Encavis AG

XETRA:ECV

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Christoph Husmann, executive]

Good morning, ladies and gentlemen. A warm welcome to our Q1 Analyst Call. We released our figures of Q1 2024 already by [ NetTALK ] announcement on May 3, because our figures are fairly below previous year's level, although we are convinced that none of you will be surprised by that, that the negative deviation was there because with the guidance already, we announced that the 2024 figures will be, many of them, fairly below 2023, having in mind the big impact of high power prices of previous years, which fortunately cannot be repeated this year. But these figures are approximately on target. So therefore, we are still positive regarding our guidance.

Today, I'm here with -- together with my colleague, Mario Schirru, CIO and COO of Encavis, we will guide you through the figures and then afterwards will be available for your questions.

Ladies and gentlemen, well, one of the highlights certainly in Q1 2024 was that KKR launched a voluntary public takeover offer. The process is progressing and we have already now the investment agreement signed, which was released on the 14th of March. KKR launched a public takeover on April 24 with a cash consideration of EUR 17.50 per share for every shareholder. And the first offer period will end in 2 weeks from now.

The Management Board and the Supervisory Board of Encavis AG recommended that, offer in a joint recent statement, which was published on May 2. But at the same time, we are not only working on the progress of that process, but we are building up the business of our company at the same time. So in the meantime, we started the construction of 114 megawatt solar park in Borrentin in Mecklenburg [ Fort ] Pomerania as well as we did some [indiscernible] refinancing of 2 parks in Spain, Talayuela and La Cabrera, which is in the total amount of EUR 203 million, setting up better financial positioning of these 2 parks. And we signed for Encavis Asset Management, a Power Purchase Agreement for 80% of the electricity of our 216-megawatt solar park Bartow in Germany.

Ladies and gentlemen -- next page, please. Ladies and gentlemen, if we have a look into our figures, then we see that the energy production of our existing portfolio is -- has decreased by 59 megawatt hours by 8% to 694 megawatt hour -- gigawatt hours -- sorry -- gigawatt hours. Two-third of that deviation of 59 gigawatt hours is due to meteorological conditions. One-third of it is due to 2 wind farms, which we sold at the end of last year before they were pretty much at the end of their feed-in tariff and who are up for repowering. Certainly, that last effect was recognized in our guidance.

The total energy production increased -- decreased by minus 2% or 12 gigawatt hours. So obviously, we acquired 47 gigawatt hours of additional power production last year, which we are now producing, which were wind farms in Germany and Finland. These minus 2% of reduced energy production in total [ boil ] down to 12% negative deviation in revenues of minus EUR 12.2 million. These are predominantly firstly, it is EUR 8.1 million special effect, which we announced Q1 2023, which was the cash in onto the accounting for a performance in balanced factor in the Netherlands and the Dutch SD plus system, which we received last year and certainly which we could not repeat this year. This was planned for as well.

And we have approximately EUR 5.3 million negative revenue effect out of lower prices. Maybe you recall that Q1 2023 was impacted by pretty high price levels still. And that was -- could not be repeated this year and was certainly reflected in our guidance as well. And lastly, it is [indiscernible] sale of 2 wind farms, which I already stated. This is minus EUR 1.5 million, which was reflected in the guidance as well.

So therefore, we were not surprised by the negative deviation of the revenues by minus EUR 12.2 million. This also reflected in the EBITDA development by minus EUR 15.8 million, where first of all, these revenues are missing. And secondly, we have additional cost for the growth of the company for the personnel as well as cost for the new projects, the 2 wind farms in Germany and Finland. And that is then further reflected in the EBIT as well where we have additional depreciation.

At the end of this table, you see that we have an operating negative EPS of minus EUR 0.04. This is not unusual for solar companies since we have fixed cost in every quarter, but low radiation and therefore, low revenues in the first quarter. And that is in some periods, as we will see on the one of the later charts, overcompensated by unusual high prices like the last 2 first quarters of 2023 and 2022 or/and high wind performance.

Ladies and gentlemen, if we go into the segmentation report, then we see that we have a decline of revenues in 3 out of 4 segments. Only the PV services is growing. We see here the impact of the specific, issues which are already raised.

So in solar, we have negative metrological effect and price effect. In the wind farms, we have the sale of the 2 wind farms, [ Sohland and Greußen ]. And in Asset Management, we just have a shift of business to the second and third quarter. PV service is growing. But overall, all of them developing in a way as expected on our side and in line with guidance.

If we go to the specifics. First of all, we see a decline of revenues in the solar segment by EUR 10 million. This is, firstly, EUR 8.1 million of the performance imbalance factor of the Netherlands, then EUR 1.7 million of price effect and only EUR 600,000 of lower production than previous year.

We see that in the overall portfolio, we have a decline of power production by 9%, but that only leads to the EUR 600,000 of lower revenues due to the fact that most of it or almost 50% of it is from Spain, where in average, the remuneration per kilowatt hour is one of the lowest within the group. So the input back from the bad weather situation in Spain is not so much reflected in the revenues. As you see here very well that we have a fixed cost system because the EUR 10 million gap in revenues is exactly -- can be seen within the gap of the EBITDA and the EBIT.

And if we have a look into the wind segment, then we see a decline of revenues by EUR 3 million. Here, we have 2 compensating effects. One is we have minus EUR 5.1 million revenues in the existing portfolio, which is partially due to the sale of [ Greußen and Sohland ] wind farms of EUR 1.5 million and metrological effect of minus EUR 3.6 million and a positive effect of EUR 2.6 million from new assets, the wind farms in Finland and in Germany.

If we have a look into the PV services, here, we see a growth of the business. Half of it internal growth, half of it external growth. You see that here because the net revenues grew by EUR 1.2 million and total revenues by EUR 2.5 million. So half of it is consolidated because it's internal. With that growth of the business, the margin is coming back, is improving. That's positive and should be seen during the course of the year in a further positive way.

Next page. In the asset management, we have a decline of revenues. The issue is that last year, we suffered somewhat from high interest rates because some of the investors were reluctant to invest into such funds because, firstly, they want to see that the returns are coming back. This could be shown now, but now the business is [ always ] starting. There's more committed equity. And so we see that the business which shifts more to the second and third quarter. And honestly said, in the first quarter is always pretty weak in the asset management.

If we have a look into consolidation and headquarters, it is in the first line the revenues is just the consolidation of the internal works of Stern. The operating EBITDA is increasing from minus EUR 2.7 million to minus EUR 3.4 million. These are increased costs of the team for the growth of the company.

Ladies and gentlemen, if we then go to the guidance. And here, we have to have a look on the relation of the first quarter results compared to the guidance. As you might see here, the Q1 2024 figures are not unusual. You have seen that in Q1 2021 as well, Q1 2018 and Q1 2016 as well. Here, we have seen negative results. But you might argue that they are increasing. Well, just only for simple rule of thumb, the more solar you have, the more fixed cost you have. But the radiation in first quarter is always bad.

You make your profits in second and third quarter. So the bigger your solar portfolio is, the bigger the losses in first quarter should be. But in some of the quarters, that trend is overcompensated, specifically in Q1 2022 and in Q1 2023 due to the war in Ukraine and the high power prices in combination with high volumes, we had a positive effect. But that was quite unusual. In Q1 2019, Q1 2020, we had good wind and therefore, this negative was overcompensated. But wherever you look, whether there is, in the first quarter, a profit, a loss or a 0 result, it is always the case that the guidance was reached, was fulfilled and was on the level above previous year.

So ladies and gentlemen, therefore, it is that, and now I would like to go to Page 16. We stick to our guidance and emphasize that we are heading to revenues of more than EUR 460 million of EBITDA of more than EUR 300 million, EBIT of more than EUR 175 million and operating cash flow of more than EUR 260 million.

Let's talk lately -- lastly, on -- then the carbon footprint on Page 19. In the year 2023, and you might have seen that because we released our ESG progress report and our ESG plus report. Recently, you have seen that we, again, could reduce the Scope 3 emissions. So the Scope 1 and Scope 2 emissions are not of that importance to us. They are pretty small anyhow, yes, there is an increase here. Unfortunately, it is, first of all, that the direct carbon emissions, for instance, the fuel consumption of the company vehicles are increasing. This will, as you might recall, be abolished that Scope 1 because we are currently changing all company cars to full electrified cars. But this with the existing lease contracts will last some time.

The scope 2 emissions, which is mainly our purchased power with the bigger parks and more parks we have, there is an increase. This cannot be prevented, but we are, as you might recall, switch that to full green electricity. So let's focus more on the Scope 3 emissions. The Scope 3 emissions could again be decreased by 13% compared to 2022. 98% of our emissions are in Scope 3, but this quarter, we will be stable because the other ones will be abolished, but was in total, over the last 2 years, decreased by almost 50%.

And here, we were pretty active in -- well, by increasing the use of recycled materials as well as the increase of use of low emission means of transport with the construction of our parks. So we are heading here as well, and we are on plan here as well.

Ladies and gentlemen, that was a brief introduction into our figures of Q1 2024. And now we are available for your questions. Thank you very much for your audience.

[Operator]

[Operator Instructions] The first question is from Teresa Schinwald from Raiffeisen Bank International.

[Teresa Schinwald, analyst]

Thank you for the presentation. I'll ask my almost usual, can you give us an update on the investment cost for a new project under development here? What's going on with the wind and solar panels?

[Christoph Husmann, executive]

Yes. That's, I think, pretty easy. The price have been quite stable over the last month. Last time, I think we mentioned figures around EUR 0.11, EUR 0.12 for about peak. I don't see significant decrease in this figures. Things seem to be stable. Actually, same holds for the other, capital expenditures when constructing new plans.

[Operator]

[Operator Instructions] The next question is from Harrison Williams from Morgan Stanley.

[Harrison Williams, analyst]

I was hoping you could maybe provide a little bit more color on what you're seeing in the European PPA market in terms of latest demand trends, given we have seen power prices fall quite significantly this year. So any overall color you can provide on anything specific, you can say, by geography would be particularly useful.

[Christoph Husmann, executive]

Yes. Happy to elaborate a little bit on that. We see still a strong demand. So when we reach out to off takers to sell the power from our plants, there is a lot of interest. There is, of course -- people are careful in terms of pricing because everyone has seen this huge decrease in prices. Actually, none of them expecting it to be that significant. We also were a little bit surprised. Over the last weeks, we've seen a slight recovery. There are sort of different factors that are now playing a role. In general, yes, I think it is sort of -- the toughest thing is -- really to agree on pricing. And for us, it's important to find and to look for off takers that are currently more looking for sort of basing their decisions on a strategic [ generic ] rationales rather than on sort of optimizing the -- their own energy costs because this is -- again, I feel like there is a little bit of an uncorrelation between sort of the price that we see on the market, on the spot and what is expected to happen over longer term. And this is a challenge.

Again, volumes have been still high. So there are a lot of contracts being signed. Again, we see that the price finding, discussions are a little bit more difficult than in the past. Let's wait and see.

[Harrison Williams, analyst]

And maybe if I can ask one follow-up to that. Are you seeing any change in the structure of these PPAs and the demand of off takers? And I mean that both in terms of the length of the PPA and also in terms of the sophistication, I mean, are off takers still happy with pay-as-produced PPAs? Or is there a shift towards more base load as the preferred option?

[Christoph Husmann, executive]

Yes. Well, this is sort of a discussion which I think will stay with us for the next years, because ultimately, yes, there are a lot of buyers who wish to buy base load, but there are a lot of sellers introduced, like in [indiscernible] who know that sort of producing base load from single assets is nearly impossible and could be -- can be very, very dangerous.

So I think that sort of as soon as everyone will start looking at portfolios, meaning off takers and producers, there might be sort of discussions going in that direction. As long as everyone is still looking at the assets, the single assets, I think that is taking -- it will take max -- I don't know even if it will ever happen that significant amount of base load PPAs are signed. So long story short, we still see enough interest from players to buy on a base -- pay-as-produced basis, which is our preferred, of course, our preferred sort of structure, and this seems to still work well on the market.

So again, everyone is talking, a lot of players are sort of pretending like that's the only thing that they are willing to sign. But in the end, there a lot of pay-as-produced PPAs being signed. So nothing to worry about in this regard for us.

[Harrison Williams, analyst]

That's very useful. And any color on the lengths of these PPAs? Is there any change there?

[Christoph Husmann, executive]

No. No. The length I mean, again, it's a little bit about the price. We have seen a couple of months ago that there was significant spread between the 5 and 10 year contract. On the 5 year, people were willing to pay unproportionally more compared to the 10 years. This is not as acute as a couple of weeks, of months ago. In general, we still see sort of strong demand also for longer terms, PPA. Again, I wouldn't say, nothing really fundamentally changing at the moment.

[Operator]

[Operator Instructions]. There are no more questions at this time -- I'm sorry, sir. We have a last minute registration from Anis Zgaya from ODDO BHF.

[Anis Zgaya, analyst]

Do you hear me?

[Christoph Husmann, executive]

Yes. Yes, we can.

[Anis Zgaya, analyst]

I have two questions, if I may. Two follow-up question. On PPA, could you please give us an idea on the level of current PPA prices in main geographies? I mean, in Germany, Italy, Nordics and balance. And do you still see tech companies and data centers as main off takers in the market?

[Christoph Husmann, executive]

In terms of prices, I would say that, they are quite stable. Of course, they are going down compared to one year ago. Just to give you a couple of figures, in Spain, again, we always talk about 10 year pay-as-produced. We see prices between EUR 30 and EUR 35.

In Germany, we see something around EUR 60, EUR 65, which is the same, maybe around EUR 60 in Italy, still a little bit higher, can be around EUR 60, EUR 65 on the upper end. These are sort of the more the countries where we are currently being more active in terms of sourcing. Again, maybe slight decrease but marginal compared to the last quarter. This was the first one.

The second one was on off takers. Yes, tech companies are still keen to source green power. I think that the evolution around AI is sort of putting pressure on them. It seems like, AI is going to significantly require more energy than sort of the traditional business. This is definitely a good thing for us.

But to be honest, and as I mentioned before, we are more looking for players, who are a little bit less price sensitive maybe than the big corporates, who actually reach out with their power and can negotiate, sort of, hard. We see SMEs. We see sort of a lot of industrial players, again, not the biggest ones, but I would say the medium as well as medium enterprises who still want to procure the power to stabilize their cost positions and want to also have a good visibility on the cost in long-term.

These guys, these companies are sort of are somehow easier to deal with, because, again, they are not putting the price sort of on the list of their top priority when negotiating. They are more interested in sort of having the right party and sizing the PPA in appropriate way. This is what we're currently seeing and we're focusing more on industrial players, I would say, than in the past to sell our power.

[Operator]

That was the last question. I would now like to turn the conference back over to Dr. Christoph Husmann for any closing remarks.

[Christoph Husmann, executive]

Yes. Thank you very much for dialing in. Thank you very much for the interest in our company. Whenever you have questions, you can ask us whatever you want. And thank you very much, and have a good day. Thank you. Bye.