Solaria Energia y Medio Ambiente SA

MAD:SLR

Earnings Call Analysis

Solaria Q1: Increased Generation, Strategic Shifts, and Future Plans

Solaria reported a 22% increase in generation and a 6% rise in sales for Q1, reaching a record EBITDA of EUR 41 million. The company focused on strategic asset sales and reducing merchant exposure by 50% by year-end. They highlighted the purchase of low-cost models and expected PPA prices around EUR 40-megawatt hour. Solaria is also expanding into data centers, leveraging their infrastructure for AI-driven projects. They secured permits for 155 megawatts in new data centers and expect to reduce the operation’s risk. The company confirmed 1.7 gigawatts in operation and 1.4 gigawatts under construction, all fully financed.

Growth Amidst Challenges

In the first quarter of 2024, Solaria has demonstrated remarkable resilience by achieving a 22% increase in energy generation, totaling over 400 gigawatt-hours. This increase comes despite prevailing low price scenarios, where the company's revenue rose by 9%, indicating not only growth but also effective management of their operations. They reported a record EBITDA of EUR 41 million, showcasing strong profitability even amid market pressures.

Strategic Growth Through Asset Rotation

The company is actively engaged in a pipeline rotation strategy, selling off certain non-core assets to optimize its portfolio. In particular, Solaria has sold a 40% stake in a project totaling 500 megawatts, generating around EUR 13 million in income. This strategy serves to streamline operations and focus on high-potential projects, enabling further investments and development. A notable part of this strategy includes a plan to reduce merchant exposure by 50% by year-end.

Positive Outlook on Power Purchase Agreements

Solaria is pursuing attractive Power Purchase Agreements (PPAs), with current negotiations for a significant package of 400 megawatts. The anticipated pricing for these PPAs is approximately EUR 40 per megawatt-hour, which aligns well with maintaining a targeted Internal Rate of Return (IRR) of 12%. Such agreements will further enhance revenue stability and mitigate exposure to volatile energy prices.

Optimizing CapEx for Future Projects

Capital expenditures were a focal point during this quarter. Solaria successfully closed the purchase of 435 megawatts at a remarkably low price of EUR 0.0911 million per megawatt. This achievement underlines their commitment to efficiency and cost management, setting the foundation for future project development. Additionally, the company's ability to secure financing for 1.5 gigawatts currently under construction is a positive sign of its financial health and operational capability.

Emerging Focus on Data Centers and AI

Another strategic initiative discussed involved expanding into the data center and artificial intelligence (AI) markets. Solaria has already secured grid access and connection permits for 155 megawatts in new data centers. This sector is projected to require substantial power, and the company's existing infrastructure positions it well to capture this emerging demand, further diversifying its business model.

Navigating Regulatory Challenges

While Solaria is poised for growth, it faces regulatory challenges that could impact project timelines. The authorities have delayed permit approvals significantly, which has caused some projects to lag behind schedule. However, they are actively working to obtain these permits, and progress has been made with new permits recently received for an additional 1.2 gigawatts of capacity.

Looking Ahead: Expectations and Market Position

For the remainder of 2024, Solaria aims to maintain growth momentum while navigating market fluctuations. The management expressed confidence in meeting consensus expectations for EBITDA despite potential hurdles. Overall, the company's focus on leveraging its strengths in project development, optimizing financial performance, and entering new markets bodes well for its position in the renewable energy sector.

Earnings Call Transcript 2024-Q1

[David Guengant, executive]

Good afternoon, everyone, and welcome to

Solaria 2024 First Quarter Results Webcast. My name is David Guengant, the Head of IR of Solaria. I am joined today by Dario Lopez, our Chief Operating Officer; and [indiscernible], our Chief of Development. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectation as of today. During this presentation, we'll begin with an overview of the results and the main development during the period given by our CEO, Dario Lopez. And following this, we'll move on the Q&A session. [Operator Instructions] So thank you very much again. And I will now [indiscernible] to Dario.

[Dario Lopez Clemente, executive]

Thank you, David, and thank you, everyone, for joining this conference call. Starting with the results of the main highlights of the Q1, we would like first to express our main message of this presentation that we are able to keep delivering growth and profitability even in a low-price scenario. In this case, as you will see, we have increased the generation 22%. We have increased the sales of the company, 6%, and we have reached an EBITDA of EUR 41 million, which is our record.

At the same time, we keep having more and more visibility on the portfolio of new permits. You will see also that we have started a program of pipeline rotation with the sale of some assets. And at the same time, we continue the work to reduce our [indiscernible] exposure by 50% before the end of this year. Also very important, [indiscernible] will explain with me the new steps we are taking into the data center and artificial intelligence business. Regarding the highlights of this quarter. First, we would like also to talk a little bit about the CapEx. We have been able to close models, the price of the models at a record low price.

We announced last May that we closed the purchase of 435-megawatt models at 0.0911 million per megawatt, which is up an absolute record of all times. At the same time, we continue working on the PPA market. We see prices in the range of the 40s and this allows us to maintain our 12% IRR return target.

Entering into results of Q1. As you will see, we have increased the generation of our assets above 400 gigawatts hour, which means a 22% compared with the Q1 of last year. And at the same time, we have increased the sales of the projects of more than EUR 40 million. This year, we have around EUR 24 million of energy and EUR 60 million of infra. You will see that even in a very low prices of scenario, we have been able to provide good results.

In terms of revenues, you will see we have an increase of 9% and EBITDA [indiscernible]. In terms of the pilot development, we -- as you will see, we have around 1.7 gigawatts fully operational. We are -- we continue working on the construction of 1.4 gigawatts that we have for all of them with the financing secured, which is also very important to highlight. And regarding the next project, we have another 1.2 gigawatts additional where we are able -- we have obtained -- we have received in the last days, new permits, for example, in the case of [indiscernible], 175 megawatts [indiscernible], the AAC, which provides us more visibility for this. Regarding the remaining portfolio, we continue the development on the whole portfolio with the projects of Basque Country, Catalonia and Portugal.

Very importantly, the projects that we have in Italy, where we have a portfolio of almost 3 gigawatts and as you will see, we are following the same strategy in terms of flagships. This is very important to highlight because, as you know, with the recent developments of the Italian government, they are also focusing on very large projects, which seems that our strategy is correct in these places.

I would also like to highlight the wind situation where we have already installed our [indiscernible] the advances in this business. In terms of the cash situation, here, you will see that we have continued the investment process with another EUR 45 million of investment. And what is very important to highlight here in this slide is that it does not include the proceeds of the infra business and pipeline rotation, which means that we -- it's a significant additional revenue of around EUR 20 million that we have received in May.

Pilot rotation. As you know, we have been working on the sale of minority stake -- strategic portfolio in the past, especially for the Basque Country projects where we already sold a 25% stake of a package of 100 megawatts. We are working, as we announced some time ago on the sale of a package of between 25% and 50% stake of another 500 megawatts in the Basque country. This is something that we have already announced that is very well known.

And at the same time, what is new, it has given our capacity to generate new pipeline, we have taken advantage of this capacity to sell some of these assets or some of these pilot that we consider not strategic. In this case, we have identified 500 megawatts of projects, as we say, nonstrategic, where we are selling between 50% and 100% stake projects located in Spain and Portugal. And all of them, [indiscernible] at a very early stage of development, which means it has not, of course, reached [indiscernible].

For this portfolio, we can confirm that we have closed the sale of 40% of it. And this means that we have been able to include in our results around 30 percent million -- sorry, EUR 30 million -- sorry, EUR 13 million of income. And finally, very important, the part of the PPAs, we are working on the reduction of our merchant exposure. Our objective is to reduce it by 50% before the end of this year. In order to do that, we are working with different utilities. We are negotiating very similar PPAs to the ones we have negotiated in the past. As you can see here, all of the [indiscernible] profile for a portfolio of around 400 megawatts, all of them for assets already in operation. And as we have said before, the places we see it's around EUR 40-megawatt hour.

I will now hand over the word to [indiscernible].

[Unknown Executive]

Thank you, Dario. Well, as we have recently informed Solaria [indiscernible] in data centers market. Considering our current context, and the difficulties to ensure the grid access for consumption, we plan to use our own infrastructure portfolio as high-voltage lines, substations, communications with backbone fiber optics and so on and the power of our green installations to accelerate and boost digital facilities and data centers. As all of you know, artificial intelligence in data centers is going to require large amounts of power and associated energy. For this reason, we have incorporated a specific company in the group for this strategy. And we are firmly committed to do it and jointly with our [indiscernible] in order to develop our new project portfolio in this sense. In this route, grid access and connection permits for energy consumption have been already granted to Solaria for a total amount of 155 megawatts in new data centers.

Also, we are managing additional portfolio, additional pipeline that, for the moment, is [indiscernible] additional gigawatt Additionally, we are [indiscernible] contact and also keeping conversations with the main players in the industry as hyperscalers and working with all of them in the possibility of a global agreement for this new strategy. We consider that Solaria is going to be a key player, considering our infrastructure portfolio that includes solar and also hybridization, including wind, batteries, power and communications that will allow Solaria to develop iconic clusters for that [indiscernible] including these new infrastructures as data centers. And regarding all of this, I take the opportunity to inform about our strategic update in energy and digital transition that will take place in September. I will now hand over the word to David.

[David Guengant, executive]

Thank you, [indiscernible]. I will now open for a Q&A session. And once again, thank you for your time.

The first question [indiscernible] from JB Capital. First question is how much asset rotation gains were booked in the first quarter 2024 and what are our expectation for asset rotation gain in 2024?

[Dario Lopez Clemente, executive]

In terms of the asset rotation books, we are around EUR 30 million and net around EUR 11.5 million. And in terms of the rotation, I mean we will continue with the process. I mean we do know we have suffered low prices in the market, but we have been able to compensate to provide good results using a capacity that we had that is to generate pipeline. That is something that we haven't done in the past and that we are able to do now. We feel comfortable with the situation. We feel comfortable with the results and also with the consensus of the market.

[David Guengant, executive]

Second question coming from Fernando Garcia from RBC. Can we clarify a split note in the sales from sales and infra sales? Can we give the split? And second question is that the personal expenses and OpEx is a good figure for the following quarters or if we expect some increase in personnel expenses and OpEx?

[Dario Lopez Clemente, executive]

Well, in terms of the sales, we have said before in terms of energy, is around EUR 24 million. And in terms of infra, it's around EUR 16 million, of which EUR 13 million belongs to this pipeline rotation process. In terms of the OpEx, we -- you know that first, we have suffered the impact of the generation tax. That is something new that we did not have in the past in the last quarter. And yes, I mean, this is a reasonable number, and we are not expecting any relevant increase in the OpEx.

[David Guengant, executive]

Next question is coming from Enrico Bartoli from Mediobanca. How much capacity was fully sold? And how much of this capacity -- sorry, is where only minority stake have been disposed. So how much capacity has been fully sold, or if there is minority in this context?

[Dario Lopez Clemente, executive]

In this case, it's a full sale, it's -- there are no minority stakes in this case. So this is a 100% sale of the -- 40% of 500, 100% sale.

[David Guengant, executive]

And next question is also from Enrico. Which could be the timing for [indiscernible] total 500-megawatt disposal?

[Dario Lopez Clemente, executive]

I mean it's difficult to say, but I mean, we are working on the process. I mean, you know it's [indiscernible] sale process are complicated and takes time, the due diligence and everything. So we prefer not to give accurate dates.

[David Guengant, executive]

Next question coming from [indiscernible]. If we can give some color regarding the EBITDA for this year if we are comfortable with this consensus expectation for 2024?

[Dario Lopez Clemente, executive]

Yes. I mean, as we have said before, this is Q1. Even in this very complicated scenario with low prices, we have been able to reach [indiscernible] the objective we have for this quarter. And I will say this is a step by step. We will keep on working to be in the consensus.

[David Guengant, executive]

Next question is coming from [indiscernible]. Have we changed our strategy to maintain a level of 70% secured and 30% merchant capacity?

[Dario Lopez Clemente, executive]

Yes. As you will see, I mean, there is not a significant change that we are going to have everything PPA, but you will see our objective is to reduce a little bit our merchant exposure, and we say our objective is to be around 20% by the end of this year.

[David Guengant, executive]

Next question is coming from a few analysts also. Do we expect to connect to the grid some asset in 2024?

[Dario Lopez Clemente, executive]

We are working on it. As you know, this does not depend only on Solaria, we also depend on the development of the grid that is something that we all suffer and also we depend on the permits. The authorities that usually take a long time. And we always say it's not only that you finish the project, you need between 1 and now even more than 4 months to get the [indiscernible] connected once it is finished.

[David Guengant, executive]

Next question is coming from Manuel Palomo from BNP Paribas. Can we please give some additional detail about the asset sale up to 500-megawatt of non-core pipeline, what type of project are we talking about, who is a buyer, industrial, financial utilities?

[Dario Lopez Clemente, executive]

Well, I mean, we cannot disclose the name of the buyer at this moment. What we can say that this -- as we have explained before, we have a huge capacity to generate a pipeline. It's something that we have proven before especially quality pipeline, the pipeline that is possible to execute. Well, we have taken advantage of this capacity to leverage our results, okay? In this case, what we are also selling our projects in a very early stage of development, good quality projects, but in an early stage, so it's not affecting at all our expansion plans. So -- and this is what we can tell, okay?

[David Guengant, executive]

Next question coming from [indiscernible]. For new capacity in 2025, 1 gigawatt, at what stage the financing is? Would the bank require PPA in advance and a capacity addition in 2024, 2025, 2026?

[Dario Lopez Clemente, executive]

Okay. In terms of the financing, we are -- I mean, we prefer to start receiving the permits. We have suffered in the past, the delays from the government, they postponed 6 months [indiscernible] the permits from January to July. Well, it's -- we prefer to see the permits before going into the -- in the financing stage. The good news is that we have already received some of these permits, and we are receiving, hopefully, in the next weeks, the remaining permits. And from that moment on, we will start with the financing process. The financing process as you know, we have aligned with the European Investment Bank that covers 50% of our financing needs, including all these projects. And of course, this financing line does not require a PPA. Another point is that we will start negotiating and everything, but we do not need a PPA to finance these additional projects.

[David Guengant, executive]

In any case, just to be clear, all the capacity that is today under construction is already financed, okay? We have 1.7 gigawatts in operation, 1.5 under construction and all these capacities already fully financed. Next question are coming from some analyst regarding PPA. If we can give some more detail on what we are doing or what we want to do this year regarding PPA and duration of the PPA and price of the PPA we are seeing today in the market.

[Dario Lopez Clemente, executive]

Yes. In terms of the PPA, you know we have significant experience in this market. We are very well known between the off-takers, especially the large ones, we are negotiating with them especially a large package of projects, which are projects already fully operational with no construction or connection risk. It's a package of 400 megawatts. The PPA we are negotiating for them [indiscernible] PPA. In some cases, we are working on a solar profile. In other cases, [indiscernible]. Well, the prices we see are around EUR 40-megawatt hour.

The idea is to close in the next -- in the following weeks.

[David Guengant, executive]

We have some -- also some questions from a few analysts regarding the data centers. On data center new offering, do we target network operator [indiscernible] hyperscalers, don't we think we have the balance or not. We can make some comment on that.

[Dario Lopez Clemente, executive]

Well, as we said, we are working on deploying this new portfolio. We are evaluating different possibilities. And we are trying to focus in hyperscaler type in order to optimize the high volume or high power kind of project in this case.

[David Guengant, executive]

Okay. So maybe a last question. Can we give maybe some more color about the capacity that is under construction and the time of the connection, and if we will get EBITDA in 2025 from this 1.5 gigawatts that are today under construction.

[Dario Lopez Clemente, executive]

Well, of the projects we have here, in some cases, we have very advanced status of construction [indiscernible] all these examples, these projects, they already have completed most of the connection world. We have completed service station. We have made a huge effort for the connection. But as I say, this does not depend only on us. I mean it depends also in [indiscernible] that you have to be able to develop the projects. They also need permits from the ministry, which has not been providing permits in the last months, so it has been taking a little bit longer than expected, not only for Solaria but also for [indiscernible]. Well, of course, we are trying to be able to provide some EBITDA -- to get some EBITDA of these projects this year, working on it.

[David Guengant, executive]

So I think we are done for today's call. So thank you. Thank you very much, and I'll let Dario just close this call.

[Dario Lopez Clemente, executive]

Thank you very much for being part of this conference call. As always, our Investor Relations team will be available for any additional information you may require. Thank you. Have a great afternoon.