Roth & Rau suffers earnings loss; believes turnkey is in decline

The German supplier of equipment and technology for the photovoltaic industry was affected by the cost of one-off items totaling € -52,983 k, leaving the company with an earnings before interest and tax (EBIT) of € -27,290 k. This is equivalent to an EBIT margin of 6.1 percent, which is well below the 2010 target of nine percent.

The group cited valuation adjustments on old turnkey projects and the establishing of unplanned provisions for legal and tax risks from current large-scale projects as the main reasons for the loss. It also pointed to the conversion of the accounting treatment of SiNA-2 systems and the streamlining of its product portfolio as other factors contributing to its EBIT being in the red for the first time.

The negative EBIT comes despite the fact Roth & Rau increased its sales from €197 million in 2009 to €285 million in 2010. In doing so, the company met its sales targets for the year and also reached levels above those it enjoyed prior to the economic crisis of late 2008.

Balancing the recalculation of turnkey investments, although not being enough to turn a profit, were the strong gains made in the Asian market, as well as the development and success of the second generation SiNA antireflective coating system, which was launched in 2010.

The strengthening Asian market accounted for 77.3 percent of sales (2009: 51.3 percent) and helped push the company’s export quota over 90.1 percent for the year (2009: 82.8 percent).

At over €417 million, the volume of new orders received in the past financial year also set a new record, almost doubling their previous best from 2008. Orders on hand on December 31 were in excess of €336 million.

The acquisition of OTB Solar B.V. in 2010 additionally enabled Roth & Rau AG to expand its market share as a crystalline silicon solar technology equipment provider and gave it access to new competitive technologies to leverage from.

This positive news means that before one-off items, the adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) was over €36 million.

Turnkey troubles

Roth & Rau CEO Dietmar Roth described the main cause for the negative EBIT as a series of "one-off impairments, mostly involving the turnkey business".

He admitted that the company had learned a lot with its business model ever since it entered the turnkey market in 2006 and believes that the current way companies deal with the market is in need of change.

"We have gone through a significant learning curve and we certainly made mistakes at some points," he said in an interview for the company’s Annual Report 2010. "But in my opinion, the most important fact is that the market for turnkey production lines has changed fundamentally."

When prompted about his company taking too many risks, he suggested that as a result of the financial crisis and the reduction of government spending on photovoltaic technology and subsidies, such as the market crash in Spain, some of his company’s customers had been left in default, which has called for a reassessment of policy.

"Some of our customers, especially in India, were hit hard. Other customers got into financial difficulties as a result of the financial market crisis. New entrants to the photovoltaic market, who accounted for a large proportion of our potential turnkey customers, were hit particularly hard by the market changes and the financial crisis."

Roth also cited the example of the failed company SpectraWatt, which was a customer of Roth & Rau as a cautionary tale for their future development, saying that whereas five years ago turnkey investment was a must, now this is not so.

"The solar industry has become more mature and has changed and we are adjusting to the market. We clearly see the turnkey market on the decline. We are convinced that it is only a question of time until our competitors reposition themselves in the turnkey business too," he said.

The revised turnkey model that the company now uses offers customers packages in combination with various services. These can be adapted to customers’ needs and range from project management through to production ramp-up and has already landed them a €6 million deal.

Looking ahead

This rethinking of its business model means the company will be putting more effort into forward-looking products and technologies, and prioritizing growth from within through the development of their training Academy.

To safeguard its competitiveness on a sustainable basis, in the third quarter of 2010, Roth & Rau introduced a cost and structure optimization program called CRiSP to boost the company’s profitability to be integrated by the end of 2012.

"Our guidance for 2011 assumes sales rising to between €300 million and €325 million," said Roth. "We want to achieve a clear increase in our profit margins and believe that it is realistic to report an EBIT margin between four and seven percent for 2011. As for 2012, we expect a positive double-digit margin."

2011 will also see the market launch of new products for use in the manufacture of high-efficiency solar cells, such as the HELiA system series for the production of hetero junction cells and new MAiA generation for the passivation of the reverse side of multicrystalline cells as well as the expansion of service and spare parts business in Asia, including creation of resources for the production and procurement of spare parts in China.