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

Welcome to Arise Q2 presentation for 2024. [Operator Instructions] Now I'll hand the conference over to the speakers. Please go ahead.

Thank you very much. This is Per-Erik Eriksson, CEO for Arise. I will start with a brief introduction of the company. We were founded in 2007, starting up as an IPP, and further on, listed on NASDAQ in 2010. Currently, we are some 73 employees in the company. We have activities in 5 countries, in the Nordics, Sweden, Finland and Norway, in the U.K. and also in Ukraine. We have 3 business segments, starting with Production, which is, you could say, the original Arise. Currently, we have some 172 megawatts in production, including Lebo project, which was added in May this year. Currently, we have a budgeted production of some 430-gigawatt hours. You could mention that Lebo adds some 25% to the earlier production. We have a Development business. Currently, we have a product pipeline of roughly 7.9 gigawatt or 7,900 megawatts. Here, we had a quite good contribution during quarter, which we'll come back to later during the presentation. We have since inception divested some 1,450 megawatts. So that's the Development segment. We also have the third segment, Solutions, which is our services business, including construction management and asset management. Currently, we have some 2,000 megawatts under management, and under construction, 380 megawatts. We have Salsjohojden project, 277 megawatts, and also Fasikan project, 105 megawatts under construction. With that said, I hand over to Markus.

Thank you, Per-Erik. So looking into the Q2 numbers in brief then. It was just another very solid quarter we think, with net sales of SEK 101 million compared to SEK 110 million the year earlier quarter. We had some positive contribution there from the earn-out in Ranasjo- and Salsjohojden. I'll get back to that. EBITDA came in at SEK 53 million compared to SEK 69 million in Q2 '23, and EBIT came in at SEK 33 million compared to SEK 53 million in Q2 2023. Profit after tax totaled SEK 30 million, which represented some SEK 0.76 per share. The operating cash flow was SEK 24 million, was SEK 60 million in Q2 '23. And cash flow after investments improved to negative SEK 34 million compared to the negative SEK 167 million the year earlier period. Our own production generated 69 gigawatt hours, an increase from Q2 '23 of 54 gigawatt hours. But on the other hand, the average income dropped to SEK 549 compared to SEK 947 in the year earlier quarter. If we look into our segments a bit, Development posted a very solid EBITDA, which was impacted by the mentioned earn-out in Ranasjo- and Salsjohojden, a project which was taken over during the quarter. The earnings effect of the earn-out for the quarter was EUR 2.4 million. During the quarter, we also saw a stronger SEK in the SEK-euro FX, which had some negative impact on our revenue recognition in the quarter, since now the revenue is recognized in euros. Per-Erik mentioned it in the beginning, we're pleased to see the portfolio, which increased by 745 megawatts in second quarter, and also 175 megawatts were advanced to the late stage. Our Finnish subsidiary, Pohjan Voima, entered into a partnership during the quarter with Finsilva in Finland. Finsilva is one of Finland's largest landowners. They have 5 identified projects initially with a 500-megawatt potential. In the Production segment, Lebo was included from the takeover in May. And the quarter saw significantly lower market prices than the same period last year. And in Q2 2023, our realized price was actually at all-time high of SEK 947 per megawatt hour. However, Production still contributed to the good result. The Solutions segment posted just again stable earnings and was another quarter with positive EBITDA contribution of SEK 3 million. And the LTM EBITDA for Solution is currently now at SEK 12 million, not massive numbers, but nevertheless a solid contribution. Going into the project portfolio, we're happy to see both growth but also diversification. We added 745 megawatts, as mentioned previously, during the quarter. Finland roughly 500 of those, and Sweden and U.K. just above 100 megawatts each. Within the portfolio, we advanced 175 megawatts to the late-stage portfolio, and that is related to battery projects in the Nordics. Total portfolio now is 7.9 gigawatts, of which 1.1 gigawatt is in late stage. Sweden still dominating, as is wind. But we continue to see increased diversification both in terms of technology and in terms of geographies. If we look at the power prices and our realized prices, Q2 was a clear drop from the same quarter last year, as discussed previously, when we had the all-time high numbers in the year earlier period. However, it's worth noting that our realized price was still slightly above the market average due to the favorable hedging. This drop obviously impacts the LTM EBITDA for our own production, but still at very good level around -- or just north of SEK 160 million mark. And this is actually the 10th consecutive quarter where the LTM EBITDA is above SEK 150 million, which we're pleased to see. Our hedging portfolio was unchanged during the quarter. We continue monitoring the market, and we believe it's more likely than not that prices will pick up in the second half of the year. With that, I'll take a breath and hand back to you, Per-Erik.

Thank you very much. Market development. Looking into the power market in the Nordics and also Continental Europe a bit, you can see the graphs to the left. And upper one is the spot prices, development of spot prices, and the sort of below left, you can see the forward prices represented by calendar year '25 in euros per megawatt hour. Starting with the spot prices, we have seen weaker and quite volatile prices during the quarter. We had a quite mixed weather with a cold April. We had a quite hot and dry May. And later on, we had quite a wet June, a lot of rain during June, which had some impact, obviously, on the power prices. We also see that demand is still on a low level, but we also see some signs of recovery year-to-date. Looking at the forward prices, the market is fairly stable compared to the spot prices. Short term, we see forwards impacted by weather. We also see in a bit longer perspective, also in short perspective, that fuel prices are strengthening a bit from last winter lows. And we also see European forward prices somewhat higher during the quarter. And the Continental prices should be mentioned, are quite much or materially higher than the Nordic levels, very much due to the gas market. We see quite slow gas storage injections, which keep the price elevated, especially on the forwards. We also have seen that the gas market is still very sensitive to potential supply disruptions, which was the case in '22 when the supply from Russia were interrupted. We see a potential recovery on energy-intense industry, which is the main driver for the winter. With -- yes, I could also mention on price areas in the Nordics that we see quite large differences, for instance, between SE4 and the other price areas. With that said, I think we flip slide. Our agenda for 2024 for the second half, we will continue to accelerate projects to ready-to-build stage as much as we can. We have said and we still say that we will -- we have the ambition to do at least one project sale in '24. We have a continuous work to advance early-stage projects to late-stage. That's high focus for us. We have an ambition to continue to grow our pipeline in selected geographies, the geographies mentioned earlier, both through greenfield but also -- greenfield development, but also, we are looking into acquisitions as well. Obviously, we have grown the number of people in the company quite much. We have more than doubled the number of employees during just a few years' time. And we have a lot of focus to integrate new companies and new people in the company and also to support acquired companies for development activities and could be transactions as well. We still have and will keep the focus on capital discipline. I think we flip slide one more time. Looking ahead the short-term outlook, we have -- we see potential improvements on project valuations. We are supported by interest rates expected to go down, but also, we see that there are potential for CapEx to go down. We have already seen solar panels going down a lot in prices, but batteries also dropped a lot in CapEx. We also see that on the wind side, the turbines last year, we had a bit of a perfect storm, meaning that all suppliers basically increased the prices quite much due to the fact that they were losing money. Now we see that raw materials go down, for instance, steel prices. And also, we believe that the suppliers, the manufacturers have margins now. So we believe that, that competition will start working again on turbines. And then looking on to the power markets, which also is something that has a big impact on project valuations. We see a quite big or even a huge gap between Continental Europe and the Nordics, which we think suggests an upside potential in the Nordics. Just as an example, perhaps in the Nordics, where we are trading around EUR 40, EUR 50 per megawatt hour in '25, and the corresponding value in Germany is almost double that number. So we are talking about roughly EUR 90 per megawatt hour today. We have very sensitive markets across Europe, which we always should keep in mind. Things go fast up and down. In the more longer term, industrial consumption will be one of the main drivers in the Nordics, but also in Continental Europe. Something to mention is that we see quite strong bullish signals for renewables in the U.K. The new Labor government already taken steps to accelerate development of onshore wind and solar PV. The target is now to double onshore wind capacity and to triple solar PV capacity by 2030. And just to give some color to this, we are talking about on onshore wind some 15 gigawatt to be increased to 30 gigawatts in a quite short time, and the corresponding value for solar is 20 -- around 20 gigawatts to 60 gigawatts. So a quite massive target in the U.K. And in England, it has been almost impossible to develop onshore wind. But now they open up and also have very ambitious targets for that. And we have actually in early phase some 300 megawatts we are working with to develop to early phase, put into the portfolio. So we have established organization in the U.K. We have projects coming into the pipeline. To sum up, Arise is well positioned for another good year. We think that our business model works well. We expect to continue profitable growth and to be meeting our financial targets in the long run. With that said, we say thank you for listening and leave the floor open for questions.

[Operator Instructions] The next question comes from Kaleb Solomon from SEB.

Kaleb Solomon here from SEB. Just a few questions from me. I noticed you changed the disclosure in the late-stage portfolio from specific projects to countries. So my first question is, what's the reason for that? And second, can you give some color on the 45 and 150-megawatt battery projects you added in Sweden and Finland? What time -- what lead times you expect and so on?

On the first question related to why we changed it, I think that's -- in -- it's kind of a legacy from the time when Arise maybe had a handful of projects in late stage. As we grow the portfolio now, we think it just makes more sense to disclose them geography by geography rather than project name by project name. So -- and as you mentioned, the -- what you could see in Sweden, for instance, is the addition of 45 megawatts battery. And we also mentioned that we had more battery in the Nordics, all in all 170 or so megawatt. In terms of timeline, always difficult to estimate. But I mean, both those projects are projects where we are pushing significantly forward to be able to move them into a transaction mode. Exact timing on that is difficult to say.

And on the net financials, the euro weakened against the krona sequentially, if you're looking at the last trading day of the month in Q2 compared to Q1. So the reevaluation of your euro bonds should impact net financials positively. But it was minus SEK 3 million. Am I missing something here or...

That's also, I would say, to some extent offset by liquid funds and also from kind of other positive reevaluations from the same euro weakening.

And I guess another question. You mentioned PPAs earlier and that you're kind of looking at it for next year. At what levels you need to see them to kind of find them attractive and lock something in for 2025 and 2026?

Are we talking about the hedges now, right?

Yes, exactly.

Yes. We have -- at the moment, it has been a bit, you can say, soft market and also quite poor liquidity in the market. And we believe -- or we have a hope and believe that we will see some improvements during the autumn here. Of course, it's very much weather driven, but also, as I said earlier, it's also driven by the fact that we have a big gap between Continental Europe and Sweden. I would say that we expect to be -- we are talking about in the range EUR 60 plus, I would say, where we would be attractive to do hedges at the moment. But it depends also on other factors as well. But to give you a number, I would say that.

And is it fair to assume that would be 40% of the volume as you had last year? Or you expect it to be lower than that?

I mean we wouldn't -- we always -- when we do hedges, we always take lots of time. We don't do everything in one, because that's not -- our risk management strategy is always to work with smaller portions. And so basically, yes, you could say that you average the market somehow over time. But normally I would say that if we find prices attractive, we would be in the range 30% to 40%. And that's our sweet spot, I would say, if we find prices on a good level. But also we are not that worried to be quite open as well. It's a bit a matter of where we see value basically.

And just one last question for me. The operating costs in the Development segment was a bit higher than it has been historically during quarters where you haven't divested anything. Was there anything special we should consider this quarter? Or should that just be extrapolated moving forward?

Yes. Well, project development, I think that's -- in all material aspects that is in a sense FTE-driven with the full Fenix team, and Fenix OpEx is -- Fenix is included in full in the Development segment, as is our growing U.K. business. So I think there you have it.

The next question comes from Hanna Grimborg from Handelsbanken.

Yes. So I have 2 questions. So the first is, due to the contribution of Lebo in the Production segment, should we expect the operating expense per megawatt hour to be lower going forward? So that's the first one. And the second question is, since you are aiming to sell at least 1 project this year, should we expect that the payment should be more close to the payment in a normal market since you spoke about potential improvement on project valuations? Or should we still expect it to be in the more lower end considering the market?

I think on the OpEx side, with the inclusion of Lebo, it wouldn't move the needle a lot in terms of specific OpEx per megawatt hour. That's the first one. And the second one is -- yes, I mean, even though we do believe and see that valuations might improve, it's kind of difficult to answer also where that would be because it depends a lot on which technology and geography the specific project is in. I hope that answers your question.

All right. I understand.

The next question comes from Orjan Roden from Carnegie Investment Bank.

Just to understand, how would you say that Lebo were producing during the quarter. This was transferred from Development to Production, I understand that. But was it producing in full during the quarter? Or was it kind of a ramp-up during the quarter? That's my first question.

Yes. We could say we started up production --we took over into the commercial operation in May. So it hasn't been fully -- doing full operation during the quarter. So you could say it has been ramping up during the quarter.

Okay. And second question, you're citing the new political landscape in the U.K. Do you think that, that will also impact prices for Tormsdale or the timing that it could be sold faster? Or do you still expect that process to be as you expected to be before?

Well, there are, of course, positive political signals in the political landscape in the U.K. in general. But I think the key here is really that England is opening up as a company -- as a country for onshore. I think that's the main thing for us. And we have been quite early movers in that market as well. And this was basically what we hoped for. So hopefully, we can harvest a bit from this. When it comes to Tormsdale, we are in a very late stage permitting process there. If this has a big impact -- might have, but it's difficult to say really. In any case, we expect to have Tormsdale ready-to-build in a short time.

Okay. And a final question, you had some P&L impact of Ranasjo- and Salsjohojden of SEK 2.4 million. But you also -- I expect to at least to have a working capital impact as well from the remaining part. Still the working capital were negative in the quarter. Will that snap back going forward? And what is your expectations on working capital or cash flow from working capital?

And you might isolate it -- of course, expect the working capital change to be positive during the quarter with Ranasjo- and Salsjohojden and give or take SEK 45-ish million in working capital release. Then keep in mind also that all the other revenue recognition within the Development goes the other way, which is the revenue recognition in Skaftasen and Fasikan. But I would say also the kind of tipping point in this quarter was a Siemens invoice for -- related to Lebo, which was just in the beginning of this quarter. So kind of tipping over from Q1 to Q2.

The next question comes from Mattias Ehrenborg from Redeye.

Mattias Ehrenborg from Redeye here. And I have a few questions. And I want to start off with the Production. Is it possible to quantify what the total production for Lebo was in Q2? I know that some of it should have come in the Development segment. But is 15 gigawatt hours a fair assumption you think?

The production that is included in the Production segment during the quarter was roughly 8, 9 gigawatt hours or so. So basically for May and June. Then you could extrapolate.

Okay. Excellent. And was there CapEx for Lebo? Has it been accounted for now in your books? Or is there anything remaining?

Yes, it has.

Okay. Excellent. And this quarter, I mean looking at the implicit capture price discount, it looks it was pretty big when adjusting for your price hedges. What do you think is a fair rate going forward?

Sorry. Can you repeat that one, Mattias?

Yes, sure. So the capture price -- or the implicit capture price discount to the market price was pretty big when adjusting for the price hedges. What do you think is a fair rate going forward this discount rate?

Yes. We had a discount rate in the quarter, if I remember correctly, around 30%, which is a fairly high number, I would say. But that number is variating a lot nowadays. And the background to it was basically that we had a huge volatility -- a huge or a big volatility, I would say, during the quarter on spot prices, very much impacted by a lot of solar PV in Continental Europe during May. So what we know is that it will be -- it will happen a lot up and down during the year. But what I would say I believe that in this market that we should have a bit lower number moving forward. I would say that a normal for us would be some 15%, perhaps half of that.

Okay. Great. If we just move over to the Development segment or at least the Pohjan Voima earn-out, I'm curious to hear how much remains at this point? Has anything been paid out already? Or what does it look like?

Mattias, no, nothing has been paid out yet, and it's linked to getting to more or less towards the late stage or fully permitted stage. So nothing has been paid out yet.

Okay. Great. And is it possible to quantify the negative FX effect on the revenue recognition in this quarter?

It is, and it's give or take negative SEK 4 million on the revenue recognition.

Okay. Great. And when do you think you will have sort of a better view of the final capacity over Finnaberget?

Yes. That's -- current status is that we have a line concession ongoing, and that is in reality more a formality. We expect to have the line concession, but it's a matter of time, how long it takes. When it comes to the capacity, the best -- we hope for 200 megawatts, but there are still some studies to be made by the grid company during early '25. So it will take some time until we have a clear understanding.

Okay. Good. And the final question from me, can you shed any light on the transaction that you're targeting now in 2024 in terms of size or technology or anything?

Well, the short answer is no. But we are work -- at the moment, working on a few different tracks or alternatives. It's difficult to say which transaction and when we will go for. For us, it's a matter of how to optimize value. And it could be so that we -- we have the possibility now to decide the optionality, to decide there to wait, to sell later or keep and divest later on. So we'll see. But then as said earlier, we have a quite firm ambition to do -- to have a transaction this year. I know it's a quite vague answer, but that's how reality looks like.

Yes. And it makes sense, I think. But is it fair to assume that you're not in any sales process at this moment?

Pardon?

Is it fair to say that you're not in any sales process at this moment?

We are working on a few tracks. So you could say that we are looking into sales, absolutely.

There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Thank you very much for listening. Yes, some last comment from my side. I think the key word for us is that we made a solid quarter. I think we are quite happy with the results, and I'm quite happy that we continue to deliver positive results. So that's, I think, the main thing for us. Thank you very much, everyone, for listening, and wish that you all have a nice summer.