Earnings Call: Q4 2019

Jan 24, 2020

Happy to see you all here at our new offices at Skagen and Oslo. And in case you have time after the presentation, you're free to join us up and take a look at our offices. And if you take a look at some of the highlights that I'd like to share with you, just looking at last quarter, we reached 2 98 gigawatt hours in the quarter and 9 26 gigawatt hours, up almost 3 times compared to the year before for 2019 as a whole. And of course, the growth in the gigawatt hours will contribute to SEK 1,571,000, also a very good increase from the year before. We completed our last plant in Egypt out of 6 in the quarter as well, bringing us up to 3.90 megawatts in operation. And as some of you might be aware, this is the largest bifacial plant in the world. And every morning, I take a look at the production from our plants and in particular Egypt, and I can see that the bomb directly from the sun or the ray directly from the sun. The Board of Skatek Solar is proposing a dividend of NOK 1.05 for the year. If you look to the right there, you can see that it has been a tremendous growth. I mean, plants have been added throughout the year, and you can see that the power production gigawatt hours comparing it to the last quarter 2018 and last quarter 2019 is up almost or a little bit less than 3 times. Points to mention for last year, I mean, we doubled in capacity, and we have also expanded the pipeline, both in terms of megawatts, but also in terms of geographical reach. 609 megawatts were connected, Egypt, Malaysia, Ukraine and Mozambique, in total 1.2 gigawatts in operation. And I guess the best word, if I may call it, ESG on a couple of slides later. This is our portfolio in operation. And the whole portfolio is performing very well. And sort of the in aviation from year to year, if you look at statistics, it should be plusminus4%. So compared to wind, I mean, that's pretty stable too, but solar is much, much more stable in terms of production. And we see that we have seen that in our numbers, and we expect that also to happen in the future. Plants under construction, looking at the plants there, really nice, 3 plants next to each other also coming together, fantastic solar conditions, almost 2,500 solar hours every year. So it's amazing compared to Norway, for example, we are less than 1,000. Argentina also, I think yesterday, Paul Helzing, Head of Solutions in our company, mounted the last panel. So we're pretty close to testing period there as well. And then our final small plan, it provides an insight into the diverse portfolio that Skatek Solar have. We're now enjoying revenue streams from 5 sorry, 10 different countries, more plants in several countries. You can see the split with regards to currency, most dominated by euro and U. S. Dollars, but also some important contribution from SAAR, Malaysian ringgit and reais from Brazil. I don't remember exactly, but I know for sure when I connected Stone on Stone contribute to the increase in the long cash flows. And that will, as we go forward, be more and more dominant compared to sort of the very big fluctuations that we have seen in the numbers when the revenues from the constructions activities were substantial. Now a solar plant doesn't just stop producing electricity after 20 years or after the contractual period. It has a lifespan of progression, the tail end production. The production happens on the way down. They will then enjoy either the market conditions or enter into new power purchase agreements with the market as they present themselves. I mentioned ESG. And I think some, it's not easy to really understand. I mean, this is not a committee that is sort of sitting next to the money. You will see parts of these elements and all the important aspects of ESG embedded into the way that we operate. And what happens on a continuous basis is that we focus on risk. I mean, everything we do is risk. When you focus on the risk and you're able to mitigate it, then you're taking a lot of the uncertainty out of the equation. So this is what the management of the company is focused on and also what the board is focused on. So that goes on the top line looking into it, who has developed the project, are there any environmental issues that we need to take into, are there any birds nesting in the area? I remember in California where the plant there have an out pair that sort of enjoy themselves and we had to watch them for 12 months before we decide that it's okay, we can build a plant. We prepare roofs up in Utah. I mean there are things like to yes, and then when you identify issues, it could be that it's a small village, it's next to the plant or it could be where the plant is going to be. We may have to move these people. We have to find them a new home. We may have to find them a new area to grow the rice patties or whatever they're growing and that takes time. If you know the IFC rules, then you know if you apply that to your business, you have to take or build a plant. And then, of course, we very early involve stakeholders. They have exactly the same interest as we have to have the right answers to these questions. This is co shareholders, it could be the banks, it could be all the partners. And throughout everything we do, we focus on health, safety and environment. And I mean, also in our previous life, that was important when I worked in oil and gas business, and it should be important for every business, the other projects that we deliver. And that is good. I mean, our performance last year, we had an LTI of 1, I mean, 1 in a 1000000 hours, which is extremely low. I don't think many companies in Norway is at that level. Our sick leave last year was at 0.2%, 0.3%, which is I don't think many companies in Norway has that or elsewhere. So I think the statistics shows that we are on the right track. It's not easy to keep it at that level. I also like to point out something extremely important here. Go into the documentation to have a proper decision is presented to the Board and they make a decision to go ahead. Important point for us, but of course and then you can see things move on. We continue our focus on ESG aspects and then it moves on and I can tell you to build a business, a sustainable business. South Africa, we're doing a lot of that. So it's more than just the bottom line. That's what I'm trying to tell you. And this is the way I think businesses are going to be managed in the future. They have to be. I can talk a bit about more about these things, but maybe at a later stage. Now there are several institutions that have specialized in actually judging, analyzing and human capital business ethics and so forth. And they decided that going through all these factors that we are a low risk in terms of experiencing material financial impact from ESG factors. This is serious for some companies if they're not scoring properly. And if the risk is high, it's worth actually studying that in detail to try and mitigate it. Now if you compare that to our peers, were actually the global universe. They looked at 12,237 companies, 450 Utility. So let me start by just reflecting a bit on our historical development on the financials and I think this is quite a nice graph to put together here. We IPO ed in 2014 and to the left of this graph you can see Better now? Yes, sorry. So I'm saying that this is a graph showing the historic developments of of the company since the IPO. Over the last 6 months, on the right, you can see the development of revenues and EBITDA on a proportionate basis. And again, we've seen a 4 fold increase of EBITDA over this time period and reported now close to SEK1.6 billion of EBITDA last year. So then moving into our segments, starting with the Power Production segments. Raymond already talked about the increased power production, and we report now SEK379 1,000,000 of revenues and an EBITDA of reach close to SEK1 1,000,000,000. And of course, we will, as we expect, increase power production and the revenues here as we connect the new plants that we're completing these days. On the O and M side, we also see growth, of course, at a more moderate level in and the absolute numbers here are smaller than in Power Production. EBITDA of $11,000,000 in the quarter and revenues of $34,000,000 Performance and availability further and also to learn and build this into our new power plants. When we look at then O and M for the whole year, revenues reached SEK 115,000,000 and EBITDA SEK 45,000,000, up about 30% year on year. Now in development and construction, activities continued to stay high. We reached revenues of SEK1.2 billion and EBITDA was 78% at the end of last year. We continue to develop a wide range of projects. We've added 3 60 megawatts to the backlog, while we also reclassified 158 megawatts from backlog to pipeline in the quarter related to the projects we have some of the projects in Vietnam and a smaller one in Honduras. Also worth mentioning that we capitalized development expenses and we impaired SEK10 1,000,000 now in Q4. And that's compared to SEK20 1,000,000 or so in 2018. If you look at this segment as a whole for 2019, you can see revenues close to SEK5 1,000,000,000 and EBITDA SEK589 1,000,000. Moving on to our financial position. We've invested a lot in 20%, 60%. And if you look at the consolidated cash in the group, it was DKK2.8 billion, of which DKK758 1,000,000 was free cash at the group level. When we look at the proportionate net debt, it ended at SEK7 point billion, up from SEK6.1 billion in Q3 as we drew down more debt at the project level. Again, group book equity, we received DKK66 1,000,000 of distributions from the operating power plants, and we invested DKK66 1,000,000 sorry, we invested $87,000,000 of equity in the quarter, mainly in Argentina, Ukraine and South Africa. And you can see a fairly large reversal of working capital related to our construction projects in this quarter. And we will continue to see some capital and then that's reversed towards the end of the projects. So this will continue to fluctuate as we move into construction of new projects as well. And obviously, we'll expect to see growing distributions from the existing power plants as we connect new plants now also this year. Also included a summary of the same picture. Now looking at this 2019 as a whole. You can see we received and you can also see the capital increase that we did as well as the working capital movement. And we had a similar positive movement on the working capital side in 2018. Lastly, a bit on the guidance. The remaining contract value for the construction portfolio is about 700,000,000 remains to be recognized as revenue and the volumes on the plants currently in production. Now in 2020, the revenues and margins from Asset Management Services and O and M Services will be reported together in a new services segment. We see that the Asset Management part of our business have grown quite significantly and we believe it makes sense for us to report this together with O and M. It has until now been part of the power production revenues and margins. And we will provide you with restated figures for these segments prior to Q1 reporting as well as provide you then with some guidance for the year. So you get a better handle of that slightly changed segment definition. Okay. Raymond? Thank you, Mikael. We have grown the pipeline backlog and pipeline by a couple of 100 megawatts since we last reported to you all. It's a substantial pipeline. And within the pipeline, there are some also some very big projects. And also extremely hot at the moment. And we see in the developing world or the emerging markets, the emerging world that governments look to renewables as the quickest source of getting access to electricity. This is good news. Normally, when they were looking for additional plants to have more electricity into the grid, it took up to 5, 6, 7, 10 years. So that situation is changing to the better, which is I think. Nam is a country that is actually enjoying the highest one of the highest growth in their GDP in the world. They are between 7% 8%. And you all know that to be able to support such a growth, the access to electricity, an increase in electricity, we'll have to increase even further. So you're talking about 7%, 10%, up to 15%. They're close to 100,000,000 people. Some people call it the new small China, meaning that now we have seen this before. When things move a bit fast and they actually installed 4,000 megawatts in 2 years of renewable in Vietnam, They are overtaken by the share size and the impact on of these renewables. And that made them last year halt a bit, stop what's going on, do we need to relook at the policies, can the grid handle all this new electricity that is not as a sort of a gas power plant or a hydro power plant? It's a bit has a bit more issue with options. We don't really know the answer. For us, Vietnam remains on top of our list. We are increasing the number of people in our offices in Ho Chi Minh City. We are developing continue to developing one of the largest floating solar plants in the world. In fact, if it becomes the size that we believe, more than 1,000 megawatts, then it will be the largest floating facility in the world. Of course, those projects aren't really good candidates for auctions. I mean, they are special. To remind you, Vietnam wasn't the only country in the world that stopped for a bit to figure out how they're going to best put their new policies into action. South Africa did the same. They actually did it twice. Egypt stopped also, what's going on? The price is coming down. What do we need to do? They looked around, gathered information and they actually contacted company of ours to access the type of experience that we have collected from many different markets. They took that along with other information and adjusted their policies and then they went ahead. Egypt became a PV plant in South Africa. There has been some assumptions saying that the performance of Eskom has a direct impact on the ability to pay the bills for plants in operation. That is wrong. It's a pass through. The government guarantees for the payments that goes to companies like us and other IPPs. Now what's happening in South Africa? Well, the growth isn't very high. They need growth. They need employment, new jobs. For that, electricity is extremely important. So this has become so severe in South Africa that President Ramaphorsa decided that we need to accelerate the deployment of new megawatts into the system. And they publicized 3 to 4 weeks ago that they would like to have 3000 to 4000 megawatts on a 100% basis added to the capacity in the country as soon as possible, meaning from 6 to 18 months from now. Renewables will be a part of that solution. They also, in parallel, which they've been working on for a long time, they've been working on round 5. This is series production that we do in Southern Spain, and we can ship it out in a matter of weeks. So this is what we're going to propose when we reply to request from the government by end of this month. In addition to that, we have almost 1,000 megawatts of sites ready to construct. So that will also be something that we will offer to the authorities as a rapid deployment and installation of new megawatts. So if you ask me, South Africa is our home market, is extremely interesting for us and we are ready to actually help the government. It's something that is very well received both by co investors, by banks and by the buyers of electricity. The long term cash flows will dominate our numbers in the future and for many years to come. 1.9 will be connected during the year and additional plans will be added to that as we go on. ESG, I've talked enough about that. You understand how it fits into our operating model. Market everywhere is moving very rapidly, which in fact, I mean, that means that there has to be some very big projects and there are in our pipeline. And from there on, 1.5 or 1500 megawatts will be added as we move into the future beyond 2021. Thank you very much. And both Mikael and I are open for questions. Correct. This is a matter of organizational culture in your firm, of course, and this is difficult. The other question is dividend policy, which is less important. But I wonder why do you pay dividends when your growth is so high and you go to the market to issue new shares? Why do you do this at the same time? So I guess it's more a question, what is your dividend policy in general? How do you think about the dividends? I can answer the last one first. So we defined the dividend policy when we went public in 2014. And the idea obviously, we the growth component of the value creation is dominating the yield obviously at the moment. And I think that's and the policy is that we pay 50% of what we receive of distributions from operating power plants. That's the policy. It's a fairly moderate amount. At the moment, of course, this will grow as we connect new plants and there's also a bit of a lag here. Investors say that it's you are in difficult countries, sort of perceived difficult countries and it's very good to see that you're actually bringing the dividends home, right? This is proof because if you want the dividend, you're going to watch out, what's that what about that country? Did you get the dividends back? No, I'm sorry, it's stuck there. Well, you can find out from the numbers and our dividend policy. That was a part of the thinking. Now to corruption. I remember many years ago, I was in a different company and we were almost acquired and I said, you are in Angola and you are in Nigeria, where we have been how should I put it? You have been exposed to situations, but very, very seldomly. We train 100% of our people, 100%, both with regards to reporting, how to tackle situations when that if that arises. And this is goes along with all our partners as well. They have the same interest. We will not finance our get our projects financed if there's anything wrong. We also carry out due diligence on we cannot accept. And I'm telling you, we have said no to projects, not many because very few projects have that in them when they come to us, where we have said no, we're not going ahead because the situation isn't good. So very I mean, we don't really experience people that are approaching us to say, okay, you want to I can help you if you help me a bit. That doesn't happen, which is I think is very good. They know that tokenoscopic solar, they will not get it any other ways. Thank you. A question on D and C. Will the activity level in 2020 be higher or lower than in 2019 in D and C? Activity level on D and C, as you have seen in the past varies. In 2018 and particularly in 2019, we had an extremely high level. We don't think the level is going to be at the same this year as it was last year. But then again, the year after, maybe beat the record from last year. In the revenue recognition, that's also important. We are doing a lot. There's a very high activity on developing new projects. And of course that will then be in the end reflected also in revenues, just to be clear on that. Yes. For example, we have a large group of other people in the construction segment now involved in this signing, this floating facility and elsewhere, but the floating facility that we're looking at in Vietnam. It doesn't show up, as you say, in the revenues, but hopefully You told me now that your gross margin at the moment is about 15%. And this is what it boils down to in the future, right? How could you protect them? You told us in September how you tried to put it with your project in a way that you provide more than just your panels. You do it right, I mean, you said. But if I if you think 5 years ahead, 400 competitors around you, would there be a margin of 15% to 5% now? I remember in 2014 margins. I mean and it's so easy to deliver projects without focusing on the margins. But I mean we focus on cost all the time. We are the largest procurer of panels among many of our peers. We buy 1,000 megawatts of panels. Can you imagine how many 100,000 of panels that is? So we have a negotiating power that is actually helping us to protect the margin. We are trying to work, which is nothing that stops. You never finish. How to optimize your operating model, make more people more efficient, have partners that know what will add to what we're doing now, batteries being 1, grid connection being another one, providing energy to stabilize the grid is a 4th one. So there are many different things. I mean nothing is sort of stagnant. It moves on. And this industry, I mean I've said this many times before, 3, 4 years ago, I would have never guessed where we are today. Let's talk in 4 to 5 years and we'll compare the thinking behind the question to where we are. So I think there are numerous opportunities, for example, release. So a question from Maike Plaschowre. Could you please comment on the progress in Bangladesh? I can comment on the progress on many projects. We don't really do that in detail, but I mean, since it's being mentioned, Bangladesh is moving ahead. There, we have had the situation, the one that I was touching on under ESG, where there were a group of families living in an area that we wanted to. And we're not designing for floating in Bangladesh. It should be on dry land. So that has an issue. And of course, then that determines the speed of how we can implement start construction. But financing together with some of the development banks, I mean, that's all in preparation. Construction, design, everything is being worked on at the moment. You want to add anything? No, I think we mandated lenders to this project and Yes. I mean, we have insurance coverage. Maybe you're a better candidate to answer this, Mikael. But I mean, we have insurance coverage. During construction, during operation that covers, I guess, most of the things that can go wrong. In terms of floating, I mean, you have to tailor the insurance to whatever challenges or whatever you think is of uncertainty and see if we can get insurance for it. Normally, you can get insurance for everything. That's I mean, do you want to add anything? And then one last from the weather, how is the competition now in compared to earlier? How is the competition in the market now compared to earlier? I don't think it has changed all that much. We see that some of the oil companies, I saw an article in Financial Times this morning, a large oil company in Portugal is spending SEK2.2 billion to buy into the solar business. I think that's good news. It's increasing. The cost of the panels is coming down. So electricity will continue to become cheaper as we move into the future. And on top of that, you will see the batteries. That's all good news. We're not now competing with the traditional providers of electricity, diesel and gas turbines and renewable beats all of them. Okay. Then I think we're through. So thanks again for coming to SKU in today. So hope to see you again here.