s say, the overall price pressure, which will continue to remain, if you just look on pure PV inverters. So that goes, let’s say, that is aligned to those pictures.

There is not a price point that has gone away and will come back, but it’s rather a question of product mix, circumstances like we have now with regard to the higher transportation costs, which allowed us, let’s say, to keep prices higher than originally planned and of the offerings that every competitor has. If you would just compare, let’s say, a pure PV inverter business of today in within 3 years, we still see that very much more – much, much cheaper in 3 years from today, as we have seen that in the past.

Your third question with regard to new products or opportunities. Yes, the EV charging business plays a role, not so much with regard to the top line.

Here, its impact is still very, very low. But with regard to profitability, that’s a nice business that we are having right now.

Electrolysis is not yet of any importance. That’s a market that we see rising exponentially in – as of 2023 and ‘24.

But there is some something else that I would like to mention in this context, and that is our so-called Sunny Home Manager product, which is, in fact, a software, a software that I sometimes relate to – refer to as being the key part in becoming not just a system provider of inverter battery EV charging, but a solution provider who can really provide a plug-and-play, easy to install, easily to maintain solution for the customer because it is steered and monitored by perfectly adapted software. And that we see being – the demand for that product is increasing tremendously.

And – and here, again, on the top line, note, this is not that much important yet, but on the bottom line, that is also positively affecting our profitability. So to sum up, the course that we have set a few years ago is exactly paying.

By becoming a solution – a system and solution provider, we are able to increase margins, thereby compensating for the strong price pressure on the pure inverter level that we have seen and that we will also not – we do not see to go away in its entirety.

Alright. Alright, thank you then.

Very clear.

Thank you.

Yes. Hi, can you hear me?

Awesome. Thank you for taking my question.

Unfortunately, my colleague Constantin had some technical issues. So I’m going to substitute for him.

I shall give you his best regards. So we generally have three questions.

The first one is on the remeasurement you mentioned of general warranty provisions with a positive impact on home and Large Scale earnings. Could you just elaborate a little bit more?

And what was the impact at group level, meaning, for example, what would have been the EBITDA excluding these one offs? Then the second one is on market share.

Could you maybe just give us some insight in terms of market share as we see revenues in Europe have declined quarter-on-quarter, whereas the competitor, SolarEdge, has reported an increase of roughly 26% in the same period? Could you maybe just give us some more color on that end?

And is it possible that you may be losing market share in residential or commercial to SolarEdge in Europe? And then the last one is just on the headcount, as it increased driven by strategically important future field.

Could you just add some color on this one as well? Thank you.

Certainly, Nicolas. With regard to the first question, remeasurements that you have seen in the half yearly statement, I have to explain that.

This is not a special effect. What we do is whenever we sell a product, we build accruals for possible warranty claims that might pop up later.

And every 6 months, always by the end of H1 and by the end of the full year, we revisit the amount of the accruals. We take then as reference, our failure rates in the field and how they have developed.

And as you know, SMA, we are always taking a rather conservative than an audacious approach and regularly find our accruals for this general warranty provisions to be too high and therefore, then reduce them, which leads to, let’s say, a one-time inflow in the month of June and in the month of December. But this is nothing but earned revenues in H1.

So I’m not willing to really call that one-off effect. And I would advise to not deduct it from the EBITDA from the segments because it has been earned money in the period.

It just happened to be, let’s say, happening all in one month rather than continuously over the 6 months period. And if you would insist, I would just refer to what we have said, it is a very low single-digit figure for the segments of home and Large Scale.

But as – again, as I said, I regard that as earned revenues and earned profits not being affected by a one-off. With regard to your second question, the market share.

I’m not aware of any SolarEdge market gains in the EMEA market. You have seen that we have now provided you with market share figures for 2020.

It always takes quite some time to really assemble all the market intelligence to come to an assessment how market shares developed. And as you mentioned, SolarEdge, I would like to pick up that ball and tell you that according to our knowledge, SolarEdge lost market share in 2020 in comparison to SMA, which kept its marketplace and outside China increased its market share last year.

So maybe SolarEdge was regaining some ground somewhere, but I’m not aware of that. Certainly, we have not seen any – I have not received any information about a big bounce of SolarEdge in the European theater so far.

With regard to the third question regarding headcount, could you reiterate that question? I think I didn’t get it in its entirety.

Yes. So just the headcount increase driven in part by strategically important future field, could you maybe just elaborate a little bit on what that actually means?

Of course, yes. As you know, and as I mentioned, we are going to transform SMA into system and solution provider, meaning that beyond the pure PV inverter software and related hardware fields become more and more important.

Also, our services business, especially our operations and maintenance activities extended continuously. Also, you see our growth rate with regard to revenues, that all makes it necessary to hire additional, not only salespeople, but especially people for our research and development activities and especially personnel, very specialized personnel, dealing with these new business fields that we are active in.

I mentioned, EV charging, I mentioned the energy market integration, software, hydrogen, etcetera. So the uptick in personnel and headcount is related to our overall growth and to our specialization that we see in our business activities in our business model.

Alright. Thank you very much.

You are welcome, Nicolas.

Thank you, operator, and thanks to all of you for devoting time and your interest in SMA. I would like to conclude by just one remark.

Despite the difficulties that we see these days, COVID, material supply constraints, etcetera, the overall prospectus for SMA have never been brighter. For the first time, we see a consensus in society that we have to do something about renewables.

And we see consensus in, let’s say, the community that PV is going to be the cheapest source of electricity. And that, in combination, gives us a perfect base for our growth plans and development plans over the next years.

So 2021 may cause a dip with regard to our expectations, but the business, as such, is more than healthy and bears a lot of prospects. With that, I’ll leave you and again, thank you for your interest and wish you a very nice day.

Thank you.