Scatec ASA

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Earnings Call Transcript 2019-Q1

[Raymond Carlsen, Chief Executive Officer]

Good morning. I'm pleased to see you all here for our Q1 2019 report. And I'll ask you also to enjoy the photo on the screen. This is southern part of Egypt, Aswan. One of the largest or possibly the largest solar power plant in the world, 2,000 megawatts. And we have 400 megawatts, and I think some of that you see here. And this is just a small part of the desert. We have -- we can expand west to the Atlantic. So I mean, there's a lot of space for solar. Some people said that the world has not enough space for solar. Well, I think there is sufficient space to cover a lot of electricity needs in the future.The agenda, as usual, I get the opportunity to talk a little bit about the highlights and product updates. Mikkel will take you through the numbers. And finally, I'll go through some outlook and a slight -- a small summary.We are, as we were last quarter, on a pretty steep growth path as -- and this manifests itself in the numbers. The proportionate revenues are a bit higher than NOK 1.5 billion with an EBITDA result of NOK 315 million. We are in the middle of a high activity within the Construction segment, construction projects or plants at 4 continents and almost NOK 1.3 billion in revenues and then NOK 159 million on the bottom line.Power generation reached the highest level ever, which should be expected, of 133 gigawatt hours. That's up 50% over last year. This should have been a bit -- even a bit higher, but we were being affected with some -- by some bad weather in Brazil and Malaysia.We have also added another 152 megawatts to our backlog. I'll get back to that on a separate line. This is in Ukraine. And we have secured our first project, including batteries, in Africa. I also will share a slide with you with some more details later on in the presentation.And it's very nice to see that the first out of 6 projects in Egypt is connected on time. And also here, I will show you a different -- another slide. Well, actually this is the slide. So this is 400 megawatts. It is the largest plant with bifacial production, meaning that we are producing electricity from the backside of the panels. So the indirect light that is hitting the ground hits the back of the panels, is actually transformed into additional energy. An anticipated increase of almost 10% and maybe even more, this is what we're going to figure out. But -- and you should expect us to actually implement more and more bifacial panels on the future projects. So this is adding competitive technology elements to a solar power plant. The -- we have 6 projects. You see the bottom line there or the schedule. First is connected. And then sequentially, over the next few months, you will see the remaining plants have been connected. And then we'll be producing for their contractual -- contracted period.Ukraine. We decided 1.5 years ago that Ukraine is an extremely interesting market for us. They have a -- they were in extreme need for additional electricity, and they have the policy approved by the government for renewables. So we said, well, this is something for us. They only have a 10-year feed-in-tariff. So that is the basis when we're doing our financial analysis. Progressovka is 152 megawatts. It's in the very southern part of Ukraine, very good solar conditions. And it will have a capital expenditure of EUR 150 million. So if you look at the totality of what we have at the moment, we have a total portfolio of 500 megawatt. 2 projects is in construction already. Another, 326, including Progressovka, is in our backlog. And most of these projects are anticipated or should be anticipated a completion by end of the year. 1 or 2 may go into 2020, but of course, we are trying to build as fast as we can. And then we have an additional pipeline of 100 megawatt.So Kiev is, I guess, what South Africa was. For us, Ukraine. South Africa was for us in 2011. We are constructing, developing projects while we're building an organization. So right now, we have about 50 people, not counting the people out there on the field working for us. And this will develop into, I think, an execution hub for the region, but I think also for Europe. There's a lot of competent people there. And those of you who follow the IT industry know that they're doing a lot of -- they're very competent on the IT side, but also mechanical engineers and civil engineers, very high quality and very cost competitive. So I think this is very interesting and good news for our organization.Now if you look at the rest of the projects that have under construction, I mean, this is 1,000 megawatts. Remember, we are only operational by 500-plus megawatts at the moment. Egypt, we have 335 megawatts to go. We have proven that we are able to deliver on time. And also here, as on all our projects, we have 80%, 90% of unskilled workers. So by the right training, by the right attitude and buying the right systems for focus on HSSE, you can deliver these projects according to plan. South Africa, northern part of South Africa nearby Upington, these projects are well underway as well, and they should be connected towards the end of the year and maybe a little bit into 2020. And then we have Jasin and Merchang. Gurun is already connected. We are in the final testing stages of Jasin and Merchang, and we are also anticipating the connection of these projects very soon. They are slightly behind the original schedule, but the contracted period for supply of electricity will remain the same. So we're not eating into any normal contract length.Argentina, this is together with Equinor, 50-50. It's also -- we have prepared everything now, so we can start erection of the equipment and then panels and inverters and that kind of thing. Ukraine, I talked about. You will see the first project, the Rengy project, is mechanically almost complete. RedSol, Malaysia, very early. This is the project we won in competition with a lot of other players, and that is also under construction. And then we have Mozambique. This is also mechanically complete, and we're doing the final testing. We were extremely fortunate to not be hit by the hurricane that hit Africa, the worst natural disaster that Africa has ever actually seen. And we are directing some of our funds to try and assist with some of the needs that the people have in the region.Now sustainability, and I've covered this a bit before, but I think it's important to address in every quarter. It's an integrated part of our business. It's not only to be a good corporate citizen, it's also risk mitigating. We interfaced very early with the local communities. We have developed -- try and develop strong community relations. We involve them in the planning. We let them have input to the programs that we're going to work together with them on during construction, but also during the contracted period, up to 25 years. It also allows us to facilitate strong partnerships, both at the project level, but also at the corporate level. And I think -- no, I don't think, I know this has given us a competitive advantage.So we have -- we used to have 7 out of the sustainability goals as sort of things we wanted to compare us to. We have focused now this into 4 to may -- have an even stronger impact. And number one, it's quality education. I have a separate slide on that a bit later. Affordable and clean energy. We will probably most likely also provide a lot of these villagers with free solar and battery power. This is what we're working at the moment, and we will report back to you once this is put into operation. Decent work and economic growth and then partnerships for the goals.We are a partnership company. One of our values is actually collaboration or working together. So this fits very well within -- very well with our business philosophy.Taking a look at quality education. Local programs and the -- I mean, just to mention a couple, Jordan. Engilsh language lab to help people to learn English language and then again to create jobs. I mean, they will use that language to establish a platform to apply for jobs where English language is needed. Honduras, it's a bit strange. But I mean, the women were extremely interested to learn about health, safety and environment on a different level than the industrial level. This is more on a local level. South Africa, we're trying to create businesses where they can actually evolve on their own after the program sort of fizzles out. So we have 60 entrepreneurs that received business administration training. And then one that isn't there. Five years ago, we established a relationship with the University of Stellenbosch, just north of Cape Town. And we established, together with the university, a support program to -- for renewable energy. We sponsored a chair. We also put up bursaries to help students that couldn't afford a program. And we made up our mind to offer our plants as sort of a research lab. And this has been going on now for 5 years. And I'm in the Steering Committee, and I'm extremely impressed when I meet the master and doctorate students what they've achieved. And in fact, some of the results that they are -- they have managed to come to conclude on is being implemented into our plants at the moment. And we have hired some of them, but they are also participating -- building an industry in South Africa, not only for South Africa, but also for export. And by the way, our operations in South Africa is actually working on our plants around the world. Mikkel?

[Mikkel Tørud, Chief Financial Officer]

Thanks, Raymond. So before I dig into the details, I thought I could reflect a bit on the financial results and the performance of our company over the last few years. And I think the graph here to the right is quite telling. We have over the last 12 months generated about NOK 5.7 billion of revenues and an EBITDA of close to NOK 1.2 billion. And the free cash flow back to us, the SSO equity, is about half of that, NOK 639 million, as you can see. And the growth has been tremendous, and as we will grid connect and construct new plants, is set to continue.And this is really driven by the team and in fact reflect a bit on this. We have now a project development team with a very strong track record of consistently converting our pipeline into fully financed construction-ready projects. And we have historically converted about 50% of our pipeline into operating power plants. So I think that's really an important driver obviously. Our EPC team is continuing to deliver solid margins under very challenging environments and complex conditions, I would say. And as Raymond also mentioned, there's a strong focus on HSSE and compliance in all of what we're doing here. And we believe that this experience that we are -- and competence that we're building here is really creating a lasting competitive advantage for us in winning new business.And our asset portfolio is really broadening and growing. And through these power purchase agreements, we lock in these cash flows for many years. And if you look at the current operating plants, the average remaining tenor of these PPAs are 17 years. And that is set to be -- to grow, and I will add more to that as we connect new plants, obviously. And finally, we have a strong focus on operations and asset management. We make sure that we always optimize plant performance, and we're a long-term investor. I think that is also a mindset that influences the way we design the plants and how we conduct our EPC. And I think we see both our partners and our customers really recognizing that perspective when we develop our plants.Now focusing on the Q1 results. Raymond mentioned it, NOK 1.5 billion of revenues and NOK 315 million of EBITDA. Both revenues and EBITDA is up threefold compared to the same period last year, and the construction activity remains high. And the Power Production EBITDA is up 58% compared to last year.And looking at Power Production, NOK 208 million of revenues and EBITDA NOK 168 million. Over the last 12 months, we had revenues of close to NOK 700 million and EBITDA of NOK 555 million. Production ended at 133 gigawatts in this quarter compared to 68 gigawatts last year. These are all numbers based on our ownership share in the power plants, our proportionate ownership.The growth here is driven by reconnection of new plants in Brazil and Malaysia. But as mentioned, we have had an impact of the weather conditions that has been extreme in the negative sense unfortunately in Brazil and particularly also in Malaysia in this quarter. And that is why we also came in a bit on the low end of the production guidance. But obviously, we will see further growth here as we grid connect the new plants, as we have already talked about.When it comes to O&M, Operation & Maintenance, it's still really steady operations. We see some increase in revenues as we have new plants connected. We see normally a seasonally low revenue and EBITDA in Q1. It's related to the contract structures we have in South Africa. And we will see a somewhat lower margin on the O&M side if you look at the overall numbers when we connect new plants, because the margins that we have on new contracts is somewhat lower than the historic contracts on the O&M business.Development & Construction. We -- it's reflecting, of course, the broad portfolio of projects that we're now constructing. Accumulated progress across this portfolio was 53% at the end of the first quarter. And the team -- the project development team is continuing to mature a number of opportunities, as Raymond also will talk more about. And we will grid connect Merchang and Jasin, the last 2 projects in Malaysia now in the second quarter. We will reach COD for the project in Mozambique in the second quarter. And there will be 1 or 2 sites in Egypt that we also expect to reach commercial operation now in the second quarter. So a lot of activity in this quarter.14% gross margin. It's fluctuating a bit, as you can see, but still fairly stable. And that is reflecting the mix of projects that we are constructing under. There's, of course, slightly different margins across that portfolio.Financial position, we saw the total assets closing in at close to now NOK 16 billion on a consolidated basis, up about NOK 1 billion since the end of last year. Continuing to invest CapEx, obviously, that is driving that increase. And then on the table to the left, total cash on a consolidated basis, NOK 2.8 billion, free cash close to NOK 800 million. We have expanded our revolving credit facilities from -- by about NOK 275 million to NOK 775 million in -- now in April. So we -- this is a facility that remains undrawn, but it's good for us to have some working capital support as we continue to have a large portfolio of construction activities.Group level book equity, as we have defined it in our loan agreements, is strengthened further to NOK 3.3 billion, up by a couple of hundred million since end of last year.Now looking at the movements of the cash, the free cash at the group level throughout the first quarter. We received NOK 73 million of dividends distributions from the operating power plants. That's a consistent performance there. D&C, NOK 128 million. This is a EBITDA-derived number. Then we invested about NOK 114 million of new equity in projects in Malaysia and Ukraine. And we spent about NOK 12 million on developing new projects, CapEx on new projects in backlog and pipeline. And we saw some reversal of the working capital compared to the last quarter, NOK 300 million, related to the construction portfolio, and we'll expect that to fluctuate a bit quarter-on-quarter. As I said, the construction portfolio is still at a fairly high level. Cash balance ended then at NOK 785 million.Now back to our guidance. The 2019 O&M revenues and EBITDA margin guidance is the same as we had last quarter, NOK 110 million to NOK 120 million and around 30% EBITDA margin. The D&C value, contract value of the 1 gigawatt under construction is about NOK 7 billion. It remains NOK 3.3 billion to be recognized going forward. And then on Power Production, we here present the guidance for the second quarter and full year, reflecting the power plants that are currently in operation by the end of Q1. Obviously, as we connect new plants, as I've talked about, we will lift these numbers further throughout 2019.Okay. I will leave it to you then, Raymond.

[Raymond Carlsen, Chief Executive Officer]

Thank you. While I was listening to Mikkel, I just came to think about our HSSE numbers that was reported the other day. And just to share with you, on a 12-month rolling basis, we have had almost 10 million man hours. So that's a lot of people working for us at the moment. The lost time index, meaning how many days you are away per million worked man hours, is 1.7. And those of you who know the oil and gas industry or in the construction industry, you know that, that is not high. It's actually very low. The sick leave is less than 1%, it's 0.9%. So it's a bit lower than the average in this country. You may question if these are exact numbers. And they may not be 1.9%, it could be 2%, but it's very low. So it means that the people that start working for us, they don't want to be sick at home. They want to work. Now on to very interesting project, extremely interesting opportunity. Don't count this in megawatts, but as an opportunity. We are now partnering with the UN. When I say partnering, meaning that there is an ambition in the partnering growing here, it's one project. And that is actually to assist the UN in saving money actually. And on top of that, we've got further reduction in the CO2 outlets. UN spends almost NOK 5 billion -- or more than NOK 5 billion a year transporting diesel into these faraway camps at, to a certain extent, great risk, but absolutely essential. So on all of these projects, we are replacing up to 80% of that diesel that is being consumed by reducing the transport, but adding solar panels and batteries. And I think this is extremely interesting and just realizing how much money that can be spent elsewhere than on diesel by actually implementing renewable energy. It's amazing. And this is also linked to a new business concept of ours that we will share the details with you a bit later in the year, because there are a lot of opportunities in this space that are sort of in between rooftops and utility scales. We are not on rooftops, we are on utility scale. So here we are extremely -- I wouldn't say hopeful, we are extremely optimistic about the future and how we can actually add a lot of electricity to the market, not in terms of megawatts, but in terms of actually reducing the cost. And now I'm talking about not supplying a kilowatt hour at USD 0.30 per delivered hour -- or power at the USD 0.30 per kilowatt hour. We're talking about actually delivering power not only to the UN, but to villages and those faraway villages at levels where they can afford it, talking about USD 0.10, USD 0.15 or maybe less per kilowatt hour delivered. So this is -- I'm being very extremely optimistic about it, and it has only positives to it.Now we have sort of been a bit brave here saying that Scatec Solar a global solar power company, but actually maybe we're not brave. Because if you look at all these spots spread around the solar belt of the world, we are a global company. And the -- you see that we have offices in the Honduras, Tegucigalpa; in Recife in Brazil; in Amsterdam, in Paris; headquarters where we're sitting right now in Cairo, a big organization there; in Amman, Jordan; our control center execution arm in Cape Town; in Maputo, Mozambique. A big operation is under construction on the back of the project in Malaysia. So we are -- and then you look at the plants under construction, the 1,000 megawatts and the backlog and pipeline spread around. So -- and we have -- of course, these spots are not there on their own. I mean, these actually represent people that are following these opportunities that are decoding, deciphering the opportunities into something that we put into our pipeline and put in our backlog, and later we'll construct. And the -- so I mean, it takes -- it should give you a view into how we are expanding our business, and we are ready to entertain growth that will hopefully come. And the market is not stopping up, and you can see that in statistics from all over. The solar and power market is going to increase. I saw a statistics towards 2050, and solar is going to take 65% of that on the renewables side. Wind is going to take 15% to 20%. So it's very interesting and comforting to a certain extent. Maybe different, I mean, it will be different solutions, not only utility scale that will be distributed or the different ways of actually providing solar power. I believe that our track record puts us into position to take advantage not in terms of market share, but in terms of picking the project that is fitting our profile, our competent profile, our execution profile and the way that we would like to operate in a very responsible manner.If you look at us right now, we are constructing our plants 1,000 megawatts. So that means that while we're delivering on this, we have the people, the competence and the partnerships, which gives us a capacity at the moment of around 1,000 megawatts per year. We have given the guidance of 3,500 megawatts by end of 2021. Of course, the world doesn't stop there. So we wanted to let you know that, well, we're going to stay around for a while. And we anticipate that we will stay at the growth path that we have at the moment. But rather staying there, I mean, we have an ambition to grow further. So that's where we're at, at the moment. And when we're growing further, of course, we will add more people, high-quality people, partnerships and that kind of thing. So yes, it's a journey. It looks like an uphill journey, it's not. It's a good journey. By that, I think I'll just conclude my presentation. And Mikkel and I are ready for any questions from the net or from you all.

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kepler Cheuvreux. Two questions on your final slide there, Raymond. Obviously, you will continue to grow at pace of 800 megawatts to 1.2 gigawatts. Is it fair? What I'm wondering is you've previously communicated the breakdown of your pipeline bilateral feed-in-tariff project tenders, price tenders. Looking beyond 2021, as you do now, could you give us an indication of how this wheel might turn?

[Raymond Carlsen, Chief Executive Officer]

I don't really want to preempt our next capital update, but I think you should expect us to give you more feedback on that. But I think the wheel that you've seen in the split, it's not going to change dramatically. You will see probably like the UN type of projects, smaller projects with a higher contribution per megawatt than what you've seen in the past, but different solution, more a solution provider. In this case, it will be a combination of PV, storage and diesel that is there. And if you look at Africa, 250 gigawatts of installations of these standards are there already. Think about the potential to reduce the spending on diesel by 80% is a lot, but by 10%, by 20%, it's a tremendous saving. So those that are not looking at those opportunities are not doing their job. So that wasn't exactly what you wanted me to say, but I'm trying my best.

[Andreas Bertheussen, Equity Research Analyst]

My second sort of follow-up, obviously, on this question is you have given us kindly a sort of a indicative ratio of your NOK 1 million per megawatt profitability. And I guess, the fact that it's falling is what drives the growth, so it has to fall. But this is why I'm asking about the mix. Are you seeing this continuing on trend? Or are you expecting, as you say, through shifts through combining battery, a couple of PPAs that this could sort of level out instead of continuing down at the same trend?

[Raymond Carlsen, Chief Executive Officer]

Yes. I mean, we are looking at projects now that are outside the range -- I mean, I'm sorry, the upper range. So when you're looking at different solutions, that what you should do -- you should also expect that.

[Andreas Bertheussen, Equity Research Analyst]

Which can -- these projects can justify sort of the size of 1 gigawatt per year run rate for you?

[Raymond Carlsen, Chief Executive Officer]

I wouldn't say that at the moment.

[Unknown Analyst]

Solar panels, I guess, that's a big part of your CapEx. What about the sourcing of that? And how is the development, the price decrease and the effect of the solar panels? And following up that, do you have any plan to replace old technology with new technology solar panels?

[Raymond Carlsen, Chief Executive Officer]

In fact, solar panels is less important than what it used to be. It used to be 50%, 60% or more. I mean, the price of the panels have dropped 90-plus percent since I joined in 2009. So that's why the market is growing tremendously as well. Today, I think the panels are maybe 30%, but everything else has dropped. And then you add the bifacial and you can sort of add another 10% in performance improvement. And then on -- and if you don't look at bifacial, look at one phase, I mean, the improvements there also have been tremendous. So if you can look at our plants in South Africa, Kalkbult, they could have been 40% less space consuming than what the technology is today, and that's a 1:1. And then you can take that out as a direct reduction in the price that you're paying per kilowatt hour. This will continue. And the solar industry is still very young in the industry, and I think the price will continue to go down. Right now, we are buying solar panels at USD 0.25 per kilowatt peak. I know it's hard explain.

[Mikkel Tørud, Chief Financial Officer]

Cents per watt.

[Raymond Carlsen, Chief Executive Officer]

Yes, per watt, which is -- it used to be $2. So that's the development we're talking about. So I think the cost is going to continue to go down. This is going to be so cost competitive, if you only look at the panels, that the price is not going to be too interesting. The customer will -- and I think we can see ourselves in similar situations. You're looking at more as a total solution than the actual price of the panel itself when you price per kilowatt hour. You're looking at access -- stable access to electricity. You may be looking at different services that you add. There is grid stability opportunities. There are many different things. So the purchasing pattern of the buyers of electricity at different parts of the world will change. And then you have also different markets. I mean, in Europe, you're replacing dirty old electrons with green new ones. This is interesting itself. Right now, we are -- solar panels in Europe, even though the sun is not up that many hours a year, is competing with all types of technologies. And we see even better elsewhere where they need new electrons where they don't have electricity at the moment. Interesting world.

[Lars Ove Skorpen, Director of Power & Renewable Energy]

Lars Skorpen, Pareto. Could you explain the economics of bifacial panels? And does it always increase the IRR? And in case, what's the magnitude?

[Mikkel Tørud, Chief Financial Officer]

Yes. I mean, it's 2 ways of looking at that, of course. You can -- the bifacial panels, as Raymond indicates, is giving us a 10% increased yield. Obviously, it depends on the reflection from the ground, and that is in the desert environment, quite advantageous. In other ground conditions, it's not that the same effect, obviously. So then you can use that extra 10% to produce more or basically reduce the size of the plant for the same capacity or same production volume. So that's how we look at that. We will look at this for some new projects now where we -- you basically -- the customers are sometimes putting a limitation on the capacity that we can feed into the grid or the production that we can feed into the grid. Then you will basically use that to downsize the plant somewhat and reduce the CapEx. Or if you don't have that limitation, you would basically produce more. And of course, it's costing somewhat more, those panels, but net effect is obviously positive for the business case. Yes.

[Raymond Carlsen, Chief Executive Officer]

If you want to learn more about the reflection, look at the albedo effect. Look it up on Google, and then you will understand that it will vary between 7% or up to 35%, but not -- I mean, not necessarily directly as improvement in their electricity production. So actually, the best place to put panel is on top of snow. Of course, the sun isn't there always. That's the problem.

[Mikkel Tørud, Chief Financial Officer]

Okay.

[Raymond Carlsen, Chief Executive Officer]

Okay. Thank you very much for your attendance. See you, well, in middle of July maybe. Maybe.