SMA Solar Technology AG (OTCPK:SMTGF) Q3 2020 Earnings Call Transcript November 12, 2020 7:30 AM ET
Ulrich Hadding – Chief Financial Officer
Conference Call Participants
Constantin Hesse – Jefferies
Jeff Osborne – Cowen and Company
Please standby. Good day everyone and welcome to the SMA Solar Technology AG Analyst, Investor Presentation Financial Results Q3 2020 Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over the CFO, Ulrich Hadding. Please go ahead, sir.
Thank you, Augusta. And welcome everyone. We very much appreciate that you are taking the time for this investor and analyst call, and SMA’s Q3 2020 results. You can find today’s presentation on our Investor Relations website, ir.sma.de. This conference call is scheduled for 45 minutes. The replay will be available for seven working days. After the presentation, I will be happy to answer any questions you might have.
I will start with a review of the financials for the first three quarters of this year before presenting you our expectations regarding market developments and our outlook for the full year 2020. I refer to our disclaimer on slide 2. And on our slide 4 you’ll find a summary of the key financials for the first three quarters.
Since I will provide you with more details on our sales, profitability, balance sheet and cash flow in the next slides, I would only briefly comment on quarterly development in the table in the bottom right corner of this page. As you can see, we concluded yet another quarter of strong sales and EBITDA. And in Q3 2020, our gross margin remained on a good level was 20% of sales, even with a higher proportion of Large Scale & Project Solutions sales. The higher sales level and stable price levels in our Home Solutions and Large Scale & Product Solutions businesses contributed to the good gross margins.
Now let’s please turn to the next slide and I will provide you with insights regarding our sales performance.
Net sales for the first three quarters of 2020 grew by 23% to €774 million and increased in terms of nominal inverter capacity sold by 42%. In the first nine months of this year, all segments increase sales, and our Home Solutions and Large Scale & Project Solutions segments achieved double-digit growth rates.
Looking at the regions. EMEA remains our largest region in terms of revenues with €392 million, which represents 49% of SMA’s global sales and an increase of 12% compared to the first three quarters of 2019. The region has been a consistent contributor for SMA’s revenue growth since early 2019, and in the first nine months of 2020 the Home & Business Solutions segments deliver double-digit growth, while revenues in the Large Scale & Project Solutions segment declined slightly. Within EMEA, Germany and Benelux contributed the highest revenues and grew by double-digits compared to the same period last year.
SMA’s Americas region nearly doubled its sales in the first three quarters of 2020 as compared to 2019. With €252 million of revenues, the region represents 32% of our total sales. The substantial increase in sales compared to the first three quarters of 2019 is mainly driven by significant revenue growth in the U.S. large scale business, where we have regained market share.
Our Asia-Pacific region represented 19% of SMA’s total sales. In the first three quarters, sales declined by 8% as business has been affected by strong local competition and to some extent by the COVID-19 crisis. Within the Asia-Pacific region, Australia clearly remains SMA’s largest market and revenues grew by high-double-digits in the Home & Business segments. Japan, which is our second biggest market in APAC, grew revenues by double-digits compared to first nine months of 2019.
We saw a sales decline in South Korea and Vietnam. In summary, we see double-digit sales growth in the Americas and EMEA regions, while SMA’s APAC region declined. Now, looking at the sales per segment on the right side of the slide, you see that all segments increased revenues in the first quarters as compared to the same period last year.
Our Home Solutions segment continues to perform well and grew revenues in the first nine month by 16%, reaching €204 million. Germany, Benelux and Australia delivered high revenues and high double-digit sales growth for this segment. Our Business Solutions segment also increased its revenues, achieving €225 million of sales which represents an increase of 8% for the first three quarters compared to the same period last year. Germany and USA remain our top market for the segment and grew revenues compared to the first three quarters of 2019. South Korea, Singapore and Australia are also key markets for the segment.
Now I come to our biggest segment in terms of revenues, SMA’s Large Scale & Project Solutions. It continues to deliver strong sales with €345 million, which is an increase of 40%, 4 0 percent, compared to the first nine months of last year. In the US, revenues have more than tripled compared to the first three quarters of 2019. Australia and Japan are the next biggest regions for this segment. Revenues in Australia have declined in the first three quarters, while Japan has nearly doubled the size of its Large Scale business.
Now let me walk you through our profitability on a group level and by segment. For the first three quarters of 2020, SMA achieved an EBITDA of €41 million and an EBITDA margin of 5%. EBITDA significantly increased compared to the same period of 2019, mainly driven by the strong sales growth achieved. In the first three quarters of 2020, there were no unplanned depreciations. It was slightly lower than in the first nine months of last year due to the decreased level of capital expenditures over the last years. Also in the third quarter of 2020, SMA sold all its shares in Tigo Energy Incorporate, which due to earlier impairments, led to a positive one-off effect benefiting our profitability. Other effects positive as well as negative ones were very small and almost balancing each other.
Let’s now have a look at the profitability by segment. Our Home Solutions segment was very profitable in the first three quarters of 2020 with €19 million. The significant increase in profitability was driven by the strong sales achieved in combination with a stable price level and positive developments in our product portfolio as compared to the first three quarters of 2019.
In the Business Solutions segment, EBIT was negative. There are several reasons for that. First, sales in Q3 were even weaker than Q2. We see the commercial markets being particularly exposed to COVID-19 concerns of investors. Second, price decrease in Q3 was stronger than anticipated, about the same level as in the entire first half year. This is most likely a consequence of the current oversupply in the commercial markets, thereby also related to COVID-19.
Third, SMA had an unfavorable product mix in Q3. All this led to EBIT in our business segment falling behind the EBIT level achieved after Q3 in 2019. However, all three reasons mentioned as responsible for that development are of temporary nature. COVID-19-related drops in demand are already much softer than in Q2 and will eventually stop. Also, SMA in Q3 launched a new key product in the business segment, the Sunny Tripower CORE2, which will improve the product mix.
We therefore expect to see an uptake in sales and improved margins over the next quarters for this segment. The Large Scale & Project Solutions segment improved its profitability compared to the first three quarters of last year and had a profitable third quarter, however, remained in the red for the first nine months of 2020. Despite strong sales growth, profitability of this segment continues to be affected by strong price decline and unfavorable mix in the first quarter.
Now, I will move on to the balance sheet and the net working capital. SMA started 2020 with a net working capital balance of €160 million and a net working capital ratio of 17%. As I explained a few months ago during our 2019 annual results call, our net working capital was extraordinarily low at the end of last year as a result of a onetime advanced customer payment in Q4 2019, for which we delivered the products and booked the sales in Q1 2020. We therefore expected an increase in our net working capital.
However, the level of €260 million or a ratio of 25% is slightly above our normal level, mainly due to the COVID-19 pandemic, as our inventories remain on a high level in order to mitigate supply risks. The decrease in trade receivables from €145 million at the end of 2019 to €121 million at the end of Q3 2020 was a result of good AR collection, but could not compensate for the decrease in trade payables from €175 million at the end of 2019 to €123 million at the end of September, another effect from the COVID-19 pandemic, which we expect to ease in 2021, then freeing additional cash.
Now let’s have a look on the group balance sheet on the right side of this page. On the balance sheet, the most noteworthy changes since the beginning of 2020 are related to the development of the net working capital positions, as just explained. This includes a decrease in advanced customer payments, which is booked under other liabilities.
Total cash decreased from €318 million at the end of 2019 to €206 million at the end of September 2020. The decreased balance of total cash is mainly a result of the increase in net working capital. Our equity ratio of 43% at the end of the first three quarters is very solid. The ratio increased from 38% at the end of 2019, driven by the positive results during this year and the significant decrease of non-financial liabilities in the first nine months.
Let’s now turn to our cash flow profile on the next slide. In the first three quarters of 2020, SMA generated a strong positive gross cash flow, mainly driven by our net income, compared to the same period last year. SMA is clearly delivering higher cash flows from its business operations. Our cash flow from operating activities is negative, €83 million for the first three quarters of the year and is mainly a result of a significant increase in net working capital, which, as mentioned earlier, was largely related to the settlement of liabilities from the end of 2019 and cash invested in our inventories to ensure our ability to supply customers throughout the COVID-19 pandemic.
So in summary, SMA continued to significantly improve its business performance in the first three quarters of 2020 with strong sales growth, a solid level of profitability and a positive gross cash flow. Cash flow from operating activities and adjusted free cash flow in total were negative, mainly due to the increase of net working capital. This concludes a detailed review of our 2020 financials. Let me briefly summarize the key figures. First, year-on-year SMA grew revenues by 23%, all segments contributed to that growth. Second, profitability year-to-date improved significantly. Third, SMA’s financial position remains solid with an equity ratio of 43% and net cash balance of almost €200 million, a credit facility of €100 million and a debt-to-equity ratio of 1.34.
I now turn to the market and competition part of this presentation. Our market view, which we had adjusted in May due to the global impact of the current COVID-19 pandemic, remains largely unchanged. While the COVID-19 pandemic is currently taking the toll at the development, we expect markets to recover soon.
For 2020, we expect a global market volume of 101 gigawatt, which is 10% down on 2019, and 18% down on our pre-COVID-19 market outlook. We expect the strongest downturn in APAC, where India plays an important role. Strict lockdown measures and difficulties in financing will have a strong negative effect on the Indian market this year. As a reminder, India is no key market for SMA, and we do only little business there.
On the other hand, we expect little to no decisive negative impact from the COVID-19 pandemic on SMA’s core markets in EMEA as well as in the Americas. Therefore, we expect both regions to mainly develop in line with 2019 in gigawatts. Next slide, please. On this page, you see the global market in euro terms. The 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 decline to ease off to one-digit percentages over the next years.
Slide, please. On this slide, we display not only PV business, but all those markets that SMA actually does address with its portfolio of components, systems and solutions. As a transition to a decentralized energy supply based on renewable energies, proceeds globally, storage and digital energy services become ever 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 COVID-19-related dip in 2020, we expect a strong recovery for the whole market addressable by SMA. Therefore, on the next slide, we have gathered our long-term market outlook. The 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. Political initiatives, such as the European Green Deal point in the right direction here. Now it is a matter of consistent implementation. SMA is ready and well prepared to help shape this with our comprehensive know-how and our innovative and sustainable technologies, which brings me to our current developments and impact on SMA.
SMA is of course, also feeling the effects of the coronavirus and experienced weaker demand in Q2 with a slight recovery in Q3. Nevertheless, as you have already seen in the financial slide, we were able to grow sales and earnings from January through the September 2020 compared to the previous year. This was possible only thanks to SMA’s good IT infrastructure, modified processes, active supplier management, our continuous customer support and especially, the great dedication and flexibility of our employees. Please also note that we did not have to use any government aid. We will continue to monitor the further development very closely and react accordingly. Another important development is Joe Biden’s victory in the U.S. Presidential election. While solar capacity successfully grew under the Trump administration despite his focus on fossil fuels, we expect a boost from the Biden government, which has climate change high on its agenda.
Mr. Biden’s commitment to decarbonization targets and international treaties like the Paris Climate Agreement will foster a stable and supportive environment for renewable energies and especially for utility-scale PV, which is one of the most cost-efficient energy sources in the United States.
In addition, individual U.S. states, such as California, have implemented their own renewable energy targets and programs and more and more major U.S. corporates are signing power purchase agreements to supply themselves cost efficiently and sustainably with solar energy from utility-scale PV power plants. We expect this positive development to be accelerated by the Biden administration.
As you may recall from earlier investors call this year, we usually try to inform you about current developments in our product portfolio, also with regard to technological features or new products. This time, we would like to point your attention to a field where SMA has long been active in, but you might not think of it in the first instance. Digitalization accelerates the global energy transition and enables new opportunities and business models in the energy industry. SMA uses this trend to develop into a provider of systems and solutions.
Over the last couple of months, we have brought this SMA 360-degree app for solar professionals and the SMA Energy app for prosumers to market.
With their comprehensive and unique features, the apps support solar professionals in nearly all areas of their daily work and visualize and optimize energy use for end-customers, including EV charging. Those helpful apps, thereby, do not only strengthen our brand promise as sustainable quality provider, but deliver additional data, which later can be monetarized. But perhaps most importantly, SMA with its various digital activities, can herewith show its ability to continuously accompany the global energy transition towards a, decentral and renewable energy supply.
Now I would like to share with you our outlook and guidance for 2020, starting with our order backlog. Looking at the right side of this slide, you can see that our total order backlog is solid and increased by 3%, compared to the end of 2019. Focusing on our product backlog, which will be, recognized as revenues, within the next months and it is on a good level. And we do see positive developments in order intake over the last three months.
In addition, in 2020, we continuously increased our order backlog for services to now €460 million. That reflects our success, in building up a substantial portfolio with the operations and maintenance business in the U.S. As you can see on the left side of this page, our product order backlog for Large Scale & Project Solutions remains on a high level, and EMEA and Americas are the major regions for open orders. This brings me to our 2020 guidance on the next slide.
Despite the COVID-19 crisis, SMA has achieved strong sales and solid profitability in the first three quarters of 2020. Our highly motivated organization has been working remotely in many countries worldwide, and continues to deliver on key business milestones. Until the end of Q3 2020, sales and EBITDA were almost in line with our original expectations. And given our solid order backlog and our ability to mitigate supply chain issues, we remain confident to achieve more than €1 billion revenues for the full year.
However, though we have coped with the challenges of the COVID-19 pandemic successfully, we do not expect Q4, making up for the revenue losses suffered in Q2 and Q3. Therefore, we expect revenues to end up most likely in the lower 1/3 of the guidance of €1 billion to €1.1 billion. With regard to our EBITDA prognosis, we uphold the full spectrum of our guidance of €50 million to €80 million of EBITDA, expecting depreciations of almost €45 million.
Let’s turn to the last slide 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 proven since the company’s inception. Part of the sustainability, are also our financial stability and our focus on sustainable energy supply based on PV. With our comprehensive portfolio for all segments and applications and our global sales and service infrastructure, we can serve all customer groups around the world and thus profit from the whole potential of the global energy transition. This is why, if you trust solar, there’s no way around SMA. That ends my presentation, and now I’m happy to take your questions.
Thank you, Mr. Ulrich. [Operator Instructions] We’ll go first to Constantin Hesse with Jefferies.
Sorry, I was on mute. Can you hear me?
Yes, I can Constantin. Hi.
Okay. Great. Fantastic. Hi, there. Good morning. Congratulations on the strong results. So I have a few questions, the first one on margins and pricing. I was wondering, if you can elaborate a little bit on the margin improvement, driven by product or maybe elaborate a little bit on the product mix improvement that we saw in Q3 and also what the impact was of the sale of the share in Tigo? And on pricing, if you can just give us an update per segment – where do we stand here? If it is at the same level we were in the first half or if this has somehow changed? Thank you.
Yeah. With regard to margins, you know that we have had very comprehensive product portfolios in all three segments. And as a part of our chain strategy in that regard, moving away from offering every product in every segment and every niche and every part of the world, we have, over the last two years, concentrated on products with more profitable margins. However, that takes some time to, let’s say, sort other products out. And we have seen that continuously. So for instance, in the Large Scale segment, Q1 still had some old products in its portfolio and margins were rather low.
With regard to Business Solutions, there are also some products who are just discontinued by the end of this year and therefore, had been burdening margins for – the home segment margins are already okay. We have already a very up-to-date portfolio here. For business, we really awaited the beginning – the start of production of the Sunny Tripower CORE2, which is now hitting the shelves of the distributors, which is now making an impact on business and margins.
So overall, that increased. And with regards to the gross margin, it went well as I prognosed. We are now, let’s say, close to 20% and continuously improving. So that is probably the most important message in that regard. With regard to pricing, I would like to distinguish in between segments. Overall, pricing continues almost as prognosed by the end – by the beginning of the year, within Large Scale with – meaning Utility, we see the expected continued strong price pressure, although not as strong as last year. Market was almost 20%. This year, we expected to end up by the end of the year at low two-digit price decrease rates. So that went as expected.
With regard to Business, the price drop is less severe than in Utility. However, it is still quite strong, high single-digit percentage and a little bit stronger than we anticipated, a little bit. With regard to our Home segment, it’s the other way around. It is less severe than we expected. And right now, prices are stable. So there is no price decrease at all within our Home Solutions segment for the time being. We expect this to continue until the end of the year, so that we will have actually no price decrease in our Home Solutions segment.
And your last question was with regard to Tigo. You know that has been a long-awaited step in turning away from module-level power electronics. We have turned away from selling optimizers and other MLPE and in consequence of that strategic move, we also discarded our interest in Tigo Energy. And as we had earlier devaluated our stakeholding here, the effect is still feelable. However, it is rather small. So that’s for your calculation and then modeling, you can just deduct the one-off effect that we have shown here in the slide, and then you will be fine, which is almost €2 million.
Thanks. Perfect. Thanks. If you can just maybe talk about the order backlog? And with regards to the quality of the order backlog, have you seen an upward trend in margins in more recent orders, implying the continuance of margin improvements in the coming quarters? And how is demand currently looking in Q4?
Yes. In general, I can’t answer your question with yes. The order intake is developing well, especially September, October were looking good. Also October was looking good and we see momentum. However, it is, as I already explained, different by segment. It is — we like it with regard to Large Scale and Home. Within the Business, we see still an oversupply in the market. That will take some more time to actually open up.
However, we do not really suffer under this. We have some take back — some slower movement within our stock and some slower demand, but not tremendously slow. However, still, business is different than the other two segments. And price quality margins are improving or have improved. And also, what we now see as order intake is clearly better than what we have seen in Q1. So that the profitability level we have achieved here in Q3 is, let’s say, the basis of what we are going to see for the future. It becomes this or better.
Okay. This is great. With regards to — I’m very curious with regards to market share clearly being a key thing here. Can you maybe elaborate a little bit more on the current dynamics here? And where have you gained market share and from whom? And is it sustainable in your view?
Yes. With regard to market share, it’s very difficult to really assess that throughout — during the year. We will have more precise figures in Q2 next year. But the strong sentiment that we have is that we have gained market share in the Large Scale segment, especially in the U.S. market. That’s for sure. And that we have also gained some market share in the business with Home and Business applications on a global scale. I could not confirm that we have gained market share in Home or Business in the U.S. It is very difficult to say, as we do not know really the COVID-19 implications on the U.S. commercial market. Certainly we have not grown any market share in Home in the U.S. So what you might have in mind is does our ShadeFix technology actually starts killing solar ads market share, I could not confirm this yet.
The overall dynamics are still very much driven by Chinese competitors coming in with low prices and the run for — on the technological side, who is going to deliver, let’s say, the best features with regard to the transition of our component business into a systems and solutions business. And here, as you know, whenever there comes a new generation of products, this company picks up market share, and with aging products, you lose it again a few years later. So there is a continuous momentum in that. On the overall scale, we see a consolidation of markets, which helps SMA regaining market share on a global scale.
That is great. Thank you. Just my last question then is on free cash flow. Just taking another big hit, clearly, primarily driven by working capital now. I’m just wondering, where do you expect to end the full year in terms of working caps? And what actions are you taking to improve this going forward?
Yes. Thank you for asking because that allows me to elaborate a little bit on that. With regard to inventories, it is difficult because we see that high order intake, especially for Large Scale in the U.S. So this is going to be manufactured in Germany. It is then shipped to Sicily for making medium voltage station out of that, and it is then shipped to the U.S., East and West Coast. So the more order intake we have, the more revenues we can expect, the higher is our inventory with finished goods. So we see that, and we will not be able to reduce that due to the uptake in order intake. So as long as we grow revenue-wise, it will be difficult to really bring down our inventory, at least with regard to finished goods. With regard to components — sorry, with regard to raw materials, this is still a consequence of the COVID-19 pandemic. We have just secured more raw materials in order to secure stable supply. That will eventually go down sometime middle of next year.
With regard to AR, we are fine. We are well on track. We have very low DSO. With regard to APs, it’s difficult because in the — during the pandemic, of course, all suppliers looked to just secure their — AR business. And SMA is still regarded as a negative company due to the 2019 results, and also credit insurance companies rate SMA still as being a negative company. However, our good performance throughout 2020 has regained confidence also with the credit insurance companies, which I’m in continuous contact. So we can expect of being risen — being raised in our credit worthiness on the basis of our 2020 results, which will then be positive. So then we can, let’s say, work for longer payment terms with our suppliers in 2021 and thereby, reduce APs in the first half year of 2021. So that’s really feelable tangible decrease of the net working capital ratio will most likely not happen before the middle of 2021. And as you know, there is a direct interconnection between net working capital and cash flow — and net cash positions within SMA. It’s only — the only thing that consumes cash is our CapEx and the net working capital development. By the end of this year, we will have almost the same net working capital amount as we have now.
That’s great. Thank you very much.
[Operator Instructions] We’ll go next to Jeff Osborne with Cowen and Company.
Hey, good morning Ulrich. A couple of questions on my end. One, on the outlook for 2021, I saw you lowered the EMEA outlook from 33 to 29 gigawatts, and then you also lower 2022. Can you talk about what’s going on there in light of the green new deal?
Yeah. Let me just skip to some notes, because Pamela actually told me why we have changed that. So what we have done since our last global outlook is, we increased also the 2019 number for Asia by 2 gigawatt, because we had new intel about that. And then with regard to 2020 EMEA, your question, we took — we lowered that by 2 gigawatts, because we see that the expected increase in business in Africa is not going to happen. The outlook on our core markets, which is Central Europe is unchanged. So the 2 gigawatts being going down is for Africa. And with regard to…
2021 as well?
Yes. And with regard to 2020, Americas, U.S., we now see that 3 gigawatt higher than the last time. Therefore, 2 gigawatt more in Utility, 1 gigawatt more in resi and commercial. So that has been the change in our model since last time.
Okay. And then just in light of the cash flow commentary on the prior question as well as the guidance being now below €250 million. I assume it’s a safe assumption that you’re not anticipating any safe harboring that would bring in cash at year-end and then have a strong Q1?
No, we won’t have the effect that we had last year, not to the extent. Actually, I’m quite uncertain what happens in December because due to COVID-19, there are pushouts. The construction site is sometimes not ready because you cannot people move people there, et cetera. So December business is somewhat in the midst this year, which is also the reasons why I’m very cautious with regard to the guidance. Usually, you could expect me to be more precise. But as December is still uncertain, I tend to be more open here.
Make sense. And the last were a couple of housekeeping questions. On the last earnings call three months ago, you talked about trading revenue, storage revenue and attach rates in Germany being about 60% for storage. Is there any shifts in any of those trends, or just given the margin performance, can you talk about what trading revenue was in particular?
Here, you can assume that these trends are unchanged. We have a trading share of our overall revenues of about 16%, and service business, including operations and maintenance, is about 8%; and then storage, that changes more from quarter-to-quarter as now in year-to-date, all three quarters be 9%; and the attach rates are unchanged. There is, of course, a growing trend, but I have no better figures than 60% attach rate for home applications in Germany.
Great to hear. And my last question is just the tax rate has come in below expectations or at least our expectations here for Q3. How should we be thinking about Q4 and then into 2021 for the effective tax rate?
Yeah, very much depends on where we are going to make our revenues. For Q4, I wouldn’t expect any large differences to that. For 2021, it’s too early to call. We are, of course, still working on DTA that we have. But I can’t elaborate. I can’t be more precise on that at this point in time. We are still working on 2020 modeling — 2021 modeling.
Okay. That’s all I have. Thank you.
Mr. Hadding, we have no other questions at this time.
Right, and thanks to all of you. Thanks for spending some time with us this day. And I hope that you have heard the call. And I hope to see you all someday in person, again, and wish you all the best in these very challenging and difficult times. Have a great day and stay healthy.
And that does conclude our call for today. Thank you all for your participation. You may now disconnect.