Earnings Call: Q1 2021

Apr 30, 2021

Good morning. Mikkel and I are here to present to you the Q1 results for 2021. And the headline, as we put it today, is strong growth and solid cash flow. We are enjoying the proceeds from SM Power for the first time after having completed the transaction, the acquisition transaction in January this year. We have had a good quarter in hydro production, both in terms of hydrology and also revenue, particularly from the Philippines. The overall production came to $854,000,000 that's more than 2 times up since the Q1 last year. And correspondingly, the power production cash flow to equity reached NOK681 1,000,000. As we have informed you previously, we have financial closure of in Pakistan and we have now also started the construction. We enjoyed sharing with you all our ambitions toward 2025 and we will then aim for 15 gigawatts to be installed resulting in a CapEx of NOK100 1,000,000,000. If you look at our portfolio that is under construction or in operation, we are more at more than over 3,500 megawatt at the moment. We continue to treasure our business model where we develop, we build, own and operate renewable energy. As you can see to the right here, we have almost 400 megawatt in Latin America, 500 in Europe and Central Asia, 1175 in Africa and the Middle and the 1450 amounting to 3,500 megawatt. And the spread you see in the right hand corner, more than 2,000 megawatt of solar plants, hydro power, 1400 Megawatts. And in the beginning of a pretty strong growth for wind, we are operating at 39 Megawatts in Vietnam. Now we are now towards the end of April. We have 9 or 10 months to go towards the end of the year. And we aim to have 4.5 gigawatts in in construction or in operation by end of the year. And here you see the bridge. Pakistan has now moved into construction. Tunisia, we're working on there negotiating the final documents with the Tunisian authorities. Of course, the tariff is already secured as we have been talking about previously. Brazil, 2 projects, 101 Megawatt and 530 Megawatt, the largest one in close cooperation with Equinor and Hydro. And the largest project there is 900 Megawatts in India. Of course, there are other projects as well that we're not showing here that is a part of the portfolio that we're working on. And of course, the pipeline is much, much bigger. For us, environmental and social governance is continued to be extremely important and we will remain reporting to you about this over the next quarters as well. Right now, we have about 70 projects that we're operating on across the world. And they are focusing mostly on education, infrastructure, energy and health. And to give you some examples here, we have conducted visual education courses for about 200 teenagers in Ukraine. Argentina, creating small businesses across the region, you need a hydro or a water tank at high level. This we have done in Honduras. And of course, school heating project in Jordan, providing electricity and heating to 9 schools. If you look at sort of the bigger picture, we of course have just and you can find it on the Internet on our webpage. We have just released our sustainability report. For 2021, we have 33 targets. Just to mention a couple, we have life cycle management, climate target, responsible supply chain and human rights. And below these, we have programs that are focusing on important elements. For example, on the responsible supply chain. We follow the product from sort of when we receive them all the way back to where they are the where they started manufacturing to make sure that there is high quality at all levels of the supply chain. And this is not easy. So of course, we're using a lot of resources, experts to assist us also with inspections to these suppliers so that we see that they're meeting our targets. So we will also focus on the life cycle of our products, making sure that once they're installed, I mean, from the beginning, manufactured, installation, operation and once they are sort of finished with their useful life, where do we get rid of them or how do we recycle them. This is also something that we are working extremely hard on. We will now move over into the numbers and I'm happy to introduce Mikael Torje who will share those numbers with us. Thank you. Thank you, Remind. So let me start then by going through the proportionate financials just briefly. And we report about SEK 1,000,000,000 of revenues in Q1 and an EBITDA of SEK 636,000,000 and cash flow to equity of SEK 571,000,000. If you look back at the last 12 months, we reported revenues of close to SEK 3,000,000,000 and EBITDA of SEK 1,600,000,000. If we go a bit further into this and look at the different segments, you can see that, as expected, power is the main and largest contributor to the revenues and EBITDA in the quarter and also over the last few quarters as Now also Essen Power has come into our portfolio. We've seen strong growth also despite currency headwinds. The NOK have strengthened against most currencies. And on the services side, we've seen stable performance, While D and C revenues continue to be fairly moderate with limited also gross margins, And the OpEx of this segment was about SEK 60,000,000 in the quarter. About onethree of this relates to the hydropower and hybrid solutions and the development of that. So that's an increase from last year In the Development and Construction segments. On the corporate side, we report a negative EBITDA of $25,000,000 That's a moderate increase also from last year. Also worth mentioning that in 2020, we had about SEK 100,000,000 of nonrecurring SM Power transaction cost in the corporate segment. Then moving into the Power Production segment. We report SEK 924,000,000 of revenues SEK 704,000,000 of EBITDA. The hydro assets added SEK 367,000,000 of revenues or sorry, of EBITDA, and that's, of course, representing most of the growth compared to last year. Remind also mentioned the strong performance on the Philippines. EBITDA here of SEK 243,000,000, up more than SEK 100,000,000 from last year in the Q1. So that's a significant growth and an important part of our portfolio. The solar assets delivered stable compared to year on year on the EBITDA side. And then we had a debt refinancing on the Philippines and released close to SEK 400,000,000 of cash. And this is part of a long term strategy of basically leveraging the assets there, and we expect to do so every 5 to 10 years based on the fact that we have long term assets with very long lifetimes. This is a slide I also presented on the Capital Markets Day, giving a bit more insight into the Power Production segments. On a pro form a basis, we reported EBITDA of SEK 2,700,000,000 from the power production portfolio last year, you can see we generated revenues from 13 countries. And after debt service, we generated SEK 1,100,000,000 of cash. Average contract duration, more than 18 years on this portfolio. Services, fairly stable business for us. Report revenues of SEK 56,000,000 and EBITDA of SEK 17,000,000 and the last 12 months, SEK 235,000,000 with an EBITDA of SEK 83,000,000. Then on the Development and Construction side, limited revenues and gross margins, as I mentioned. And also, as I explained on the Capital Markets Day, there is significant activity ongoing with focusing on the project development across all our regions and all technologies. And we are spending more now than before on this, obviously to address a very attractive market, a very strong market as we see these days. Now I've gone briefly through the proportionate financials. And we report this way because we believe it's a good presentation of the value creation across our business. But at the same time, we, of course, also report under IFRS the consolidated financials. And we see that to bridge the two angles is sometimes complicated. So I thought I could use the opportunity now to explain a bit how we bridge the movement from proportionate financials to consolidated P and L. Again, the proportion of financials is our report of revenues and EBITDA across the operating segments and it's also where we adjust for Skatek's ownership of the various power plants. Now under IFRS, there is really not possible to consolidate in that way. So you have 2 options. You either fully consolidate the plans you control Or your equity consolidates the plans that you do not control or the subsidiaries that you do not control. In our context, we fully consolidate most of our solar and wind assets, and we equity consolidate the hydropower assets and a couple of solar assets on one single line on the net income line in our P and L. And we also specify for each assets in our report which method we're using for each of the assets. So to move from proportionate to consolidated, we have to do some adjustments, and I will explain these now. The first adjustments that we do is to add back the revenues for the other owners of our assets for the fully consolidated power plants. Here, revenues of SEK 279,000,000. That is the revenues that is belonging to our core investors on those assets that are fully consolidated. The next step the next adjustment is really to then deduct the revenues for those power plants that are equity consolidated, here it's the revenues of SEK 511,000,000. And we then add back the net income from these same plants, SEK 138,000,000 is in this quarter on the 3rd line in the P and L here. Now under IFRS, we consolidated SM Power assets from the end of January when the control were transferred. But we actually took on the economic risk of the plants from the beginning of January. So that's why the proportionate financials also include revenues from for the full quarter, while the net income, the SEK 138,000,000 here is for the last 2 months of the quarter. And if we include the January net income, that was about 57,000,000 to get you to the full quarter results pro form a basis. And then the last adjustments is the eliminations that you may be familiar with, where we eliminated internal gross profit in the D and C segment And the internal revenues and OpEx for the Services and Corporate segments. And then lastly, we add back our adjusted depreciation charge for historic internal gains that are mostly related to the D and C segments. So this table we provide in each of our quarterly reports. We've done so for some time. Becomes slightly more complicated now with more equity consolidated assets into our portfolio. But I think it's worthwhile to have a look at this. And of course, we're happy to also spend time with whoever are interested to go deeper into this. So let me then continue with our financial position. We had total assets standing at SEK 33,600,000,000 at the end of Q1, up from SEK 26,700,000,000 at the end of last year. We have now close to SEK 10,000,000,000 of investments in JVs and associates. Obviously here again reflecting the hydro power plants that I just explained. And consolidated cash in the group stood at SEK 4 point SEK 8,000,000,000 proportionate cash at SEK 4,600,000,000 and the proportionate net debt now at SEK 13 point SEK 8,000,000,000 as we have more depth at the group level, also part of the funding of the acquisition of SM Power. When it comes to the movement of the group's free cash in the quarter, received SEK 723,000,000 of dividends and distributions from the operating power plants. We invested SEK 359,000,000 of equity mostly in the through the acquisition of the Damnai Wind Farm in the Philippines. We spent SEK 3,600,000,000 of cash to settle the acquisition of SM Power. We also acquired SEK 490,000,000 of cash from those entities. So SEK 2,900,000,000 of cash at the group level at the end of the quarter. Now I also thought we should reiterate our guidance on returns and margins from the Capital Markets Day. We are expecting an average equity IRR on our investments of 12% to 16% on the power production side, and we expect a 10% to 12% gross margin on the development and construction side of our important to reiterate. And then on the funding of the 15 gigawatt business plan, the SEK 100,000,000,000 of CapEx. We expect 60% to 70% leverage on the SEK 100,000,000,000 CapEx based on long term contracts, project finance. Then SEK 15,000,000,000 to SEK 20,000,000,000 of this will be Skatek's equity investments based on an ownership are 50% to 60%. And the funding of this equity is mostly coming through the cash flow that we generate from the operating assets, but also from the development and construction of the same new plants as we have done also historically. And then we have SEK 4,500,000,000 of cash and credit lines available. So there's a limited number, dollars 1,000,000,000 to $4,000,000,000 we estimate of other funding that needs to common place. And we have several sources to fund that, either through more depth at the corporate level, tweaking the business model or the model in terms of ownership stakes, asset sale and so on. So that's not a big concern as we see it. And then on the 2021 guidance, power production here, 2nd quarter, 8.15 to 8 5 gigawatt hours. For the full year, 3.5 to 3,700 gigawatt hours. And then also just to highlight on the development construction side now. With the new construction contracts we have related to Pakistan. We have an unbooked contract value of close to NOK 500,000,000. And of course, this will grow as we move more products into construction. Services and Corporate guidance here is in line with what we have already shared with you on the Capital Markets Day. So, Remon, back to you. Thank you, Mikael. We have been extremely busy. And as Mikael said, we are extremely busy now also developing projects in addition to operating them. You can see here the bridge from where we are today towards where we're going to be in 2025. And right now, we have in the construction and in operation 2.1 gigawatts from the old Skatek side plus the new hydropower business in operation 1.4, so it's 3.5. Now we have said that we're going to add to the 2.1, another 2.4 gigawatts towards the end of the year, bringing it up to 4.5 plus the 1.4. So by the end of the year, the plan is to have 5.9 gigawatt in operation or under construction. And then we will add another 9.1 gigawatt to bring us to 15. So this is going to be very interesting for us because we will then of course use the market knowledge, the pipeline that we have, the partners that we base our expansion on. And if you take a look at the next slide, you will then see our Renewable Universe, where are all these opportunities going to come from. You know that we're working on some floating solar projects up there on the reservoir, by the way, offshore wind, onshore wind, batteries, and they will, as you may see it, sometimes come together in hybrid systems. So as you can see, I mean, we will be thinking, of course, about the technologies, but also about providing the customer a system with different technologies, providing stable energy, stable electricity. So the 12 gigawatt pipeline that we have at the moment is of course a snapshot of our pipeline at the moment, because as we move in to the rest of the year, to 2022, 2023 and 2024, this pipeline will continue to evolve. But if you just look at the snapshot, this pipeline as it stands today, you will see on the left hand side that it will contain all the different technologies that we represent at the moment. Solar will at the moment be the most dominant one with 42%. We have some very interesting wind opportunities, both onshore and offshore that we're working on. Hydro, lot of interesting opportunities there too. I'll revert a bit to one opportunity that is very interesting on a later slide. The release concept, although the percentage is small, it's also it will have a big impact. This concept will have shorter contract terms or contract period. So all in all, we are actively pursuing opportunities in all these segments that we have been sharing with you. And we are extremely optimistic about the future. You can see the opportunities or the pipeline spread out on the map here, the largest being Africa. And by the way, we are the largest operator of solar plants in Africa with more than 1,000 megawatts in operation. So and of course, Asia, Southeast Asia, Europe, Central Europe and Central South Asia is going to continue to offer us a lot of opportunities going forward. Brazil, also a very interesting market for us. Now just take a look at this release concept. The release concept was developed to entertain market opportunities where the customers couldn't enter into long term contracts, meaning 15, 20, 25 years. So this is a lease concept where we take the opportunity to present to the customers a contractual structure that allows them to extend the contracts beyond 5 years, 10 years, making it flexible. We entered into first substantial contract a bit earlier in the year, 8.5 Megawatts and the customer is Torex Gold. Here the initial contract is 10 years, which is pretty good. I mean it doesn't have to be 10 years. It could be 5, 3 or whatever. We have about 300 megawatts in the pipeline, the release pipeline that we're working on. So very hopeful that this will be an important part of our business going forward. Now dwelling a bit on the hydropower. This is the first time Q1 after actually reporting on the Hydro Power performance. And you've seen that we have enjoyed very high production from part of our business, particularly in the Philippines. Now if you dive a bit deeper into hydropower, you will see that there are some projects that are in operation that have the opportunity to be upgraded to perform better. You can increase the performance by 10%, 15%, 20%, 30% sometimes. Now and then you can combine that maybe somewhere with greenfield opportunities. Greenfield meaning that there are plants that are new from the beginning. You start sort of with a lawn and then you build a power plant, so that's why it's greenfield. And then you have a combination of several technologies. And then moving over to the right on this slide, we are working on one particular opportunity in Africa, extremely interesting. That it's a plant operating with 2 60 megawatts. That's the existing, that's the brownfield part of it. And then you can add another 220 megawatts to it as a greenfield. And then, I guess what, these projects lean themselves to floating solar as well. If you combine all of these, you have a hybrid plant with old new hydro power and new solar power. So it's extremely interesting. And if you look at sort of the effects on the sort of the power price, we will be able to actually reduce the overall footprint of these plants and also provide a lower cost to the customer. So very interesting. And of course, to do that, you need hydropower competence that we have with our new colleagues from Essen Power, really understanding how to design a hydropower plant, that is not straightforward. Of course, it's a lot of civil engineering. You have to know what you're doing, but of course that experience we have now with SM Power. So this is my final slide. And we are very optimistic about the future like everybody else. We think that the future is going to come quicker towards us in terms of capacities than what we see here. And also if you look at the market projections presented by Bloomberg and others, the volumes are huge. But of course, the business propositions are going to change. You will have more combination of technologies. That's why we moved into hydropower, wind, batteries. I mean, we're pursuing big projects as we speak. So our goals then for the next 4 to 5 years is to invest a NOK100 1,000,000,000 resulting in 15 gigawatts of 15,000 megawatts in the construction operation in 4 years' time. We have a growing team. We have a very good team. We have a track record. We have a lot of people really wanting to join us, not only in Norway, but around the world. And as Mikael has shared with you, the cash flow that the company is generating at the moment actually almost closest the gap on what we need to actually come up with in terms of equity to deliver on the 15 gigawatts. And as always, environmental and social governance will be at the center of everything we do. And if you look at the people that work with us, almost 10% of our people are engaged at all levels within the ESG. We're now ready for questions and thank you for listening in. Okay. Then we can start with Eivind Galvik from Carnegie. What is the main reason to the EBITDA beat from power production? I can answer that. The main sort of reason is the performance on the Philippines. That is the asset where we have power sold into the wholesale market and the ancillary service market and where both hydrology and power prices is impacting performance. And hydrology has It's been very favorable in the quarter, and also power prices have been better than before and especially compared to last year. So that is the main reason for that beat. And then Andreas Bertheusen from Kepler Cheuvreux. He has And related to this, if you can comment on the assets in Philippines, Uganda and Laos, how they have performed in the quarter compared with normal or expected run rates. Yes. So in Uganda, there is basically capacity payments, meaning that we get paid for having the plant available for the offtaker. So that's a fixed payment every month, every quarter. So that's not really impacted by volatility, if you like. In Laos, there's a certain flexibility on the offtaker on when to take volumes during a year. So that's been somewhat weaker in the quarter than we would normally expect. But then on the Philippines, I think we've seen, at least from a production and hydraulic perspective, a very good quarter. But Obviously, I think we can also see power prices historically being even higher than what we see now. So that's, of course, a bit of uncertainty also there. And then Janard Leysen from ABG. Would it be possible to elaborate a little bit on the possible timing of contract awards for the projects That you mentioned on Slide 6, the 6 projects slide. I mean it's only 9 plus months left the year, so it sort of gives itself. We for South Africa, we have provided the authorities with all the answers that they've requested. So we're done with our job. It's a processing time there. So how long Jotarcio would take to review and come back with their decision, we don't really know, but we're hopeful it's going to happen soon. In India, we have been negotiating the contract now contracts because it's a fairly complicated project with EPC contracts, with shareholder agreements, with land agreements, with a lot of things. And it's fair to say that I mean, just to let you know, I mean, the Chief negotiated on the other side of the table that we negotiated with actually had corona. So he was out for 2 to 3 weeks. So we've had a slight delay there, but we're slowly closing in on date of signing, we hope. And I don't really want to give a specific date for that, but we're working hard on it. Indonesia, we have signed we have negotiated and signed the fine documents, of course, we were awarded the project a year and a half ago or something like that. But there we have also signed the documents, so that's progressing. And also on the big project with Hydro and Equinor, those documents are also being negotiated among the parties and progressing, but I don't really want to give any timing. But there's still they are on the completion list, a list projects to complete it and move into construction by the end of the year. I also like to say and repeat what I said previously, there are other projects as well that are not on this sort of slide with 6 projects that could be candidates, but let us concentrate on those 6 projects first. And then question from Jurgen Biraset in Nordea. Can you elaborate on the situation in Ukraine regarding the covenant breach? Yes. So we have reported today of a covenant breach at the end of the quarter, and that is related to the situation we've seen for some time unfortunately in Ukraine, where basically the utility have been behind on payments. It's been it has improved over the last 6 months, but there's also a discussion On the long term financing for Ukraine portfolio given the situation. And basically, we are in a very good dialogue with the banks on this. So we are expecting to find good long term solutions with our financing partners. But at the end of the quarter, we were basically reaching a couple of covenants. And then we are basically discussing a long term viable debt level for these projects. And another one from Jurgen Nordea. Can we expect to see further refinancing gains like in the Philippines going forward? Is there any color you can put on refinancing potential in the portfolio? Yes. I mean it's Something we have touched upon historically as well over the last few years. It's been we've been a bit reluctant to share updates on that process with you because we want to make sure it's happening. But we are in dialogue on at least in one market on this. The structure is slightly different where you have where you sell power in a power market and you have a perpetual license like you have in the Philippines compared to a situation where you have a 20 year PPA. So the potential is not the same, I would say, on a per megawatt basis for those PPA refinancing opportunities compared to what we saw on Hydro, just to be clear on that. And then there's a follow-up from ABG on Tunisia, why this project is dragging out in time? I mean, they changed government. It's very simple. So you have the new civil servants that they've been negotiating with. But as I said, that belongs to the past. That was last year. We are now efficiently moving ahead in Tunisia. So there's nothing holding us back right now. Is more like optimizing the project execution schedule. But we have a very active team on the ground in Tunisia, very good people and moving well ahead on the project. And then another from ABG. Were there any one off items in the quarter that we should be aware of? No. I would, of course, just to reiterate this refinancing proceeds on the cash side, which affected the cash flow to equity that we reported, and I think that's well explained in the report. But when it comes to the P and L as such, it's there's no one offs. Then there's a question on release. How much do you expect release will contribute with in the coming years? Well, I mean, we're not really giving out the numbers, but this was 8.5 megawatts, we are working on we have a project list with product names, customers of 300 megawatts. So we believe it's going to be substantial. We are extremely optimistic about this. We see there is I mean the mining industry is now back on. I mean powered by battery needs, precious metals, different type of ingredients that you have to put to the batteries and it's moving up very quickly and prices are also helping this. And we see now after the corona has sort of level off and are on its way down that some of these mining companies are really interested in. And what's interesting is that it's not like only saving the environment. That is good, but they're also saving a lot of money. And in the release concept, it's a flexible contract structure that they like. So we were very, very optimistic about the future. I don't want to add anything, Mikael. Yes. Maybe just saying that We see that the prices we can achieve on some of these concepts are obviously higher than what we see on 2025 year contracts. So that's just important to keep in mind. And then on the financing of it, at least the first projects will be equity financed. So the capital deployed on these projects will be much higher Per megawatt than what traditional power plants, utility scale plants will be. So the cash flow generated per megawatt will, of course also be much higher. So from that perspective, you cannot compare release megawatts with utility scale megawatts in our portfolio. That's Good to keep in mind. Very important point. Then a question from Anders Rosenblin, SEB. Congratulations on the great report. Could you repeat your comments on the €1,000,000,000 to €4,000,000,000 equity gap towards 2025? And should we expect the gap to be even higher for periods of time affected by construction or phasing, Etcetera. Well, I think the main message is that we are in a really good position when it comes to funding this business plan. And we have a lot of flexibility in how we structure ourselves. I would say that the numbers we presented in terms of both capital structure and funding is relatively conservative here. And obviously, if we invest and have a lot of volume happening at the same time or investments happening at the same time That may have a constraint on the funding side, but there's also solutions available for that. So I think we also see at the group level strong support from our banks. Also in the bond market that we were active in now in the Q1, we saw very good response. And It's a number of instruments available to us to handle that. So We are not very concerned with that funding. And then from ABG, I noticed you changed the Power production profitability target from 12% to 16% return on equity to 12% to 16% equity IRR. Could you please comment on that? Yes. We had some feedback on this after the Capital Markets update. And I mean, we have had no intention of changing the definition of our return guidance on projects. And we wanted to clarify that we continue to guide on average equity return on the projects As we have done in the past. So there's just to clarify that, there's no change to our guidance or definition of guidance on when it comes to investments and returns. And then a follow-up on the Brazil contracts. Is price an important subject in these negotiations? And do you expect to be able to generate 12% to 16% IRR on projects in Brazil? I mean price is always important for everybody. Of course, Hydro is both a buyer and a provider along with Equinor and us. So I don't really want to go into detail about profitability. I mean that wouldn't be appropriate, I think. But it follows sort of our policies. So I'll rather return to that later. I don't know if you want to add anything, Mikael? No, I think it's again within our guidance. That being said, the 12% to 16% guiding is, of course, Across the portfolio, across different currencies and technologies. So there will be depending on the currency, location, technology, different levels of returns. But of course, I'm not commenting specific on this opportunity. Okay. I Ingrid is telling us that, that was the last question. More question this time, I'm happy about that. So hopefully, we will beat the record number of questions when we see each other in July. So on behalf of Mikkel and myself, thank you very much. See you next time. Thank you.