Scatec ASA

OSE:SCATC

Earnings Call Transcript 2020-Q1

[Raymond Carlsen, Chief Executive Officer]

Good morning. My name is Raymond Carlsen. I'm the CEO of Scatec Solar. We are here to present the first quarter results 2020. This is webcast only. That means that we don't have any audience in this room. However, we have allowed for you all to send in questions that we will get back to after the presentations are completed. We just need to turn this one on. [Technical Difficulty] We had a few technical problems, but we are now back to the agenda. I will, as usual, present the highlights and the project updates. Mikkel Trud will go through the financials, and I'll get back at the end for a summary and an outlook. This year -- sorry, this quarter, we experienced the highest production of power ever. And that's, of course, a direct link to the plans that we have connected over the past few months. We actually increased the power production by 162% from the same quarter last year. The EBITDA was NOK 346 million, up from NOK 315 million in the first quarter. Most of that, 95% plus came from power production. In early April, we finished the last of 3 plants in Upington that gives the total installed capacity of 258 megawatts. And we also, last quarter, secured a new bank facility of $75 million, and together with the $90 million revolving credit facility, we have a very good financial capacity to handle our operations going forward. In terms of the COVID-19 impact on our business, those, I would consider, as we have said before, limited. But I'll get back to that on a separate slide later on. Just to dwell a little bit on Upington, Upington is in the northern part of South Africa. It's a fantastic place in terms of eradiation. It has more than 2,500 hours of solar radiation per year. If you compare that to Norway, we're around 1,000 hours. We installed 700,000 panels, and we had almost 1,500 people working on the plants during peak installation. If you look at the total portfolio that we have, it's almost 2,000 megawatts in operation and under construction. Yesterday, we publicized a new project that has reached commercial operation date, the Boguslav project in Ukraine, bringing the total in operation up to more than 1,500 megawatts. We still have 399 megawatts under construction, basically in Ukraine, Argentina and Malaysia. Now back to COVID-19. We have had limited impact by this very tragic situation in the world. And if you look at operations -- our operations, our infrastructure is considered essential, meaning that we have had full operation of all our plants during the quarter and also up to today. We have had full manning of our operations center in Cape Town, working 24/7. In terms of construction, we are at the very end of the construction of our plant in Argentina, Malaysia and Ukraine, and we have had some delays on the finalization of these projects estimated to be between 2 and 5 months. This is natural as a consequence of limited travel and so forth. Plus in Malaysia, for example, we have had a lockdown. The project development is going ahead. Of course, by limiting the travel, we have had some impact on the progress in the backlog and pipeline. This is natural, but it means that the projects are moving ahead but at a slower pace than in the past. This will change when things normalize in the future. Another point that I'd like to make as well is that in these -- in situations like these, also opportunities that we haven't seen before arise, and we see some M&A opportunities that we are considering for the time being. Sustainability. We publicized our sustainability report for 2019. And there, you can see how we did last year with key results, and we have also established the new targets for 2020. You can also follow us on our website, where you can have direct access to our reporting data and policies. Now in terms of how we fare, we are being studied and monitored and examined by external auditors, so to speak, companies that are specializing and looking at how companies are doing in the environmental, social and governance aspect. And ISS ESG completed an analysis that gave us an A-, an excellent rating. Previously, we have reported to you that Sustainalytics have also rated us low-risk, ranked #1 out of 450 utilities. Now in terms of the work that we do. We, of course, start extremely early developing a relationship with the local communities. We established plans, and these are further developed and are with us with the local community and the plans throughout the lifetime, meaning up to 20 years. Now with a crisis that is ongoing, in fact, in all the countries that we operate, we have also redirected some of the efforts to immediate needs. I'll show you at the end of the presentation today, some of the things that we have been working on. Now in general, the programs go as they have been planned, and you will see the programs in the sustainability report. Key ambitions for 2020. We have established 22 sustainability targets. And two of those being procurement, responsible procurement, where we engaged in the supply chain, specifying how we would like our suppliers to behave, selecting suppliers that are meeting criteria that are important to us. This, we will continue to do and even more so during 2020. Further on, climate action, reducing our footprint of CO2. We only -- how should I put it? We emit 1% in terms of CO2 compared to 99% that we save. That doesn't mean that we shouldn't concentrate on reducing our footprint, so we will continue that work as well when we move further into 2020. I'd like to introduce Mikkel Trud that will bring you through the numbers. Thank you.

[Mikkel Tørud, Chief Financial Officer]

Thank you, Raymond. So as already been highlighted, we saw record-high production in the first quarter, and operations have really continued as normal over the last few months. However, in Q1, the proportionate revenues decreased compared to the same quarter last year due to the lower construction activity. That was only partly offset by higher power production revenues. And revenues reached NOK 866 million; and EBITDA, NOK 346 million on a proportionate basis. So we saw a shift in segment mix with a higher-margin Power Production business, creating a higher overall EBITDA margin in the quarter compared to previously. And I will briefly comment on the segments in a minute. Now if you look back over the last 12 months and 24 months, revenues have been fairly stable, around NOK 5.7 billion, and EBITDA has increased from NOK 1.2 billion to NOK 1.6 billion. This is again reflecting the fact that we sell much more power now than a year ago and the quarters before. Now I also wanted to comment on the consolidated financials because we report consolidated net profit in the quarter of close to NOK 300 million, and Scatec Solar's share of this was NOK 235 million. The net profit in this quarter was affected by unrealized currency gains of more than NOK 300 million. These currency gains arise from our dollar-based intercompany funding and investments in solar power plants. And when the dollar strengthened almost 20% against the NOK in the quarter, we saw this currency gain in the consolidated financials. Now moving on then to the segments and briefly touching upon Power Production. 1.4 gigawatts were in production at the end of the quarter, and we added 172 megawatts compared to the end of last year, mainly then in Upington in South Africa. Production reached close to 350-gigawatt hours compared to 298 gigawatts hour in the previous quarter and 133 in the same period last year. Revenues reached NOK 391 million; and EBITDA, NOK 331 million. Operating expenses have been fairly stable, and depreciation and impairment decreased compared to the previous quarter since we had an impairment that we recognized in Q4 last year. The last 12 months' revenues grew to NOK 1.4 billion and EBITDA to NOK 1.1 billion. And this was a doubling of both revenues and EBITDA compared to a year ago. Now we did a slight change to our Services segment, basically combining operation and maintenance and asset management into a Services segment in this quarter. These are services that we and Scatec Solar provide to the power plant companies that we own together with our partners. And we saw the revenues from Services increasing by close to 80% from the same quarter last year due to basically a larger asset portfolio. It was in Ukraine, Mozambique, Egypt and South Africa that we added services contracts in this time frame. Revenues reached NOK 52 million and EBITDA, NOK 16 million in the first quarter. Over the last 12 months, revenues grew to NOK 191 million, and EBITDA ended at NOK 73 million with a 38% EBITDA margin in this segment. Now Development & Construction. Projects are near completion. And in this quarter, we generated revenues from Malaysia, South Africa, Ukraine and Argentina. Accumulative progress across these construction projects was around 90%. And we completed, as I said, the Upington projects in the first quarter, and we also completed our first solar hybrid plant in -- for the UN in South Sudan in the quarter, with a fairly small contribution to the D&C segment, but still an important milestone for us. So revenues reached NOK 414 million and EBITDA, NOK 15 million in the first quarter. The 11% gross margin is both a mix effect, but mainly reflecting an increase in the estimated cost to complete of the remaining projects and due to the delays that Raymond mentioned, 2 to 5 months of delays that we see caused by the corona situation. And without these delays and this extra cost, the gross margins would have been 2 to 3 percentage points higher than what we report today. And the guidance of 12% to 14% from -- for the D&C segment remains unchanged. And now the EBITDA in the quarter is obviously impacted by the reduced gross margin, combined with the operating expenses in the segment that remain fairly stable. If you look back at the last 12 months, revenues reached NOK 4.1 billion and EBITDA, NOK 445 million. Now looking at our balance sheet. We continue to hold a strong financial position. And at the end of Q1, consolidated assets to that NOK 24 billion, up from NOK 22 billion at the end of last year, mostly driven by further investments, but also now currency effects with the NOK weakening against the dollar specifically. And cash in the group was NOK 3 billion, of which NOK 718 million was free cash at the group level. The group level book equity as we define it in our bond and bank facilities increased to NOK 5.6 billion. And as Raymond also mentioned, in March, we secured a new credit facility of $75 million, and refinanced the existing $90 million revolving credit facility, and we did this obviously to -- at attractive terms. We reduced the cost of the -- of our RCF compared to the previous one and it gives us increased financial flexibility and obviously supports further growth for us as a company. At the end of the first quarter, NOK 1.5 billion of these facilities were undrawn. Now let's move -- look at the main movements of the free cash at the group level in the first quarter. We received NOK 142 million of distributions in the quarter from the operating power plants, and we invested another NOK 350 million of equity into Argentina, Ukraine and South Africa. And we've seen some further reversal of working capital in this quarter. And we did a drawdown of about NOK 300 million of the credit facilities at the end of the quarter. And we do drawdowns of the facilities from time to time to manage working capital. I'd also like to highlight that several projects now are being completed. We see further incoming EPC cash flows that will come our way as we are completing projects. And obviously, we're also continuing to work with additional equity partners on some of our projects in the portfolio. Now a bit of the short-term guidance. The current projects under construction represents a total value of NOK 1.5 billion, of which NOK 400 million is the remaining NOK booked value of this portfolio, meaning revenues mainly over the next quarter or 2. We will see further growth in the power production volumes, and production is expected to increase about 10% from Q1 to Q2. And the guidance here is based on plants in operation at the end of the quarter, and we have obviously connected another couple of plants now in April and May. So this will increase even further. Services revenues, we shared guidance on this segment a month ago, NOK 230 million in 2020 with an EBITDA margin of around 30%. I wanted to end my section to talk a bit about our relationships and partnerships with the development banks as we have discussed before as well. We are partnering with development banks for project finance but also equity investments in our solar power plants. And we see that these partners are adding a value in several different aspects, both through obviously, competence and capital, but also through political risk mitigation. The multilateral development banks have, for many years, been providing finance for public infrastructure across the emerging markets. They have a lot of experience from the countries that we operate in and they have longstanding relationships with the relevant authorities and also know the legal frameworks that are in place. And since the DFIs are important partners for the governments, they also have leverage and influence on the authorities. Now with the corona crisis, we see the benefits of working with these institutions again. First of all, the banks -- these banks are really active in the dialogue with the governments to provide financial support to both the governments and utilities and others to ensure continued operation of critical infrastructure. They're also very proactive towards us as a sponsor. They're proactively approaching us to see how they can potentially support us in the various projects that we are involved in. We have so far not needed that support, but of course, it's good to know that they are there to support us. And then lastly, I think it's important to highlight that we see continued strong appetite for financing of new projects also under these challenging conditions. These are institutions that we expect to see even further strengthen mandates for investments and financing of the green growth in the quarters and years to come. So I just wanted to mention that in the current climate. Thank you.

[Raymond Carlsen, Chief Executive Officer]

Thank you, Mikkel. Outlook and summary. I decided to show this market slide. And you're probably wondering what -- how do we view the markets. For the time being, a 70% of all markets in the world, renewable energy will be lower than any other type of technology, 70%. That's a lot. If you look at our markets, renewable energy, including solar, will be lower than any type of other technology in all markets, in 100% of the markets. So those are the markets that we're operating in. It has also been interesting to monitor, and that is in mature markets in Europe, how the markets have been able to accept and sort of translate in renewable and then into stable energy in Europe. I saw somewhere that 70% -- it was up to 70% renewable energy in Europe at times without affecting the stability. Of course, you had some swing producers. That tells me that some people saying that renewable energy will cause trouble at very low levels of penetration. I think we have a lot to add to that. I think it can go much higher if you look, for example, at Denmark. Now in our situation, we are not in those markets. We are in emerging markets. And some may question the lower energy prices that we're seeing today, oil down to $20, $25, $30 a barrel. Gas, also very low levels. We had a similar situation in 2014, although not so severe in terms of pricing. If you go back and look at the penetration, the expansion of renewable energy, you can see that it didn't really have an effect, meaning that already at that time, renewable energy could be competing with lower energy prices -- lower oil and energy prices. And that is the case now. So we do not expect any deceleration of installed capacity in the renewable sector despite the lower energy prices. We also see that the supply chain are starting to improve, meaning that we see lower prices on our equipment side. Again, that will reflect and have a direct impact on the cost per kilowatt hour for produced energy in the future. If you look at a couple of our markets, Africa, of course, in desperate need for more energy. So even though there is a slowdown in the world, a slowdown in Africa, there's a gap in between the needed energy and the energy that is available. So those markets are ready as we speak. Of course, it's easy to say that because it's not straightforward to develop a project. It takes time. We have to do the financing, the project development, but the market is there. We have a broad pipeline in Africa. 50% of that pipeline is in South Africa, some -- a market I consider our home market. If you look at Southeast Asia, we have more than 1.5 gigawatts of opportunities in our pipeline that we are pursuing. Vietnam is still extremely interesting for us. The pipeline represents 1,000 megawatt. We had the project, in fact, in our backlog there, Hong Phong that we removed last quarter. The reason for that is that once the feed-in tariff was decided and approved by the government, we felt it was too little time left until the end of the year to complete the plant, including also having the financing in place. So we took it out of the backlog. Other opportunities. Malaysia, Bangladesh, we have projects there and Indonesia with the thousand and thousand of islands that you have there. Now if you look at our summary, the summary slide. We -- as we have said, have seen limited impact of COVID-19. In fact, going forward, we don't really see much impact either. We are expecting to pick up the completion of the plants that are in between 90% and 95% complete as we speak by doing a final testing and start enjoying the long-term revenues. Those plants represent 399 megawatts, bringing it up to 1,900 megawatts in operation when they're finished. And when they're finished, they will also start their 20-year journey, meaning that the long-term cash flow will be there from now until 2040. And you will see that manifesting itself into the Power Production numbers as we go forward. We are actively considering opportunities in the market, M&A opportunities, and we are pursuing a couple of them as we speak. Mikkel mentioned the development banks, and they are extremely supportive. We are extremely also happy with the relationship that we have with the banks. And I think all the banks that we are working with, almost all, we have been through projects with in the past. So they know us, we know them. Now with regards to the target, 4,500 gigawatt by 2021. Due to the delays that we see at the moment in development and maturing the backlog, you will see that the projects that we will finish from now until end of 2021, more of them will be under construction in -- towards the end of '21 than completed, but the target remains the same. I think then we're almost open for questions, but I think that I would like to share with you some few slides on what we are doing, in fact.COVID-19 is, of course, very, very serious for some of these countries that are not developed countries that are in desperate need for support. We have, together with our partners, set aside on our spending, as we speak, NOK 3 million in helping out in Egypt nearby our plants in the Aswan area. That means that we are helping to deliver medical equipment, supplies, protective clothing, and we have also handed out 7,500 food boxes. And of course, that is being appreciated. And we will continue to be there and see how the situation develop to see if we can assist more. If you look at Ukraine, also there, medical supply, protecting equipment are delivered to local health stations and hospitals in 7 regions. In Honduras, food supply, medical equipment, protective. I mean they all need more or less the same in all regions. Also, food boxes there. In Malaysia, food parcels have been handed out to people in need. And in Brazil, we have actually established a manufacturing line to produce medical masks. I think this number is a bit outdated, but we are producing all our masks and are also providing local jobs by doing that. Here, you see the last plant that we connected in South Africa, in Upington. The tower in the background is not a part of our plant. That was something that was installed in the past. It's actually a concentrated solar plant, but it's nice to look at along with our plant. Thank you very much. Then I think we are open for questions. So Mikkel, if you would like to join me.

[Ingrid Aarsnes, Vice President of Communications & IR]

Yes. We've got some questions from the web. And starting with 2 questions about Ukraine. So what is the main reason for focusing on Ukraine opposed to many other countries within the EU?

[Raymond Carlsen, Chief Executive Officer]

I mean there are many countries that are interesting to look at. We are an emerging market player, and we concentrate on those markets. And Ukraine has been a market that is in desperate need for new energy. They had a very good feed-in tariff program, and that was brought to our attention and -- so we decided a couple of years back that Ukraine is an interesting market for us.

[Ingrid Aarsnes, Vice President of Communications & IR]

And then also on Ukraine, could you please provide some color on the Ukrainian government's evaluation of the current feed-in tariff scheme and potential transition towards a tender scheme. And is there any impact on Scatec Solar's projects?

[Raymond Carlsen, Chief Executive Officer]

The government in Ukraine has said that they are sort of looking at how the program should be further developed. I think the World Bank has been giving them some advice, too, and along with a lot of other countries in the world that are moving from an initial program that relies on a feed-in tariff program towards more a regular auction type of program. But in some economies, it's absolutely essential to create a situation that builds confidence for international investors. And this is what the Ukrainian government did when they established a feed-in tariff program. We have other countries that did the same. In fact, Europe did the same. Germany, the leader in the early 2000, did the same. And if you look down the road, you will see that everybody is benefiting from those lower prices. The Ukrainian government is looking at the overall budgets, and the Ukrainian program is also shorter than others. So it's only for 10 years. So that means that investors that are looking at Ukraine will have to sort of get back their investment in 10 years as opposed to 20. 10 years means a higher price. So what they're looking at, at the moment is how can they reduce the charge that they are seeing at the moment to a lower level, possibly by extending the period of the feed-in-tariff. But those are negotiations that are not really happening in some discussions that we're having at the moment, and we have had for quite some time. And it has also been stated that these changes should be voluntary, meaning that it should make sense to both parties to enter into them.

[Ingrid Aarsnes, Vice President of Communications & IR]

Then we have 2 questions from Mikkel Nyholtt-Smedseng in Carnegie. You mentioned M&A. Can you elaborate on the opportunities? And should we expect part of the growth towards the 4.5-gigawatt target to come from acquisitions? And then what sort of IRR could we expect on this?

[Raymond Carlsen, Chief Executive Officer]

Well, I mean, I wish I could say or share, I should say. We are doing, to a certain extent, a bit of M&A on a day-to-day basis. In the past, we developed projects from the very, very beginning in looking at land, finding out where to go, how to develop, taking 2 to 3 to 4 years to develop. What we've been doing so far and in the later years, is that we have looked at opportunities, for example, in Vietnam, and other places that we have a developed project, and we buy them. If you look at other opportunities which was more what I was thinking about here is that we can think about the broader pipeline, we can think about other opportunities, but I don't really want to go into that at the moment. What I can say is that if we decide to go ahead with some of these opportunities, the return levels should fall within the brackets of what we are guiding.

[Ingrid Aarsnes, Vice President of Communications & IR]

And then a second question from Carnegie. Can you elaborate further on the D&C gross margin of 11%? And how we should think of this onwards? And should we assume this level as long as COVID-19 persists? Or may it go even lower?

[Mikkel Tørud, Chief Financial Officer]

Yes, I can answer that. So we have made some accruals for extra cost for completing the current projects in the first quarter. So there's no reason for us to believe that we need to do additional provisions for cost to complete these projects. So from that perspective, we have already then taken that cost into our estimates. And we also potentially see -- as I said, the guidance remains between 12% and 14%, and then that implies that we have a perspective on the margin that we expect to report over the next quarters.

[Ingrid Aarsnes, Vice President of Communications & IR]

Then there's a question about when do you foresee a construction start in Tunisia?

[Raymond Carlsen, Chief Executive Officer]

Well, I mean, the progress in Tunisia is going very well. We are developing the PPA with the authorities. We are negotiating with the banks, and we are actually approaching the point that we're going to mandate the banks. The financing without me mentioning numbers, but financing the project, the debt financing is also a process that have produced very good results. So if I should -- I mean there are many things that needs to be lined up and completed, but construction start towards end of the year, beginning of next year, give or take.

[Ingrid Aarsnes, Vice President of Communications & IR]

And another one, how is the interest rate from developing bank loans impacted by current COVID-19? Is the interest rate going up in the future?

[Mikkel Tørud, Chief Financial Officer]

Well, I don't think -- we haven't -- I mean as we -- Tunisia is maybe the latest example of ongoing discussions on financing and pricing, and there's certainly no COVID-19 impact on those discussions. It's fair to say that to the margins that we pay for project finance from development banks is fairly high compared to what you see from commercial banks in the western world. So no, I don't think we will expect to see any impact on those margins due to COVID-19. And as I mentioned, I think we see more appetite and reinforce mandates from these institutions to support new projects, especially now in this -- after COVID-19.

[Raymond Carlsen, Chief Executive Officer]

Yes we have seen that some of these development banks are actually out there to support some of the utilities in these developing countries with liquidity, which I think is a very good sign that they are present, and they're going to be there for a long time.

[Ingrid Aarsnes, Vice President of Communications & IR]

And then about Argentina. In case of default in Argentina, how do you manage the impact on Scatec Solar? And who is your partner there and who provide the project finance?

[Mikkel Tørud, Chief Financial Officer]

Okay, I can answer that. So we, first of all, have a long-term PPA, one under an auction in Argentina with Cammesa, which is a state-owned utility institution, a government institution that buys the power. They have had a very strong track record on paying their bills, to put it that way, for power over many years, also through the last crisis in Argentina. So that's the first point. Secondly, our partner in this project is Equinor, which is already quite heavily involved in Argentina, and they have also provided a construction finance facility for this project. And together with Equinor, we are in a process of securing long-term financing. And that would again be from the development finance institutions as we have talked about today that we expect to secure this long-term financing from. Obviously, the -- again, the World Bank and IMF is heavily involved in these processes. And that's what we see as a benefit as well from having these partnerships that we get a good insight into those discussions on the public financing side, also through the partnerships we have with these DFIs.

[Ingrid Aarsnes, Vice President of Communications & IR]

There is a question from Andreas Bertheussen with Kepler Cheuvreux. Will you consider buying operating assets or only assets under development?

[Raymond Carlsen, Chief Executive Officer]

Yes. I won't rule it completely out. But so far, we have benefited from the additional value that we gained from developing, constructing the plants. So of course, that is a very, very high value. If you look into operating assets, of course, we have the knowledge to assess them and to see if there are certain upsides. And you could -- I mean in the future, you could look at refinancing them. You could look at them in a portfolio perspective together with our other plants. So I wouldn't rule it out, but it's not really particularly in our focus at the moment.

[Ingrid Aarsnes, Vice President of Communications & IR]

Then there are 2 questions from Petter Nystrm in ABG. Can you please clarify if M&A is included in the 4.5-gigawatt target by year-end 2021?

[Raymond Carlsen, Chief Executive Officer]

The target that we have established was based on sort of what we have done in the past, meaning that we have acquired smaller projects that we have complete development and construction of. So that was the plan.

[Ingrid Aarsnes, Vice President of Communications & IR]

And then excluding the projects you are currently finalizing, is it realistic that you will be able to finalize more projects by year-end 2021?

[Raymond Carlsen, Chief Executive Officer]

I think it's difficult to complete the construction of more projects towards the end, but I think that...

[Mikkel Tørud, Chief Financial Officer]

2021.

[Raymond Carlsen, Chief Executive Officer]

Sorry, 2021.

[Mikkel Tørud, Chief Financial Officer]

Yes.

[Raymond Carlsen, Chief Executive Officer]

Yes, of course. I was thinking 2020.

[Ingrid Aarsnes, Vice President of Communications & IR]

And then on the Release, how is Release developing? Are there orders coming in?

[Raymond Carlsen, Chief Executive Officer]

There are small orders coming in. I have to say, a bit of a reduction in activity now for some of the potential customers that we're looking at because those are mines that in many regions, in many parts of the world that we are addressing, have been shut down or closed temporary. But dialogue continues, and we are hopeful that we will be able to conclude more projects very soon. Okay.

[Mikkel Tørud, Chief Financial Officer]

That's all.

[Raymond Carlsen, Chief Executive Officer]

Well, thank you, everybody. Thank you.

[Mikkel Tørud, Chief Financial Officer]

Thank you.