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Earnings Call Transcript 2018-Q2

[Raymond Carlsen, Chief Executive Officer]

Good morning, everybody. We're extremely happy to welcome you to the second quarter presentation 2018. As usual, the agenda, we'll cover some highlights and the project updates. That will be handled by myself. Mikkel will go through the financials, and I'll have a short summary and outlook.We're now seeing, as you also see in the numbers, a tremendous upswing in the construction activities and are also pursuing new opportunities, that you will see reflected in an increased backlog and an increased pipeline. So the Q2 proportionate revenues was, this quarter, NOK 1.229 million compared to NOK 167 million last year. And of course, the difference here is on the second bullet here. We are now ramping up construction. The EBITDA is up from NOK 100 million last year to NOK 266 million for this quarter. D&C revenues, a bit more than NOK 1 billion and NOK 140 million, reflecting what I just mentioned, high level of construction activities, as we have been expecting. In addition to that, we shared with you on the Capital Markets Day an increased ambition with the target of 3,000 -- 3.5 gigawatts by end of 2021. And I'm happy to confirm that we have been adding then over the quarter 117 megawatts of backlog in Argentina and 130 megawatts in Ukraine. We've also added equity by issuing rights that added NOK 600 million to our balance sheet.A bit on the projects that we have under construction. Up to -- in the right -- left-hand corner, sorry, Malaysia, these are 3 projects at 3 different locations in Malaysia, almost 200 megawatts. They are in their final stages sequentially or being completed. And first project, Gurun, is in final testing right now, while the other 2 will follow over the next few months. Brazil, this is a project that we are doing 50/50 with Equinor. We were experiencing some heavy rainfall, as a few others, in Brazil that brought us a bit behind the schedule. But all key performance indicators now are showing that we're picking up speed and are targeting early fourth quarter grid connection. Honduras, a project that we had a few challenges, this is past history. We're now in the final phases also of erection of the panels. And substation is complete, and we're aiming towards the end of this quarter, beginning of early fourth quarter to complete Honduras, this Los Prados project. Egypt, the largest project in Africa, 400 megawatts, this is just north of the Aswan Dam, south in Egypt. We have started construction. Not an interesting picture, but it shows that we're trying to fence in the future plant just to see -- show to you that there is activity. The substation there has actually been completed. This was handled by the utility, by the way. Mozambique, up -- if you are familiar with Africa and Mozambique, you know that this is deep in the jungle. And also logistically, this is a bit of a challenge. But as you can see, we have troops on the ground, and we are starting to do the groundwork there, too, to make sure that the place where the plant will be erected is plain and going to be receiving all this equipment in a good manner. South Africa, also a large project -- 3 projects, in fact, but same location; considered, the way I look at it, as one; lot of synergies. This is in Upington, a tremendous place in terms of solar influx. We have started there the road construction, access roads. And we will then really kick off for the rest of the project on the first one in -- towards the end of this quarter, beginning of next; and then the other 2 will follow suit.With regards to the backlog, Argentina is a country that has been going through some turmoil lately and also over the past 10 years and have now been given some assistance. They are growing. They are in desperate need of more electricity. They have committed themselves that a large portion of this electricity addition should be renewables. So in that respect, we're extremely happy that Equinor and ourselves took over this project. I think this is also a good example on how our relationship with Equinor is evolving. Here, we're looking for financing, debt financing, but we will only have that in place after COD, after commercial operation date, when we are producing electricity. And Statoil -- sorry, Equinor, is -- I've been saying this for 30 years, right? So Equinor is providing construction finance, allowing us to start construction very early and complete without actually having a debt financing in place.Ukraine. I was in Ukraine, in Kiev, 3 weeks ago. I met with top officials in 3 departments. And I was extremely, I have to say, impressed and also happy with the determination of the administration in Ukraine to add renewable energy. They are clear that 10-year feed-in-tariff is a short period, which is reflecting the fairly high tariff. They are revising their program now, and they are committed to add more renewable energy in the years to come. And of course, we have shared with you our ambition to add 300 to 400 megawatts -- or complete 300 to 400 megawatts in Ukraine. You should expect us to financially close some of this project already in the second half of 2018.Now for the backlog and pipeline. The pipeline increased about 500 megawatt to 4.5 gigawatts. And you can see that we are -- all our projects are in the solar belt, the sundrenched part of the world, the emerging markets. And well, we see a very positive market development. And I also see that with the reduction in equipment prices, as you have seen over the past few weeks, I think the growth over time will start to accelerate further. But yes, that is still to be seen. That is at least our expectation.I'll hand the word over to you, Mikkel, to go through the numbers.

[Mikkel Tørud, Chief Financial Officer]

Okay, thank you. So let's jump into it. The proportionate revenues reached NOK 1.2 billion, as Raymond mentioned, in the quarter; EBITDA, NOK 266 million. And the increase here on a proportionate basis is basically driven by the significant construction activities that we now have achieved. And last year, it was, in the first half of the year at least, very limited activity.Revenues and margins across the other business segments remained fairly stable, and I'll revert to that in a minute. And when it comes to EBITDA, about NOK 140 million of the NOK 266 million that we report for the second quarter came then from Development & Construction. Last year, we had a negative EBITDA of NOK 18 million in that segment. Just also to comment on the EBITDA margins in percentage terms, it's really affected by the mix of business activities. And we have above 80% EBITDA margins on the Power Production business, while on Development & Construction report this quarter 13% EBITDA margin. So when we have more activities on the construction side, the overall EBITDA margin is coming down, and that's why we see a lower margin in this quarter compared to the quarter a year ago. Cash flow to equity reached NOK 136 million, up from NOK 20 million last year. And again, the main bulk of that growth is coming from construction.And looking at Power Production, these days, I mean, across -- I mean, during this year, we have had the same assets in operation, and you can really see the stability of the financial results of this portfolio. Production reached 68 gigawatt hours in the quarter compared to 70 gigawatt hours a year ago. And on a 100% basis, we reached 144 gigawatt hours, which is more or less in line with what we guided on. Same goes with EBITDA, really reflecting the steady state of these plants. And again, we're selling power on fixed tariffs, and irradiation is very stable, a stable resource, and the plants are operating at a high level of availability. So you will basically see that EBITDA compared 2 years ago and the last 12 months is more or less the same. So it's, I think, proving that solar is such a good resource for Power Production.O&M. This quarter, NOK 30 million of revenues, NOK 19 million of EBITDA, it's affected by a catch-up effect, where we recognized revenues of NOK 8 million in Jordan. That stems from the period October 2016 to March 2018 for 2 of the 3 plants in Jordan. So that's a catch-up effect. And furthermore, we saw a good performance of the plants in South Africa, so we have somewhat higher O&M bonuses also in this quarter compared to the same period last year. Now again, NOK 1 billion of revenues from Development & Construction. Six projects, Raymond talked about them, Honduras, Malaysia, Brazil, Mozambique, Egypt and South Africa, all contributed to revenues in this quarter. Accumulative progress across that portfolio was about 21% at the end of the second quarter. And this is a portfolio with a contract value of about NOK 8.5 billion, meaning that about NOK 6.7 billion is remaining value of these contracts and the revenue from that before we start construction of any new plants. Gross margin came in at 16%, and this is fluctuating. It's been down and up from quarter-to-quarter, and it will continue to be like that, depending on the mix of projects that we are realizing.On the balance sheet, main event, obviously, in the last quarter, in June, we raised NOK 600 million. And we now have a very good basis for funding further growth of the company, and we have strong ambitions. And as Raymond alluded to, we expect to deploy more capital already in the second half of this year, so we have a good basis for doing so here. Total assets stood at NOK 11 billion, a bit up from end of last year, mainly based on CapEx investments that we have done in the first half of this year. And then when it comes to cash, NOK 2.4 billion on a consolidated basis, while NOK 1 billion was free cash at the group level. And book equity strengthened further to NOK 2.8 billion after the equity raise. And the equity ratio stood at 79% at the end of [indiscernible]. Now looking at the cash movements through the quarter, you will recognize how we present this. First of all, we received NOK 21 million from operating plants in terms of distributions and dividends. We have NOK 100 million or so of cash flow from D&C. And we invested about NOK 300 million of equity in new projects -- or existing projects, I would say, both in Malaysia but also in Egypt, in the quarter. And the -- we spent about NOK 30 million on development CapEx, on new projects in backlog and pipeline and then, yes, NOK 590 million of net proceeds from the equity raise, while we had a negative movement of working capital of about NOK 300 million in the quarter. And we've had a very positive working capital movement over the last 6 to 9 months, and now we see some reversal of that as especially the project in Malaysia is getting completed.And then I thought I could repeat some of the key figures that we presented also on the Capital Markets Day at the end of May in terms of the new targets -- the new growth targets that we set out. First of all, aggregate investments for reaching 1.5 gigawatts by the end of this year and then further to 3.5 gigawatt by 2021. CapEx is expected at NOK 13 billion and NOK 15.5 billion, respectively. And then our share of equity investments for the current portfolio is about NOK 1.85 billion while we expect to invest about NOK 2.2 billion for the additional 2 gigawatts over the next 3 years or so. And then if you look at the D&C contribution from us realizing this portfolio, it's about NOK 1 billion and, yes, NOK 1.2 billion for the 2 steps of this growth path, basically getting us to NOK 2 billion to NOK 2.5 billion in total from D&C. While the annual cash flow to equity, the long-term cash flow, so over 20, 25 years, is expecting to do -- to grow from current NOK 170 million or so to about NOK 800 million when we have the 3.5 gigawatts in operation. And again, we expect then to enter into long-term contracts, power purchase agreements, where we fix the tariffs and have stable long-term cash flows as a basis for this.Okay, I'll then leave it to you, Raymond, to summarize.

[Raymond Carlsen, Chief Executive Officer]

Thank you, Mikkel. I thought I was going to just bring back a slide that some of you may have seen on the Capital Markets Day. The theme of the Capital Markets Day was accelerating growth. And we thought we would want to capture this in the slide showing 4 important pillars. Of course, it's interesting to win new projects and put them into the backlog, but you need to deliver these projects. And right now, we are building projects at 3 different continents. And having been in the EPC business, although this was subsea and oil and gas, I have deep respect for execution. So we have been working extremely hard on making a new operating or updating our operating system. That is tailored in a way that we can roll it out into different environments, make sure that we have the right ingredients or competence, marry that with local competence to make sure that we are meeting the schedules, the quality and the local content requirements. Sometimes, that is a challenge, but of course, we are following these projects in a detailed manner. And in a broad brush, most of the projects that we are executing at the moment are following the schedule that we were planning to follow. There are some delays, as I've said to you before, in Malaysia, but again, there we are approaching the end of the construction period.Accelerating growth, you need to feed the animal. I mean, you need to discover new projects, you need to discover the projects with a content that allow you to meet the investment criteria that we have, that allows you to meet a lot of other criteria: security, land issues, how you interface with the local population, so all of these criteria, which is a long list that cannot fit into an A4 page, but I mean, we are scrutinizing these projects. And when we move them from just an opportunity into the pipeline, they have met certain criteria.And then we talked about new opportunities. I mean, solar, utility scale, this is what we know, this is what we have been doing most of. We are now adding to the opportunities or the menu a broadened scope. We presented one project at the Capital Markets Day, which is a small project with the UN in Africa, where we're actually seeing a combination of power -- or solar power with batteries, maybe with a backup from diesel where we can actually reduce the cost of power that they are actually paying for in these rural areas by 50%. A lot of opportunities like that, but of course, we have to find customers that have -- that are solid -- that have a solid balance sheet and can pay us. So there are numerous opportunities like that, that we're pursuing. Furthermore, we talked about corporate PPAs. And why is that now entering the scene? Well, in some countries, for example, in Brazil, the power that is being produced from solar today is actually costing less than the base power that is spreading to the market. And that, of course, industrial players watch this all the time. And if they see an opportunity and if it is a regulatory regime that allows you to buy from us or from a similar company to us directly, then they're looking at that to maybe spice up their energy mix so that they can reduce the overall cost. We're pursuing opportunities like that in several parts of the world, and that will increase as more and more countries will deregulate the energy markets and allow for this type of power purchase and that alike.Finally, of course, a lot of the cost that we have is financial costs. So if you can optimize the way that we raise funds, the way that we distribute funds. That is healthy, and it actually reduces the costs of the project tremendously. And in other words, you can have a lower tariff. And hopefully, also we can get the benefit from it. We also said at the Capital Markets Day that we may rotate some of our assets. We have talked about this in the past, but I mean, the volume in some of the areas that we are now -- have reached a certain level that, well, maybe we could rotate it, maybe we can combine it with other assets to increase the returns or actually take the process -- proceeds from one investment into something else that will enhance our financial performance. So you should watch us on all these pillars on how we perform. And I think we're going to share with you a lot of interesting news over the next few quarters on how we are performing here.Finally, this slide you have seen before. We have updated this slide to show our new ambitions, our goal for end of 2021. We only have 300 megawatt in operation, but we have 1,100 under construction. Some of these plants will -- or most of them, I suppose, will be connected at least over the next 12 months, but a lot of them also in the second half of this year. We have been starting to add backlog to the 2,000 megawatts that will be on top of the 1,500 megawatts. So we're moving up and a bit ahead of our schedule for the time being. So we will see projects that will mature and that will go from the pipeline into the backlog sequentially as they meet certain targets, giving us then at the end of 2021 the 3,500 megawatts of projects.The -- Mikkel covered this a bit before. I mean, the D&C contribution, NOK 2 billion to NOK 2.5 billion, which gives us -- or gives a bit of a piece of information with regards to our ability to create capital from Development & Construction activities. Cash flow, once we're done, NOK 800 million, in average. We are guiding on the margin on D&C, again, linked to our ability to generate capital, in the range of 12% to 15%. Equity IRR, here we also talk on average, it will vary a bit from country to country, but we are targeting 15%. And then, of course, what is the foundation of our business, health, safety, security and making sure that we are not having a negative impact on the environment. So interfacing with local communities towards sustainability programs will continue to be a very important part of Scatec Solar foundation moving forward.Now I'm ready -- Mikkel and I are ready for questions from the audience.

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kepler Cheuvreux. A couple questions, if I may. First of all, could I just -- on the maintenance question and the equity invested so far in Malaysia, how -- are you nearing a completion there, or are you still expecting to invest more equity?

[Mikkel Tørud, Chief Financial Officer]

We're nearing completion, so it's a bit left but not much.

[Andreas Bertheussen, Equity Research Analyst]

And could you just give us some color on -- I don't know, you don't disclose the completion on single projects, the 21 overall. But are you -- especially in Brazil and Malaysia, when do you expect to be the final quarter that you will receive D&C earnings?

[Mikkel Tørud, Chief Financial Officer]

Okay, well, when it comes to revenue recognition, it's again following an S-curve. And you will normally have a certain portion of revenue recognition left at the very end of the project. So I would say that we're talking about Brazil grid connection in the fourth quarter and Malaysia now in the second half of this year. And I think you will see revenue recognition for both of those projects both in the third and the fourth quarter, but less so in the fourth than in the third.

[Andreas Bertheussen, Equity Research Analyst]

Okay. And it's an interesting observation, the recent transaction in South Africa, Globeleq acquiring the Brookfield assets, 178 megawatts, I think. Do -- were you approached for a bid in -- for your South African assets? And do you know anything about the pricing?

[Raymond Carlsen, Chief Executive Officer]

I do not.

[Mikkel Tørud, Chief Financial Officer]

No, I have not seen anything in -- on the pricing of that transaction. So no, we have not been a seller of assets, so we have not really been engaged.

[Andreas Bertheussen, Equity Research Analyst]

Okay. Two more, if I may. One is on the component prices coming down on the back of this Chinese demand drop. Are you able to benefit from this in terms of D&C margin? Or are you experiencing the opposite that the counterparties are backing down on pipeline projects, wanting to renegotiate on the back of potential lower tariffs?

[Raymond Carlsen, Chief Executive Officer]

In terms of renegotiation, we haven't had any initiatives taken by our customers. But I mean, that doesn't say that, that could happen, but we do not expect it. Some of these contracts are signed in ink and are sealed. So I think that mostly, this is a benefit that is hitting our D&C margin straight on. And we've seen price reductions of 10%, 15%, dependent on the type of module. We are, I would say, technologically in front when it comes down to taking new panel technology into our plants. And in Egypt, for example, we will install panels that are producing electricity not only from the front side but also from the backside, which is the first time. And this is 400 megawatts, so this is going to be a major activity, and -- or installation. And we will see a boost because these panels are installed in a desert. And when you're producing from the backward panel, you are actually taking the indirect light. And you know that you can get sunburned even if you're not directly in the sun, right? So this is the light that we're actually picking up on the backside of the modules and are increasing the efficiency of -- and the output of our plants. Those panels used to be fairly expensive. They have been -- have come down in -- over the past year 20%. Mono technologies has come down the same level. And poly, which we used to install on all our plants, are trading now at $0.26 to $0.27. So although the upstream part of the business is hurting to a certain extent, and you will see some consolidation, we happened to be, at least this time, on the receiving end. Next? [Foreign Language]

[Jørgen V. Bruaset, Senior Analyst]

Jørgen Bruaset, Nordea Markets. Just going back to the asset rotation potential in your portfolio, have you been in any firm discussions regarding asset rotations with potential counterparties? And how do you see the interest rate sensitivity to the asset rotation potential?

[Mikkel Tørud, Chief Financial Officer]

I think it's fair to say that when we have talked about this, we have done it in the context of us growing our portfolio and beyond the 1.5 gigawatts that we're currently realizing. I think also from our perspective, to do an asset rotation would probably make more sense once we have some more operating experience from the plants that we're currently constructing. So the answer is no, we have not really initiated any specific processes around the asset base at this moment. I think that will be a better discussion to have once we have sort of realized at least the current portfolio of construction projects.

[Raymond Carlsen, Chief Executive Officer]

If I may just add to that. What Mikkel is saying is, of course, very, very true, but we are seeing in some of the markets that there are interested parties that are wanting to enter the market. And a bit surprising maybe, but even though before -- even before Egypt is finished or even started construction, we see that there's a lot of Middle East interest in the Benban project. So that's good for Egypt, it's good for the electricity price in the future, and it's also good for the companies that are investing into Benban. We're seeing some of that in South Africa as well. So different industries that were not so -- well, that were risk averse on the construction but then see the parts in operation. You saw Mikkel's numbers. There is not much variation when you're producing electricity from solar.

[Jørgen V. Bruaset, Senior Analyst]

Okay. And also just a final one from me. On the added capacity to the pipeline, could you just share some thoughts on sort of where we are in those projects? I mean, we've seen a quite big spread on the lead time from entering pipeline and going into backlog. So how mature are these projects you've added to the pipeline and just some color on those?

[Raymond Carlsen, Chief Executive Officer]

I mean, it's 500 megawatt, then it went up to 5 -- 4,500. It's very difficult to be specific about it because it's a whole host. Some of them will take some time to develop. Others, as we have seen in the past, may jump from being an opportunity, not being a part of the pipeline and straight into the backlog. But I think -- I mean, if I should anticipate the behavior of the pipeline, I think more projects will move quickly into the backlog, which is also reflected in our view of the increased or accelerated growth. For example, in Ukraine, we are not developing the projects. We're spotting opportunities, companies and people that have been developing projects for the past to 24 months. We're looking at them. Are they interesting? Do they have all the permits? And if we're happy, then we start negotiations, and we reach in some kind of an agreement that satisfy our criteria and their criteria, and then we move ahead, and then they go straight into the backlog, like the one we just signed when I was in Kiev 2 weeks ago.

[Mikkel Tørud, Chief Financial Officer]

Okay, I just checked, we don't have any questions from the web, so I think we're...

[Raymond Carlsen, Chief Executive Officer]

We're done?

[Mikkel Tørud, Chief Financial Officer]

I think we can end it there.

[Raymond Carlsen, Chief Executive Officer]

Okay.

[Mikkel Tørud, Chief Financial Officer]

Yes.

[Raymond Carlsen, Chief Executive Officer]

Very good. Thank you very much. In fact, it's more sunny here than at some of our plants in Norway, so maybe we should reconsider and bring our home market or our home place into the portfolio of opportunities. Thank you.

[Mikkel Tørud, Chief Financial Officer]

Okay. Thanks.