Encavis AG

XETRA:ECV

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Encavis AG conference call regarding the half year results 2020. [Operator Instructions] Let me now turn the floor over to your host, Dr. Christoph Husmann.

[Christoph Husmann, CFO & Member of Management Board]

Thank you very much, and a warm welcome from Hamburg in these rainy days, we're somewhat immediately in a spot changed to autumn. Welcome to our conference call on the Q2 2020 interim report, which was released this morning. Ladies and gentlemen, in the last 4 months, you have seen a lot of news flow on Encavis, and I would like to cluster it when we go through these highlights of the last 4 months. Firstly, we resumed with our investment strategy on with the target Fast Forward 2025 to double our capacities by increasing our participation in PV Parks up to 100%, which applies to our park, La Cabrera, with 200-megawatt park in Spain to our French portfolio to Bitterfeld and Brandenburg alone in these 4 month. In addition to that, we acquired a 14.4 megawatt wind farm in Germany. In addition to these direct investments which we did, we agreed on a new further development partnerships with 2 developers who promised us to deliver certain capacities in the next years. Firstly, it is GreenGo Energy, a Danish developer, who delivers to us subsidy-free solar farms in PV in Denmark of more than 500 megawatts and with Sunovis, a German developer, who will deliver to us 200-megawatt plus. So the 200 is the bottom line of subsidy-free solar PV Parks in Germany. Well, in addition to that, our asset management was successfully -- it was very successfully. Started very good in the first quarter, and as we announced with the first quarter results, we're slowing down in the second quarter to speed up again in the third and fourth quarter. To foster that growth, they were able to raise additional EUR 74.5 million of equity for the special fund, Encavis Infrastructure II, which fund volume now exceeds EUR 200 million. And this fund invested some of that money already into an additional wind farm in France.Encavis was successful to refinance the project financing of 10 ground-mounted PV plants with 29 megawatts in Italy in the first half, signing it in July. And with that refinancing, we were able, without any early termination payments, to substantially reduce the interest which we pay on these EUR 64 million debt from 420 basis points down to 210 basis points, so cutting the margin by half. This is part of our Fast Forward Strategy 2025 as well as we pointed out that we want to increase the efficiency of our group with refinancing and with optimization of our project financing. Last but not least, BlackRock increased its shareholding in Encavis from 3.51% to 4.1%, and this is not the only institutional investor who got an eye on Encavis. DWS, for instance, is one of our major shareholders now as well. On back of this demand for our shares, the market cap exceeded the EUR 2 billion line last Monday. Coming back to our minority policy. You know that we follow a very diverse strategy for our wind farms as well -- on one hand side and our solar farms on the other hand side. For the wind farm, it is true that our intention is to reduce our participation down to 51%, keeping the majority and manage these parks professionally, but inviting financial investors to join us with 49% participation in these parks. By this, we want to recycle cash to invest that leverage money into new wind farms in different regions to diversify our wind portfolio to reduce the local wind risk. And here, we -- last year, we sold down 49% participation in our 66 megawatt German wind park portfolio, which now bolts down our net owned assets to 181 megawatts compared with gross assets we hold of 229. If we have a look on the total number of wind farms, then we have gross 427 megawatts, but net 376, so we own 88% of the shares in our capacity. Please have in mind that our intention is to reduce debt this year further on. The strategy for the solar farm is the other way around. As I pointed out, we acquired in France, in Spain and in Germany numerous minority holdings with our parks and these -- this leads to the position that we currently own 1.269 gigawatt of our capacities net compared with 1.343 gigawatts of our capacity gross. That means we own 95% of our solar capacities. Specifically in Italy, France and United Kingdom, we own 100%. In Germany, 98% of also close to 100%. And only in the Netherlands and Spain, this is 88% or 90%, slightly lower. But our intention is, as I pointed out, to improve our debt position. As you might be aware, we do have 2 parks in Spain under construction, which are scheduled to be connected to the grid soon. With the lock down in Spain, we were afraid that the park COD would be delayed by some weeks or even months, but we are glad to inform you today that we are back on track. The construction of our 300-megawatt park Talayuela is well underway. Please be aware that here, as with the other park Cabrera, connection to the grid is critical since we signed a PPA contract with an offtaker. For Talayuela, which is located in the Extremadura that offtake is an undisclosed Northern European utility, and the PPA is about to start in Q1 2021. Sorry -- the status of the construction is that 70% of the entire plant is completed. The basic works are already done -- almost done like the civil works and site preparation where we have finished already 95%. And on the later stage of that construction is that the modules have to be installed. And here, we have already 35% of the modules installed. Most important to note is that whenever due to the increasing infection rates in Spain, there might be another lockdown that almost all products are already on the construction site. So it is now nearly an issue of further construction. Only 2 exceptions from the rule apply here that means that only the 0.5% of the modules -- PV modules are not yet on the construction site, but I think we -- that this would be material if 99.5% of the modules are fixed. The critical part here is that the step-up transformer is still currently in the harbor of Seville. The reason is that in Spain, the transportation rules have changed and such a step-up transformer is not allowed to be transported by truck anymore. That has to be transported by train. So the direct route from Seville to Extremadura is -- has to be done by train, and there has to be -- we have to look for the perfect track, which has to be used. But all in all, in May, we informed you that we were afraid of a potential delay of the whole construction by 78 days. That boils now down to 0 to 30 calendar days. We are confident that we will be able to bring it down close to the 0. That depends heavily on the step-up transformer when it will reach the construction site, but we are confident to reach the grid connection date midst of November. In May, we announced that we -- there is the danger of EUR 1.4 million of extra costs for the finalization of the construction that fortunately could be brought down to EUR 250,000. The project Cabrera is further through the process of the construction, the 200-megawatt part La Cabrera will be connected to the grid within the next days. Please be aware that this park which is located close to Seville and [indiscernible] has PPA of 10 years with Amazon Inc., which is about to start in Q1 2021 as well. Here, since the park is almost through the process, it is not only that all components and products are already delivered to the site, know the high-voltage section is already good, connected and energized. And now you keep in mind, the 200-megawatt park portfolio of Cabrera consists of 4 parks, each of them 50 megawatts, 2 of them are already completed and are ready for hot commissioning for a total capacity of 100 megawatts, while the other 2 are ready for hot commissioning in August 29. So within three days, we are confident that the commissioning will be done at the end of August. The construction's on time compared to what we announced most likely -- what was most likely in May. We announced these days that was formally 90 days delay. Currently, well, the delay is done. We are connected to the grid on time. The formally announced potential cost of EUR 2.5 million for finalization of the project, additional costs brought it down to EUR 240,000.Ladies and gentlemen, we had a very strong 6-month figures, but there is some fog around the 6-month figures, which I would like to delete the fog and let me explain you why the company is in line with the guidance and with our plans. If we have a look back into Q1 2020, there we have seen strong revenue increase of our profit key figures. In Q2 2019, we see the same increase in the revenues, but we see a shortfall in the profit key figures. Why is that? I would like to explain that to you on the total 6-month key figures, but most of these issues occurred or partially of them in Q2.First of all, we see an increase of the revenues from EUR 144 million to EUR 155 million, plus 8%. If we have in mind that last year 2019 was an extremely good metrological first half year with EUR 11.3 million additional revenues due to meteorological reasons, then we have to admit that the 6-month 2020, we have only meteorological effect of EUR 8.2 million, so a shortfall of EUR 3.1 million. So if we believe both meteorological effects in both half years, then we have an increase of our revenues of 11% or plus of 2% in EBITDA or minus 1% in EBIT. So why are the profit figures not improving as much as the revenues do? First of all, please have in mind that in the second quarter 2019, we had a successful disposal of minority shares of 49% in 66 megawatt wind farm portfolio to [indiscernible] in an open bid of several other competitors. These EUR 5.9 million are not yet -- or nothing similar to that in our 2020 figures. We have -- for a technical reason, we merged our technical department with our minority participation in Stern Energy and by that, raised EUR 1.9 million profit out of such an AV this year. But comparably to Q2 2019, we have here lack of EUR 4 million of profit, which we could not have now. Please have in mind that this is purely a temporary effect because, as you know, we are planning to sell down 49% participation in the performing power plant portfolio this year as well. So over the year, this will be compensated. So if we take out, in addition to the meteorological effect, the temporary effect, then we have with -- we've adjusted increase of the revenues of 11%, an increase of EBITDA and EBIT of more than 6%. Beyond that temporary and metrological effect, there is, I would say, hopefully sustainable effect. As you might know, we do have a virtual stock option program. And for 2016, we had a physical stock option program for management. In 2017 for taxation reasons, we turned that around in a virtual stock option program, which is reflected like a bonus program but works same like a usual stock option program. And here, due to the strong stock price for development within the last half year, we have higher burden for expenses for provisions for the virtual stock option program this first half year compared to last year's first half year. In 2019, the burden from the virtual stock option portfolio was EUR 0.5 million. And this year, in 2020, it is up to now EUR 2.8 million. If we take that out as well, then revenues, EBITDA and EBIT grew more or less all of them around 10%. If we then have a look into the cash flow, the cash flow exceeds previous year's development by 51%. Please have in mind that there is some extra effect of EUR 9 million, additional capital gains payment last year and additional capital gains repayment this year. If we take that out, our operating cash flow improved by 24%, which is sustainable and in line with our guidance. If we then have a look, and this is what I already pointed out, our meteorological effect, EUR 11.3 million last year and EUR 8.2 million this year, when you see that development of plus 11%, which is due to the acquisition of the Danish wind park portfolio at the end of 2019. Having a look into the segments, we see, first of all, that the solar farm still contributes a major chunk to our revenues. The revenue portion of solar farms is 68% in this first half year compared to 34% last year's half year. The reason for that is the growth of the revenues in wind farms, which is again due to the acquisition of the Danish wind park portfolio at the end of last year. This will be even strengthened in the second half of this year by the acquisition of the 14.4 megawatt wind park acquisition, which we did at the end of June. In the future, as we look into the next years, the solar parks will redirect a portion of the sola farms revenues and our total revenues will improve since our focus is on the acquisition of PV Parks. And please have in mind that the big parks, Talayuela and Cabrera will be connected to the grid during that year and therefore, contribute to the revenues. The EBITDA margin in solar farms was shrinked from 86% to 82%, which is still a very high level. The reason for that reduction is purely the meteorological effect, which solely hits the solar farms as we will see that on the next page. The reduction of the margin -- EBITDA margin in wind farms is only due to the fact that in the first half last year, the EUR 5.9 million of profit from the disposal of the minorities was accounted for there. If we then have a look into the weather-adjusted segment, then we would see that last year's first half, so 6-month 2019 weather effect was in solar EUR 10.5 million positive effect and EUR 7.4 million in the 6-month '20 for solar farms. So the pure gap between -- of the meteorological effect is due only to solar, while in wind, the meteorological effect in both half years is EUR 0.8 million. Well, with Fast Forward 2025, we have a challenging growth program, which not only means to find the right projects in the market, but to have the right financing in place. Maybe you're aware that we did not approach the credit market further this year. The reason for that is twofold. Firstly, we have a very good current financial situation due to the cap of the hybrid convertible last year and the capital increase with Versicherungskammer Bayern at the end of last year. We currently have a financial position, situation of cash available for investment for the equity portion of more than EUR 80 million, which easily can be translated in a transaction volume of EUR 250 million to EUR 300 million. And this, after all these 14.4 wind park acquisition and all these minority acquisition in our PV Parks, which we already have done.In addition to that, we have to admit that this is not really the right time just to collect money for future investments because we see currently that the banking market is currently very busy with coping with the challenges of COVID-19 and helping out companies, which are not in such a good situation as we are. So we see that if we are approached by banks with offers that the interest rate on such credit facilities would be substantially higher, just only to give you a flavor, credits for which we paid in Q1 this year is the EUR 35 million, 1.6% for 5 years duration were offered us again for additional cash for 3% on 5 years. So thank you to our very good cash position, we currently do not see any reason why we should currently test the debt market. Well, we published on -- yesterday or Monday -- sorry, update the analyst consensus. And we have to admit that the 6 months figures are generally in line with our Encavis results. If we compare revenues and cash flows and EPS, this is absolutely in line, where we do have a gap as an EBITDA and EBIT. Obviously, the EUR 2.8 million expenses for the virtual stock option program was not aware. And the same applies to the fiscal year 2020. Here, the analyst consensus is slightly above the Encavis earnings guidance. But here, I would like to admit that we say we -- our guidance is more than EUR 280 million revenue, more than EUR 220 million EBITDA and so on. So I think these figures are all in line. After the 6-month figures, the Board had a look on our guidance, and we still -- we confirm our guidance. We currently do see that with the first half year's results, we reached more than 50% in all our key figures for the full year guidance, which is more than EUR 280 million of revenues, more than EUR 220 million of EBITDA, more than EUR 130 million of EBIT, EUR 0.41 EPS and more than EUR 200 million cash flow. The guidance sticks at the same for our segments as well as we pointed it out in the past. Therefore, I would like to skip it. Ladies and gentlemen, thank you very much for your attention. And now I'm available for your questions.

[Operator]

[Operator Instructions] And the first question comes from Andre Finke from HSBC.

[Unknown Analyst]

Two of them, maybe one after the other. The first question is more strategic relating to the recent announcements by RWE with regard to investments into the renewable space, the Nordics deal, et cetera. And maybe your strategic take on that, whether that is changing the competitive landscape? And what are your thoughts on this?

[Dierk Paskert, Chairman of Management Board & CEO]

Should I take that question, Christoph? Or would you like to?

[Christoph Husmann, CFO & Member of Management Board]

Certainly. Go ahead.

[Dierk Paskert, Chairman of Management Board & CEO]

Yes. It's Dierk Paskert, CEO. I think -- I don't think that this changes at all, let's say, our picture at least of the world. So we are aware that more and more conventional utilities are stepping in to the renewables market, and they take different routes if you compare them. And for us, it doesn't change anything. So we have a clear outlook until 2025, which we will follow. We have a clear plan how we would like to achieve that. We are building our partnerships. We are not investing directly in development companies, so we won't do any M&A in that respect. But we are fostering our partnerships, which gives us enough flexibility to reach our goals until 2025. So therefore, no change from our perspective, but we are obviously also watching what other players are doing in the market.

[Unknown Analyst]

Okay. And there's any concern that you might be take overtime with yourself with regard to pick up...

[Dierk Paskert, Chairman of Management Board & CEO]

There's never a concern because if something like that would happen at some time, which we never know, then we will have a -- to give an honest answer to our shareholders, whether we comment to follow such an offer or not. So I'm not speculating on such things. So we can only do that once that is reality. That is not reality, and we do not have any, let's say, messages from any company that this would come soon. So therefore, that's all we can say. I would say, pure market speculation, and we won't comment any further.

[Unknown Analyst]

Okay. Fair enough. And my second question relates to your comments on financing and the current COVID environment, interest rates on that having gone up significantly. Obviously, that might change going forward. But if it would not change, would you be prepared to go down for a period of lower growth or transaction activity? Or would you have different use in mind to raise money?

[Christoph Husmann, CFO & Member of Management Board]

Well, thank you for that question. Well, first of all, this will be pure speculative -- speculation to say whether this will change in the future or not. So therefore, in the end, the financial cost for -- cost for the financing of such a park are one of the major cost position in the calculation of the value of such a park. If we are hit by higher interest rates, then the whole market will be as well. So therefore, all these companies will have to adjust their value expectations regarding these parks. So therefore, the pricing will change. No, we do not see that our speed of growth will change by that.

[Operator]

The next question comes from Igor Kim from Bankhaus Lampe.

[Igor Kim, Analyst]

I've got a couple of questions. First one on weather effects in -- I think you gave a figure for 6 months. Could you give us a separate figure for the second quarter only? And yes, the second question is, if the parks in Spain will be connected to the grid in November? Is it realistic to expect that revenues will start to come through already in December by the end of the year? And is it somehow reflected in your guidance for 2020?

[Christoph Husmann, CFO & Member of Management Board]

So first, regarding the question, thank you, Mr. Kim. The question regarding Spain, yes, it is actually true that if the parks are connected to the grid, we will be remunerated by that in the spot market. So we will see what that means to our P&L.. But yes, it is already included in our guidance. But we should not expect too much from that, and the reason for that is, as you pointed out, for instance, if one of the parks, Talayuela, will be connected to the grid mid or end of November, that even in Spain in December, the sun is not beaming as hard as it is in summer. So the fourth and the first quarter are usually the weak ones in solar. So therefore, we shouldn't expect too much energy generation, too much revenues from that. Regarding the weather effect, as I pointed out, in Q1, the weather effect was, in total, EUR 6 million -- Q1 '19, the weather effect was EUR 6 million positive, while it is -- was EUR 5.1 million in Q1 '20, so it was a negative EUR 0.9 million. Now we have negative EUR 3.1 million. And the reason is that in Q1, we had a very positive effect from wind, and that is now going down to 0. As I pointed out, in total, in the 6 months, there's no positive weather effect from wind anymore, so we lost that in the second quarter due to weak wind performance.

[Operator]

The next question comes from Charlotte Friedrichs from Berenberg.

[Charlotte Friedrichs, Analyst]

I've got 3. So firstly, on the solar market in Spain, and there was an announcement by China Three Gorges. Europe recently -- they made a large acquisition there. And the question here is, are you seeing more competition in general here for the Spanish market? The second question would be the phasing of your cooperation with Sunovis and GreenGo. Can you give us a bit of a feel as to when you would expect the projects to be completed here? Are they more back-end loaded or should we expect a more linear development? And then finally, on the financing side, can you give us an update post refinancing where you are right now with your average cost of debt? And also what your firepower is currently?

[Christoph Husmann, CFO & Member of Management Board]

Okay. Dierk, you take the first 2 ones.

[Dierk Paskert, Chairman of Management Board & CEO]

Yes, I'll do. Regarding Spain, yes, it is a hot market currently because it qualifies as PPA market, at least pre-corona, and prices -- wholesale prices came down a little bit. That calmed down a little bit the PPA activity in Spain. We were able to secure our PPAs before corona times, which was good. But anyway, Spain will remain a competitive market. We are offered on a monthly or sometimes even weekly basis new projects in Spain. We are carefully looking at them. Most of them we have turned down because pricing was not, or at least IRR expectations were not competitive in our view or not reaching the bar which we set. So therefore, yes, we still participate in that game, and I would not exclude further activities in Spain, but very selective on that end. Second question was, again, Charlotte, was regarding -- I know that's the -- yes, the cooperation and timing of the projects, if I understood it right. No, it's, let's say, typical development projects. So we have reached first milestones from -- with GreenGo. Just yesterday, we were informed that all the projects we have in line have reached their respective milestones. So that's a good development. I would expect, let's say, first parks connected to the grid in late 2021, early 2022. So that's -- but the bigger ones, definitely more in 2022. But from Sunovis, the time line is a little bit, let's say, earlier. So there, we could expect already 2021 some, yes, additions to our portfolio. So it's -- but it's all, let's say, early phase to mid-phase development. They have more or less reached mid-phase development. Some of them are near to ready to build.

[Christoph Husmann, CFO & Member of Management Board]

So -- and now regarding our financing, the average cost of debt reduced slightly, and this can be, by the way, to be seen over the cost of the interest expenses were pretty much in the first half of 2020, the same as in the first half of 2019, but on EUR 100 million more of debt. And as a matter of fact, so the average, if you just take the first half, interest rates and take them twice time. So we reduced it especially by 10 basis points in total in the average of our group. Regarding the financing of -- the firepower we have, as I pointed out, it is currently at EUR 80 million -- more than EUR 80 million equity, which we have available already after all these acquisitions of the 14.4 megawatt wind farm and all the minority stake acquisitions, which we did. So it is still EUR 80 million -- more than EUR 80 million equity available. So it depends now very much whether we will be active in the PPA market or whether we will be active in a feed and tariff market, as you might know, depending on the type of remuneration for these energy produced. The leverage is the higher...

[Operator]

Ladies and gentlemen, just one moment, please. We will continue shortly. [Technical Difficulty]

[Christoph Husmann, CFO & Member of Management Board]

Hello. Husmann, [Foreign Language].

[Dierk Paskert, Chairman of Management Board & CEO]

Yes. Sorry. [Foreign Language] online.

[Christoph Husmann, CFO & Member of Management Board]

[Foreign Language] Sorry for that. I was kicked out of that. I'm sorry, I don't know where I -- where you stopped listening to me. What did I say at last? Hello?

[Dierk Paskert, Chairman of Management Board & CEO]

Yes, you were explaining -- Christoph, you were explaining the financing costs, and then you were cut off.

[Christoph Husmann, CFO & Member of Management Board]

Okay. So in the end, our average interest in the group is reduced by all the measures currently by 10 basis points. So since we have huge amount of debt, we are working through that. This will -- is also -- although we had some success in this reduction of our interest rate, in the average, this is shown by 10 basis points. And then regarding the firepower, as I pointed out, we already do have EUR 80 million -- it's like EUR 80 million or more than EUR 80 million of cash available for investment and that already after all the investments we did this year and now depending on...

[Operator]

Ladies and gentlemen, please stay in line. We will continue shortly.

[Christoph Husmann, CFO & Member of Management Board]

Hello, I'm sorry for that. I was dropped again out.[Technical Difficulty]So the fire power is still there and depending on PPA versus feeding tariff market, it is between EUR 250 million and EUR 300 million total transaction volume, which is possible for us with our liquidity. Hello?

[Dierk Paskert, Chairman of Management Board & CEO]

Yes. [Foreign Language].

[Christoph Husmann, CFO & Member of Management Board]

Okay.

[Operator]

Okay. Apparently, I'm very sorry, Ms. Friedrichs dropped out as well. So at the moment, there are no further questions in the queue. [Operator Instructions] And I think there's one follow-up question from Andre Finke from HSBC.

[Unknown Analyst]

Yes. Just one quick follow-up. I think there was an accident at one wind park in [indiscernible] in early June, which hasn't caused any issues, but I just wondered whether there's any -- whether you see any risk that additional maintenance or regulatory requirements for wind farms might come on the back of accidents like that?

[Dierk Paskert, Chairman of Management Board & CEO]

I can take that question, Christoph. Yes, first of all, so we have analyzed the accident quite carefully, also with external advisers, including also the company, the service company. And it was relatively clear that we have an issue in servicing this wind park. So it's nothing which we can, let's say, transfer on other wind parks. So this is an individual issue with that wind -- or with that pole actually, not with the entire wind park. It was just that pole and actually not, let's say, level of maintenance, which we would expect from the service provider that was at least for the -- what we can see from up today is the issue. There is further investigation, but there's nothing which we have to be mindful of in terms of the entire wind park or on other wind parks.

[Operator]

Okay. There are no further questions.

[Christoph Husmann, CFO & Member of Management Board]

Good. Again, thank you very much for your interest in our company. Thank you very much for the attention and the good questions, and we will be happy to answer you all the questions you have after this call. And well, have a good time and stay safe and healthy. Thank you very much.

[Dierk Paskert, Chairman of Management Board & CEO]

Thanks also from my side. Thank you.