Soltec Power Holdings SA
MAD:SOL

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MAD:SOL
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Price: 1.598 EUR Market Closed
Market Cap: 145.3m EUR
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Earnings Call Analysis

Summary
Q3-2023

Soltec Reports Strong Q3 Recovery and Positive Outlook

Soltec witnessed a Q3 2023 rebound with consolidated revenues of EUR 304.1 million and a positive EBITDA of EUR 0.6 million, uplifted by the Industrial division with an 8.6% EBITDA margin. The division's backlog hit EUR 329 million, and pipeline soared to EUR 16.9 billion, showing confidence in meeting the year's guidance. Supply chain issues have receded, and raw material costs are declining, boosting project IRRs despite higher financing costs. Soltec's Development division sold 433 megawatts by September-end, with new construction authorized for co-developed projects, including a 200 megawatt agreement with TotalEnergies. Innovative financing was achieved for Soltec Acids with bank and community funds. Soltec's asset strategy involves hedging with power purchase agreements (PPAs) to stabilize revenues. The Industrial division's positive trends, geographical expansions, and a strong Q4 outlook on revenues and margins underscore Soltec's robust financial health, projecting adherence to their commitments.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
M
Meritxell Perez Castro-Acuna
executive

Good morning, ladies and gentlemen, and welcome to the Soltec Power Holdings 9 Month 2023 Conference Call. As always, all documents were released on our website today before market opening. My name is Meritxell Perez, Head of Investor Relations, and I'm here with Jose Jimenez. Jose will take you through the key developments of the year and review the financial information. After that, we will have a Q&A session. Please Jose, go ahead.

J
Jose Francisco Jimenez
executive

Thank you very much, Meritxell, and good morning, everyone. Trading update we're sharing today takes place just a few weeks after the release of our H1 2023 financial results. And therefore, the main trends related to the evolution of our businesses have already been anticipated.

On Slide 4, you can see how we have experienced an improvement in the business during Q3 2023 with a clear recovery in our Industrial division. Consolidated revenues reached EUR 304.1 million with a positive EBITDA of EUR 0.6 million, driven by an EBITDA margin of positive 8.6% in the Industrial division. If you look at the operational figures in our Industrial division, there are good news and better visibility. Our backlog as of September 30, which represents contracts signed but not yet executed, was EUR 329 million, and our pipeline stood at EUR 16.9 billion.

Based on the visibility we currently have, we are on track to deliver on our commitments. It is true that this year has been particularly seasonal, very back loaded. But as we have said several times, we believe we will be able to deliver our guidance. The business environment has improved during 2023.

Supply chain is no longer an issue. The prices of logistics and raw materials continued the downward trend, and there is good availability of solar panels in the regions where we operate. The late release of the IRA guidelines, together with the administrative milestone, Spain have delayed the rate-to-bill status, some projects in Spain and the U.S.A. But despite the current environment, we're not seeing significant delays in the execution of our backlog, at least compared to our estimates.

Although the increase in financing costs is a reality, it is not a concern when looking at the internal rate of returns of projects due to the decreasing CapEx of the projects with prices on materials going down, panels, trackers, et cetera. Looking at the Development division, I would like to point out that we have rotated -- we have sold 433 megawatts until the end of September 2023. And we have recently received a new construction authorization for 200 megawatts in Spain for a project co-developed with TotalEnergies.

Regarding Soltec Acids, we're proud to announce that we have reached out an agreement with Triodos Bank for their financing of 5.6 megawatts in Spain. It amounts to EUR 3.6 million, together with EUR 550,000 from local communities. It's a very unique agreement combining long-term senior debt with financing coming from local communities. And we expect to replicate it in other projects in the near future. This financing agreement, which by the way, has been closed at a very competitive cost, shows that our IPP business and our capabilities are already in reality while looking at differential financing agreements.

On Slide 6, we can see that we supplied 1.6 gigawatts of solar trackers in the first 9 months of 2023. We have a very good and strategic geographical diversification with our 3 divisions, which, as you know, generates key business intelligence for the company and a good number of synergies between them. We currently have 2 production facilities in Morse, Spain, and also in Salvador in Brazil, and another one will be built in Teruel, Spain, thanks to our cooperation agreement signed with Enel Green Power.

As a reminder, this agreement also includes the supply of trackers for more than 1 gigawatt of projects. We have also 4 logistics centers, one in Murcia, Spain; another one in Texas, in the United States; one in Salvador in Brazil; and another one in Antofagasta in Chile. As announced in Q2 2023, we continue to strengthen our competitive position in the United States, and we're seeing good volumes coming from that particular region that improve our positioning in that market.

In addition, as we already explained, we have new master supply agreements with key suppliers to secure the supply chains in the region and improve our competitiveness even further.

On Slide 7, you can see the good evolution of our tracker supply contracts signed during the year. We are seeing strong volumes coming from all the regions. Also in the first 14 days of November, we have also signed 720 megawatts. This is a clear reflection of the good evolution of the business. As a reminder, contracts we signed go straight to the backlog and usually start executed shortly thereafter. Therefore, we expect a significant level of revenue recognition related to these contracts will be registered over the coming weeks, right before the end of the year.

As you can see on Slide 8, the backlog of the Industrial division has been growing throughout the year and reached EUR 329 million at the end of September. In addition, we have signed new contracts worth EUR 117 million in October and November, and we have more than 1.5 gigawatts under negotiation. We continue to grow our international business and gain traction in new regions. A couple of examples can be seen with the new regions we're including in our pipeline.

The pipeline, by the way, which reflects contracts that have not been yet signed, but have a certain probability of success, reached EUR 16.9 billion in September, reflecting strong demand for our products globally. As you can see on Slide 10, our platform of assets under development is mature, diversified and balanced. We are proud to have built quality platform, 14 gigawatts in key solar markets in record time.

It is also particularly important to highlight the relevance of our co-development partnerships with market leaders. Soltec, under those agreements, will remain as a developer of the project, ensuring that the portfolio continues to progress towards ready-to-build status. The industrial know-how is including the agreement to take advantage of our vertical integration. Over the last months, we have obtained environmental and administrative permits for over 500 megawatts in Spain. And we have recently received construction authorization for 200 megawatts in Spain, which will start construction in early 2024.

On Slide 12, we can see how we continue to progress towards achieving our 2025 goal for our Asset Management division and therefore, increasing our IPP business. So September, we already have 303 megawatts under Soltec assets, 230 megawatts in operation, 25 megawatts under construction and a further 48 megawatts that have been transferred to the division from Soltec Development and will start construction in the coming months. We aim to conclude PPAs for all of our projects.

Hedging against volatile merchant prices through PPAs is part of our strategy. We have closed 4 deals in Spain and Brazil, and this is what we should expect to see for the rest of the portfolio. We closed our agreements with investment-grade companies with a fixed price long term and in some cases, as in Brazil, indexed to inflation.

On Slide 17, you can have a brief summary of the first 9 months of 2023 consolidated financial results for Soltec Power Holdings. We are focused on 2 key metrics: revenues and adjusted EBITDA. Consolidated revenues reached EUR 304.1 million, and adjusted EBITDA at the end of the first 9 months of the year was positive EUR 0.6 million.

Before we go any further, I would like to remind you the consolidated adjusted EBITDA includes not only the EBITDA generated by various businesses, but also corporate expenses incurred by Soltec Power Holdings and the consolidation adjustments.

On Slide 18, we can see that revenues in our Industrial divisions reached EUR 116.1 million in the third quarter and EUR 291 million in the first 9 months of the year. Adjusted EBITDA for the Industrial division was positive EUR 10 million at the end of the third quarter and positive EUR 2.4 million at the end of September. The EBITDA margin was positive 8.6%. This is a clear change of the trend we've been seeing since the beginning of the year as we predicted in a recent call in September.

It is also worth noting that gross margins remain very strong, and our core business remains very healthy. Looking ahead, the fourth quarter is expected to be even stronger in terms of both revenues based on the backlog and pipeline we already have and in terms of margins, and we will be able to reach our commitments.

On the next slide, Slide 19, we have the key financial metrics for our project development business. We have a negative EBITDA of EUR 0.5 million in the third quarter. We also have a pipeline of 14 gigawatts under development, and we were able to rotate 432.5 megawatts during the quarter, both internally and to third parties. Also, we have M&A processes underway in geographies such as Italy, Spain and Colombia where, as you know, we have already announced a deal where we have transferred 130 megawatts in very early stage of development.

On Slide 20, we can see that revenues for Soltec assets at the end of the third quarter reached EUR 7.6 million, while adjusted EBITDA was EUR 5.5 million. As you know, in the first quarter of the year, we were able to rise up to EUR 100 million to fund the growth of the division. And yesterday, we announced a new financing agreement with Triodos Bank for 5.6 megawatts in Spain, and their very unique framework, combining senior debt with financing for local communities. As we have explained, our guidance is achievable.

To wrap things up, I would like to make several comments about the evolution of our businesses over the last quarter. We have seen a clear turning point during the third quarter in our Industrial division, which will be reinforced in the fourth quarter across all the divisions. Our visibility is good. Volumes are good in all the regions. We have secured unique financing agreements. Our IPP business has already reached 303 megawatts, of which 72 megawatts are codeveloped with TotalEnergies. It is already a reality that it is moving inexorably towards our 2025 targets.

We have rotated 433 megawatts in our Development division, and there will be more to come before the end of the year. 2023 is a very backloaded year, but good news are coming, and the Q3 results are a clear reflection of how the business is improving towards achieving our goals. Thank you.

M
Meritxell Perez Castro-Acuna
executive

Thank you very much, Jose. We can move now to the Q&A session. We've got the first set of questions coming from Ignacio Domenech from JB Capital. First one about the Industrial division. Which was the gross margin as of 9 months '23 in the Industrial division? Assuming this is largely in line with margins seen in the first half of the year, should we expect higher EBITDA margins in the fourth quarter? Could you give us a reference of margins for the fourth quarter 2023?

J
Jose Francisco Jimenez
executive

Okay. Thank you, Ignacio, for the question. Well, basically, gross margin for the first 9 months of the year, if we're talking about tracker supply, was over 20%. The gross margin, as you know, it's not something we typically provide to the market. But what we can tell you is that at the end of the year, EBITDA margin should be between 6% and 7%, in line with our expectations for the year.

M
Meritxell Perez Castro-Acuna
executive

Second one, you expect 1.5 gigawatts of additional contracts by year-end, and you've got -- and you have increased significantly your backlog. Given the strong visibility, what is your estimate for tracker sales in the fourth quarter? Do you expect 1.8 gigawatts of tracker sales for the fourth quarter of the year?

J
Jose Francisco Jimenez
executive

Okay. Well, what we expect for the full year is in line with what we already provided in previous presentations is to have between 3 and 4 gigawatts coming from trucker supply, okay? That basically will provide us with sales, with revenues between EUR 600 million and EUR 700 million by the end of the year.

M
Meritxell Perez Castro-Acuna
executive

There was another one about the Development division. Are you confident you will sell assets in the Development division during this year 2023?

J
Jose Francisco Jimenez
executive

Well, I would say we've already sold some assets. We've transferred 433 megawatts. It's true that 300 -- 303, actually, to be more precise, megawatts out of those 433 megawatts are coming from internal projects. But despite that, we still sold 130 megawatts to a third party in Colombia.

Yes, I mean, what we expect is to have additional rotations before the year-end. And by obviously materializing or monetizing those assets at the end of the day, we'll be able to achieve our guidance for the year for Soltec Development.

M
Meritxell Perez Castro-Acuna
executive

You mentioned co-development with Aquila and ACEA in Italy, but 1.3 gigawatts are respected to each RTB status in 2024. So should we expect a delay in project sales to 2024?

J
Jose Francisco Jimenez
executive

Not at all. I mean we will provide additional visibility for our 2024 guidance, obviously, at the beginning of next year. But I can tell you that so far, our expectations for 2024 in terms of asset rotation, in terms of asset sales and in line with what we have already provided to the market.

M
Meritxell Perez Castro-Acuna
executive

Regarding the Asset Management division, contribution from projects in Brazil still remains weak. Can you elaborate on situation in Brazil? And how should we think on the contribution of these assets in upcoming months?

J
Jose Francisco Jimenez
executive

Okay. Our expectation is to meet our guidance. If you remember, our guidance was in terms of revenues to be between EUR 12 million and EUR 17 million and in terms of EBITDA margin to be between 70% and 75%. So we are on track to achieve that guidance.

What's going on regarding those assets in Brazil is that we are still fine-tuning the plants -- the 2 plants, 2 projects. We started operating at the end of last year and at the beginning of this year. But in any case, what we believe, as I said before, is that the guidance will be achieved at the end of the year.

M
Meritxell Perez Castro-Acuna
executive

We've got questions coming from Virginia Sanz de Madrid, Santander. First one, on your guidance, you need to book over EUR 300 million in revenues in Q4 in the Industrial segment. Do you believe this is achievable from an execution point of view?

J
Jose Francisco Jimenez
executive

Virginia, yes, obviously. I mean in addition to the backlog we already have at the end of September, which, as you know, is EUR 329 million, we're also considering the digital backlog that's been generated in October and November. And obviously, we haven't completed November yet. There are still a few days left. And we're also negotiating 1.5 gigawatts of contracts as we speak.

It is very clear that as we get closer to the end of the year, it will be more difficult to be able to book revenue from these new contracts. But obviously, we don't have to fully execute them to book revenue. So as soon as we start delivering trackers or supplying some of the construction services we typically provide, we'll be generating revenues that will be booked in our P&L. So yes, I mean, we are fully aligned with our objectives.

In fact, if you look at what we've done in previous years, it's true that we haven't reached EUR 300 million in just 1 quarter. But if you look at 2021, for instance, the figure was EUR 223 million, which is a little bit lower than the figure that we're going to have to achieve at the end of the year. But still, percentage-wise, was much larger in terms of total revenues for the year than the figure that we need to achieve this in 2023.

2023 -- 2022, sorry, was a little bit more linear, late seasonal. But still, the figure was quite high, over EUR 150 million, in fact, EUR 163 million. So yes, I mean, we're confident. We have the backlog. We have the contracts. We're executing them. And right now, we are more than in line with our objectives.

M
Meritxell Perez Castro-Acuna
executive

On the development side, you guide to EBITDA of EUR 25 million, EUR 35 million. How do you plan to achieve that? How much of that EBITDA disappears then in intra-group consolidation?

J
Jose Francisco Jimenez
executive

Well, actually, so far, if we look at the numbers at the end of September, the majority of it will disappear in consolidation because it's related to the 303 megawatts we have rotated internally from Soltec Development to Soltec Acids.

But you have to keep in mind that operating costs, OpEx, at the end of the day for this particular division is relatively low. So as soon as we start rotating assets in the last quarter of the year, EBITDA will increase very quickly. So yes, we are confident that we're going to be able to achieve our target for 2023.

M
Meritxell Perez Castro-Acuna
executive

Which is your net debt as of 9 months 2023? Where do you expect to finish with the net debt at year-end?

J
Jose Francisco Jimenez
executive

Okay. Net financial debt was not disclosed in the presentation, but I can give it to you. I mean, at the end of the first 9 months of the year, was EUR 217.6 million for the whole group, which is a little bit lower than the figure we had at the end of H1 2023. This is because essentially, gross financial debt increased a little bit because we basically made a new withdrawal from the Incus financing facility, a small one, EUR 5 million in September.

But basically, cash and cash equivalents have increased and are obviously higher than the figure that we had at the end of the first half of the year. So more or less in line -- a little bit lower, but more or less in line with what we had at the first half. But in any case, our expectations for the end of the year remain the same. So we're expecting net financial debt to be between EUR 250 million and EUR 260 million by year-end.

M
Meritxell Perez Castro-Acuna
executive

Do the new contracts signed in October and November have additional services? Or is it just trucker supply?

J
Jose Francisco Jimenez
executive

No, some of them do have additional services. But percentage-wise, it's a very small portion of the total, okay? So we can say, as we explained during our H1 webcast, that we're going to be reducing percentage-wise, the part of our revenues coming from services in comparison with, obviously, the revenues that will be generated by our tracker supply activities.

M
Meritxell Perez Castro-Acuna
executive

We've got more questions on the platform coming from Richard Dawson from Berenberg. What is the outlook for trucker sales in 2024?

J
Jose Francisco Jimenez
executive

Well, basically, the outlook that we currently have for 2024 in terms of tracker supply is essentially the one we provided during the Capital Markets Day presentation we had back at the middle of 2022, and it's a figure that is between 3.5 and 4.5 gigawatts for the full year.

Obviously, we will provide more detail or more specific information about this particular topic when we provide the guidance for 2024 at the beginning of next year.

M
Meritxell Perez Castro-Acuna
executive

When do you expect the EUR 5.3 billion of pipeline orders in the U.S. to start converting into firm orders?

J
Jose Francisco Jimenez
executive

Okay. Some of them are already being transformed into backlog as we speak. I mean some of the new contracts we've been signing lately are coming from the United States. And as we explained during the presentation, essentially, we're strengthening our procedure in that particular market. And obviously, we're still probably behind NEXTracker and Array, our 2 main copays in that particular geography.

But slowly but steadily, we're improving our positioning, and obviously, that's good news for us.

M
Meritxell Perez Castro-Acuna
executive

What gives you confidence in delivering over EUR 300 million of revenues in the Industrial division for Q4 to reach the guidance range?

J
Jose Francisco Jimenez
executive

Okay. This is a question, I guess, similar to the one sent by Virginia before. And the answer, obviously, is more or less the same. I mean we have enough backlog to be able to achieve that revenue figure. Not only that, but also if you look at previous years, obviously, revenues for the whole year are a little bit different and were smaller. But we're still seeing significant fourth quarter sales volume coming from our Industrial division.

As I said before, if we look at 2021, you have EUR 223 million, which was, percentage-wise, over 50% of the total sales for the year. If you look at 2022, the figure was a little bit smaller, EUR 163 million, but still a very significant figure and quite relevant for the fourth quarter.

As we explained at the beginning of the year when we provided the guidance, this year is very backloaded. We said based on what we were seeing in the market back then regarding the release of the IRA guidelines, what's happening back in Spain and our expectations for also that particular market that first half of the year was going to be relatively low and second half of the year was going to be obviously more relevant towards achieving our targets. And it's behaving exactly as we expected at the beginning of the year.

M
Meritxell Perez Castro-Acuna
executive

There are questions from Roberto Casoni from Otus Capital. Can you be granular on the reasons behind such a recovery on the industrial EBITDA?

J
Jose Francisco Jimenez
executive

Well, I guess this question, Robert, is similar to the one I just answered. Essentially, we didn't have enough sales at the beginning of the year to be able to cover our overhead expenses. And this is something we explained in previous presentations, as volumes have been increasing over time. And also, we've had, percentage-wise, more contribution coming from supply -- the tracker supply rather than the construction services.

Obviously, average gross margins and EBITDA margins have increased. So it's a combination of more tracker supply, more volumes, being able to overcome or hedge against the overhead, the expenses that we have in our company.

M
Meritxell Perez Castro-Acuna
executive

Module prices are going down, logistics as well. Which are the price dynamics that you're seeing in the tracker industry right now?

J
Jose Francisco Jimenez
executive

Okay. What we're seeing is that average selling prices, and this is something that was already mentioned in our previous webcast in that particular case by Raul. We're seeing average selling prices in the tracker business going down, okay? This is -- slowly, but going down in any case. This is the kind of trend that we saw -- the global trend that we saw pre-COVID that was stopped for -- suspended for a couple of years and then it has resumed back this year in 2023.

Regardless of how prices are behaving, and this is something that Raul explains very well because a portion or a part of that price reduction is related to the fact that modules are becoming more efficient over time. And at the end of the day, we're selling trackers based on per euro or per dollar amount by megawatt or per megawatt or per gigawatt or per watt at the end of the day. So if you have more efficient coming from your modules, the price will seem to be lower, while at the same time, it remains more or less the same.

But in any case, regardless of that particular impact that is being well analyzed by Raul in previous calls, I would say that the key issue here is not whether average selling prices are going down or up, but how the margins are behaving.

And in this particular case, gross margins coming from the tracker supply activity are behaving very well. This is something we've been mentioning in the past. Logistics are under control. The price of steel is also under control. And therefore, the margins we are able to obtain -- the gross margins we're able to obtain on our tracker business are high or higher than what they were in previous years, okay?

So I think that's one of the key elements. If you look at the business as a whole, I'm talking about the solar PV industry as a whole. What we're seeing, and we also mentioned this during the webcast, is that CapEx is going down definitely. It's true that you also have increasing interest rates, but CapEx is kind of offsetting the impact coming from higher interest rates. And at the end of the day, IRR, internal rate of returns, are more or less the same as we saw before.

M
Meritxell Perez Castro-Acuna
executive

We've got the last question from Virginia Sanz de Madrid from Santander. Should we expect then very weak Q1 2024 in the Industrial segment, given the fact that you will recognize so much revenues in the fourth quarter of the year 2023?

J
Jose Francisco Jimenez
executive

Not really. I mean we've always said that this business does have some seasonality. This year has been extremely seasonal. Previous years did show some seasonality, although not as significant as this year. Not necessarily. I mean the backlog that we currently have, plus the new contracts that we expect to sign before the year-end, makes us very positive regarding the first quarter of next year.

And obviously, 2024 should be less seasonal than 2023, okay, based on our current expectations.

M
Meritxell Perez Castro-Acuna
executive

Thank you very much, Jose. There are no more questions on the platform right now. So we can finish Q3 2023 conference call. Thank you all very much, and have a nice day.

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