Earnings Call: Q2 2018

Jul 20, 2018

Good morning, everybody. I'm extremely happy to welcome you to the 2nd Quarter Presentation 2018. As usual, the agenda will cover some highlights and product updates that will be hand by myself. Mikael will go through the financials, and I'll have a short summary and an outlook. We're now seeing, as you've also seen in the numbers, a tremendous upswing in the construction activities. And we're also pursuing new opportunities that you will see reflected in an increased backlog and an increased pipeline. So the Q2 proportionate revenues was this quarter SEK1.229 million compared to SEK167 million last year. And of course, the difference here is on the second bullet here, we are now ramping up construction. The EBITDA is up from SEK 100,000,000 last year to SEK 266,000,000 for this quarter. D and C revenues, a bit more than NOK 1,000,000,000 and NOK 140,000,000 reflecting what I just mentioned, high level of construction activities as we have been expecting. In addition to that, we shared with you on the Capital Markets Day an increased ambition with the target of 3,005 gigawatts by end of 2021. And I'm happy to confirm that we have been adding then over the quarter 117 Megawatts of backlog in Argentina and 130 Megawatts in Ukraine. We've also added equity by issuing rights that added SEK 600,000,000 to our balance sheet. A bit on the projects that we have under construction up to in the right left hand corner, sorry, Malaysia, these are 3 projects at 3 different locations in Malaysia, almost 200 megawatts. They are in their final stages sequentially of being completed. And first project, Gudrun, is in final testing right now, while the other 2 will follow over the next few months. Brazil, this is a project that we are doing fifty-fifty with Equinor. We were experiencing some heavy rainfall as a few others in Brazil that brought us a bit behind the schedule, but all key performance indicators now are showing that we're picking up speed and are targeting early Q4 grid connection. Honduras, a project that had a few challenges. This is past history. We're now in the final phases also of erection of the panels and the substation is complete. And we're aiming towards the end of this quarter, beginning of early Q4 to complete Honduras, this Los Prados project. Egypt, the largest project in Africa, 400 Megawatts. This is just north of the Aswan Dam, south in Egypt. We have started construction, not an interesting picture, but it shows that we're trying to fence in the future plan just to see show to you that there is activity. This substation there has actually been completed. This was handled by the utility, by the way. Mozambique, if you're familiar with Africa and Mozambique, you know that this is deep in the jungle. So logistically, this is a bit of a challenge. But as you can see, we have troops on the ground and we are starting to do the groundwork there too to make sure that the place where the plant will be erected is plain and we're going to be receiving all this lot of A lot of synergies. This is in Upington, a tremendous place in terms of solar influx. We have started there the road construction, access roads, and we will then really kick off for the rest of the project on the first one in with regards to is a country that has been going through some turmoil lately and also over the past 10 years. They have now been given some assistance. In that respect, we're extremely happy that Equinor and ourselves on how our relationship with Equinor is evolving. Here, we're looking for financing, debt financing, but we will only have that in place after COD, after commercial operation date when we're producing electricity. And Stator sorry, Equinor is I've been saying this for 30 years, right? So Equinor is providing construction finance, allowing us to start construction very early and complete without actually having a debt financing in place. Ukraine, I was in Ukraine in Kiev 3 weeks ago. I met with the top officials in 3 departments. And I was extremely, I have to say, impressed and also happy with the determination of the administration in Ukraine to add renewable energy. They are clear that 10 year feed in tariff is a short period, which is reflecting the fairly high tariff. They are revising their program now and they are committed to add more renewable energy in the years to come. And of course, we have shared with you our ambition to add 300 to 400 megawatts or complete 300 to 400 megawatts in Ukraine. You should expect us to financially close some of these projects already in the second half of twenty eighteen. Now for the backlog and pipeline. The pipeline increased about 500 megawatt to 4.5. Megawatts. And you can see that we are all our projects are in the solar belt, the sun drenched part of the world, emerging markets. And now we see a very positive market development. And I also see that with the reduction in the equipment prices as you've seen over the past few weeks, I think the growth over time will start to accelerate further. But yes, that is still to be seen, but that is at least our expectation. I'll hand the word over to you Mikael to go through the numbers. Okay. Thank you. So let's jump into it. The proportionate revenues reached $1,200,000,000 as Raymond mentioned in the quarter, EBITDA 266,000,000 and the increase here on a proportionate basis is basically driven by the significant construction activities that we now have achieved. And last year, it was in the first half of the year at least, very limited activity. Revenues and margins across the other business segments remain fairly stable, and I'll revert to that in a minute. And when it comes to EBITDA, about $140,000,000 of the 2 $66,000,000 that we report for the Q2 came then from Development and Construction. Last year, we had a negative EBITDA of $18,000,000 in that segment. Just also to comment on the EBITDA margins in percentage terms, it's really affected by the mix of business activities. And we have above 80% EBITDA margins on the power production business, while on development and construction, we report this quarter 13% EBITDA margin. So when we have more activities on the construction side, the overall EBITDA margin is coming down, and that's why we see a lower margin in this quarter compared to the quarter a year ago. Cash flow to equity reached $136,000,000 up from $20,000,000 last year. And again, the main bulk of that growth is coming from construction. And looking at power production. These days, I mean across I mean during this year, we have had the same assets in operation, and you can really see the stability of financial results of this portfolio. Production reached 68 gigawatt hours in the quarter compared to 70 gigawatt hours a year ago. And on a 100% basis, we reached 144 gigawatt hours, which is more or less in line with what we guided on. Same goes with EBITDA, really reflecting the steady state of these plants. And again, we're selling power on fixed tariffs and the irrigation is very stable, a stable resource, and the plants are operating at a high level of availability. So you will basically see that EBITDA compared 2 years ago and the last 12 months is more or less the same. So it's, I think, proving that solar is such a good resource for power production. O and M. This quarter, dollars 30,000,000 of revenues, dollars 19,000,000 of EBITDA. It's affected by a catch up effect where we recognized revenues of $8,000,000 in Jordan that stems from the period October 2016 to March 2018 for 2 of the 3 plants in Jordan. So that's a catch up effect. And furthermore, we saw a good performance of the plants in South Africa. So we have somewhat higher O and M bonuses also in this quarter compared to the same period last year. Now again, dollars 1,000,000,000 of revenues from development construction, Six projects, Raymond talked about in Honduras, Malaysia, Brazil, Mozambique, Egypt and South Africa, all contributed to revenues in this quarter. Accumulative progress across that portfolio was about 21% at the end of the second quarter. And this is a portfolio with a contract value of about NOK 8,500,000,000, meaning that about NOK 6,700,000,000 is the remaining value of these contracts and the revenue from that before we start construction of any new plants. Gross margin came in at 16%, and this is fluctuating. It's been down and up from quarter to quarter, and it will continue to be like that depending on the mix of projects that we are realizing. On the balance sheet, main event obviously in the last quarter. In June, we raised $600,000,000 and we now have a very good basis for funding further growth of the company, and we have strong ambitions. And as Raymond alluded to, we expect to deploy more capital already in the second half of this year. So we have a good basis for doing so here. Total assets stood at SEK 11,000,000,000, a bit up from end of last year, mainly based on CapEx investments that we have done in the first half of this year. And then when it comes to cash, dollars 2,400,000,000 on a consolidated basis, while dollars 1,000,000,000 was free cash at the group level. And book equity strengthened further to $2,800,000,000 after the equity raise. And the equity ratio stood at 79% at the end of will recognize how we present this. First of all, we received SEK21 1,000,000 from operating plans in terms of distributions and dividends. We have $100,000,000 or so of cash flow from D and C. And we invested about $300,000,000 of equity in new projects or existing projects, I would say, both in Malaysia but also in Egypt in the quarter. And we spent about $30,000,000 on development CapEx on new projects in backlog and pipeline. And then, yes, dollars 590,000,000 of net proceeds from the equity raise, while we had a negative movement of working capital of about SEK 300,000,000 in the quarter. And we have had a very positive working capital movement over the last 6 to 9 months, and now we see some reversal of that as especially the project in Malaysia is getting completed. And then I thought I could repeat some of the key figures that we presented also on the Capital Markets Day at the end of May in terms of the new targets, the new growth targets that we set out. First of all, aggregate investments for reaching 1.5 gigawatts by the end of this year and then further to 3.5 gigawatts by 2021. CapEx is expected at $13,000,000,000 and $15,500,000,000 respectively. And then our share of equity investments for the current portfolio is about NOK 1,850,000,000, while we expect to invest about NOK 2 point $2,000,000,000 for the additional 2 gigawatts over the next 3 years or so. And then if look at the D and C contribution from us realizing this portfolio, it's about SEK 1,000,000,000 and yes, dollars 1,200,000,000 for the 2 steps of this growth path, basically getting us to $2,000,000,000 to $2,500,000,000 in total from D and C. While the annual cash flow to equity, the long term cash flows over 20, 25 years is expecting to grow from current $170,000,000 or so to about $800,000,000 when we have the 3.5 gigawatts in operation. And again, we expect then to enter into long term contracts, power purchase agreements where we fix the tariffs and have stable long term cash flows as a basis for this. Okay. I'll then leave it to you, Raymond, to summarize. Thank you, Mikael. I thought I was going to just bring back a slide that some of you may have seen on the Capital Markets Day. The theme of the Capital Markets Day was accelerating growth. And we thought we would want to capture this in a slide showing 4 important pillars. Of course, it's interesting to win new projects and put them into the backlog, but you need to deliver these projects. And right now, we are building projects at 3 different continents. And having been in the EPC business, although this was subsea and oil and gas, I have deep respect for execution. So we have been working extremely hard on making a new operating or updating our operating system that is tailored in a way that we can roll it out into different environments, make sure that we have the right ingredients of competence, marry that with local competence to make sure that we are meeting the schedules, the quality and the local content requirements. Sometimes that is a challenge, but of course, we are following these projects in a detailed manner. And in a broad brush, most of the projects that we are executing at the moment are following the schedule that we were planning to follow. There are some delays, as I've said to you before, in Malaysia. But again, there we are approaching the end of the construction period. Accelerating growth, you need to feed the animal. I mean, you need to discover new projects. You need to discover the projects with a content that allows you to meet the investment criteria that we have, that allows you to meet a lot of other criteria, security, land issues, how you interface with local population. So all of these criteria, which is a long list that cannot fit into an A four page, but I mean, we're scrutinizing these projects. And when we move them from just an opportunity into the pipeline, they have met certain criteria. And then we talked about new opportunities. I mean solar, utility scale, this is what we know. This is what we have been doing most of. We are now adding to the opportunities or the menu. At BroadenScope, we presented 1 project at the Capital Markets Day, which is a small project with the UN in Africa, where we're actually seeing a combination of power or solar power with batteries, maybe with a backup from diesel, we can actually reduce the cost of power that they are actually paying for in these rural areas by 50%. A lot of opportunities like that, but of course, we have to find customers that have a solid balance sheet and can pay us. So there are numerous opportunities like that that we're pursuing. Furthermore, we talked about corporate PPAs. And why is that now entering the scene? Well, in some countries, for example, in Brazil, the power that is being produced from solar today is actually costing less than the base power that is spread into the market. And that, of course, industrial players watch this all the time. And if they see an opportunity and it is a regulatory regime that allows you to buy from us or from a similar company to us directly, then they're looking at that to maybe spice up their energy mix so that they can reduce the overall cost. We're pursuing opportunities like that in several parts of the world, and that will increase as more and more countries will deregulate the energy markets and allow for this type of power purchase and that alike. Finally, of course, a lot of the cost that we have is financial cost. So if you can optimize the way that we raise funds, the way that we distribute funds, that is healthy, and it actually reduces the cost of the project tremendously. And in other words, you can have a lower tariff, and hopefully, also we can get the benefit from it. We also said at the Capital Markets Day that we may rotate some of our assets. We have talked about this in the past, but I mean, the bulk rotate it, maybe we can combine it with other assets to increase the returns or actually take the proceeds from one investment into something else that will enhance our financial performance. So you should watch us on all these pillars on how we perform. I think we're going to share with you a lot of interesting news over the next few quarters on how we are performing here. Finally, this slide you have seen before. We have updated this slide to show our new ambitions, our goal for end of 2021. We only have 300 megawatts in operation, but we have 1100 under construction. Some of these plants will or most of them, I suppose, will be connected at least over the next 12 months, but a lot of them also in the second half of this year. We have been starting to add backlog to the 2,000 megawatts that will be on top of the 1 of 1500 megawatts. So we are moving up and a bit ahead of our schedule for the time being. So we will see projects that will mature and that will go from the pipeline into the backlog sequentially as they meet certain targets, giving us then at the end of 2021, the 3,500 megawatts of projects. The Mikkel covered is a bit before. I mean the D and C contribution, dollars 2,000,000,000 to $2,500,000,000 which gives us or gives a bit of a piece of information with regards to our ability to create capital from development and construction activities. Cash flow, once we're done, SEK 800,000,000 in average to generate capital in the range of 12% to 15%. Equity IRR, here we also talk about average. It will vary a bit from country to country, but we are targeting 15%. And then, of course, what is the foundation of our business, health, safety, security and making sure that we are not having a negative impact on the environment. So interfacing with local communities through our sustainability programs will continue to be a very important part of Skatexular Foundation moving forward. Then I'm ready Mikkel and I are ready for questions from the audience. Andreas Bertelsen, Kepler Cheuvreux. A couple of questions, if I may. First of all, can I just on the maintenance question? The equity invested so far in Malaysia, are you nearing any completion there? Or are you still expecting to invest more equity? We're nearing completion. So it's a bit left, but not much. And could you just give us some color on I don't know, you don't disclose the completion on single projects in 'twenty one overall. But are you especially in Brazil and Malaysia, when do you expect to be the final quarter that you will receive D and C earnings? Okay. Well, when it comes to revenue recognition, it's again following an S curve, and you will normally have a certain portion of revenue recognition left at the very end of the project. So I would say that we're talking about Brazil grid connection in the Q4 and Malaysia now in the second half of this year. And I think you will see revenue recognition for both of those projects, both in the 3rd and the 4th quarter, but less so in the 4th than in the 3rd. Okay. Thanks. It's an interesting observation that the recent transaction in South Africa, Globe Black acquiring the Brookfield assets, 178 Megawatts, I think. Were you approached for a bid in for your South African assets? And do you know anything about the pricing? I do not. No, I have not seen anything in on the pricing of that transaction. So no, we have not been a seller of assets. So we have not really been engaged. Okay. 2 more, if I may. One is on the component prices coming down on the back of this Chinese demand drop. Are you able to benefit from this in terms of D and C margin? Or are you experiencing the opposite that the counterparties are backing down on pipeline projects, wanting to renegotiate on the back of potential lower tariffs? In terms of renegotiation, we haven't had any initiatives taken by our customers. But I mean, that doesn't say that that could happen, but we do not expect it. Some of these contracts are signed in ink and are sealed. So I think that mostly this is a benefit that is hitting our D and C margin straight on. And we've seen price reductions of 10%, 15% depending upon the type of module. We are, I would say, technologically in front when it comes down to taking new panel technology into our plants. And in Egypt, for example, we will install panels that are producing electricity, not only from the front side, but also from the backside, which is the first time. This is 400 megawatts, so this is going to be a major activity and or installation. And we will see a boost because these panels are installed in the desert. And when you're producing from the back of a panel, you're actually taking the indirect light. I mean, you know that you can get sunburn even if you're not directly in the sun, right? So this is the light that we're picking up on the backside of the modules and are increasing the efficiency of and the output of our plants. Those panels used to be fairly expensive. They have been have come down in over the past year 20%. Mono Technologies has come down the same level. And Poly, which we used to install on all our plants, are trading now at the $0.26 to $0.27 So although the upstream part of the business is hurting to a certain extent and we will see some consolidation, we happen to be at least this time on the receiving end. Just going back to the asset rotation potential in your portfolio. Have you been in any firm discussions regarding asset rotations with potential counterparties? And how do you see the interest rate sensitivity to the asset rotation potential? I think it's fair to say that when we talked about this, we've done it in the context of us growing our portfolio and beyond the 1.5 gigawatts that we're currently realizing. I think also from our perspective, to do an asset rotation would probably make more sense once we have some more operating experience from the plants that we're currently constructing. So the answer is no. We have not really initiated any specific processes around the asset base at this moment. I think that will be a better discussion to have once we have sort of realized at least the current portfolio of construction projects. If I may just add to that, what Mikkel is saying is, of course, very, very true. But we are seeing in some of the markets that there are interested parties that are wanting to enter the market. And a bit surprising maybe, but even though before Egypt is finished or even started construction, we see that there's a lot of Middle East interest in the Benban projects. So that's good for Egypt. It's good for the electricity price in the future and it's also good for the companies that are investing into Benban. We're seeing some of that in South Africa as well. So different investors that were not so well, they were risk adverse under construction, but then see the parks in operation. You saw the Niklas numbers. There's not much variation when you're producing electricity from solar. Okay. And also just a final one from me. On the added capacity to the pipeline, could you just share some thoughts on sort of where we are in those projects? I mean, we've seen quite big spread on the lead time from entering pipeline and going into backlog. So how mature are these projects you've added to the pipeline? And just some color on those? I mean, it's 500 megawatt and we're up to 4,500 megawatt. It's very difficult to be specific about it because it's a whole host. Some of them will take some time to develop. Others, as we have seen in the past, may jump from being an opportunity, not being a part of the pipeline and straight into the backlog. But I think I mean, if I should anticipate increased or accelerated growth. For example, in Ukraine, we are not developing the projects. We're spotting opportunities. Companies and people that have been developing projects for the past 12 months to 24 months, we're looking at them. Are they interesting? Do they have all the permits? And if we're happy, then we start negotiations and we reach some kind of an agreement that satisfy our criteria and their criteria, and then we move ahead and then they go straight into the backlog like the one we just signed when I was in Kyiv 2 weeks ago. Thank you. Okay. I just checked. We don't have any questions from the web. So I think we're we can end it there. Okay. Very good. Thank you very much. In fact, it's more sunny here than some of our plants in Norway. So maybe we should reconsider and bring our home market or our home place into the portfolio of opportunities. Thank you.