Arise AB (publ) (A4W.F) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Arise AB Q4 Report 2019. [Operator Instructions] Today, I'm pleased to present Daniel Johansson, CEO; and Linus Hagg, CFO. Gentlemen, please begin.

Okay. Thank you very much and welcome all to this year-end report for Arise for 2019. As you know, we are one of the leading wind power companies in the country. And to date, we are close to 30 employees. We have 3 business lines. So basically, we develop and construct and sell on projects to investors. And after divesting Skaftåsen, we hold approximately 850 megawatts of developing assets late stage. And then we also have the asset management, where we take care of the customers' wind farms, and that is amounting to 1,300 megawatts, including our owned wind farms. And then we have the production. As you know, that constitutes of 10 wind farms in the south of Sweden, of a total of 139 megawatts. And I will hand over to Linus Hagg to run through the figures of this quarter. So turn into Page 4.

Yes. Thank you, Daniel. Again, Linus Hagg, CFO. So I'll go through the numbers for the quarter and offer a few comments to those. So beginning on Page 4. One could say that the quarter was characterized by the sale of Skaftåsen, which, of course, contributed greatly to our P&L and cash flow for that matter in the quarter. I think other events or other effects in the quarter were more marginal caused by a little bit lower wind than expected or the normal, and a slightly lower profit recognition in our other 2 ongoing construction projects, Bröcklingberget and Enviksberget. So with that, we had net sales come in at SEK 247 million, which is a little bit more than SEK 150 million increase. Our EBITDA came in SEK 100 million above last year or the quarter last year at SEK 147 million. Similarly, operating profit increased to SEK 128 million from SEK 28 million. And pretax profit also in line with that number, so up to SEK 108 million compared to last year's SEK 5 million. And finally, net income then increased to SEK 98 million for the quarter. At the same time, we recognized an operating cash flow of SEK 196 million. That's also quite a big increase from last year, obviously, to a large extent, driven by Skaftåsen sale. Looking at the production side, winds were slightly lower than normal. So we came in at 89 GWh. So that was still an improvement over last year, but last year also suffered from weak winds in the -- in quarter 4. Price-wise, in terms of the production or electricity and certificates that we sell, we were largely unchanged year-on-year. And I think this is despite lower market prices. So it's due to our hedging portfolio and hedging strategies that we apply. Finally, as said, we sold 231-megawatt project Skaftåsen to fund managed by Foresight, a U.K. infrastructure investment firm, and we expect to recognize profits of around SEK 210 million over the years '19 on through 2021. And of that, approximately SEK 140 million was recognized in quarter 4 of this -- of 2019. So with that, turning the page to Page #5 for a few comments to our different business segments and how they have developed. So on the graph to the left-hand side, you can see our 9 months' earnings before tax, which was minus SEK 48 million. Then in quarter 4, development and asset management contributed SEK 133 million. We believe it's a strong number. It could, however, been even a little bit stronger. But as we took down the pace in profit recognition in Enviksberget and Bröcklingberget as they are slightly delayed, we want to have a conservative approach on how we recognize that. But still, obviously, a very, very strong quarter from development. Looking at owned production. It contributed minus SEK 5 million to earnings before tax, again, slightly weaker winds than normal, but other than that, things are improving on the back of improved net financials, and also lower OpEx. Finally, we had unallocated items and eliminations, and they increased as the sale of Skaftåsen meant that there was a full allocation to the group bonus program. But there also was some FX effects on our euro accounts. So all in all, earnings before tax for the full year then came in at approximately SEK 60 million compared to SEK 28 million in 2018. Turning the page to Page #6. We had a fairly strong cash flow in the quarter. Net, we came in at SEK 187 million. And for the full year, we came in at a little over SEK 300 million of cash flow. That means that the net debt position of the company has improved dramatically over the years and in particular, over the last year. So we currently have a net debt position of SEK 498 million. And I think it's good to point out that approximately SEK 238 million of those are in the form of a convertible bond. And obviously, that bond is currently well in the money. So obviously, one can take a view on it, but I think it's good to point out that almost half of our net debt position is the convertible bond. So very pleased with that. And I think this is a great position to be in as we will refinance our existing secured bond in September. And with the position we have, we're going to do that at terms that is significantly better than what we have currently. So we're very much looking forward to that refinancing, and it would also help to bring our own production to profitability, given that we will have a lower debt amount and a much lower interest rate cost. So that's good. So to the right-hand side, you basically see the debt we have, it's the secured bond of SEK 650 million, which we then hope to refinance this year, using cash and some new debt. And we have the convertible notional at SEK 245 million, but IFRS-wise SEK 238 million. And it's convertible into shares at the strike price of SEK 22 per share. Obviously, with the cash flow generation we've had, we have a big cash position at year-end of SEK 365 million. And having said that, that's despite having amortized debt of SEK 146 million in this year. On top of the cash position, we also have some cash in blocked accounts, where we will release almost SEK 20 million already in Q1. So we will have an improvement just on that basis as well. So the financial position of the company is basically very strong, and we see a lot of potential in the upcoming refinancings later this year. Turning the page to Page #7, just to update you on our 3 projects and how they are recognized in our accounts. If you start to the left, top left corner, the profit contribution from Bröcklingberget that we recognized in 2019 was about SEK 10 million. We expect to recognize an additional SEK 2 million. Obviously, there is a good chance that it will be higher, but we want to have a conservative view, given the delays that we have seen. So all in all, if it goes according to expectations, Bröcklingberget will have contributed about SEK 62 million since we sold the project. If we look to Enviksberget. We recognized some SEK 9 million of profit in 2019. We expect to generate another SEK 3 million first half of this year, which would then take the total project economics to SEK 33 million. Again, there is upside potential, but we have a conservative view given the delays. Lastly, if we look to Skaftåsen, we recognized just a little bit more than SEK 140 million in 2019. Then we have another EUR 6.4 million to be recognized over the years 2020 and 2021, bringing the total to about SEK 210 million, as previously communicated. On top of that, we also have a production earn-out mechanism in the transaction, which may take this number higher. It can take it lower because it's just an upside, but it's further out in time. So turning to cash flow from the projects. We have from Bröcklingberget recognized SEK 27 million in 2019, and we expect to receive another SEK 11 million in the first half of this year. Enviksberget, we had no cash flow in '19, but we expect to receive some SEK 30 million on cash flow in the first half of this year. And finally, Skaftåsen, we expect to receive another EUR 6.4 million, but that cash flow is contingent upon the completion of construction. So that will occur early 2022. So all in all, we expect to generate another SEK 75 million of profits from our projects that we have sold as of today. And we expect to receive approximately SEK 110 million of additional cash flow from these 3 projects. So with that, I'm handing the word over to Daniel to go through among other price developments.

Yes. Page 8, electricity price development, and we can see that the forward prices has basically been moving sideways for a couple of years and then taking a slight downturn now beginning of 2020. A few reasons for that, a mix of reasons, actually. I think coronavirus has been in play and also the much warmer weather than usually this season and strong wind conditions, combined with a strong hydrological balance has also pushed down the price levels slightly. And if you look at the spot prices, you can also see in the lower part of the diagram that they are much more affected by this extreme weather situation than the forwards are really. In the long run, we still see a lot of interest for investors to come into the market to invest. And that's basically on the back of seeing a lot of fossil fuels being phased out from the power production and also a couple of nuclear reactors. The first was now closed 2019 and another one Ringhals 1 is closed during 2020 as well. But then again, also seeing the new consuming technology such as the electric vehicles and then the new ways for the industry to phase out fossil fuels, consuming more power. So expecting the power consumption to actually increase and data centers and so forth. Still see that the markets are very short term-oriented. So most of us are actually still buying power under short contracts or even spot contracts, which has been a good call this winter, but not sure for the future. Turning to Page 9. The green certificates. They have been now almost phased out already, and that's because the government has not been able to give any message on how this is going to be stopped, the system. And as you know, we don't need a certificate in order to sell new projects and develop new projects. So it's basically creating a potential upside to our existing production assets. If there is a good improved proposition to make a stopping mechanism work earlier and more effectively than is now expected in the market. So obviously, the industry is looking to have a much better and quicker and clearer rule in order to leave the subsidies behind. And there has also been a promise to the Norwegian government that we should have a stop mechanism in place during 2020. So I think the government is now running out of time. Turning to the realized prices and the production. As Linus mentioned, Q4 2019, and then we are to the top right corner, wasn't great compared to the normal for the season. Then we have slightly higher prices this quarter than we had in Q3 '19. And if you are worried about the downturn in the spot prices, that is to a higher degree hedged since we are hedged at 60% of P50 production levels. So we are, to a high degree, protected against the record low prices that we've seen lately. And obviously, the market can change. And on a broader basis, I think you can say it's fair to say that we have been, over the last few quarters, getting lower payment from the power compared to the market prices and higher from the certificates. And that's due to the hedges in place basically. Turning to Page 11. As Linus has mentioned, we have delays in the 2 projects Bröcklingberget and Enviksberget. We still don't see any dramatic effect to our earnings, but we have taken a slightly conservative stance because we don't know yet. So that's something to be discussed with the suppliers and so forth. But we now expect the Enviksberget that was sold to BlackRock in 2018 to be completed in Q1 this year and Bröcklingberget to be completed in Q2 this year. And with regards to Skaftåsen, it has been now started with civil works. It's expected to be commissioned by the end of 2021. And for the numbers, as Linus mentioned, we have a remaining cash flow expected at some SEK 110 million, and the remaining P&L at around SEK 75 million. Turning to Page 12. Our project portfolio. We've had some developments actually lately. So I'm going to update you on that. For Ranasjöhöjden and Salsjöhöjden, which are planned to be sold as one package, we did get the decision from the environmental court just recently. And then they ruled in our favor on the line concession. So we now see that as a very high possibility that we can go to sell the project before the summer. And then we have an aim to close the sale before the year-end. So that's all good. Turning to Fasikan, which is 15 roughly turbine project, where we have the environmental permit in place from before. We have now actually pointed out the point where we want to connect. And we are now in the process of applying for a line concession there as well. So we expect to be able to get a line concession during 2021, which is obviously positive, and there is also capacity in that substation that we are now applying to connect to. Turning to Kölvallen, which is our largest project in the portfolio of 47 turbines. We did get just before Christmas, yes from the Ljusdal municipality. And we are expecting a decision from the County Administrative Board during the first quarter. And obviously, we hope and think it should be positive, but we can't give you any promises for that. Turning to the next page. It's Finnåberget. It's constituting around 25 turbines. And as you might recall, there was a reindeer issue where actually [indiscernible] village that was not directly affected by the project did apply, and that was something that County Administrative Board took the opportunity to lean towards when they turned the project down. Now the environmental court has overruled the County Administrative Board and sent the application back to them. So the reindeer issue has now been resolved to our favor, which is really positive. Then we don't know the exact time before we can have a probable approval of the project, but I think the odds are really much better now. And if the County Administrative Board does it correctly, they should prioritize this project in time because it has been sent back to them. So that is actually what should take place in theory, we are following up on that, of course. Turning to Tormsdale in Scotland, some 15-plus turbines. We are now in the late stage of our bird survey, which has almost took place now during 2 years' time. So it's progressing according to plan. We are now into discussions about the grid connection agreement, and we are planning to post a full environmental application around the turn of next year. So looking good. It's a high-quality portfolio with good progress. So we feel that the coming 2 to 4 years is really looking good perhaps. Turning to Page 13 on the outlook. We're obviously very much focus on getting these 2 projects Enviksberget and Bröcklingberget completed as soon as possible, but also very much focused on being able to recognize the highest profit that we can make. We are starting to prepare the procurement of Ranasjö and Salsjöhöjden projects and intention to sell -- start the sale process before the summer and then sell them later on this year. Obviously, as Linus pointed out, I think it's a landmark for the company when we are able to refinance our secured bond of SEK 650 million. And it's, for sure, a very important step to make the production assets profitable. And that, together with the extension of remaining useful lifetime, I think it's crucial for us to be able to show the market that we can run our wind farms with reasonable profits. And obviously, when it comes to our development business that has shown a great success during the last few years, we have a strong focus also to grow and diversify our project portfolio. We are not going to give you any news today, but we, for sure, we are working also on other projects than ones we are presenting in the list, [ so we are strong for it ]. And beside of this, in our third business line, we are looking forward to also continue to grow our asset management business. So I mean, with a strong balance sheet and a good business going on, I think we are basically under control, trying to achieve profitable growth going forward. And with that, I invite you all to ask us questions. Thank you.

[Operator Instructions] Our first question comes from the line of Henrik Alveskog of Redeye.

A few questions, if I may. Regarding the Skaftåsen project, maybe you've said it before, but could you please remind us how -- if you can give us an indication of how much of the revenues that will be recognized in your P&L.

Sure. As mentioned, in terms of profits, we recognized some -- a little bit more than SEK 140 million in quarter 4 of 2019. But in 2019, you also -- on our revenue line, you also saw as we do gross accounting, when we do the project sales, you also have development assets flowing through the revenue line but also through the cost line. So revenues was higher than that. But the net effect of the revenues coming in and the costs going over the P&L was a little bit more than SEK 140 million. Going forward, we have another EUR 6.4 million to recognize. And since all the costs have already been recognized, it means that it would be sort of the net number coming through our P&L. And that would come through our P&L over 2020 and 2021. Now as the project gets built and de-risked, it will come to a percentage of completion basis over those 2 years.

Okay. So it's the net number going forward?

Yes, yes.

Great. And then different question then regarding asset management contracts. Is it normal that you -- or could you just elaborate a little bit on the new contracts that you acquire? Are they expected to be profitable from day 1? Or are you giving clients like maybe a good deal at the start and then working your way into the contract, so to speak? Could you elaborate a little bit on this?

No, I think it's pretty straightforward that we enter these contracts usually, when we sell the projects such as Skaftåsen on reasonable commercial terms. So we expect to get the profit, both from the construction management agreement and also from the asset management agreement once the wind farm is taken into operation. So it's obviously that the asset management part of the -- the asset management agreement is not really in place before operation. But -- so it's a construction management agreement that is in place already now.

And then I think it's fair to say that they are contributing to profits from day 1.

Great. And then just in general regarding the -- yes?.

Yes, yes, I think just -- so to be clear, when we talk about the development, the SEK 210 million, that is development profits. And asset management profits will come in addition to that, of course.

Yes, later. Yes, of course. Well, then now regarding the -- all the high activity now in the construction market and expected to continue so for several years, do you see major risk or bottlenecks when it comes to people, equipment, something else?

No, I think some of the suppliers have been struggling a bit, but I think it can also be the case that they are now starting to cure the problems and you also might not see the same kind of explosion of new sales of the new wind farms, as we have seen during the last year or so or 1.5. So I think it's fair to say that I think the market will be a bit more balanced moving forward. But obviously, there are a few suppliers who are struggling a bit. I think it's only natural if you have a very high activity. But at the same time, a lot of projects are now being finished. So then capacity is released also.

But it's not something you consider a restraint on your future projects?

No, not really. I think it's something that will -- it can pop up, and it's also different between the different suppliers. But I think it's -- it can be a bit tougher, but it's not something that stops our business. It's more like yes, development that we, of course, follow closely, but it's not something jeopardizing our core business. And also the contracts that we signed with the suppliers are also protecting us. That's also important to stress, I think.

And I think -- I mean, the reason we have some slight delays in Bröcklingberget and Enviksberget, but still, we don't expect any major impact from that. And that is basically, as Daniel said, we obviously have certain commitments to our clients, but there is also a commitment from ours -- or from the suppliers which tend to cancel one out to a large extent. So -- and that's very important, of course, that we try to minimize our risks in our projects.

All right. Just finally then, regarding dividend policy. Is that something that the Board is discussing at all?

I think we have raised the question, but we have come to the -- the Board has come to the conclusion that it's not yet time for dividend.

And our next question comes from the line of Johan Widmark of Erik Penser Bank.

Daniel and Linus, just one thing, in the report, you stated there revenue recognition was delayed for Enviksberget and Bröcklingberget. Could you please -- you also mentioned increased uncertainty. Can you just elaborate on what specifically does this relate to? And what are the uncertainties there?

Yes. I think it's basically -- it's uncertainties in relation to time. And obviously, we have sold the projects with a certain sort of planned completion date. And to the extent we don't deliver that, that can have an impact. But again, if the project is delayed due to certain suppliers, that means -- that also means that we get through the project compensation for that. So -- but of course, there's always more uncertainty if you hit the date or if you don't hit the date, so we have slowed down the recognition. But having said that, we actually expect to be to be -- and that's also the conservative approach we have in this presentation. But we basically, we also have pretty good protection. So we're being conservative as you have more uncertainties, but at the same time, it might end up considerably better than what we have here. So I think that's where we are.

Okay. Perfect. Also regarding this planned refinancing. Could you give some early indication of what kind of terms you expect to receive on this? You mentioned significancy. And could you be a bit more specific maybe?

Yes. But I think in general, if you look to our financial position, with the cash position that we have and considering that almost half of the net debt is the convertible, that means that we have quite a lot of cash at hand to help achieve much better terms. Basically, it's -- I mean, we will refinance at a much lower quantum than the SEK 650 million. We want to keep some cash, obviously, to help drive our business going forward. But we're going to reduce the quantum. And by reducing the quantum, we will achieve much better terms. But I think one also have to recognize that the SEK 650 million bond was done in Q1 2018, along with additional financing on top of that bond, which meant that the terms we got then was basically, as [ Daniel ] used to say, I mean, it's expensive to be poor. And now we're not poor anymore, so there would be a dramatic reduction in the interest rate, and there would be a reduction of the quantum. And I think if you were to go to speak to banks about how you do project financings in new project sales, I mean, you would be -- if the margin we have on the bond at the moment is 450 basis points, that would be probably around 3x more than what you would pay if you are low geared and have a strong -- no, low gearing and strong position. So we expect a dramatic improvement in rate and a much lower debt quantum.

Okay. Perfect. And also, just one last question on the project portfolio. Beyond 2020, where you plan to sell Ranasjöhöjden and Salsjöhöjden, you have 3 projects, as I understand, next in line for '21, '22, the Fasikan, Kölvallen and Finnåberget that you mentioned. Which one of these do you expect to start executing on first? I mean, what order? And is it reasonable to expect that -- any of them already to put up for sale or maybe even be sold in 2021? Or could you give some closer guidance?

Yes. I think it's fair to say that there is a chance that both Fasikan and Kölvallen could be up for sale in 2021. But it's depending on how quick the rulings come out from -- when it comes to Fasikan, it is the energy market inspector that is handling the line concession application, and they can take up to 12 months to handle that. And so if that would come out quicker or less quick, that has an impact. And then if it's appealed or not, it's also important for the time elapsing. So I think it's fair to say that we will have a decision during 2021. If it's early enough, then we can sell the project during 2021. If it's not, it's going to be a 2022 project. So that's the case with Fasikan. When it comes to Kölvallen, you might recall that it was turned down by the highest environmental court back in 2017. And so we have done quite a big job, actually, on the bird investigation studies and also removing and moving some of the positions. And then the technology development has been so strong so that the actual number of megawatts has increased despite the number of turbines going down in numbers. So that's good. So we think we have done a really, really good job, and we think there are no -- no need for the court to drag that process, but we still -- we are in their hands, but we do hope for a positive call now during Q1, and we do hope for the next -- because there is always, almost always, appeals to the projects, even if we have a good case. So if we then estimate another year for that process to come to a decision, then you have a possible decision during the spring 2021. And then if that is appealed, I think they're not going to be granted the right to appeal possibly because it has already been up to the highest environmental court once. We don't think it would will get there again. So during 2021, it's fair to say, I think, we will have a permit. And then same basically as Fasikan, open question whether it's going to be early enough to be sold during 2021. Or if it will go over to '22? But then, again, with a robust financial situation that we have, it's not a panic if we don't have them. But on the other hand, you could have both of them sold in 2021 as well. So it's how it looks.

And it's also fair to say that in Kölvallen, you already have the line concession. So.

That's also very big plus. Yes.

Right. Okay. So form the court approval, when that process is done, you're more or less good to go to put it up for sale? Or...

That's correct. And also a big advantage is that Skaftåsen project now being constructed is the substation that's going to be used by Kölvallen. So it's going to be a much simpler project to build as well and could, therefore, also have a quick time schedule when it comes to the grid works, at least.

Yes. And with regards to Finnåberget. You should, we should expect the 2022?

Yes. If you ask me, I would say, yes. But then again, I think the case has become much stronger. So it's a very strong case, but then we are still dependent on how quick the courts can be.

[Operator Instructions] Okay. There seem to be no further questions coming through at this time. So I'll hand back to our speakers for the closing comments.

Okay. Yes, thank you all for listening, and speak to you soon. Have a great weekend.

Yes, thank you, and goodbye.