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

Welcome to the Arise Q4 conference call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Per-Erik Eriksson; and CFO, Markus Larsson. Please go ahead.

Good morning to you all. This is Per-Erik speaking. We will give you a brief intro of the company. We'll also go through the numbers, some market conditions, achievements in '22 and also what we expect for '23. I will start with a brief introduction of the company. I hope you can see the slides now. Starting up with Arise being founded in 2007, listed on NASDAQ in 2010. We have, during the recent year, increased the number of employees. We are just about 40 currently. Arise, we have 3 different business segments. You have the original Arise that started up as an IPP. The production part, we have 139 megawatts in our production, corresponding to some 340 gigawatt hours power production annually. We have our development business, the second business segment, including both wind and solar developments in selected geographies. Currently, we have a project pipeline just about 3 gigawatts or 3,000 megawatts. And until the current date, we have divested some 1.3 gigawatt or 1,340 megawatts. The third leg is what we call solutions, our services business. We have currently just about 1,800 megawatts under management, operations management. And on top of that, we also have under construction management a record level of 800 megawatts currently under construction. With that, we flip the slide, and I'll leave the word to Markus.

Yes. Thank you. So looking into our Q4 numbers. Net sales for the quarter amounted to SEK 106 million compared to SEK 79 million in the same quarter last year. EBITDA came in at SEK 52 million and EBIT at SEK 37 million. Comparable profit before tax amounted to SEK 50 million, and the reported profit before tax was SEK 36 million as compared to SEK 13 million in the fourth quarter '21. Looking at net income. It totaled SEK 36 million, which corresponds to about SEK 0.80 for the quarter, an increase compared to the same quarter last year, which was SEK 0.33 per share. Operating cash flow was minus SEK 3 million. This was an effect of working capital buildup during the quarter. And the cash flow after investments amounted to minus SEK 76 million in all material aspects driven by our investments in the Lebo project. Looking at our own production, we generated 79 gigawatt hours compared to 82 in the same quarter last year, but the average income increased to SEK 857 per megawatt hour compared to SEK 812 million Q4 '21. After the reporting period, worth mentioning that we entered into an agreement with Persson Invest, where we see an estimated potential of up to 500 megawatts. A brief look into our segments. Development posted EBITDA of SEK 24 million for the quarter, which was related to the revenue recognition for Kölvallen for the full quarter. We also saw -- during the quarter, we intensified our efforts to secure new projects, the Persson Invest agreement after the end of the period, marking kind of the first step in that direction. Including that, we now have a project pipeline of more than 3 gigawatts, which Per-Erik will get back to in a bit. Within production, we saw somewhat weaker wins than normal, but a realized price, which was at all-time high level of SEK 857 per megawatt, giving an EBITDA of SEK 50 million for our production segment in Q4. Later on, when we add Lebo to our own production and also with our share of the Kölvallen production, the annual energy production will increase from about 340 gigawatt hours at the moment to about 520 gigawatt hours by 2025. Solutions saw another quarter with positive EBITDA in Q4 and continuing to position itself for new assignments and seeing some benefits from economies of scale. That was briefly about our segments, and I'm handing back to you again, Per-Erik.

Thank you. Yes, this slide shows a bit the development of the company until now. In the upper left, you can see a stable diagram showing our operating assets. And also, you can see a green line, which is the divestments we've done until now. And as you can see from 2013 and onwards, we developed a strategy to also include a development business. And as said, the 1.3 gigawatt divested until now and the results from that, we have been using -- for the last 10 years, you could say, basically to decrease our debt. And we are quite happy to say that we have managed to do that in a good way. And actually now, we have a net cash position for the first time in a few years. And this also means that we have positioned ourselves to manage our growth strategy, which we have now. And then we have growth initiatives in all business areas, both -- we are looking into organic growth, looking to filing agreements with landowners as well as we are looking into M&A opportunities product portfolios and also actually operating assets. So we have the possibility now to be active in the market in a different way. We are changing slide. Looking into our project pipeline. We have increased the pipeline a bit since the last quarter. I will, yes, soon tell you what happened. But starting with the late-stage development, we have 3 projects, which we have also come as the 200 megawatts we expect to have ready to build this year. We also have [indiscernible] barriers and SE2 as well. Wind, 120 megawatts and Tormsdale, a wind project as well, including a battery storage in Scotland, 70 megawatts related to, we expect to have ready to build within 2 years. So all in all, we have, in the short term, 300 megawatts in pipeline, late-stage development. Looking on the early-stage development, we have some changes since last quarter, and Markus mentioned that we enter into an agreement with Persson Invest. We have an indicative potential around 500 megawatts in that -- within that agreement, which we have added here. So we have some 2.8 gigawatt early-stage development in the portfolio at this moment. Looking a bit into the market conditions. Obviously, 2022 was a bit of a special year, given what's happened in the market. We entered into the winter period, we would have quite high risk for capacity constraints, I would say, the European energy system, it was a bit tested, I would say. It turned out that we would -- that the winter was quite mild at least until now. We also -- I would also say that the outlook is still -- might meaning that we haven't -- the risk for capacity constraints has diminished quite much. I don't expect that we will have any consumption curtailments. You never know, but it looks fairly good. And also, we can see that the power demand has decreased partly due to energy efficiency due to high prices but also due to the fact that we had a quite mild winter. Fuel prices still on a relative -- on a high -- historically high level but comparing to the peaks we have seen during 2022, it has quite sharply down from the peaks. Looking into the Nordic markets, we still have high volatile prices across the Nordic market, different price areas. SE1, SE2 been trading a bit higher. One thing is that the transmission capacity -- the transmission work better, north-south in Sweden, but also, we had quite severe icy conditions during November, December in northern part of Sweden. Hydro situation on the weak side, but I would say within a comfortable range. It's not -- no extremes what we're seeing in the hydro situation. Looking into Continental Europe, the gas storage levels are quite high in the end of the year, which is good, and the LNG deliveries to fill up the gas storages has been quite strong during the year. So that was one of the main concerns last year that we wouldn't have gas in Continental Europe enough for the demand, but that has actually worked, the market has solved that situation. Also, in general, we see energy savings having an impact also on lower consumption. But also looking into Continental Europe, spot price is still on a very high level, but came down from the extremes we have seen during the year. Our expectation of the market, we believe that we will see a higher price environment also during this year and next year. But -- and also high volatility still, but somewhat calmer than what we saw in '22, I would say. With that, I'll leave the floor to Markus again.

Yes, good. So if we look at the market prices on the left-hand side, Q4 again saw very high market prices and also, as mentioned, high volatility. We can also see in the chart that following the somewhat weak Q3, we now saw all-time high realized prices of almost SEK 860 megawatt hour. At the top right-hand side, if we look at our production, as mentioned, Q4 came in at 79 gigawatt hours, which was somewhat below normal. 2022 as a whole was 15% below budget due to weak winds this year. But however, one should keep in mind that this obviously varies over the years. And if we look at the average over the past 10 years, the actual outcome of our production is more or less on budget, just to take away from that. On the hedging side, we have added some additional volumes for '23 and '24 at prices well above USD 100 per megawatt hour. And this is something that we continue to -- a market that we continue to monitor going forward.

Key achievements in '22, just to sum up the year. In the beginning of the year or in the second -- yes, in the beginning of the year, we issued a green bond of EUR 50 million, which, of course, makes us improve the capitalization of the company. We had an investment decision to construct Lebo now ongoing, 33 megawatts, adding the gigawatt hours annually into our production portfolio. And in July, we managed to finalize the sale of Kölvallen, 277 megawatts, which we had a purchase price of EUR 100 million, which, of course, was good. And also we have a retained 9% ownership which means that we are basically adding some 80 gigawatt hours to our production portfolio when we have the project in operation. We have continued the focus to increase and secure our project pipeline according to the strategy that we have communicated earlier. Wind and solar in different selected geographies. An example is what we managed is that we have now started to build up our solar PV portfolio in Sweden, some first 50 megawatts achieved in '22. And also, in the beginning of the year, we will sign an agreement with Persson Invest regarding possibility -- a facility to develop wind power on their land. So to sum up '22, a great year for the company result-wise. And also, we have positioned the company for a growth strategy. Moving over to what we're aiming for in '23. We have a strong focus to increase the project portfolio. Sweden, wind, solar, U.K., wind, solar. I can mention that we have been focusing very much on solar in the U.K., but now it has opened up also for onshore wind in the U.K. So we are building up a team to manage that at the moment as we speak. We are looking into the Nordics as a core market and Finland, primarily wind, we are looking into. Mainly, we are talking about here agreements with landowners, but we are also selectively evaluating acquisition opportunities in project portfolios, but could also be operating assets. Obviously, we have a lot of construction projects ongoing, some 800 megawatts, and we have a strong focus of course to manage those projects in a good way and to have them finalized. Another target is to -- I earlier mentioned the late-stage developments and Fasikan projects, some 100 megawatts, so we are aiming for to bring that or to be during the year as well. We have, as already communicated, the first solar PV projects in Sweden in the pipeline, and we are aiming for to realize the first solar project could be as well too in Sweden during the year. We have an ongoing strategy to strengthen the organization in order to support the growth strategy. U.K. team is 1 thing, but we are looking into increasing or strengthening our organization in general. But of course, that will be handled in a disciplined manner. So to sum up, we have high expectations also for 2023. We think we have good conditions, but that means that we could have another great year for Arise. With that, I think we'll leave the floor open for questions.

[Operator Instructions] The next question comes from Hanna Forsgren from ABG Sundal Collier.

I have a few questions. The first one is regarding the group cost [ elimination ]. In 2022, you had about SEK 41 million in elimination. And I'm wondering, is this a normal level? Should we expect same levels in 2023 forward? And could you give us some color on what would these eliminations are?

Sure. Hanna, the -- I see where you are coming from. As mentioned in the report, large part of the nonallocated costs for the quarter, I mean, typically, that includes certain administration costs and so on, where the previous quarters probably have been more or less the normal level while they might pick up somewhat as the organization grows. But the major item that you'll see in the Q4, which you maybe didn't account for is costs for our variable remuneration program, which for Q4 amounted to SEK 16 million.

So my second question then. Looking at the profitability for developments in 2023, is Q4 a normal level with mainly revenue recognition from Kölvallen?

Sorry, we need to increase the volume.

Sorry, could you repeat that, Hanna.

Absolutely, no worries. So looking at the profitability for development in 2023, is Q4 a normal level with mainly revenue recognition from Kölvallen?

I think that's kind of a difficult one to answer. I think you should keep in mind that the revenue -- in essence, the revenue recognition is not a kind of a 100% straight line. They will probably deviate -- or there will be deviations between the quarters. So you cannot say that, that 1 quarter is a proxy for the coming quarters.

And looking at the hedging program, are new hedges designed the same way as the previous model?

Yes, they are base load hedges, right?

Yes.

[Operator Instructions]

This is [indiscernible] from Penser Bank. A few questions, if I may. The first one is regarding Lebo. Could you please update us on the time line here and whether you feel very comfortable or a bit uncomfortable regarding potential delays? The second question is related to your growth ambitions. You have listed some of the areas here. Could you elaborate a little bit on these 3 lines where you want to -- what was the biggest probability that it will grow? And how do you view the commercial prospects in these different areas?

Should I?

Yes.

Starting with Lebo project, that is ongoing according to plan, and we expect to have that in operation in the first quarter next year. And we don't have any hiccups so far on time scheduled there. So that is expected to happen in time and within budget as well. And the next question, sorry, was regarding our growth initiatives, right?

Exactly. And how do you -- if you kind of rank them between where do you see the best prospect? And where do you see the challenges between these different areas?

Yes. Looking in total Sweden, wind and solar, we will see -- we are focusing a lot on finding small-scale projects on wind and solar and adding them to our portfolio. But where we are also looking into a larger scale opportunities in Sweden as well. Finland is -- Nordics in general, let's say, start with Sweden and Norway, we have some ongoing projects there, and we are continuing those projects. This is a greenfield project. Norway is a bit tricky situation right now due to the fact that there are new taxes that are proposed to be introduced that will have a big impact on the profitability for projects in Norway. So there is a lot of political risk in Norway at the moment. Most likely we'll, in any case, make sure that we are finalizing the development part of our projects and see it's not a huge spend for us to do that. Finland, clearly an interesting market, quite low political risk, I would say. We are continuously looking into opportunities in Finland. And hopefully, we can do something there as well during the year. U.K., quite interesting, it's a busy market. It's a quite mature market, but still, we see opportunities in the U.K., and we are building up an organization to start shaping projects both on wind and solar in the U.K. Interesting to see that they have changed the policy in the U.K. or in England, I should say, to open up for onshore wind, which is quite interesting thing. And as we are already established in the U.K. with our products and spot, it's natural for us to continue. And we also have one of the group management members. He is an Englishman as well, which also helps to -- we are a bit established in the U.K. You can also -- we have also been quite active with a partner in Poland. Poland is bit of a question mark. Like Norway, I would say, a bit political risk. They are introducing some cap pricing in Poland. So we are a bit evaluating what to do in Poland moving forward. We'll see that, that is something that is ongoing. But all in all, we are optimistic that we will have new agreements during '23, and I would be extremely disappointed if we don't manage it.

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any closing remarks.

Thank you. Yes, the only closing remarks we have is that we are extremely pleased with the outcome in 2022, and we have -- we really look forward for 2023 as well to be a good year for the company. So I think that's the closing remark, and thank you very much for joining.

Thank you.