Encavis AG

XETRA:ECV

Earnings Call Analysis

Strong growth despite challenges in H1 2024

In the first half of 2024, the company experienced a challenging period due to bad weather and lower power prices, leading to a 7% drop in energy production. Despite these hurdles, the company maintained its revenue guidance, attributing a 9% revenue decline mainly to unfavorable weather and new park connections. Significant investments continued with projects including a 95 MW park in Spain and a large credit facility of €300 million. The partnership with KKR and Viessmann aims for an ambitious growth target of 7 GW capacity by 2027. Internal revenue grew by nearly 50% due to strategic acquisitions, positioning the company strongly for the future.

Navigating a Challenging First Half

The first half of the year proved to be quite turbulent for the company, marked by unfavorable weather conditions and significant shifts in power pricing. The results reveal a combined energy production decrease of 7%, amounting to 130 gigawatt hours, largely attributable to prior year wind farm sales and reduced sunlight, which led to a 9% reduction in revenues. Specifically, the company's revenue decline was quantified at €21.3 million in net operating profit, primarily driven by lower production volumes and declining prices, half of which were anticipated in the 2024 guidance.

Segment Insights: Solar and Wind Performance

A more in-depth analysis of the operational segments shows that solar parks, which contribute around two-thirds of total revenue, experienced a 14% revenue drop due to anticipated lower power prices and decreased sunshine levels across Europe. Conversely, wind revenue saw a slight decrease of 7%. Notably, despite operational challenges, new parks were on schedule to connect to the grid, reaffirming that long-term capacities are on track.

Growing Internal Revenues Amidst External Pressures

Despite the overarching challenges, there were bright spots in revenue growth for the Stern parks, which saw a remarkable 30% increase, showcasing the strategic acquisition's significance. Internal revenues surged from €8.7 million to €12.7 million, marking a nearly 50% growth attributed to the successful integration of Stern's operations.

A Cautious Yet Optimistic Outlook

Looking ahead, management has reaffirmed its 2024 guidance based on an assumption of standard weather conditions, which remains vital given the extreme weather variability experienced recently. Although the volatility of power prices adds uncertainty, the overall pricing landscape appears slightly more favorable than earlier projections. The guidance anticipates ongoing challenges, dependent on factors like daily price fluctuations and extreme weather events.

Financial Health and Strategic Positioning

The company has made noteworthy strides in securing its financial health, including a €300 million revolving credit facility aimed at supporting its growth strategy through 2027. Recent ratings confirmed an investment-grade issuer rating of BBB-, signaling confidence in the firm’s long-term stability. The planned expansion toward a target capacity of 7 gigawatts by 2027 illustrates a robust strategic vision and commitment to the energy transition process.

Conclusion: Strategic Resilience in a Volatile Environment

In summary, while the first half of the year has presented several operational hurdles, the company remains committed to navigating these challenges through proactive financial measures, strategic expansions, and maintaining a clear focus on long-term growth. Investors are encouraged to evaluate the company’s capacity to optimize production in a recovering power pricing environment and its adeptness in managing the impacts of climate variability.

Earnings Call Transcript 2024-Q2

[Christoph Husmann, executive]

Good morning, ladies and gentlemen. A warm welcome to our this year's conference call on the H1 2024 figures. These figures are already published on July 30 via netTALK and via press release, because these figures are pretty much below previous year's figures, but as expected. And the guidance for fiscal year 2024 is currently confirmed.

Ladies and gentlemen, as you are aware, and I think I don't have to highlight that very long, is that there is a transaction going on, Elbe BidCo, which is an investment fund, which is managed and advised by KKR together with family Viessmann and ABACON is having out a takeover offer for Encavis, a cash consideration of EUR 17.50 per share. And it is that the Management Board, Supervisory Board of Encavis AG recommended the acceptance on May 2. And in the meantime, until 18th of June 2024, 87.41% of all Encavis shareholders accepted that offer. The closing of the deal is expected for Q3 2024 or Q4 2024.

Well, the whole contemplated transaction will benefit Encavis and the energy transition. As a matter of fact, before that contemplated transaction, we had a target of 5.8 gigawatt in 2027. And now we have a new ambition together with our partners to reach 7 gigawatt of capacity then. Here, you already see what that will mean -- the whole transaction will mean to Encavis.

Although the whole company is working on the realization of this new partnership, we are working on our daily business as well. As we pointed out in Q1 already, we signed 2 nonrecourse project refinancing agreements in total amount of EUR 23 million for our plants in Spain, Talayuela and La Cabrera.

And in the meantime, now on 30th of April 2025, which was not already announced in the Q1 figures is that we signed a syndicated revolving credit facility in the amount of EUR 300 million. Both will help us to foster our further growth of our accelerated growth strategy 2027. The syndicated revolving credit facility will hold until 30th of April 2025, until then at latest, the total takeover will be done. And this interim financing was necessary, because we received a rejection vote of our Annual Shareholders' Meeting for our capitalization measures. And recently -- most recently, in July 2024, we got from SCOPE Ratings a confirmation of our investment-grade issuer rating of BBB-.

But not only on the financing side, we are busy, but we are working on further investments, construction and connection to the grids of some parks. So in Q1, we already stated that we are under constructing in the Borrentin park with 114 megawatts, the largest park of our own portfolio. In addition to that, we could acquire another park in Spain of 95 megawatts, which brings our total capacity in Spain alone at the end of year 2025 to 800 megawatts. This park was acquired from BayWa r.e. The park is under construction. It will be connected to the grid in Q4 2025.

In addition to that, we closed the contract of the already grid connected 11-megawatt wind farm, Schieder-Schwalenberg. That park was already acquired in December 2023. Sometimes closing of such parks needs some time. And we got a 14-megawatt solar park Mörghult in Småland in Denmark connected to the grid. Encavis Asset Management is working on the projects as well. As you might know, the largest German solar farm in the group managed is with asset management. It is the Park Bartow with 260 megawatt. Here, we could sign beginning of April, a PPA contract with LyondellBasell. And now we got financing done with Commerzbank on the 31st of July in the amount of EUR 145 million.

Before I go now into the details of our half year figures, I would like to highlight that these figures we will presented in this presentation are without the cost of the partnership with Elbe, with KKR and Viessmann. And the reason for that is that we want to keep the half year figures here comparable to the guidance, which did not incorporate these costs as well.

So the total cost so far of that project are EUR 5.4 million, which were accounted for in the half year 2024. So if you compare our half year report with the figures here, please have in mind that all figures despite cash flow and revenues have to be reduced by EUR 5.4 million.

Well, if we go then into the details of our figures, we usually start with the energy production of our existing portfolio. And for the first time, we have here a severe drop of 7% or 130 gigawatt hours. As a matter of fact, there are numerous issues, which we are confronted with, and this is a very unusual combination. Firstly, it is that we sold at the end of last year 2 wind farms, which were at the end of the feed-in tariff, Greußen and Sohland, and they produced in the first half of last year, 20 gigawatt hours. So that is obviously lacking now, and that was planned for.

And we have much less favorable weather conditions in the first half of this year than we had in the first half of 2023. It is not that 2024 is extremely bad. Yes, it is below standard weather, but the first half of 2023 was very much better than standard weather. And therefore, there is a big deviation here. And we were in some areas of Europe confronted for the first time with negative prices. Now you might ask why do negative prices influence the gigawatt hour production.

In 15 minutes periods where we see negative prices, we stopped the power production because we do not want to pay money for producing electricity. And then we do not produce the electricity, and that costs us a huge part of this 130 gigawatt hours power production. And then we had in some areas as usual, but fully compensated grid curtailments. That all means that we have a reduction of our gigawatt hour production of the existing portfolio of 7% or 130 gigawatt hour. That is by 2/3 compensated by new parks connected to the grid.

So in total, the energy production in this growing portfolio is only 3% or 46 gigawatt hours below previous year's figure. But that leads to 9% reduced revenues. Well, if there is a big lack of power production in the existing portfolio, which in average has a much higher remuneration per kilowatt hour than the new parks, then this means that there is a higher negative deviation in the revenues. In fact, it is that the EUR 21.3 million negative deviation in net operating profit is by half as a reason in the reduced volumes, which I pointed out in the existing portfolio and the other half by lower prices. These lower prices were expected and were planned for in our guideline for 2024 and therefore, reflected in our guidance, but it is a deviation to the first half of 2023.

You see that EUR 21 million different deviation in the revenues in the EBITDA as well. But in addition to that, some compensational effect in the revenues, which is provided by Stern or by huge newly to the grid connected parks, they come along with cost. And so that means that the EBITDA has a slightly higher deviation compared to previous year, and they come along with depreciation. So the same applies to EBIT.

If we have a look into the segmentation report, then we see that although we have a severe drop in power prices and reduced volumes due to metrological reasons, good curtailments and some negative price-related shutdowns, that still the operating revenues of the solar parks contribute approximately 2/3 to the top line of the whole group. While wind farms are stable with 22% providing to the total top line PV Service is increasing its importance to the top line.

If we go now into the details of the solar farms, we have a drop in revenues of the solar parks by 14%. This is due to the expected lower power prices in combination with less sunshine in many European states and first in the lifetime negative price-related uncompensated shutdowns.

Let's have a look on the metrological effect. As a matter of fact, we always plan standard weather for solar and for wind. While we have seen in all European countries in the first half of 2023, very positive deviations in the radiation compared to standard weather, we see in all but one surprising country, negative deviations to that standard weather. Why a surprising country? Well, most Germans would consider this summer not to be the most sunny one. But in fact, we still are above standard weather in the radiation.

But in fact, the highest deviation we see in the Netherlands, we had last year in the first half, 9.2% more irradiation than usually expected and this year, 6% less than usually expected. So compared with the usual expectation, it is a negative deviation of 15%. And that certainly means that there is less power produced. But the likelihood of high or low radiation in the future does not change with that experience. So this is something, which we cannot forecast and something where we always assume standard weather.

If we then have a look into the wind farms, here, we have a deviation of minus 7% in the revenues, and this is mainly due to the deviation of EUR 3.2 million to the sale of the parks Greußen and Sohland, which produced in the first half of 2023, EUR 2.2 million of revenues, which are obviously missing now and EUR 1 million is due to prices. Our Stern parks develop very well as well as our other projects, so not to take it too negatively. So the solar farms and wind farms are working properly. They are in a good shape, and they have the capacities, which we have, are growing, and we are further investing successfully.

But there is, by accident, a combination of some negative influences, which currently overcompensate that effect. Stern is developing very well as well. We have growth of 30% in our revenues, mainly driven by internal revenues with our own parks. As a matter of fact, this is exactly what we had in mind strategically when we decided to acquire Stern.

The EBITDA margin looks to be under pressure. But in fact, the first half of 2023 was fairly impressed by one-off effects of winding down the formerly small development business of Stern. Here, we had realized some profits in winding that business down. So the 11% of EBITDA margin is in line with our expectation.

In our Asset Management business, we still have due to the interest rate environment and to the reluctance in the past of some investors to provide us with sufficient committed equity, some delays in further project investments, which are expected now for the second half of this year. And so we have some shifts in projects. So therefore, the revenues are somewhat reduced. But since the costs are fixed, we are currently in the negatives, but we are confident that this will turn around in the second half.

In the headquarters, we see in the revenues only the consolidation of the internal revenues with Stern. Here, you see the magnitude of the growth of the revenues from EUR 8.7 million to EUR 12.7 million, so almost plus 50% of internal revenues with our new subsidiary. So that is very positive. The EBITDA is purely the cost of the holdings. Here, you see a reduction from minus 6.3% to minus 5%, although the company is growing as well as the workforce. So that is not the reason, but the reason is that in first half of 2023, we had several one-off effects, which have a cost burden, and this means that we have a reduction of our cost in total.

Ladies and gentlemen, now we had a turbulent first half year due to bad weather, shutdowns due to negative prices as well as negative prices and the low price volume. As a matter of fact, our guidance 2024, which we announced in March was based on like every year, standard weather. This is something which I already early pointed out. Only the fact that we had negative or bad weather conditions in the first half does not mean that we have any reason to assume that we do not have standard weather in the second half.

So the weather is an open issue, and there is no relationship between the first half weather condition in the second half. So therefore, we stick to our assumption of standard weather. And we had the power price curve of 10th of March 2024. The power price curve is the assumption and regarding the power prices, the overall power price environment. It is not a forecast of every 50 minutes corridor. So what we cannot say today how many negative price, 50-minute corridors there will be and so how many shutdowns will be done. And so therefore, we cannot forecast anything like that for the second half.

But having a look on the pricing level and if you compare this chart with the Q1 figure, it is that there is some relief in the power prices. In most of the countries and technologies, the reduction in power prices is somewhat slightly lower than we assumed in the Q1 figures. This is not material. So therefore, there is no reason to change the guidance out of that reason. And it is a snapshot and the prices are extremely volatile in the current environment, but there is some relief.

Overall, we currently stick to our guidance. Honestly said, it depends very much on the weather conditions and very much on the volatility of daily power prices and whether there are negative prices in 50 minutes corridors, which could enforce us to shut down one or the other park. Not all of them, it is only selectively. So therefore, we confirm our guidance.

Ladies and gentlemen, that's it what I wanted to present to you. The further charts in the presentation are standard charts, which you have seen already in the last quarters. And now I'm available for your questions. Thank you very much for your audience and your attention.

[Operator]

[Operator Instructions] It seems there are no questions at this time. So I would hand back to Dr. Christoph Husmann for any closing remarks.

[Christoph Husmann, executive]

Yes. Thank you very much for attending our presentation of the Q2 figures. And if you have any further questions in the aftermath, please do not hesitate to contact the Investor Relations department. And so thank you very much for dialing in, and I hope that you sit in an air conditioned and nice room so that the day is not as warm as it started this morning. Thank you very much, and have a good day. Bye.