Arise AB

STO:ARISE

Earnings Call Transcript 2022-Q2

[Per-Erik Eriksson, executive]

Thank you very much, and very much welcome to the quarter 2 presentation from Arise. I will start giving a short introduction to the company. Markus Larsson, our CFO, will go through the Q2 results. We will give you some highlights on the quarter and also the agenda moving forward, and we end this session with the Q&A session.

Starting with Slide #3, some brief introduction to the company. Arise was founded in 2007, listed at NASDAQ in 2010. We are a quite small company, 34 employees currently. We have 3 business segments: one is the Production, 139 megawatts. You can see at the bottom to the left. We have a Development business. Currently, we have some 2,300 megawatts in our project portfolio. And also, we have something we call Solutions, which is our services business. Currently, we have more than 1,800 megawatts under management. We also have a record level of projects under construction, including Kolvallen and Lebo projects we will talk a bit more about later on. We currently have almost 800 megawatts under construction.

That is our company in a very brief presentation, and I'll leave the word to you, Markus.

[Markus Larsson, executive]

Right. Thank you, Per-Erik. I'm flipping to the next page now. If we look into the Q2 numbers, the net sales for the quarter amounted to SEK 53 million versus SEK 36 million in the same quarter last year. That is an increase that is, in all material aspect, driven by our own production. EBITDA totaled SEK 25 million, and EBIT came in at SEK 10 million.

If we look at the comparable profit before tax, that amounted to SEK 7 million, while the recognized profit before tax was minus SEK 6 million, and this is due to quite high FX effect on our euro loans. As a result, the net income totaled minus SEK 6 million, which corresponds to about minus SEK 0.13 per share. Our operating cash flow was SEK 67 million compared to SEK 12 million for the same quarter last year. And if we look at cash flow after investments, that amounted to minus SEK 12 million as compared to minus SEK 43 million in the same period last year.

Our Production generated 61 gigawatt hours, which was in line with the same quarter last year, whereas the average income from the Production was EUR 675 per megawatt hour, an increase compared to the previous year of SEK 420 per megawatt hours. All in all, this resulted in an increase in the total income from production to SEK 42 million compared to SEK 26 million same quarter last year.

The revenue recognition for Ranasjo & Salsjohojden we will get back a little bit to that later, but it has been stopped for the time being due to risk of cost increases. We also signed an asset management contract with BlackRock during the quarter regarding in total 219 megawatts in Finland, and we issued our Green Bonds amounting to EUR 50 million.

With that I think we could turn to the next page. And as you probably have seen late last week, we announced the sale of the Kolvallen project, which was sold to Foresight 4 sites for a total consideration of just north of EUR 100 million. That includes an upfront payment of EUR 75 million, which was received at closing and no risk associated with that. And then there's also a deferred payment or an earn-out payment of EUR 25 million. That one is payable upon the completion of construction and is dependent upon how the construction proceeds in relation to timetable and budget. The expected impact on earnings is approximately EUR 90 million in total over the years 2022 to 2025, of which about EUR 65 million has been realized at closing.

In connection with this, we also invested about EUR 17 million and thereby become owner of 9% of the now fully-funded project where we invest alongside Foresight on equal terms. Siemens Gamesa is providing 42 turbines with a total nominal effect of 277 megawatts, and Svevia has been contracted for balance of plant. So summing all this up, we believe that we've been able to develop a truly great project, which is reflected in the developer premium received of about EUR 100 million. And on top of this, we're also very pleased to have the chance to independently co-invest alongside Foresight in the fully-funded project, which we continue to have very good prospects to achieve high returns.

With that I'll turn it back over to Per-Erik again and turn to the next page.

[Per-Erik Eriksson, executive]

Thank you. Yes, we consider ourselves having a strong financial position and a bit background for that. Upper to the left you see a stable background and a green line and an orange line. Looking at those lines, the green line, you can see that in 2021, we have divested some 1 gigawatt of windfarms. And actually, we have now achieved [ 1.3 gigawatt ] in Q2 this year. All in all, we have realized some 1.5 gigawatts of wind power, which is a quite impressive number, we think. And we have used the revenues from this divestment to basically clean up or tighten up our financials and decreasing our debt.

Looking to the right you can see, in Q2, we have now a net debt about SEK 290 million, some 21% loan to value. With the transaction we did with Kolvallen, we now have strengthened our position further. And we have a clear ambition to accelerate our growth, while retaining flexibility to maximize value created from our project portfolio. We aim for keeping a low leverage as we move forward, which means that we have a larger flexibility in terms of hedging for our production.

With that, I think we'll flip to Slide #7, looking at our project pipeline. You can see here that we have actually taken out Kolvallen if that is realized now. So we have more than 2,300 megawatts in the late-stage development. We have still Lebo in the pipeline since that is still open if we will keep it or if we will divest. Lebo is under construction, and we have that taken over or in production in first quarter 2024.

Next project to come after that will be Fasikan. We are still awaiting for the line concession to be approved. We expect to have that soon. That has taken more time than expected, but still, we expect to have that decision quite soon. And then we have Finnaberget and Tormsdale in Scotland. Finnaberget is in late stage of permitting process, in appeal process and Tormsdale is in permitting process right now. And then on top of this, we have the early-stage development, I could mention, HT Skogar [ 1,500 megawatts ] contract, an agreement we signed last year. We expect -- and that's a quite large potential, some 1,500 megawatts. We have a clear focus to use the situation we are in right now to be well capitalized to expand our portfolio, both short term, midterm, and also long term. Yes, I think that's it.

We can flip slide #8. Our growth ambitions, we are -- we will move into a bit of our new phase with growing the company. We are well capitalized in order to make it possible to accelerate the portfolio expansion in selected markets. And selected markets is Nordics, Sweden, Norway, Finland; U.K.; and Poland. We will grow the organization as well. We have planned for the coming 12 to 18 months to increase the organization by 10 to 15 full-time employees in all business segments. We are -- being well capitalized, we can also have a dynamic approach for realizing value from our portfolio. We can decide whether we should divest, keep, or coinvest. For instance, we have a co-investment in Kolvallen. We have Lebo where we can decide if we should keep it or divest it later on. So this flexibility, we believe, will make it possible to optimize value. We also have the capacity now to acquire project rights in various stages as well as operating assets in cases we find that attractive.

With that, we could over to Slide #9 and some comments on current power market. We are still on record levels in the Nordic market. We can see a continued upside and momentum in the forward power curve, increase in fuel prices on diminishing Russian imports. We have seen that Russia decreased the export to Continental Europe in June further for a decrease. That's why CO2 prices are traded on a quite high level still EUR 80, EUR 90 range. The hydrology in general is a normal level in the Nordics, but weak in Southern Norway, which is a strong price driver in Southern Norway. We can see SE4 have a stronger connection to Danish power prices, DK2 especially, moving into the summer. We also see that [ regulatory ] assets, SE 2 and SE 1, have recovered during the quarter due to higher prices. We still see industrial consumption potential to increase. And in the longer term, our expectation is still that we will see a price area convergence to happen.

Continental prices still or even more on record levels. We can see [ German ] prices in quarter 4 about EUR 400 per megawatt hour, and looking at the calendar year 2023 we are EUR 300 per megawatt hour plus. And there are also a bit fear regarding winter containment in Continental Europe. So that will be quite interesting to follow. We also see, as a consequence from this, that a number of countries are now looking into possibilities to bring coal units back online and also there are discussions in Germany to delay some decommissioning of nuclear as well. So the security of supply is certainly a quite strong driver for corrections across Europe at the moment.

With that, I hand over to Markus again.

[Markus Larsson, executive]

Yes. Thanks, Per-Erik. On the next page, Page 10. If we look at our realized prices and market prices on the left-hand side, and as mentioned previously, our realized -- average realized price in our own production was SEK 675 per megawatt hours. That is well below market average and a consequence of, one, the extreme volatility that we have seen in the quarter; and 2, in combination then with our hedges, which are below the market average broadly. In terms of production, on the right-hand side, the production was, as mentioned, in line with Q2 a year ago, but still some 15% below budget. One should maybe keep in mind also that Q2, together with Q3, are the weakest quarters of the year. On the hedging side, bottom right-hand side, we have continued to hedge further, especially into 2023 and 2024. Prices that we've seen of around EUR 100 per megawatt hour or even more is, in our opinion, very attractive levels. And for 2023, we've hedged about 30% of our annual production volume, which we believe is balanced level at the moment.

Turning to the next page and our projects that currently are under construction. Skaftasen turbine delivery has been delayed, but that impact is partly or to a quite large extent limited by our contract structure. We will probably see COD now in Q4 of 2022. Ranasjo and Salsjohojden, that project has been impacted previously by increase in cost of raw materials due to extreme market conditions. And as we now see risks for further cost increases, the revenue recognition has been stopped for the time being. Our own project, Lebo, which we'll build in our own books, where the construction commenced just before summer. So no deviation and COD is expected in the first quarter of 2024.

I'll now hand back to Per-Erik again to wrap up.

[Per-Erik Eriksson, executive]

Thank you. The last slide down, the key activities that we have communicated before regarding for 2022, some update. If we start with the Green Financing Framework, that is completed. As Markus just said, we have issued a Green Bond of EUR 50 million within a frame of EUR 100 million. We had a decision to start constructing Lebo, 30 megawatts, 33 megawatt to be more exact, and that is done. And also, again, we should mention that we are building this in our own book now in order to maximize flexibility later on for value creation, to keep the project or to divest.

We are extremely pleased to be able to finalize the sale of Kolvallen. We promised to do that during Q2. We did not deliver on that. We missed that by 3 -- 2 weeks, but I hope you're forgiving when we look at the results from that transaction, which we think is very good. We are looking into preparations to bring Fasikan -- to realize Fasikan 100 megawatts, depending on the grid concession. But as said before, we really expect to have that quite soon. So Fasikan will be, hopefully, something to work with during autumn this year after holidays.

We are in process to secure project pipeline in Poland and U.K. In Poland, with a partner, we are in some discussions there on different projects in different stages. In the U.K., we have earlier communicated that we are looking into greenfield on solar and that we expect to have some result from this during autumn as well. And on top of that, as also mentioned before today, is that we are now really focusing on improving our project pipeline to increase that. So that is the focus areas at the moment.

With that, I think we are through. So let's have some questions.

[Operator]

[Operator Instructions] Our first question is from the line of Olof Cederholm from ABG.

[Olof Cederholm, analyst]

It's Olof from ABG. Kolvallen, congratulations on that, fantastic project. Just a follow-up on that. How is the contract structure protecting you from raw material cost inflation or turbine cost increases going forward? I suspect given what's happening in other projects that you've been very careful with that, but any more information would be appreciated.

[Per-Erik Eriksson, executive]

Yes, I can take that one. Yes, this is -- first of all, this is a traditionally what we call a ready-to-build sale, which means that the risk we have is basically the earnout at cost. We have -- in this contract structure, we have a turbine contract and we have a strong contract, including civil works and including the internal grid, and on top of that, we have the external grid part as well. And looking at the contracts as they are right now, what happened now during the last year is that we all experienced some extreme cost inflation. And this means that all contractor suppliers basically now have requirements on the indexation to different raw materials, and that is the case here as well. So we have an indexation to steel. We have some other indexations as well in this transaction.

I would say that the risks are -- I think we have been quite conservative in budgeting the process. I believe we have a good buffer also in the earnout. And I think actually that it might be that we have now seen a peak also in the raw materials. For instance, steel prices become -- metal prices, in general, are moving south. We'll see what happens with fuels, et cetera. But all in all, I think actually we could have some upside in the indexations as it looks right now, at least. So all in all, I would say that we have a quite conservative approach for cost.

[Olof Cederholm, analyst]

Excellent. And on the revenue recognition that you expect over the coming years, will that be sort of a linear profit recognition, or how should we think about that?

[Markus Larsson, executive]

Yes, Olof, you should look at that as a linear revenue recognition, where specifically, we haven't started the revenue recognition yet. But typically, we take, say, between 30% to 40% in a contingency buffer and then the remaining part we start recognizing linear over the period, basically.

[Olof Cederholm, analyst]

Excellent. And then I have a question about Ranasjo and Salsjohojden. You're stopping revenue recognition for now. What needs to happen there for you to start to recognize revenues again?

[Per-Erik Eriksson, executive]

Yes. We have quite -- as we all experienced, we have quite extreme market conditions, I could say, connected to what's happening in Russia -- sorry, in Ukraine with Russia. So you have seen steel prices rocketing. We have seen fuel prices also that has created an extreme market situation. And in our contracts, there are some paragraphs, we have to handle such situations. So we are basically in discussions with our contractors on how to handle this extreme cost increases.

And we are not yet through those discussions and still things can move during the project on that. So ongoing discussions, we don't know the outcome yet, but we came to the conclusion that as there are uncertainties, we would like to -- so we decided to stop really, that's it.

[Olof Cederholm, analyst]

Okay. Yes. And I have 2 more questions, then I'll get back in line. So on Lebo, when do you think you'll make a decision regarding whether to keep it or to sell it?

[Per-Erik Eriksson, executive]

Yes. That's the whole idea that we should have flexibility to have an opinion about if it's good to keep it or not, or if it's good to divest or not. So we will not take that decision until we have it after [ off the course ] basically. So that will be in -- let's say, that we will have a clear opinion in 2024.

[Olof Cederholm, analyst]

Okay. Excellent. And then my last one. The net financial costs, I understand you have debt in euros, but has that effect taken now in Q2, and we should see a more normal financial net, or will the financial net simply go up significantly as long as we have these rates?

[Markus Larsson, executive]

I think if I understood the question correctly, I think the answer is, basically, during this quarter, if you look at the euro to SEK, the euro has appreciated maybe 3% or something to the SEK. And the bank loan that we had amounts to now just south of EUR 40 million. So there you have it. That's kind of the sensitivity on euro loans. But then, again, on the other hand, we have -- all our assets are typically priced in euros and so on, which we don't see in the financial net, but that -- I don't know if that was an answer to your question, but...

[Operator]

[Operator Instructions] Our next question is from the line of Henrik Alveskog from Redeye.

[Henrik Alveskog, analyst]

Okay. This is Henrik from Redeye. Well, 2 questions on Kolvallen for me. First of all, the stake that you're taking here, EUR 17 million and corresponding to 9%, should we think of this as all EUR 17 million being a fair amount from your perspective? Or is there a reason, for example, why you're -- well, why the principal owner wants to own over 90% for legal or tax reasons or something else?

[Per-Erik Eriksson, executive]

No, I think you should see that as an independent investment from our side, and we believe that the investments have a good possibility to give a good return.

[Henrik Alveskog, analyst]

Okay. So the size -- what about the particular size of this? Is this -- should we view it as this is what you consider a fair amount to invest in an individual project in this case? And would you have preferred to have more?

[Per-Erik Eriksson, executive]

No. I think this is a good size for us as a company at some EUR 17 million. And obviously, we have some earnings in this project. So for us, this level may make sense in this case. And since Kolvallen one of the or perhaps the best project they have experienced so far, we believe that this will be a good investment. And we also have, I believe, in the market in SE 1 and SE 2 in the future with increasing energy -- industry consumption, et cetera. So we believe in this investment.

[Henrik Alveskog, analyst]

Great. Okay. And then just on the estimated earnout of EUR 25 million. Obviously, it could be more than. Would you like to tell us what's the maximum potential, and also, if these factors are -- if it's depending on factors that you basically control or are able to influence?

[Markus Larsson, executive]

Okay. Thanks. Good question. I think the contractual structure, we're not disclosing that in that much details on that. And you should see that the expected earnout if the project goes according to plan is EUR 25 million. Typically, what we are seeing is rather that, again, there could be some cost increases, which will affect it negatively. That is one part.

And the second part is related to basically delays on the project, which we've seen, for instance, in Skaftasen. But there we had, as mentioned, for Skaftasen projects, for instance, then the -- so to speak, the reduction of the earnout contractually with the buyer that is offset by certain [ LDs ] or so that we received from the contract with the, for instance, turbine supplier. So that is -- we believe that, in that case, we are pretty much in control.

[Operator]

The next question is from the line of Oskar Vilhelmsson from Redeye.

[Oskar Vilhelmsson, analyst]

I have a question first. I believe you mentioned the permitting and grid concessions taking a bit more time now. Is that mainly related to wind in Sweden regarding the Fasikan project, for example? Or do you see that as a general theme in the other projects and markets as well?

[Per-Erik Eriksson, executive]

I think -- yes, permitting processes in general are quite slow. But I think in this case, it's about Energy Market Inspector, but we know it's -- we had some questions, and so we know it will come closer there quite soon, at least [indiscernible] it has been taking too long time, I think. It's quite a simple concession as well, I would say. So a bit disappointed on that. But hopefully, we'll have it during summer.

[Oskar Vilhelmsson, analyst]

All right. And you're also expanding the organization now quite significantly. How hard or easy do you believe it is to find the right people in this new market? And are the hires mainly related to the geographical expansion?

[Per-Erik Eriksson, executive]

Yes, I think we will grow in all the business segments to manage -- to grow basically. And obviously, it's a quite hot market in terms of there are people that -- still people are always attractive in the market. But we have a hope that we will be attractive as an employer as well, being quite offensive in our approach to the market. So that's our hope at least. We don't know yet. But so far, so good there in terms of the recruitments we made.

[Oskar Vilhelmsson, analyst]

Right. And I have a last question here just regarding the wording in report. We note now that you sort of open up for solar projects also in the Nordics. Is that correct? And do you have any more comments on the reason behind that decision?

[Per-Erik Eriksson, executive]

Yes, that's absolutely correct. And that's part of our strategy that was decided last year to diversify in terms of geographies and also technology. So that's part of our strategy. And we are in discussions -- advanced discussions on solar in Southern Sweden as well. So it's not only Poland and the U.K. We are actually in Sweden as well. So hopefully, we expect to have some results on that during autumn as well.

[Operator]

So this concludes our Q&A session. And I would like to turn the conference back over to Per-Erik Eriksson for any closing remarks.

[Per-Erik Eriksson, executive]

Yes, I would like to say thank you for the attention. I can only state that we are extremely happy with the first half year of 2022. I think it's above our own expectations in terms of the outcome of Kolvallen. We also expect that our own production will deliver strong cash flows during '22. Obviously, we have some market challenges and volatility. But overall, we are convinced that our production will continue to deliver good cash flows during '22. So all in all, we are -- we look forward to the rest of '22. We expect to have a good year. I'm quite convinced we will have a good year. And with that, I would like to wish you all a nice summer. Me and Markus, we will take holiday from tomorrow, which I think we deserve. So I wish you all a nice summer.

[Markus Larsson, executive]

Yes, have a good summer, everyone.