SMA Solar Technology AG (S92) Earnings Call Transcript & Summary

Good day, everyone. Welcome to the analyst investor presentation financial results Q3 2021. Today's conference is being recorded. At this time, I would like to turn the call over to Ulrich Hadding. Please go ahead, sir.

Thank you, Alan, and welcome, everyone. We very much appreciate that you are taking the time for this investor and analyst call on the results for Q3 2021. You can find today's presentation on our Investor Relations website, ir.sma.de. This conference call is scheduled for 40 minutes and will be recorded. The replay will be available for 7 working days. After the presentation, I will be happy to answer your questions. I will start with a review of the financials before presenting current developments. At the end, I will provide you with an update on our expectations for the fourth quarter and full year 2021. I expect my presentation to last about 20 minutes. I refer to our disclaimer on Page 2. And here on Slide 4, you'll find a summary of the key financials for the first 3 quarters of 2021. After 3 quarters, you can see that revenues in our Home Solutions and Large Scale & Project Solutions segments grew compared to the first 3 quarters of 2020. Business Solutions revenues, which were affected by the COVID-19 crisis in the first half of this year, improved slightly in Q3 compared to Q2, but remained below last year's level and are hampered by material shortages, which affected all 3 segments in Q3. In total, SMA's revenues were a little below last year's level, but profitability continues to be much better compared to last year. I will provide you with more details on our financials for the first 3 quarters in the next slides. If you have a look at the table in the bottom right corner of this page, you can see that our Q3 2021 sales were higher than in Q1 and Q2, mainly driven by a strong quarter for our Large Scale business. Q3 sales for our Home Solutions segment were a bit lower than in the previous quarters, partly due to supply constraints, but also due to a portfolio gap, which we plan to close in 2022 with the launch of our hybrid inverter. Gross margins were slightly lower than in the first 2 quarters of this year due to the higher proportion of Large Scale sales and higher material and freight costs. Let -- please turn to the next slide and I'll provide you with more insights regarding our sales performance. With net sales of EUR 745 million, SMA's revenues were 4% lower than in the first 3 quarters of last year, which is attributable to effects from the COVID-19 crisis and material shortages. Our Home Solutions segment grew its revenues by 5% in the first 3 quarters, with sales growth in our EMEA and Americas regions more than offsetting for a decline in the Asia Pacific region. Revenues in our Business Solutions segment declined mainly due to postponed projects as a result of the COVID-19 crisis and material shortages. Our Large Scale and Project Solutions segment increased sales year-over-year by 3% despite effects from material shortages and projects shifted to next year. Looking at the regions. EMEA remained our largest region in terms of revenues in the first 3 quarters, was EUR 386 million, which represents 50% of SMA's global sales. In this region, our Home Solutions achieved double-digit growth, while our Business Solutions and Large Scale segments declined compared to the first 3 quarters of last year. Revenues in SMA's Americas region grew compared to the first 3 quarters of 2020, driven by strong growth of our Large Scale segment in the U.S. With EUR 258 million of revenues, the Americas region represents 34% of our sales. Our Asia Pacific region represented only 16% of SMA's sales, and revenues declined compared to the first 3 quarters of 2020. Now let me walk you through the sales per segment on the right side of this slide. Our Home Solutions segment, which has consistently delivered strong sales and profits, achieved revenues of EUR 240 million in the first 3 quarters, growing by 5% compared to the same period last year. For this segment, Germany and the U.S. delivered the highest revenues and grew their revenues by double digits compared to the first 3 quarters of 2020. Revenues in our Business Solutions segment declined by 22% in the first 3 quarters as a result of COVID-19 effects and material shortages affecting several key markets. The top market for the Business Solutions were also Germany and the U.S., while Italy, the third biggest country for this segment, more than doubled revenues compared to the first 3 quarters of last year. Incoming orders were much higher for this segment over the last months, but due to the difficult supply situation, our conversion of orders into sales takes longer than usual. Finally, our Large Scale and Project Solutions segment grew revenues to EUR 355 million in the first 3 quarters compared to EUR 345 million in the same period last year. The U.S. remains our biggest market for our Large Scale business, representing more than 1/2 of the total segment sales and grew revenues by 8%. Australia is the second largest market for this segment, and after a strong third quarter, sales are nearly 3x higher than in the first 3 quarters of 2020. Now let me update you on our profitability over the first 3 quarters. For the first 3 quarters of '21, SMA generated an EBITDA of EUR 53 million and an EBITDA margin of 7%. EBITDA was solid in Q3, and the gross margin of 20% remained on a good level despite the high proportion of Large Scale sales and higher material and freight costs in the quarter. In the first 3 quarters of '21, SMA's results included both positive and negative onetime effects of low magnitude and the net effect was approximately plus EUR 1 million. Depreciation remained on the same level as for (sic) [ per ] the first 3 quarters of last year. There were no unplanned depreciations in the first 3 quarters of '21. And now let's have a look at the segments in detail. Home Solutions. Our Home Solutions segment continues to be very profitable. EBIT in the first 3 quarters of '21 was EUR 39 million, which represents a strong return on sales of 18% for this segment and EBIT twice as high as it was in the first 3 quarters of last year. The positive development continues to be driven by product portfolio improvements and stable prices in the residential market segment. In our Business Solutions segment, EBIT was negative in the first 3 quarters due to the low level of revenues, as I already explained. The Large Scale and Project Solutions segment had a significantly improved third quarter, but results remained slightly negative through the first 3 quarters mainly as a result of increased material and freight costs. Now I will move on to the balance sheet and net working capital on the next slide. At the end of the third quarter of '21, our net working capital increased to EUR 277 million or a ratio of 28% as compared to a balance of EUR 211 million and a ratio of 21% at the end of 2020. The increase is attributable to the increase in our inventories and trade receivables as well as decreased trade payables per end of Q3. Going more into detail, you see that finished goods inventories increased by EUR 19 million since the beginning of '21, and raw material stocks increased by EUR 5 million. The buildup of finished goods is related to the strong order pipeline, especially for our Large Scale and Project Solutions and Business Solutions segments. The increase in raw material stocks result from our efforts to mitigate effects of supply constraints. Trade receivables increased to EUR 142 million at the end of September as a result of the increased level of sales over the last months. Trade payables of EUR 126 million at the end of September are EUR 18 million lower than at the end of last year. This is partly due to lower purchasing volumes over the last weeks due to delays in our supply chain and the normal development during the year 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. In 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 summarized. As a result of the increase of NWC, our total cash decreased to a balance of EUR 178 million at the end of Q3. In Q4, we expect liquidity to increase driven by optimization of our net working capital and positive one-offs, including VAT reimbursement. Our equity ratio of 43% at the end of September remained on a solid level and increased compared to the end of 2020 thanks to the positive results. A decrease in provisions since the beginning of 2021 is partly attributable to reduced general factory warranty accruals as a result of improved quality parameters for our products. Let's now have a look at our cash flows on the next slide. Over the first 3 quarters of this year, SMA generated a positive gross cash flow, which continues to outperform last year's level through the first 3 quarters. This is mainly driven by our positive net result adjusted for noncash effects such as depreciation and amortization. Despite the increase in net working capital, our cash flow from operating activities was also positive, and our adjusted free cash flow was only slightly negative, which is a significant improvement compared to the first 3 quarters of last year. So let me now summarize our financial performance during the first 3 quarters of 2021 for you. Despite headwinds from COVID-19 and ongoing supply constraints, SMA delivered solid sales and increased its profitability. Our good results are also produced -- also produce a positive cash flow from operations. SMA's balance sheet structure remains solid with an equity ratio of 43% and net cash balance of EUR 169 million and a debt-to-equity ratio of 1.32. As mentioned in our last call, SMA renewed its syndicate loan earlier this year, providing us with a credit line of up to EUR 100 million if required. This concludes the detailed review of our financials for the first 3 quarters of this year. We are not going into market and deliberations as those have not very much changed since our last call and will only have you making -- we want to make you familiar with some current developments. As mentioned before, the supply situation for electronic components has worsened significantly in Q3, with cancellations of firmly promised delivery quantities. We expect this strained situation to continue over the next month. Although we are working closely with our suppliers to minimize the effects on our delivery capacities, we assume sales and profitability to remain below our initial expectations. As a result, the SMA management Board has adjusted its full year sales and earnings guidance in September. Looking ahead, SMA's long-term prospects are very positive. Current studies underline the enormous growth potential for the renewable energies. In order to decarbonize the global economy, we have to drastically reduce the burning of fossil fuels and to make electricity from renewable sources and green hydrogen our main energy sources. A prerequisite for this is the electrification of additional sectors, such as heating and mobility. The consulting company DNV predicts that electricity's share of global total energy demand will double from 19% to 38% within the next 30 years, and that by 2050, solar and wind energy could account for 69% of grid-connected electricity power. Bloomberg New Energy Finance has calculated that to decarbonize the electricity sector, up to 455 gigawatts of new PV capacity and up to 245 gigawatt hours of battery storage capacity would additionally need to be installed annually on average by 2030. For PV installations alone, this would mean the current market size to triple. The political framework for decarbonization is currently negotiated at the UN Climate Summit COP26 in Glasgow. Current political developments are also very promising in our home market, Germany. The topic of climate change is high on the agenda of the 3 political parties that have expressed their will to form the new federal government until Christmas. They have proclaimed to make their joint mission to drastically accelerate the expansion of renewable energies and to remove all obstacles and hurdles. According to our calculations, at least 15 gigawatts of new photovoltaic power must be installed in Germany every year in order to achieve Germany's climate targets, 3x the current amount. This brings me to our guidance and expected developments for Q4 2021 and 2022. Order backlog. Looking at the right side of this slide, you see that our order backlog increased to a very high level with EUR 922 million at the end of third quarter of '21. Our strong product order backlog of EUR 430 million at the end of September 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 remained on the same high level from the end of H1. On the left side of this page, you can see that our Large Scale and Project Solutions order backlog for products has increased to nearly EUR 300 million, and our total product order backlog is well distributed across our 3 regions. The strong order backlog will be only partly converted to sales in Q4, in part due to the ongoing material shortages and project postponements. As such, our product order backlog sets up -- sets us up well for the beginning of next year. This brings me to our 2021 guidance on the next slide. As demonstrated by our strong order backlog, demand for SMA's products remained strong, and we are working around the clock to mitigate the effects of the supply shortages on our revenues. Nonetheless, we expect fourth quarter sales to fall below the Q3 revenue level due to challenges from the supply situation and projects getting postponed to 2022 as a result of increased module prices. Based on this, the SMA managing Board expects revenues in the lower half of the adjusted forecast of EUR 980 billion to EUR 103 billion and EBITDA at the upper end of the adjusted guidance range of EUR 50 million to EUR 65 million for this year. We acknowledge that these figures are somewhat disappointing when compared to our original guidance. However, you will hopefully agree in the assessment that the reasons for the deterioration are foremost of external nature. Therefore, and despite planning for 2022 is not yet concluded, we want to give you already today a hint on our revenue expectation for next year. As I said earlier, the first half year of 2022 will still be affected by supply constraints and far from normal conditions in the logistics area. But for the second half, we expect the revenues level to recover and currently plan to grow revenues by about 10% for the full year, and thereby, to continue the development SMA has taken in the years 2019 and 2020. Now let's turn to the last slide of today's presentation. SMA is a truly sustainable investment, not only because we are operating in an industry that is key to decarbonizing our way of life, but also because we are doing business in a sustainable manner and have integrated the goal of holistic sustainability at the center of our corporate strategy. This is also mirrored in our excellent ESG scores. We received recognition for our ESG performance in leading sustainability ratings. In addition, we have been nominated by an expert jury for the group of finalists for the German Sustainability Award 2022, the largest and most prestigious in Europe. And last but not least, with our business activities, we are contributing to 9 of the 17 UN Sustainable development goals. This is why if you trust solar, there is no way around SMA. Now I'm happy to take your questions.

[Operator Instructions] We'll take our first question from Constantin Hesse with Jefferies.

3 and a half questions from me. So the first one, just regarding Q4, can you maybe just elaborate a little bit on the key cost headwinds? And by that, I mean, the impact that you are seeing from these higher logistics costs and how many basis points this is really costing you? And to what extent you have been able to pass-through these via pricing? So that's my first one. And let's just start with the first one.

Yes, Constantin. With regard to the higher sourcing costs, that is, of course, material, especially for electronic components, but also freight costs and what we see now coming up is energy costs. Starting with the last one. That is actually neglectable. Energy costs do less than 1% of our overall cost base. So there is an increase. We manage that. We also hedge that to some degree. That's not really the problem. The freight costs are far from normal, as I already said. And we think that this is going to continue throughout Q4 and H1 of 2022. And this goes up to sometimes even 10%, but not on an overall comprehensive basis. It's just from time to time we are running into situations that are somewhat awkward. The same is true for the supply costs. Whenever you have something to order on short notice, the costs are much higher at this point in time. On an overall basis, up to -- even more than 5% higher. At this point in time, the market is penetrable with regard to giving that down the value chain. So cost -- price increases have been accepted by the market throughout the entire product range, and we have been able to manage the deterioration of our margins due to those higher sourcing costs to a minimum. Whether this is going to continue next year is the big question mark for 2022, which is also the reason why I'm not going to be more specific on our profitability expectation for next year at this point in time.

That's perfect. Just to confirm, did you say freight costs is about 10% of the cost base? Or did you say...

Yes, sorry, for this...

[indiscernible] is 10%?

No. Sometimes, we see normal price increase. If we look on the entire cost base, we see that to have increased, meaning including costs -- including freight and sourcing costs, at about 5%.

Okay. Perfect. The next question, just regarding the Business segment. So looking at the order intake in Q3, it seems to have cooled off a bit compared to the increase here in Q2. So maybe just could you just share some words on that and when you actually plan to launch a new product in that segment? And a similar question to the order intake in the utility segment, right? The increase was actually pretty massive compared to the last 2 quarters. Do you actually see this as sustainable going forward?

Yes. With regard to the order intake in our Business segment, we have seen the pattern that I already described in our last calls. Medium businesses are the least one to really go into new investments, are the most affected one by COVID. And that seems to recuperate now, at least the last 2 months show it to that direction. We certainly expect another boost for our order intake in the Business segment once our new product platform will be launched. It will hit the market in quarter 2 of next year. With regard to utility, we think that the order intake, which is especially noteworthy for the U.S. and Australia, will continue to be on that level. With regard to Europe, our expectations have been somewhat frustrated and here we are not that sure whether we could hit higher numbers as originally thought. But on an overall level, we see that to be continuously strong business for us.

We will take our next question from Guido Hoymann with Metzler.

Sorry.

Constantin, you had another question?

I'm sorry. We already moved on, Constantin. [Operator Instructions]

Okay. So can you hear me now?

We take Guido's questions first and get back to you, Constantin, in a second. Yes, Hoymann.

Yes. So 3 questions from me, please. First on the positive ASP trend. Do you think this is a reflection of the current scarcities? Or is it just a supply demand, yes, result? Or do you think competitors are starting to act more rational? Or maybe last interpretation could be that you are actually, let's say, steering your U.S. scarce resources into the more profitable products and so improving your business mix, say, internally? So what would be your exploration for the ASP trend? And consequently, also the question, do you think that could last?

Yes. Understood.

Maybe one by one.

Yes. I think it's a mixture of all 3. Certainly, the flat prices even -- and sometimes even increased ASPs that we see foremost in the residential area are not only as a result of the higher sourcing costs being -- leading to higher ASPS. There are also a consequence of, as you put it, the market becoming more rational. And with regard to SMA, which does also see higher ASPs for the residential area, for our Home segment, it is also a consequence of internal optimization and the consolidation of our product portfolio. The question that you put up is, how is this going to continue once the sourcing prices go down again or get normal again and will we then hope this high level of ASPs, so flattish development. We believe that we won't, that the prices will go down again, however, at a pace that is less severe than it has been throughout 2020. For the other 2 segments, we also see rather stable prices. Utility is almost stable. Business segment is still going down, which is normal due to the overall market conditions. We see that the higher sourcing costs can be channeled through the value chain. We expect that to end the moment that -- especially, freight costs are normalizing again. And we still believe that the market size will not allow to raise prices continuously. From time to time in one region or for another project -- product, that may be possible. But on an overall scale, we see prices also in the other 2 segments to go down slightly in the years to come, however, at a more rational rate than we have seen in the past.

Okay. All right. Perfect. And then maybe question 2 and 3 in one go. So the first one would be -- I think you mentioned this potential tripling of the demand in the future, which I share with you and come to the same ratios. And maybe we have asked this question earlier. But again, what are your capacity -- your visibility on your capacity? So how wide could you expand your capacity, say, in a period of, say, 2 or 3 years' time? And the last one would be maybe a little obnoxious. So you're saying in your outlook that you expect the shortage to last into H1 2022. So what makes you optimistic about things to change in H2? So do you have any indication? Or is that rather, say, the general market view regarding freight rates, et cetera, chips -- chip producers? Or do you have specific indications for things to turn better in H2?

Yes. First of all, with regard to our capacity. We expect to produce about 13.5 to 14.5 gigawatt this year. We could just by exploiting the full capacity of our currently installed resources produce up to 21 -- [ 12 ] and 22 gigawatt. So for the growth to come in the next 2 to 3 years, we are already supplied. We nevertheless already plan today to expand our production capacities in due time, and therefore, we see at least for the inverter base not those many difficulties in hitting, even tripling demands in the coming years. Whether this will be, let's say, true for all regions, looking on the distribution of the inverter manufacturer segment, is something that I can't -- cannot answer for the entire industry. But for what we see as our market share and our addressable market in the future, we see no difficulties in meeting those demands. And with regard to your second question. It is, as you put it, rather the general market view that gives us the conviction that H1 will still be difficult. We are also, let's say, a little bit motivated by the fact that we will have product innovations coming up in the next year, starting especially in Q2 and then taking effect in the market in Q3 and Q4. But most driven by, let's say, the overall assessment that is more or less shared by the entire industry that H1 will still be heavily affected. But most importantly, the market demand does not deteriorate. Even in this difficult year, the overall market demand has stayed stable. So it is more a question of to manage supply chain and to manage the product portfolio and the availability of products, et cetera. Demand is always there and will increase also in the coming year. So that's, let's say, the overall environment in which we find ourselves. And our assessment led us to the fact that we will see pickup compensating demand and compensating business in Q3 and Q4 for a rather weak H1.

So we will now go back to Constantin Hesse for the follow-up.

Can you hear me?

Yes, I can.

Sorry about before. I was muted and my question didn't come through. I was just going to do a follow-up very quickly just on the commentary you made that the utility orders were sustainable in the U.S. and Australia, but less so in Europe. So I'm just -- I was just wondering how much of the order intake is actually U.S. and Australia.

Now that's -- more than 80%. So the European market is comparably lower -- of lower importance to SMA. Europe is our home base for the string inverter business, meaning for Home and Business, for residential and commercial. For Large Scale, our markets are the U.S. and Australia. That's more important.

That's perfect. And then just another one very quickly on the profitability for the next 3 quarters. I mean, looking at -- based on your commentary, if you deliver revenues on the lower end of the sales guidance that you reach the high end of the EBIT guidance. We're talking about margins of about 1.5%. Is that a fair assumption going forward, at least for the next 3 quarters because of these headwinds you're having, the profitability level? So about 1.5% at EBIT and about 5% at EBITDA?

I wish I could answer that question, Constantin. Really, I -- because it is -- it has never been more difficult to really predict how this market is going to unfold. For Q4, I think we have visibility, and that gives us confidence to tell you that we will end up at the upper end or in the upper range of our guidance. That is mostly due to, let's say, our cost saving measures and is depending on how December is going to work. And December, nobody can really predict whether you have push-outs in the last weeks or whether you have all of a sudden opportunities in the last week, which gives you EUR 20 million of revenues. That's depending on that. But beyond that, Q1 and Q2, it is really about who is going -- how is the market going to act. Guido Hoymann talked about irrational behavior of the market competitors. Sometimes that is really to be seen. And if you have big margins, you can just count on having those big margins being eaten up by the higher sourcing costs and not passing that through to your customers. That would put us into a difficult situation in some markets. I am personally seen rather positively minded with regard to ASPs because SMA has the tradition of being too conservative in that regard. And we seem to be, let's say, too -- not bullish enough when it comes to really challenging the market. And therefore, I think that we will be able to keep the level of profitability of Q4 into the overall profitability of 2022 -- sorry, the profitability of this year into next year despite the headwinds that we will have in H1. But how H1 will unfold in comparison to H2, it's too early to say.

Absolutely. Fair enough. Just lastly maybe, just a quick word on market share in Europe, U.S. And any words or any developments around ShadeFix in the U.S?

There are no developments in that regard. We are still preparing our case with regard to more scientific evidence to be given to the market and are preparing, let's say, a comprehensive campaign regarding ShadeFix on the basis of our new residential product, which will be launched in about a year in the U.S. market. So don't expect us to be very noisy on that front end. But also no other developments. It's neither being embraced by the U.S. market, nor it is rejected. It is just a matter still being in discussion. And we certainly expect it to still do great things for us once we more aggressively act on the U.S. market.

We'll take our next question from Jeff Osborne with Cowen and Company.

Ulrich, a couple of questions on my end, just a few housekeeping here. Could you give us what the trading revenue was as well as storage for the quarter?

Yes. For -- to your question, with regard to the Q3 business, the part of our trading goods were -- just give me a second -- 11% with regard to trading goods in Q3 and 12% over the year. And with regard to batteries and -- or battery-related products, I should rather say, because we don't have that much batteries at all, it has been 11% -- sorry, 8% in Q3 and 10% year-to-date.

That's helpful. Just a couple of other ones. You mentioned the gap in the product portfolio around the hybrid inverter. Is that -- what you're referencing there, is that the integration of batteries, EV charging and solar, sort of the German equivalent of the Swiss Army knife for -- inverters and power electronics all in one? Or is it something else that you're referring to?

No, it's something else. It's not yet the fully integrated solution that I was talking about so many times. Hybrid inverter is a catchword for an inverter which is able to be used also as a battery inverter, but not necessarily so. Meaning you can call it also battery-ready inverter. Which becomes more and more the standard in -- especially in Germany, where you have an [ attach rates ] regard to batteries of about 90%. So here, more and more consumers tend to invest into a more costly hybrid inverter, which allows them to use a battery, but which could be used also without a battery, whereas our approach to the market has been to provide a PV inverter and an additional battery inverter. So this trend has strengthened. We have embarked on that course as well, but, let's say, a little bit too late. And therefore, we have this gap in the product portfolio, which will now be closed in the beginning of next year. Allow me a side remark in that regard. SMA has actually been the first company in the world who has introduced a hybrid inverter, but that was 5 years ago and the market was not ready. So our innovation strength is certainly undermined by that fact. However, we have not been, let's say, clever enough to uphold this advance.

Got it. That's helpful. I appreciate the back story there. And then you alluded to lengthening lead times. Can you just update us what normalized lead times were, say, pre-COVID for the different segments and what they are today?

Yes. Usually, our string inverter business converts into revenues in between 4 and 8 weeks and our Large Scale, Project business converts into revenues in between 6 and 12 months. We have now seen several pushouts. So that's been -- lead time is, let's say, perhaps not 9 to 15 months. I would say a 3 months delay here, in that time span. And with regard to strong products, we have to distinguish. In the residential area, the situation is more or less unchanged if you do not look for specialty products like an EV charger or something. And in the C&I business, also the lead times have lengthened a little bit. So rather than 4, we would -- 4 to 8, we would now see, let's say, 6 to 10 weeks lead time in average. Some products are due to -- some products are much longer due to supply constraints, yes.

And then my last question is just on the semiconductor issues that everybody around the world is grappling with. Can you just articulate if -- do you believe it's getting better? I think you have, give or take, 10 different product lines? Are all of the product lines under production today? Or if you had to shut down assembly lines because particular shortages of particular bespoke components that are needed in individual products? Can you just maybe give us a bit more detail?

Sure. First of all, all product lines are under operation. We had a few of those, 10 to 12 product lines, being shut off for, let's say, a few days in between or to reuse it from 2 shifts to one shift due to those supply constraints. But right now, all are under operation and we don't see shifts being canceled in the coming weeks. The outlook is, however, still somewhat uncertain. We have, as you know, usually advanced -- booked well in advance, 12 months in advance the critical electronic components. But if the market demand deviates from that estimate, we also have to look then on short-term demands, and that might put us into trouble. If something unfolds as planned, we won't be affected by this at all. But history tells it never unfolds as planned. And therefore, we will still see some difficulties in H1, that becoming better in H2.

[Operator Instructions] Next we'll go to Lasse Stueben with Berenberg.

So if I just -- 2 more from me, if I may, just on the Large Scale division. I was just quite surprised to see such a big jump in the order intake just given what's going on in the U.S. and the ITC and the delay there. Could you give us some more color on sort of what's driving the market there? And how much visibility do you have on those projects? I mean, you already sort of just alluded to Jeff's question about the lead times, but just on the visibility of those projects would be helpful because I would have expected that to come down? Or not be as high as it has been historically in Q3 and also in Q4. So that would be helpful. And then we can do the questions one by one.

Yes. The visibility in that area is not that high. I have to admit that. And that is due to the fact that more and more customers are not only installing large ground-mounted installations, but are thinking about combining that with stationary storage devices. And that needs much higher arrangements, preparations, et cetera. And is, at the same time, the reason why we are sought after so well, because that is -- the more complex the situation becomes, the more you rely on SMA as the most experienced company in that regard. The situation right now is also characterized by it becoming less an amount of projects, but those becoming bigger the whole time. So the visibility is not really well. But I think what gives you the answer to your concern or to your question is SMA is sought after due to its innovation strength and especially its offerings with regard to combining PV with stationary storage systems.

Super. That's helpful. And just a follow-up on that. I mean, has there been a noticeable change in the competitive landscape in the large scale projects and you're seeing companies exiting this market? So I'm just wondering if that still seems to be the end market which is still on the most pressure on the pricing side simply because of the volumes. But is that becoming less competitive in terms of also getting profitability in this division?

Yes. Yes, it depends on the region. The U.S., which still does not allow Huawei to enter this even large scale market, the situation is unchanged. You have SMA, you have Sungrow and you have Power Electronics. And they all, give and take, year-by-year some market share. Others lose or win. But they are always the same 3. And here, we do not see big changes. But with regard to Europe and APAC, we see Huawei grabbing considerable market share from the others, with the exception of Australia, which happens to be our second biggest market. So we are fine there as well. But with regard to the other countries, you have more and more string suppliers, especially Huawei, trying to get also into large mount -- into large installations, ground-mounted installations. So that is something to be considered and to be observed from our side.

Okay. Super. And then just changing to the residential market. That seems to be remaining at a very good level sort of across the board and the industry. I'm just wondering in terms of -- because of the supply chain and the component prices, what are the price increases that the end customers see? If this supply chain situation continues well into next year, I just wonder sort of on the demand side how willing are resi customers to pay higher prices, if that's even the case? So I'm just wondering if you can give any insight on the magnitude of the increases in prices for the end user, if you will.

Yes. I think that is something I probably shouldn't answer because I can really talk only with regard to the inverter, and you know the inverter makes about 10% of the overall investment. The decisive factor are the module prices and the module prices are up sometimes even 40% in comparison to last year, sometimes even higher. And that is certainly something that will be seen by the consumer. However, in this equation -- let's say, on the overall bill, the increased cost for the inverter are not noteworthy even. And there are certainly something that would not bring every -- any customer to the decision not to buy this inverter, but rather go for another inverter. The price will never be the issue here. It's always about the offerings, the features, et cetera. But the module price, as such, may lead to an overall and temporary decrease in demand in the home sector, waiting for the module prices to fall again.

Okay. Understood. Yes, that makes sense. And then just a final -- just a small housekeeping question again. Just on the warranty provisions and the reversals there, I think I saw them in the report. But just to confirm, that wasn't really a noteworthy one-off in Q3, right? I mean, I think you said it's single -- low single-digit in the report? Or...

It's mid-single-digit. Yes, EUR 6 million.

Okay. And that's all booked in Q3?

That was booked in Q2 already.

In Q2 already. Okay. Sorry, I must have missed it.

In Q2 already, yes.

Okay. So nothing additional in Q3. But -- so that's just every 6 months, at H1 and the full year?

Yes, exactly. Yes.

Next question will be from Jan-Erik Schmidt with EB-SIM.

I'm just wondering about capital allocation. So maybe we can first start off with the CapEx. I think you're guiding for EUR 55 million this year. The number is slightly elevated compared to the last years. I'm just wondering, has there been some underspending in the past years? Or what can we expect in the future? What is kind of like a normalized level? And maybe you can give us a little color on how much kind of like capacity actually costs. So if we assume further growth, how much capital is going to come?

Yes. First of all, we are -- the higher CapEx this year is due to a higher amount of activated R&D projects, about EUR 10 million more than last year. So that's the deviation from '21 to '20, and that will continue for the entire year. But still, we are on a general course to increase investments. You will certainly see that in '22 and in '23 that our CapEx, meaning investments into machinery and buildings, is going to increase. The overall amount of capitalized R&D projects will probably not increase anymore over the coming years. Also the capitalization according to IFRS 16, meaning leasing obligations, is going to be at about the same level. But the things that are of interest to us the most, meaning investments into production equipment, et cetera, that is going to increase due to our efforts to prepare for the production of the next generation machines, inverters, et cetera.

All right. So can you give a little color then how much capacity actually costs? So how much would it cost to increase the capacity?

Yes. If we just look about capacity, that is not that difficult, because the machinery that we need could easily be rebuilt. That is not very capital intense. What we see is not just scaling up. What we see is new products coming to market, more integrated products, in which you have the inverter, the battery and perhaps an EV charging device and especially skilled software, smarthome software all being integrated into new machines. So that needs also new platforms and new production equipment. And that will see additional CapEx for the coming years. We are talking about high double-digit investments over a streak of 3 to 4 years, meaning that the part that we put into equipment and buildings might double next year. And also in 2023 remain at that high amount. We'll then go back again in '24 and '25. So the normal run rate we see is EUR 20 million, EUR 25 million. That may increase to EUR 40 million or even EUR 50 million in the next 2 years, and then reduce itself again. I hope that is what you had in mind.

Yes. So that helps a lot. Yes. And then just wondering, looking at the higher capitalized R&D and the high spending on the machines, that obviously will lead to higher depreciation and amortization. Can that be compensated margin wise? Or are we going to see a decrease basically in the EBIT margin as well as...

No, no, that is -- that will still be compensated by higher EBITDA. Yes.

Yes. But on the EBIT level, though...

Sorry. Yes, by higher -- the EBIT margin will not deteriorate due to those investments. Yes.

All right. Okay. All right. And then just looking at your balance sheet, I mean, obviously, having a net cash position is something rare. Just wondering, is there any plans to change the capital allocation, maybe going into M&A or, I don't know, buybacks, dividends or whatever to kind of like [indiscernible].

You mean it's too high?

Yes, I mean [indiscernible] leverage.

You mean it's too high?

Yes. I mean, you're basically leveraged. So I'm just wondering to get a leverage level in, and therefore, having higher efficiencies capital-wise.

Yes, absolutely understood. It's perhaps something that I have to embark on and to give you some background. SMA has, let's say -- SMA is one of the few survivors of the early phase of the PV business. And the fact or the reason for SMA to survive as more or less the only German company from the last decade has been its high cash bolster. And that is why many stakeholders within SMA tend to have higher cash reserves than are actually needed. However, we are certainly aware of the market booming in the coming years. And of course, we do not want to stay at the sidelines, but rather participate from that growth. And in order to participate in that growth, we will invest. And that will bring our liquidity down and will us also leverage to a higher degree. So I would expect capital -- the equity ratio to go down in the coming years continuously.

And those investments would be M&A wise? Or is that just organic growth investments?

Both ways. We will, as I said, invest more into CapEx by building new machineries, et cetera, new factories. But we are also on an opportunistic course regarding M&A opportunities in several areas, not just operation and maintenance, which I usually mention in this context, but also other businesses which are about to unfold. Just think of power to gas as something that we are already tapping into and doing some business at this point in time. That is something that will certainly -- the market will rattle itself and will shape itself in the coming 3 to 5 years and we want to be a part of that.

We'll take the next question from Richard Alderman with BTIG.

Just on that last point, could I just ask, are you implying then that you're trying to find a way into the green hydrogen revolution? Are you looking for a product source or some sort of structure that gets you into that? That will be my first question. And then just on the -- could I -- I apologize for asking this question again, but I just wanted to sort of get a bit more color on the situation with the shortage on components. Is it in your mind mostly semiconductors and chips? Or is it a broader number of components across your 10 product lines? And then lastly, on your '22 guidance, can I just check? Have you made the assumption that the projects that have been delayed this year all come back in 2022? And if so, are they all weighted towards the second half, the areas in Business Solutions, midsized developers, et cetera?

Okay. Let me first say, it's great to hear from you, Richard. Great that you are -- wonderful that you are on the call. With regard to green hydrogen, we have -- just to give you an idea, already this year, where everything with regard to green hydrogen is already -- is still in the pioneering phase, we already made at this point in time more than EUR 6 million of revenues with regard to products into green hydrogen projects. And what is our offering here? It is the converter, meaning a machine that makes DC into AC. So -- sorry, AC into DC, sorry, because you need DC for the electrolysis. So it's just the other way around the inverter is doing. And that is necessary for every electrolysis procedure. So the market that is going to unfold, which we see as -- almost as big as TV regarding sizes to unfold in the next decade, is something that SMA is already active on and as an early mover, hopefully, also as a sustainable player, is expecting considerable revenues already to start in 2023, '24. So that is some color that hopefully helps you with regard to our appetite and our willingness to tap into that business. With regard to your second question, it is not only semiconductors that we are lacking. It is also very ordinary normal materials. And here, we are still suffering under the COVID-19 pandemic in some countries where we have lockdowns of factories due to some infections in the workforce, et cetera, and other cases like that, that we are not supplied with necessary cables, casings, et cetera. But the longer it takes, the more it concentrates on electronic equipment. And to your last question with regard to '22, we think that those postponed projects will unfold in Q1, but then we will have other investments being pushed out. And this development then reducing itself in Q3 and back to rather normal business in Q4. But we do not see any cancellation so far. So that would mean those are not the same projects that will be pushed out into Q1 and then from Q1 into Q3, but it will be other projects that are then being delayed.

Okay. And then one follow-up question, if I may. Just trying to reconcile your guidance for -- or the elements of guidance you've given us thankfully, kindly, so far -- in '22 sales outlook and the comments you made around margins. Looking at your exit run rate in Q4, where EBITDA margin is likely to go to, it's going to be below 7%. Obviously, it's been trending down through the year from above 8% to below 7%, if I'm reading the guidance correctly. And therefore, if that trend continues through into the first half of 2022 with the issues that you've raised, it would imply a much higher margin in the second half of the year. You're sort of implying sort of EUR 60 million to EUR 65 million of EBITDA. And roughly where consensus is now, about EUR 980 million, EUR 990 million of revenue for the full year '21. So your exit rate is going to be closer to 6%. And I'm just struggling to reconcile the current consensus of about 7.5%, 7.6% EBITDA margin on visible alpha with what you're saying about the delay in the actual acceleration. You're essentially saying it's going to be a very strong second half, unless I'm missing something. Or are you assuming that you get another price rise in the first half of next year? Sorry. Rather garbled, but if you know what I'm saying.

No, no, absolutely. And actually, you put the finger right into the wound. And that is, if I would really know whether the market is going to accept those increases in order to compensate for higher sourcing costs, I would be able to give you the clear-cut answers to your questions. As this is not the case and we do not have made up our mind on how we should assess that, I cannot go into that much more. But your assessment has been absolutely accurate about the situation, yes.

Okay. So it would be fair to say that there is a bit of risk there if you can't pass-through price increases?

Yes. However, we consider this risk to be low. And then the reason for that is that the price increases already made today, as of year-to-date, have been accepted by the market without any discussion.

All right. And there are no further questions at this time, sir.

All right. Then thank you very much for spending so much time with us today. I very much appreciate your interest into SMA and SMA's share. And hopefully, you will join us on that course, which is going to be very exciting over the next years. Please take '21 as the year that it is, and that is an exception, an exception to the course on which SMA has embarked in 2019 again and that is a course of steadily increasing profitability and higher revenues on the basis of its technological innovation and strength. That is also the path that we are going to continue to follow in '22 and 23 in order to be in the game of the coming years. Thank you very much and have a great day.

That does conclude today's conference. We thank everyone again for their participation.