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

Ladies and gentlemen, welcome to Arise Q4 Report for 2020. Today, I am pleased to present Daniel Johansson, CEO; and Linus Hägg, CFO. [Operator Instructions] Daniel Johansson, please begin your meeting.

Thank you very much, and welcome all to this year-end report for Arise. I think it's obvious to most of us that renewable energy is now really entering the center stage. This is our second page, by the way. And this is a worldwide trend. But if we turn just to the European Union, we now see that the political decisions are being made to go to a net neutral climate change agenda for 2050. And already by 2030, there should be a reduction of greenhouse gas emissions by 55%. So that's pretty aggressive. That is also now seen in the pricing of the CO2 emissions in the EU-ETS trading scheme. And this is, of course, on the back goal to the expectations of a more climate-friendly politics. And just for your information, the European Commission is also preparing a bill towards the summer regarding the financing of the EU budget, and part of that bill is probably also the EU-ETS as well as common income for European Union, which could be supportive of that as a steering instrument going forward as well. We also see, furthermore, that onshore wind in the Northern Europe is really competitive. It's not a coincidence that a lot of investments are being made right now in both Sweden and Finland on onshore wind. It is amongst the most competitive energy power, the power-producing technologies throughout the world, actually, if you take into consideration the level of cost of energy. We also see that the forecasts do predict that we see a hike in power consumption over the next decades. IEA, for instance, predict that we see 15%, roughly, surge in consumption only in the EU and that's up during the 2020s. And then in a global context, there is roughly a double amount of consumption in 2040 compared to 2020. So it's a worldwide trend. And also, we see -- and it's also predicted that it's the wind power and the solar power that will lead this increase of power supply as well. So renewable energy is leading the combat against climate change, turning to Page 3. Our vision is to develop renewable energy for a sustainable future. And the mission that goes to that is that we want to be the obvious partner for investors in wind power by creating value throughout the life cycle. So we want to be a customer-oriented player in this field and be a part of these investment decisions throughout the life cycle for our customers. Furthermore, we want to maximize the value of our green electricity production through professional operation management, sales and financing. This is, of course, something that is close to our heart since we still own some 139 megawatts of wind power-producing -- wind power in the south of Sweden. And this is something we'll come back to a bit further. Turning to Page 4. We were founded on the Swedish West Coast back in 2007 and listed in 2010. We are today a bit over 30 employees. Our project development portfolio is a bit over 1,300 megawatts in capacity. The wind power operation that we hold in south of Sweden is divided between 10 wind farms, and the capacity is 139 megawatts under -- and in production a bit over 340 gigawatt hours. We are managing on behalf of our customers, some 1,100 megawatts of wind power in Sweden and Norway, looking to increase that number, of course. And right now, we have one large project under construction, which is the Skaftåsen project, which we sold to Foresight in December 2019. That's 231 megawatts. Turning to the next page, then I hand over to Linus.

Yes. Thank you, Daniel. And so basically, we're going to go through some of the Q4 numbers. Overall, the quarter was characterized by weaker winds than normal and very low power prices as has been the trend all through 2020. As you know, we also postponed the sale of Ranasjö- and Salsjöhöjden projects into 2021, which basically meant that there was also quite slow activity in the development business compared to 2019. So with that said, net sales came in at SEK 26 million compared to SEK 247 million last year. And as mentioned, we sold the Skaftåsen project in Q4 2019, which explains some SEK 200 million of this delta and the remainder being explained by lower power prices for the production. And we'll come back to pricing on the next slide. I think it's also worth to mention that 2020 was a quite extreme year in terms of hydro balance, the hydro situation and hydro reserves in the system, which has meant that it's really put a big pressure downwards on prices and that is being reversed in the beginning of 2021. So we're looking at the market that is quite different compared to what we've seen in 2020, but we'll come back to that. So basically, this meant that EBITDA came in at SEK 1 million and EBIT at minus SEK 15 million. Again, as we sold Skaftåsen last year, it explains some SEK 140 million of that delta in recognized profit. So that's the large driver. And obviously, as we didn't sell a project this year, we didn't have any cost of sales of projects either. So the cost base was also quite a bit lower. Operating cash flow came in at minus SEK 1 million. And if we look to our comparable profit before tax, this came in at minus SEK 23 million and comparable net income came in at minus SEK 24 million. And this is due to that underlying net financials improved quite dramatically on the back of the refinancing that we did in the autumn. So the comparable net financials came in at minus SEK 8 million compared to minus SEK 20 million last year. Looking at the reported numbers, net income came in at minus SEK 42 million. So again, the delta between the reported and comparable is basically that we've incurred SEK 32 million of one-off costs in relation to the refinancing. The vast majority of that number was due to our determination of SEK interest rate swap as we now took up a euro loan. But there was also -- and I think affecting comparability of SEK 14 million and that was related to that. We now are financing euro. So this will not just be a theme for this quarter. It will also be a theme for the coming quarters where we always will have an exchange rate difference on that loan. And to the extent that the euro depreciate, it will be a positive number, as we've see in this quarter, by SEK 40 million. And if the euro appreciates, it will be a negative number. Of course, this is noncash items, but it will be something that will fluctuate going forward. So we will continue to separate that loan item. Production came in at 87 gigawatt hours, which was lower than budget due to weaker winds. And as mentioned, prices was very low; it came in at SEK 202 per megawatt hour compared to SEK 440. Again, this was driven by low market prices, but also the strong hybrid situation that there was all -- at all times, a very strong hydropower production, regardless if there was a lot of wind or low wind. That means that you get a weaker or a less favorable capture price of wind when you have a very strong hydro balance. We'll come back to that again. As mentioned, we refinanced our bond and took up EUR 40 million loan, which will be very positive for the company going forward. And of course, we saw a lot of that effect already in this quarter 4, as mentioned, but additional -- we won't see the full effect until Q1, basically, because we still have the old bond, if you will, until about middle of October. So it will improve even a bit further. Turning to the next slide. So on the top left corner, you see the spot price on the new pool system. And as you can see, 2020 was extremely low prices. But we've seen a strong recovery in 2021 and various spiking spot prices due to the, basically, turn on the weather, which means that the hydro reservoirs are gradually decreasing towards more normal levels. As you can see, also, the calendar price in the bottom calendar '23, in this case, in the bottom left, growth has improved on the back of this situation. So -- but it's not only that we see actually higher prices on the market screen, we also see significantly better capture prices for wind power, and this is basically due to that the hydro reserves are coming back to more normal levels. So the impact of that we've seen in 2020 becomes much less predominant. Also affecting prices in 2020, of course, was corona indirectly through lower consumption. But I think all in all, the biggest thing or the biggest theme in 2020 were hydro power due to weather basically. Going forward, we expect a lot of new electricity consuming technologies coming into the grid. We see initiatives front, left and center, everything from hydro -- sorry, hydrogen to battery capacity to data centers, et cetera. So that's all very positive and in line with what Daniel began to say earlier about bigger sort of market trends. Turning to the next page. Here you can see an overview of prices we have realized to the left. And as you can see, it was only in Q1 2020 where we had good capture prices, whereas the rest of the quarters have been very much affected by the levels of the hydro reserves. And on the production graph to the right, you can see that production came in at 87 gigawatt hours, which is lower than budget, but quite close to what we saw in Q4 2019. We should also mention that in Q4, we had a hedging level of some 60% on a P50 basis. Going into 2021, we will be a lot more exposed to improvement in market prices as our hedging level is quite a bit lower going forward. And we can now allow ourselves to have a more aggressive hedging strategy due to the fact that we have refinanced and have a lot significantly lower debt and costs associated with that, so we can allow ourselves to be more exposed to market prices. Starting to the next page. As I mentioned, we see a quite low activity on the development side. We basically only have 1 project under construction at the moment and that's on the revenue recognition. We still need Bröcklingberget as well, although it was completed in Q2, Q3 because there might be some additional upside pending ongoing discussions with sub-suppliers. This can take a little bit of time, but we expect to see something trickle in there. So the one project that we have under construction is Skaftåsen, a big project that was sold to Foresight in Q4 2019. And construction is ongoing on schedule at the moment. We continue to be quite conservative in the revenue recognition on the remaining variable compensation that we expect from the projects, and this is basically due to the fact that it was a big project and was very front-loaded the payment we received. So the relative number in the back end is lower, so we are a bit more conservative in how we recognize it. So we got some -- a little bit more than SEK 2 million in Q4 on Skaftåsen. Turning to the next page. And just to illustrate the situation going forward on the financing side, net debt has been reduced quite dramatically over the years. So we now have a net debt position of some SEK 454 million after conversions that occurred in January. That's very positive. And the new loan that we took up is, as I said, a euro loan with, we think, very attractive terms. We have a cash interest of below 1.5%. We amortize in line with depreciating asset base. It has the maturity of September 2023 and is secured against our 10 wind farms in the south of Sweden. And as mentioned, we had a one-off charge of SEK 32 million as we canceled the SEK swap. In addition to the secured loans, we have still convertible bonds outstanding that at the end of the quarter amounted to some SEK 180 million, and they are convertible into shares at SEK 22. It matures in March 2022. And in January, there was some SEK 30 million of conversions that occurred after the end of the quarter. At the end of the year, we had a cash position of SEK 86 million. And as we have said in the past, with this refinancing, we have a completely different cost base for our own production. And on a group level, we now expect net financials to be significantly below SEK 25 million. And for the production alone, we expect it to be about SEK 8 million per year. So as we did refine mid-October, it's not fully there in the numbers, but you will see it from Q1 and onwards. Okay. Turning to the next slide and handing back over to Daniel.

Thank you, Linus. Yes, having a look at our portfolio of more than 1,300 megawatts is sincerely making you think that we are heading towards exciting times. When we look at Ranasjöhöjden and Salsjöhöjden, we are now working on getting the sale of those projects done by 2021. So we have posted an application for a longer valid permit for Salsjöhöjden and we are working on those 2 projects, and we have started having ongoing discussions with some investors. Then turning to Lebo. It's a 5-turbine project in price area 3, south of Sweden. It has a reasonably good potential mainly because it's in just the price area 3, which is quite rare. It should be ready for investment or financial close probably 2021, maybe '22. Turning to Fasikan. It's roughly 15-turbine project, where we have the legal permit in force. There, we have applied last autumn for a great concession. And that's now being handled by the Energy Markets Inspectorate who is the decisioning body on those kinds of concessions. So we expect to get their decision by probably Q3 '21 or so. Then turning to Kölvallen. We -- as you might remember, we got the permit decision from the regional authority and now we are pending, waiting for decision from the Environmental Court. We are expecting it to be occurred quite soon. So very exciting. We are positive that we have some kind of permit given to us and it's more a matter of how many turbines. And that's our belief at least. The Kölvallen project is, so to speak, the crown jewel of our portfolio because it's such a large project. It's excellent wind conditions, and it's also very close to the substation where it's to be connected to the grid. So a super good project, and we hope for a positive decision pretty soon. Turning to Finnåberget. That's a roughly 25-turbine project. Also they're expecting an important decision from The Regional Administrative Board quite soon and that is regarding the full permitting, except for the render issue that was already handled by the Environmental Court early on. So also there, hoping for a decision during the first half of this year and also for a positive on there. Our project Tormsdale in Scotland is a 60-megawatt project that is about to be posted to the Scottish authorities for a full permit application. And that is a process that could go on sometime between 6 months and 2 years. So we will come back and give you some update on, on the time frame we see there. Possible financial close sometime in 2022 to 2023. Very good wind conditions there as well. So overall, really exciting projects, good really expectations. And that's close to 700 megawatts that we are expecting to reach financial close during the year 2021 and 2022. And then we are in parallel working on the more early-stage projects in different geographies. It's different parts of Sweden. It's in Norway and another project in Scotland. Turning to the last slide, the outlook. As Linus mentioned, we are now entering a stage where we expect the pricing environment to be much improved with regards to our Own production assets. And we also see that the full effect of our lowering the cost base is coming into play from the first quarter 2021. So really excited about that. We have good hope to be able to reach financial close for Ranasjö- and Salsjöhöjden during 2021. And as mentioned before, it's a roughly 240-megawatt-sized project with reasonably good profit potential. And furthermore, we have the projects, Lebo, Kölvallen and Fasikan, which we expect to be ready for financial close during the years '21 and '22. So all in all, some 650 or even slightly higher than that megawatts ready for sale and financial close during the coming 2 years. Apart from this, we have also done a review of different markets in Europe, taking in some external expertise. And we're, of course, evaluating which markets we perceived to be the most interesting ones. So we have an addition to diversify into new geographies over time. And we will come back on that later on. I think we are now in a really good position to try to demonstrate the profitable growth that we expect in the coming 2 years. And with that, I conclude and we can have questions.

[Operator Instructions] We have a question from the line of Henrik Alveskog from Redeye.

Arise, can you hear me?

No, no.

All right. Well, yes, I have a few questions. And well, the last thing you were talking about was potential new regions or countries. I assume you will not disclose which countries you're considering.

Not at this stage, I'm afraid.

Yes, I understand. And you also mentioned in the report that new technologies could be applied. And all you talked about new geographies and new technologies and so that sounds a bit intriguing. And will we finally understand why you changed your name from Arise Wind Power to Arise? Or how should we understand it?

I think we can hope to come back to you not in a too distant future on that, but I think it's a natural step for us to have a look into other opportunities.

Is it's still happening maybe?

I don't want to go into that yet, but we will come back on that.

All right. Okay. And then also, you sent out a press release a week or 2 ago about the project and the battery factory in Norway. And I was just -- that's the early-phase project that we see in your table here, right?

Yes, that's right. That's right. The Norwegian one.

All right. And is it because it's the largest one of these early-phase projects that you, well, communicated this? Or is there another specific reason?

I mean we were holding a presentation for the municipality. And there was also this intention from their side to apply for getting this factory to be located in their municipality. And that's why we wanted to support their application to go out and give this piece of information, but also acknowledging that it's an early-stage project planning.

Okay. And then I was also curious, when it comes to Scotland and the permit process, is it different in any material aspects to the process in Sweden that makes you, well, assess that it's a bigger risk or lesser risk compared to Sweden?

I think it's hard to say whether the risk is lower or higher, but it's fair to say that the central government has more of saying than they have in Sweden. So if they deem the project to be viable, then they can basically take a quicker decision. But they could also decide to go -- have a bit longer process and involve more stakeholders. So that's a bit of an open question, actually. So we will have to update you later on that how it goes going forward.

Yes. Okay. And then just finally, you described the reduced costing in -- operating costs in your Own wind farm production. And then where you mentioned the extended service life from 25 to 30 being a part of this, is that just the depreciation you're referring to? Or is it anything else?

Basically, well, the cost base for Own production is lower due to 3 reasons really. So one reason being capital costs, i.e., depreciation, which will be some SEK 10 million lower because of the extended service life. The biggest contributor is, again, capital cost by the nature of financing costs, basically, is where we will reduce the run rate from previously some SEK 42 million on a yearly basis to below SEK 8 million on a yearly basis. And then that includes not just cash interest, but also this IFRS 16 effect. So cash costs will be much lower than the SEK 8 million is just to run the numbers on the interest that we have based on the loan. So that's a big impact from SEK 42 million to below SEK 8 million, of which cash costs being a much smaller portion than the SEK 8 million. And thirdly, there will be also an improvement in operating expenditures because we have entered into new service agreements for our GE fleet. That's 3 wind farms, which will roll into a much more attractive cost on the service for those wind farms compared to what we've had in the past. And although it's a lower cost, it's still with full-service agreements that basically that the supplier is responsible for all the components, et cetera. So low risk -- still low risk from an OpEx perspective, but at a much lower cost. All in all, this is some SEK 50 million if you add the 3 together on a net Arise.

[Operator Instructions] We have a question from the line of Ofelia Aspemyr from ABG.

Ofelia Aspemyr from ABG. I have a question about the Finnåberget project. In the slide, I can see the project was scheduled for 2021 to 2022 in the Q3 report and now being lifted to 2022 to 2023. Have you changed the time plan for projects? Or what can we expect?

Yes. We did expect a decision from the authorities already before Christmas. So we felt it was more in line with expectations to move it into the years '22, '23, given the time frame for the decision. We expect the decision from The Regional Administrative Board now during the first half of this year, and then it's probably going to be appealed. And then you have roughly 1 more year. So that's the reason.

There are no further questions at this time. Please go ahead, speakers.

Okay. Thank you all for attending, and speak to you soon. Have a great day. Thank you.

Thank you. Bye-bye.