SMA Solar Technology AG (OTCPK:SMTGF) Q2 2022 Earnings Conference Call August 11, 2022 7:30 AM ET
Company Participants
Thomas Pixa – Chief Financial Officer
Conference Call Participants
Jeff Osborne – Cowen & Company
Constantin Hesse – Jefferies
Guido Hoymann – Metzler
Lasse Stuben – Berenberg
Gunter Greiner – WIWIN
Anis Zgaya – ODDO BHF
Thomas Pixa
Welcome, everyone. We very much appreciate that you are taking the time for this Investor and Analyst Call on the H1 2022 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 seven working days. After the presentation, I will be happy to answer any questions you might have.
Before we dive into the figures for the first half of this year, I would like to start with a personal introduction. This is the first analyst conference call that I run, the CFO of SMA. I was appointed to this role on June 1st and will remain in it until our new CFO, Barbara Gregor, steps in on December 1st. You might think that this is a difficult time to step into the role of interim CFO at SMA, but I have a slightly different view. Bear with me while I briefly explain why.
I will be honest with you. The figures could, of course, look better and you will see what I mean in a minute. But if we take a closer look, the picture changes in my view. Yes, the material supply shortages remained a challenge and there are disruptions in the supply chain and other factors that continue to have a negative impact on the business.
But we see an unprecedented political support for renewable energies in all our markets. The war in Ukraine and the global pandemic have shed the spotlight and the vulnerability of our supply chain and the huge dependency of the solar industry and components from China and Taiwan. The most recent developments in Taiwan have further accelerated the sense of urgency.
In addition to the political climate we see a continuous rise in orders. Solar power is not only a political choice, but also a choice that many customers make every day for their homes, their business and their large scale projects.
It feels like the perfect storm. Now we need to set sail and we did. We adapted our business strategy to increase our focus on our customers and markets. We are continuously implementing measures to improve our operational excellence and we are working relentlessly to secure the materials needed for our business. Given this and the strong commitment of the entire organization, I strongly believe we will call out of the store even better.
And now, back to the H1 figures. I will start with a review of the financials of the first half year of 2022, then give you an update on current developments and on our expectations for the full year. I expect my presentation to last approximately 20 minutes.
So as announced at our Capital Markets Day in May, the first half of 2022 and Q2 did not develop as well as last year, as our ability to convert the high level of market demand and customer orders to revenues was significantly impacted by global supply constraints.
Our total revenues were a bit below last year’s level and profitability declined due to underutilization effects, which also resulted from the supply shortages. These effects explain also the lower gross margin in H1 of this year.
I will provide you with more details on our H1 financials in the next slides, so let me now point your attention to the table in the bottom right corner of the slide. As you can see, our Q2 sales were more than 10% higher than Q1, with all three segments above. This is mainly driven by the strong uptick in demand and slight improvements in the supply situation last quarter. As already mentioned, our profitability in the second quarter suffered heavily from the underutilization effects and a higher portion of trading goods sold.
Now, let’s please turn to the next slide and I will provide you with insights regarding our sales performance. As explained, the year-on-year decline in sales was primarily due to the strained supply situation for electronic components, mainly semiconductors, which have been affecting our business since the middle of last year. All segments were affected by this, and as such, our total net sales slightly declined by 3% compared to H1 last year.
Looking at the regions, EMEA continues to be our largest region in terms of revenues in H1 with €278 million, which represents 57% of SMA’s global sales. In EMEA, our Large Scale & Project Solutions segment achieved strong double-digit growth, our C&I segment had low double-digit growth and our Home Solutions sales declined compared to H1 last year.
Revenues in Americas declined in H1, mainly as a result of project shifts in the U.S. due to uncertainties and the module supply situation after the Biden administration announced anti-dumping investigations early in the year. The anti-dumping duties were then suspended for a two-year period in June and since then our Large Scale Project pipeline in the U.S. has gained strong traction.
However, given the longer lead times in this business, only a very small part will be converted to sales within this year. With €130 million of revenues, the Americas region represents 27% of our H1 sales. Our Large Scale segment makes up the majority of our sales in this region, with nearly 80% of total revenues in H1 this year.
With €79 million of revenues, the APAC region represented 16% of our sales in the first half year. In this region, our Large Scale business achieved strong double-digit growth compared to H1 last year.
Now, let me briefly walk you through the sales per segment on the right side of this slide. Our Home Solutions segment continues to be impacted by material shortages. As a result of this, revenues in the first half of 2022 declined by 8% compared to H1 last year, with €136 million of sales.
However, boosted by the launch of our new product, the STP Smart Energy, at the beginning of this year, order intake has been approximately 3 times higher than our average sales in H1 and puts us in a position to achieve strong growth at the supply situation gradually improves. EMEA has been the major contributor for revenues and incoming orders for Home Solutions in the first half year.
Our Commercial & Industrial Solutions segment also continues to be affected by material shortages and despite very strong demand for our products confirmed by incoming orders, which were twice as high as revenues in H1. Revenues only slightly grew by 2% in H1 to €180 million of sales. Similar to Home Solutions, the EMEA region is by far the largest in terms of revenues and order intake for our C&I business.
Finally, our Large Scale & Project Solutions segment slightly declined compared to H1 last year due to projects shifted back in the U.S., as already explained. The sales in this segment amounted to €218 million and declined slightly by 3% compared to H1 last year.
As mentioned, revenues and order intake in the U.S., which is the biggest market for our Large Scale business was weak in H1 this year, but our project pipeline is quickly gaining momentum over the last few weeks and this will position the segment for strong revenues later this year and in 2023. The H1 sales decline in the Americas region was partially offset by double-digit sales growth in our Large Scale business in APAC and EMEA.
Now, let me explain to you how our profitability developed in the first half of this year. In H1, SMA generated an EBITDA of €16 million, which translates to an EBITDA margin of 3%. The EBITDA was significantly down compared to H1 last year, mainly because of the lower level of sales and effects from the underutilization of our production capacities.
H1 2022 profitability included the positive one-off effect in our Large Scale segment of approximately €5 million in Q1, which was explained in the last analyst call and was related to a compensation for a late customer cancellation.
Our depreciation was slightly lower than in H1 last year, as a result of the lower level of investments in fixed assets over the last years.
Now, let’s have a look at the segments in detail. Home Solutions, so mainly due to the decline in sales, the underutilization effect as well as a less favorable product mix. EBIT in Home Solutions fell below the strong result in H1 last year. However, with an EBIT of €17 million, the segment still delivered a solid return on sales of 13% EBIT margin.
The C&I Solutions segment continued to fall short of breakeven as a result of lower than planned sales volumes and effects from the underutilization of production capacities.
After achieving a slightly positive result in our Large Scale & Project Solutions segment in Q1, which benefited from the one-time income from a project cancellation as already explained, Q2 profitability was negative. The poor Q2 results for the segment was due to low utilization and production and low single-digit million negative affect from the adjustment of warranty provisions in June as a result of the regular half yearly reevaluation of warranty provisions for products already sold.
Now, I will move on to the balance sheet and net working capital on the next slide. At the end of H1, our net working capital balance increased to €278 million, which represented a high net working capital ratio of 29%. The increase compared to end of 2021 is mainly due to the ongoing buildup of inventories to mitigate effects from the supply constraints as much as possible. As a result, we increased our inventories by €16 million in the first half of this year.
In H1, our trade receivables slightly increased to a balance of €145 million, which represents a slightly higher DSO ratio than we targeted, but this can be explained by the high amount of sales achieved at the end of June.
Trade payables of €128 million at the end of H1 decreased by €6 million since the end of last year. Advanced payments from our customers, which are reflected in our balance sheet under other liabilities, increased from €24 million at the end of 2021 to €28 million for end of H1 and are related to our pipeline of Large Scale projects. The increase in net working capital was just explained in combination with the payment related to the early exit of our onerous O&M contract and our negative results in the second quarter, led to a decrease of our net cash position to €176 million at the end of H1.
Let’s now turn to our cash profile on the next slide. In H1, SMA generated a negative gross cash flow, resulting from our negative operating results in the first half of this year. In addition, we invested liquidity into building up raw material stocks, as explained earlier, and as such, our cash flow from operating activities, as well as our adjusted free cash flow were negative in H1. Improving the free cash flow is our highest priority in the second half of this year.
Now, let me summarize what we have seen so far. The demand for our products and solutions in the market is high. In the first half of this year, we have seen the highest order intake over the last 10 years. There were no significant customer order cancellations until now, confirming that our high order backlog is robust.
Like the whole industry, we are facing an ongoing shortage of electronic components and this causes longer lead times for order fulfillment and sales achievement. We are, however, confident to be able to fulfill the high order backlog within the next 12 months.
Our profitability was impacted by the lower level of sales due to the above mentioned ongoing supply constraints, as well as underutilization and production and increasing purchasing prices, which we could not fully pass on to our customers.
Also, we do see substantial increases in material, labor and logistic costs. Given the strong market and order situation, revenues and profitability will certainly improve as the supply situation gradually improves.
Despite the decrease of net cash, we continue to have sufficient liquidity to finance our operations and we are implementing measures to further improve our cash position.
Finally, SMA’s equity ratio remains robust and confirms our financial stability.
This concludes the detailed review of our H1 2021 financials. Now, let me briefly provide you with some insights on the current developments. We currently see that all manufacturers in Europe continue to be negatively affected by the global shortage of electronic components. Of course, SMA is no exception to this.
In addition, the war in Ukraine and lockdowns like in China are strongly disrupting the global supply chains. The end of the war in Ukraine, as well as the global pandemic is currency well in sight.
And finally, we have seen many larger projects being postponed in H1, because the market is facing limited availability of solar modules and high prices.
At the same time, let’s come back to the perfect storm I described in the introduction. Because the situation is not as gloomy as one might think, the demand for our products and solutions is higher than ever.
One of the reasons for this is an additional political push regarding renewable energies, which we have seen as a result of the war in Ukraine. This is true for many countries, especially in European ones, but most recently, also in the U.S. To be able to meet this demand, we must secure the needed electronic components, and here, we see that the tight supply situation should start to improve in the second half of this year.
So what actions have we taken from our side to be ready to make use of these circumstances or in other words, what have we done to set sail in the storm? We have initiated several measures to increase our ability to deliver according to the high demand we see in the market.
We are tightening the collaboration with key component suppliers further, which currently results in the realization of even more long-term supply agreements. Where we see additional needs, we secure components at the spot market.
And we also have already started to redesign products to be able to substitute on scarce components as much as possible. These measures are the main reason we are confident that the supply situation will start to improve in the second half of this year.
In addition to this, we will continue to launch new products and solutions to gain market shares and improve profitability. And of course, we and the management team keep a very close track of cutting operational and capital expenditures even further in 2022 to protect liquidity and improve profitability.
Let’s have a look at the order backlog on the next slide. Our order backlog for products increased significantly to €861 million at the end of H1. This reflects the high demand for SMA’s products, as I explained earlier. The product order backlog for our Home Solutions and C&I segments have even increased by triple digits in the first half of this year.
SMA’s order backlog more than secures the 2022 sales guidance, but due to the ongoing supply challenges, the management board expects that nearly half of the current product order backlog will only be realized as revenue in 2023. Nevertheless, we remain very confident that our topline guidance for 2022 will be achieved.
Okay, let’s come to the guidance. So the H1 sales and EBITDA are within our expectations, as we already also mentioned during our Capital Markets Day in May. The market and customer demand remains very strong and our unconstrained sales potential for 2022 is above €1.5 billion.
However, the ongoing supply constraints continue to limit our ability to convert this high order backlog into revenue and we remain in a highly volatile environment. We do see a slight improvement in the supply chain in the second half of the year, which we believe will increase sales, profitability and improve liquidity.
As I mentioned earlier, the whole organization is working together to manage the ongoing challenges and achieve the best possible result for this year. As such, we remain confident to achieve both, the sales and EBITDA guidance for this year. And again, I strongly believe that we have taken impactful measures that will make sure we weather this storm.
And now I will be happy to take your questions.
Question-and-Answer Session
Operator
First question is from the line of Jeff Osborne from Cowen & Company. Please go ahead.
Jeff Osborne
Yeah. Good morning. A couple of questions on my end, I was wondering just with the semiconductor situation where it is now, if you can touch on the supply that you have for next year. Do you — would you envision 15% to 20% growth is possible or not?
Thomas Pixa
Yeah, Jeff. Thanks for the question. So, first of all, I would start with this year or the second half of this year. When it comes to semiconductors and this is still the pain point in our situation, is that we see the improvements.
So if you would remember, over shedding also explained that there is a certain supplier, actually chip supplier, who has canceled his commitments towards SMA and this is where we have, of course, also stepped into discussions, et cetera.
And we have received the commitments and also received respectively the material in the second half of the year, already in June and July. And this is also what we see for the next coming month to get the commitments and also to get the materials. So, therefore, first of all, we see the improvements in the second half of the year.
So if this will continue also in the next year 2023, of course, it’s not easy to forecast, because as I also said in my introduction, the situation is very tight and is very volatile. So, therefore, it is difficult.
At that moment in time, however, and when it comes to the next year, we think that the situation in 2023 will also continue to improve after the second half of this year. To which extent, it’s of course, difficult to judge. But if everything will not go as planned, we think that we can also commit to that growth rate, what you mentioned, definitely.
Jeff Osborne
Got it. No. It’s great to hear. Certainly, the demand is there, but the supply side has been the challenge. One housekeeping question and then another question as well, on the housekeeping side, can you just touch on what the trading and storage revenue was? You mentioned trading revenue was elevated as a rationale for the lower gross margin, so could you break that up?
Thomas Pixa
Yeah. Of course. So, just a second. You mean for H1 or is it for Q2?
Jeff Osborne
Whatever you have there, for 2Q, it would be helpful.
Thomas Pixa
Okay. So, first of all, for Q2, when it comes to the percentage of trading goods, so it were 13% and in the first half year in totaled 14%.
Jeff Osborne
And on the storage side, do you have that metric?
Thomas Pixa
Yeah. On the storage side for Q2 it was 11% and year-to-date in H1 it was 9%.
Jeff Osborne
Got it. And my last question is just on your U.S. entrants on the residential side. Can you touch on your whole Home backup solution and rapid shutdown developments? I think you have laid that out at your Analyst Day as a new product line that receiving strong orders in Europe and also intending to enter the U.S. So it would be great to get an update on both of those fronts, how you are seeing the whole Home backup in Europe, as well as your launch in the U.S.?
Thomas Pixa
Okay. So when it comes to the American market, I mean, so we are — we will also launch our new Home Solutions platform, which is a completely new platform. This will also be introduced on the FDI in September this year. So we start to — with the first deliveries in Q1 next year hope to address the U.S. market when it comes to that.
And this new platform will, of course, also consider all the functions that you would need in order for — when it comes to backup functionalities on the one side, on the other side also [inaudible], so in terms of optimizing the yield and the outcome of the assets.
And of course, we will also continue to use them and to be compliant the specification regarding the rapid shutdown requirements in the U.S. So this is where we already have the product and is also where we will have the new product then from beginning of next year in the market in the U.S.
Jeff Osborne
Excellent. Good to hear. Thank you.
Thomas Pixa
Thanks, Jeff.
Operator
Next question is from the line of Constantin Hesse from Jefferies. Please go ahead.
Constantin Hesse
Hi, there. Thank you very much for taking my question. My first one, I just want to drill a little bit further into the semi-supply situation. I mean, just maybe 15% to 20% growth next year is, I mean, basically nothing if we assume that the order intake continues to run at this level in Q3 and even if we assume a small slowdown in Q4, you could end up the year with €1 billion, if not more, in order backlog in the product side to start 2023 with, which could lead to 30% to 50% growth at the top end. So I am really trying to get a feeling of what are you actually hearing from your semi-suppliers into 2023? Are they telling you that the situation is definitely going to be much better relative to 2022, just a little bit more color into what we could see into 2023. Thanks. My first question.
Thomas Pixa
Okay. Well, this comes along with that, what I also answer to Jeff. I mean, of course, what we expect is that this growth and in order intake, so the demand from customer side is something that will also continue in the second half of the year and also beyond next year.
So it will continue. This is a matter of fact what we see. And therefore, what we are doing, as I said is that, we try really to conclude long-term contracts. So we try to really secure the material for the next year and also to safeguard the ability, also to deliver.
So the signals, which comes from the suppliers is that, the improvements will go forward and this is also what we see from the market and from the supplier base. But of course, as I said, it’s volatile, yeah. The situation changes weekly. Therefore, certain constraints will also continue to some extent in the next year. That’s clear.
We feel very confident and that next year the situation will improve and should improve also in comparison to this. If it’s the beginning of next year, mid or end of next year, difficult to say, yeah. But as I said, we are getting signals from our supplier base that that’s the improvement would go forward also next year.
Constantin Hesse
Yeah. Okay. That’s great. Thanks. And then maybe on profitability quickly, should we change of Q2 as kind of the bottom, if you could just walk us through the improvement curve and margins and the key drivers that you expect into next year or even into 2024. Are you — I mean, the question I actually asked was the 10% EBITDA margin ambition you had was something that you were thinking about 2025. But obviously, with this kind of order intake, could this be achieved much sooner now, consensus is currently expecting EBITDA margins of 7.5% for 2023. So maybe just — if you are comfortable with that, just — so just a little bit of color into the margin improvement growth that you are expecting there? Thanks.
Thomas Pixa
Yeah. So when it comes in the long-term, we still stick to the plan or our targets, which you mentioned in terms of 8% to 10% EBIT margin to 25% and also the steps in between 2025. So, therefore, we still — we see the improvement in margins definitely, which will be driven by two factors.
On the one side, again, the order intake that we see and — for our new products, so the new STP Smart Energy, as we see, it’s driving our order intake. We have our new C&I product, which has been launched in Q2 and now will be delivered starting from August.
As I mentioned before, in Home Solutions, our new platform, starting to be delivered into the U.S. market in Q2 and then for the rest of the world, of course, also to address the high demand in Europe.
And then we will continue with our new central inverter platform from end of 2023, beginning of 2024. And all these products, when I mentioned these new innovations, they are, of course, characterized by a good margin, a good price point, a good cost effectiveness, a good margin.
And this is where we see that together, the inverters, the new inverters, the new solution platforms and — to be sold assistance, bundled with EV Chargers, bundled with storage and so on in our energy management, as such, it’s something where we see that with the systems and solutions, we will increase significantly our margins from the next year onwards, and of course, also in the mid-term.
Constantin Hesse
Maybe if I can ask it a little bit differently. In terms — I mean, the Home you are right now already in double digits, low- to mid-teens. In C&I, could we expect to see net — with this new product, could we see margins also going in that direction, low-teens to mid-teens or…
Thomas Pixa
Yeah.
Constantin Hesse
… it could also go in that direction next year?
Thomas Pixa
Yeah. Next year would be maybe a little bit difficult. But the year after, definitely, and then you will see the uptake in the rise in the margins and also in C&I. But, of course, the potential here we see the same as we do also for Home Solutions.
Constantin Hesse
Okay. And just to confirm, the 8% to 10% of EBIT margin, right, not EBITDA?
Thomas Pixa
It’s EBIT margin.
Constantin Hesse
EBIT.
Thomas Pixa
EBIT margin.
Constantin Hesse
Okay. Yeah. Then lastly just very quickly on the Tigo lawsuit in the U.S., because we are obviously launching this new product now in the U.S. and Tigo apparently filed a patent lawsuit with regards to the rapid shutdown units, any color there? Thanks.
Thomas Pixa
Well, we have acknowledged that Tigo has filed this lawsuit against our U.S. entity. But it is our policy to really not comment, obviously, on the details of such an active litigation. So therefore, I would like to ask for your understanding that I cannot comment on that at that point in time.
Constantin Hesse
Okay. But this is not going to delay any launches or anything like that?
Thomas Pixa
No. It will not delay any launches, no.
Constantin Hesse
Okay. Thank you.
Operator
[Operator Instructions] The next question comes from the line of Guido Hoymann from Metzler. Please go ahead.
Guido Hoymann
Yeah. Hello, there. Thanks. And yeah, two questions from our side.
Thomas Pixa
Hello.
Guido Hoymann
Hello. And first on the order backlog services that came down quite notably in Q2. Does that have to do anything with this settlement case on this unfavorable contract and/or is it a reflection of an overall more crashes approach now in this business after these experiences or is it just the usual volatility? And the second one is on the average selling prices, they have obviously risen quite sharply and I am just wondering if this is really reflecting better pricing or any other technical effect, given the fact that you have already mentioned that the volume of trading goods has been pretty high. This actually means that since they are normally diluting your sales, that means that the ASPs actually have developed potentially a bit better underlying, so maybe a few words from your side on the pricing on your products?
Thomas Pixa
Yeah. Yeah. Okay. Thanks for the question. So let me first start with your first question. First of all, the dip or the reduction in the service or the backlog that you have talked about is exactly the reason that we are terminating the portfolios, which is in relation to this onerous O&M contract, which we have already also discussed and presented to you in our Q1 call.
So here, we are, of course, pushing the progress. We are on track here when it comes to exit out of this contract on the portfolios and to execute the termination agreements. And therefore, as a consequence out of that, stepwise we are also canceling the orders related to that contract.
So what you have seen was, in fact, in Q2 a cancellation of €42 million in our service order backlog, because we have terminated some of these assets and portfolios. So when it comes to your second question, regarding our ASP increases in each segment in H1.
So, first of all, what I can like to report is that, we have, in fact, increased our prices starting in Q1, beginning of this year, mainly in Home and C&I Solutions, so in the magnitude of 4% to 5% in the average.
And this is, of course, also an impact, what you can see in our revenues or in our P&L, respectively, in our sales in H1 also. So here we have also a positive and beneficial price impact already in our books.
The second price increase we conducted was now beginning from July onwards, also in the magnitude of 5% to 7%, also in Home and C&I. And the next one is planned from October in the range of 4% to 6% also in Home and C&I.
And by the way, we have also increased the pricing for — on our central inverters in the magnitude of 10% to 20%, which will also be effective from the next week. So here, you can see that we try really to pass on the costs that we see in our COGS on the one side. On the other side, we also see that the demand is still there. So in terms of the flexibility of the demand, we don’t see that we have a reduction in volume, although the price is rising.
Guido Hoymann
Yeah. Which makes sense, given the development of the electricity prices, should be affordable indeed?
Thomas Pixa
Yeah.
Guido Hoymann
All right. All right. Yeah. Thank you and very helpful. Thank you, Thomas.
Thomas Pixa
Yeah. You are welcome. Thanks for the question.
Operator
Next question is from the line of Lasse Stuben from Berenberg. Please go ahead.
Lasse Stuben
Hi. Just two follow ups from me. I just want to turn back to the U.S. briefly, particularly in the Large Scale market, we have seen the frictions there with DOC regulatory issues, and as you said, sort of module prices. How do you see the outlook there in the second half of the year, given that tends to be sort of more of an H2-weighted business? But I guess given the issues we are seeing, maybe that wouldn’t be the case this year or just happy to hear your thoughts here? And then one sort of, I guess, more technical question, I just noticed in your other operating expenses were up significantly in H1. I was just wondering if you could shed some light on what’s going on there, is there anything sort of one-off to take into account? Thanks.
Thomas Pixa
Okay. So, starting with our outlook regarding our project business in Americas and the U.S., specifically. In fact, what we have seen that the situation in the Large Scale is different to Home and C&I, right?
So we have the material constraints mainly in the streaming inverter business and to a certain extent just in the Large Scale when it comes to our higher density, higher voltage stream inverters, but not for the central inverters, specifically.
So that means the problem here in H1 was definitely we have less order intake, right, less order intake or push backs and from — of projects what we have seen. And this has a couple of reasons. I mean, we have the module, the PV module supply and the quantity availability was less, and then, of course, as a consequence of the pipe prices.
On top of that, with this anti-circumvention investigation, so we have seen that there were even more uncertainties in the market and investors and developers. They have pushed back the projects, and therefore, as I explained earlier, we have seen once this decision has been suspended for this two years right now.
We have seen an uptick in getting purchase orders in Large Scale, two significant ones even within the last one and a half weeks. And therefore, we think that this is not just a one-off. We believe that the pipeline now will increase and that we will also get more and more orders — order intake in H2 this year in Large Scale in the U.S., and so, therefore, but also other regions of Australia, for example.
And therefore, we think that this is then also the revenue, but rather more for 2023, because the window for — to put — to convert that order intake into revenues is going to be closed, right? I mean, we are too late in the year.
So, therefore, getting the order intake in August means almost cases that we have the revenue next year, but it is definitely an improvement what we see so far for the second half and also buoyant in the next when it comes to Large Scale. So the second question was regarding — maybe you can repeat that again, sorry for that. Regarding the other operating expenditures?
Lasse Stuben
Yeah. Exactly. Specifically in Q2, it just looks like quite a substantial increase year-on-year. I understand other operating income is up as well, but it’s quite a big delta. So I was just wondering if there’s anything sort of one-off going on there or if it’s — there’s nothing really to mention there?
Thomas Pixa
So the only thing what I can imagine regarding the other operational expenditures is really foreign exchange fluctuations, so euro against U.S. dollar, because in Q2, we had no one-offs, no one-offs also not any other operating income or expenses. So, therefore, it is just really FX effects, which also negatively affected our EBIT in Q2.
Lasse Stuben
Okay. Understood. Thanks very much.
Thomas Pixa
Okay.
Operator
Next question is from the line of Gunter Greiner from WIWIN. Please go ahead.
Gunter Greiner
Yes. Hi. This is Gunter Greiner from WIWIN. Thanks for taking my questions. I have two questions, one in regards of microinverters. So given the recent success of your competition, do you have a new strategy there, and if so, would those be produced in Germany or would those be sourced from cheap Asian supplier? And secondly, I still have big problems to grasp the magnitude of your supply problems, given that the competition doesn’t seem to have source to such extent. So what makes you looking positive for looking forward that you can manage those problems in the next 12 months? Thank you.
Thomas Pixa
Okay. So let me start with the second question regarding our situation, also in comparison to our competitors. First of all, I mean, it’s not really comparing apples-with-apples, if you would compare our situation and the performance of other competitors like SolarEdge and Enphase, who also have announced their Q2 figures recently. It’s a different situation.
I mean, first of all, if you look on SMA, we have — our supply chain is mainly based in Europe, same problems that we see also our European competitors, so the same situation. What we see, looking on Enphase, looking at SolarEdge, SunGrow or Huawei, for example. So they have their production capacities and their production facilities in the U.S. or even mainly in Asia. So they are sourcing in Asia.
And I don’t want to speculate, but to our understanding, the chip manufacturers who are based in China — in Asia, like, China and Taiwan and other countries. I mean, they — that the companies, the competitors here, they get a higher portion of semiconductors material.
So they have a benefit of being close to the chips manufacturers in this region and that’s difficult if you — the European company are more or less in the middle and having no production facilities in one of the other regions.
On the one side — on the other side, I think, also important to know. If you look on other competitors, like, for instance, Enphase, I mean, it’s also a matter of fact that they use different components and they use also less components, with a less complex engineering design and architecture of the products and the modules. So and this is what we don’t have. So therefore with that — with less complexity and less components, it would be easier to source.
And the third point is what I would like to also, look, it’s an assumption from our side is that the big Asian competitors, I mean, they are sourcing components in China, in Asia with a lower quality. And so from our quality standards, these are components, which we wouldn’t use in our product.
So, therefore, in the short-term, of course, these competitors have an advantage, because they can source. They can also turn that order intake into revenues and with appropriate margins and costs.
But the question is that in the mid-term from a quality perspective, they will then suffer from the contrary effect with higher quality and warranty costs and this is actually what we would like to prevent from us. So these are three premises where we think that our competitors are in a better position and perform better as we do in terms of overcoming the supply constraints.
So this is regarding the comparison with our competitors. What we are doing right now to overcome these problems? As I said in the introduction is that, we have definitely intensified our communication with our suppliers. We have long-term agreements. We had that also before, but we try to intensify even more to give long-term commitments to the suppliers upfront and therefore, also to secure the materials.
We are also, together with suppliers working on design and redesign and qualification of the product. So in a nutshell we have intensified the communication here and the collaboration even more in order to be closer to the suppliers and also to get more of the components with a certain certainty and also the certain certainty and the ability also to plan our production commitments.
Therefore, still we are confident that this situation will improve and we will also then even get more of the quantities in the next quarters from now. As we also, as I said, see the first segments now in Q2.
Gunter Greiner
Thank you. And in regards to the microinverter strategy?
Thomas Pixa
Yeah. Yeah. Sorry. That was the other question regarding the microinverters. So, first of all, when it comes to our strategy on that, it’s still the case that we do not see really a sustainable competitive advantage of microinverters, and therefore, this is also not part of our strategy.
Gunter Greiner
Okay. Thank you very much.
Operator
We have a follow-up question from the line of Constantin Hesse from Jefferies. Please go ahead.
Constantin Hesse
Thanks. Just a very quick one. I mean, given the, obviously, the order book is growing significantly and you continue to have trouble with regards to supply. Is there any risk of order cancellations?
Thomas Pixa
Yeah. Thanks for that question. As I also have said, this is, of course, always what we are discussing with our sales team. Yeah, we believe that our order backlog is robust, yeah. So it is still a value and we don’t see, as I said, any cancellations so far. No significant cancellations. If there are cancellations, they are just reordering even higher quantities than new products.
So, again, no cancellation so far, and that — and this is also not a big surprise, because if I remember the feedback from our Intersolar in Munich after we have launched the new products beginning of this year in Home Solutions, the new hybrid inverter and also when it comes to the launch now with our new C&I product, as I said, they are all very well received, yeah.
So we have the functions here. We have also the products on the Intersolar. And if you speak to customers and installers, the functions are well perceived, and therefore, we think they really want to have these products and not other products.
Constantin Hesse
Yeah. Okay. Thank you very much.
Operator
[Operator Instructions] Next question is from Anis Zgaya from ODDO BHF. Please go ahead.
Anis Zgaya
Yes. Hello. Good afternoon and thank you for taking my questions. I have two questions. First one, what are the main measures that you are considering to improve cash flow, as you said, in the beginning of the presentation, that you are considering some measure to improve cash flow? And the second one, what is the expected increase in CapEx related to the new facility in Kassel? Thank you.
Thomas Pixa
Yeah. Thanks. With regards to cash improvement and profitability improvement, I know I am repeating myself. But it’s again — the highest leverage is, of course, is we achieved to improve our ability to deliver.
So again, here also, it’s still the plan. We are in the negotiation of long-term supply agreements and we are making progress to secure higher volumes going forward and this will help us to take advantage of the huge demand we are seeing prospects.
When it comes to cash, then beside of that, of the ability to deliver is, of course, improving our net working capital. I mean, we did that also in the past, but it’s still also to focus more on improvements in net working capital, such as driving down our overdue receivables, which we have achieved.
So if I look on the July numbers compared to June numbers, we have €12 million reduction of the parts to a certain extent revenue driven, but to a big part, a result of our efforts to reduce the overdues.
Anis Zgaya
Okay.
Thomas Pixa
And when it comes — so net working capital, of course, also on IPs and also inventories, I mean, inventories is — what we can observe is that we have improved it so far, that we could stop the increase of raw materials and turn that into finished goods and we are sold out. And therefore, the finished goods will flow out in the next weeks when it comes to our stream inverter business.
But of course, we see that with a higher order backlog and also the ramp-up of our product in C&I and also on new products in Home Solutions from beginning from Q1. We expect, to a certain extent, an uptake, of course, also of inventories, raw materials. But it is for the order backlog. We will produce it and once it is produced, it will flow out immediately.
Beside of net working capital, it is that we review all our capital expenditures. So whatever is possible, we try to push back into the next year and the same applied for our operational expenditures. So we are managing down the OpEx in all the functions, we are still.
As we speak, we are with our functional spending. OpEx-wise, we are below our budget and this is also what we want to continue, so to stay below our budget in all functional areas, when it comes to personnel, as well as non-personal and OpEx. You have the second question, maybe you can repeat it again, regarding the CapEx spending, right?
Anis Zgaya
Yeah. Thank you. It’s regarding the expected CapEx related to the new facility, the expected increase in CapEx with the new facility in Kassel.
Thomas Pixa
Yeah. Okay. So, exactly, we have announced that new production. When it comes to CapEx, this is not that big issue, because this year production facility will be built and realized by a project developer. So real estate project developer and a construction company, which will build the facility starting from end of this year and then to be ready end of next year.
And what we will do is that we will conclude — step into a long-term lease agreement. So it’s going to be 15 years or 20 years lease agreement. So we would just pay around the leasing rate, so the rental and which is pure OpEx.
When it comes to the real CapEx expecting for this year, there is nothing planned with regards to that production facility. We have only planned for next year 2023, CapEx spending from our side for, well, technical equipment, which is roughly in the magnitude of a low two digit million euro.
Anis Zgaya
Okay. Thank you. Thank you very much.
Operator
There are no further questions at this time and I would like to hand back to Thomas Pixa for closing comments. Please go ahead.
Thomas Pixa
Yeah. Thank you for your questions and also for participating in today’s analyst call. So if there are any further questions, of course, I am always at your disposal. And otherwise, I wish you all the best, stay healthy and we will hear you again for the Q3 call. Good-bye.
Be the first to comment