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

Thank you very much. I will start with a brief intro on Arise. We were founded in 2007 and listed on NASDAQ in 2010. We are just about 70 employees located in 5 different countries. We have 3 different business segments, starting with production, our IPP business. We have today 172 megawatts installed with an annual production budgeted to 430 gigawatt hours per year located in SE3 and SE4 premium price areas, you could say. Our development business today were 8,100 megawatts. Since inception, we have divested some 1,500 megawatts. During the first 9 months, we have grown the portfolio with some 1,200 megawatts during the year. Our Services business solutions today, we have under management 2,000 megawatts and under construction, 380 megawatts. With that, I hand over to Markus.

Thank you, Per-Erik, and hi, everyone. The third quarter saw net sales increased to SEK 105 million compared to SEK 96 million the same quarter last year. In the quarter, we had a positive impact from revenue recognition in Kolvallen of EUR 3 million, which we will get back to shortly. This obviously also trickles down to EBITDA and EBIT, which came in at SEK 55 million and SEK 33 million, respectively. Profit after tax totaled SEK 63 million compared to SEK 35 million Q3 last year, and that represented SEK 1.55 per share, and that includes a positive impact from a recognition of deferred taxes, but still a very solid number. Operating cash flow was SEK 43 million compared to a negative SEK 47 million, and cash flow after investments amounted to minus SEK 8 million compared to minus SEK 231 million. Our own production generated 66 gigawatt hours with an average income of SEK 469 per megawatt hour, which I will comment shortly. Looking into our segments. Development posted a very strong EBITDA of SEK 43 million. As I mentioned, mostly impacted by this additional revenue recognition in Kolvallen due to the effect from the production and transaction on the CapEx in Kolvallen. The portfolio grew by 200 megawatts in total and 155 megawatts were added to late stage. Our own production delivered SEK 16 million in EBITDA. We saw slightly higher production with the inclusion of Lebo for the full quarter. But however, it was still very low wind speeds and significantly lower market prices than the same period last year. And as I said, SEK 469 realized price compared to SEK 718 million in the same quarter last year. Within Solutions, we saw yet another quarter in line with the previous ones with an EBITDA contribution of about SEK 3 million. Back to the production and the pricing. The left-hand side illustrates these very low market prices during the quarter. On average, that was around SEK 320 per megawatt hour. But this also illustrates the contribution from our hedges as our realized price significantly exceeded the average market price. On the right-hand side, these low market prices obviously also impacts our LTM EBITDA. But nevertheless, it's still the 11th consecutive quarter where we are around or higher than the SEK 150 million mark on EBITDA. On the hedging side, we have actively decided not to hedge in at these kind of lower price levels. And so far, our firm view is that the 2025 contracts have more potential on the upside than on the downside, and we will monitor this closely now when we enter into the winter season. Our development portfolio saw positive development in all markets actually. We had continued very good progress in Finland with a number of projects entering into permitting phase. This also includes a few best projects in late stage. And in total, the portfolio grew by 200 megawatts up to 8.1 gigawatts in total. And the diversification also continues, which we're very pleased to see. And with that, Per-Erik, I'll let you speak a bit about Pajkolen.

Thank you, Markus. Some brief info on our recent transaction, Pajkolen project, battery energy storage system project of 40 megawatts that we sold to Flower Infrastructure Technologies, we had closing actually this week, where we received SEK 15 million, and we have the remainder of the total SEK 30 million to be paid when we have completed grid connection. On top of that, we have an earn-out of some SEK 15 million, which is linked to the prices for ancillary services during the first 3 years of the commissioning. So all in all, SEK 30 million plus an earn-out of SEK 15 million. On top of this, Pajkolen connects to the same substation as Kolvallen which means that we will decrease CapEx for Kolvallen corresponding to approximately EUR 3 million which in the end of the day, will mean that we improve our earnout into the same amount. So that's a very positive indirect consequence from this transaction as well. Looking at this, I think we show evidence on our capability as a company to use our platform and our local market know-how and also to be quick to realize value. So we are really happy and proud about this transaction. Looking at our project portfolio for BESS, we today have some 650 megawatts in the pipeline, stand-alone and co-located with wind projects that were developed by Arise. Located in Sweden, Finland and the U.K., I would say, roughly 1/3 for each country. And here, of course, we see some opportunities that we can do further similar transactions in the future. With that, we take the next page. Looking at the markets during the quarter, as Markus said, we are in a low price environment. You can see on the graph to the upper left, the spot prices. The orange line is SE4 and the blue one is the system price. And you can see that we have been trading around some EUR 25, EUR 30 mark in euros during the quarter. So quite low prices on spot. And also, we have a number of occasions during this period when we had negative prices as well. Looking on the forward graph to the bottom left, you can see that we have a bit more stable prices during the year. We are trading for SE4 and the system price around EUR 40, EUR 50 at the moment or during the quarter, I could say. Some comments to spot prices, very much impacted by the pressure from solar power imports during the third quarter. We also had quite wet weather in the Nordics and also in Western Europe, building up some surplus in the hydrological balance. Quite low demand, but on the other hand, we've also seen improving capture rates during the quarter entering into the winter season. Looking at the forward markets, they've been fairly stable. We had a quite strong supply versus demand situation, quite strong hydrological situation in the Nordics. I think we are at the moment around plus 10 terawatt hours in the hydrological balance. Fuel prices have stayed quite elevated. And with that said, moving over to continental prices, which are decisively higher than the Nordic levels. If you compare, for instance, German '25 prices to what we see on Nordics, we are some EUR 40, EUR 50 per megawatt hour higher prices in Germany. We are trading around EUR 90 for '25 prices in Germany, very much driven by the elevated gas prices. And the market is still very sensitive for potential supply disruptions. And then looking at the Continental Europe -- Continental market, we can see that we have a clear upside in the Nordics, especially if we see some colder winter weather now moving into the winter period. And also, there are some potential as we see it also that the energy consumption will move upwards in Continental Europe, which also would set some pressure on the upside for power prices. With that said, we move to the next slide. When we entered into '24, we set an agenda target to accelerate projects to ready-to-build stage. We said that we should do at least one project sale in '24 and have a big focus to continue to advancing early-stage projects to late stage to come closer to transaction. We have a target to grow our pipeline in selected geographies, both through greenfield development, but also through acquisitions and obviously, to integrate and support the acquired companies from the transactions we did in 2023. And as always, given our history, we have a great focus on capital discipline. Looking at the 9 months that passed, we have delivered, we think on delivering project sale since we did the Pajkolen recently. We have been able to advance some 330 megawatts during the first months from early to late-stage development. And the pipeline, all in all, have increased by 1,200 megawatts, as I said earlier. When it comes to integration and to support the acquired companies, that is an ongoing work. We are focusing to be more efficient and make sure that we don't have silos in the organization when it comes to product development. So that's an area we are focusing on to improve as one example. When it comes to capital discipline, we are remaining strong. I will come back to that later. We have a very strong financial position. And yes, one thing to mention is that, for instance, we have an equity ratio around 56%, which is a fairly high level. So with that, we can move to the last slide, I think short-term outlook. We see some potential for improvements when it comes to project valuations, very much supported by the fact that we see now falling interest rates. And on top of that, in some markets, we also had a quite weak supply of projects, which together should improve the valuations of projects that we can deliver to the market. On top of this, we had some government decision the last week to decline a number of offshore projects, which means less new production versus what is expected by the market. And that will -- as we believe we will see an impact on forward prices and definitely, this will have impact on long-term price forecasts by different companies that analyze firms. And that as well, we believe will have a positive impact on valuations of projects that actually can be taken to the market for sales, for instance, onshore wind. When it comes to power markets, we are now entering into the winter season, meaning high demand of power, which we believe will support power prices to increase short term. Demand is one thing, but also if we have colder weather now, and it's a very sensitive situation. Price gap is quite massive to Continental Europe. And we believe that if we see colder weather now that we will come closer to German prices, which are, as said, on a much higher level. So we have a bit of a bullish view on the short-term power prices. Looking at the near future, we think that we have a quite good business model being diversified. And I think that this has proven to work well, especially when we had a quite challenging quarter, we still deliver a quite good positive result. We have a very strong financial position. We are neither a for seller or buyer and the fact that we have complementary revenue streams, we have the optionality to optimize value when it comes, for instance, to project sales, if we want to do it now or if we want to do it later on when we believe that the market looks better. So all in all, I think we are in a quite good position, and we have the means to continue our growth strategy. With that, I say thank you and leave the floor open for questions.

[Operator Instructions]

Hanna Grimborg [Foreign Language].

I have 2 questions. So first, I wondered if we could get more details on the outlook when it comes to early-stage projects going to late stage. So how much of your early-stage projects could potentially become late stage during the next 12 months? And the other question is regarding hedging. So what price levels would you need to see for hedging to look more attractive?

Yes, I can start with the easiest one, which is the hedging part. We think that around -- we have production, as I said, in SE3 and SE4. And we have a bit of target prices for SE4 around EUR 60 and SE3 around EUR 50. So to give you some idea on which levels we are talking about. So we are not a massive distance from where we are right now. But that would mean that we would start doing price hedges. We wouldn't do everything in one step. But normally, we try to be around 30% if we see decent pricing.

So if we see those levels during the winter, you would probably enter hedges for '20 [indiscernible].

Yes, we would start up to do it stepwise. We will not do everything at one time, but at least we would start to do some hedges. And I think it's realistic to see that we see these levels during the winter.

Maybe on the early to late stage, I mean, that's -- by the way, that's obviously a tricky one, but I think it's fair to assume that we would kind of keep the pace that we've had this year so far in terms of advancing from early stage to late stage or potentially even at a higher rate, but it's difficult to give you any megawatt numbers.

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

Congratulations to a good report. The first question relates to the battery storage. Do you foresee this to take place in your own parks or in other parks? And could you say anything about the timing between how you see '25 versus '26, for example, when it comes to the total portfolio of battery storage?

When it comes to BESS projects, we are, of course, looking into our own wind farms as well as wind farms that we develop for others. And since we are active in the market, we have a quite good knowledge on where there is capacity and where there are physical possibilities to install BESS. So we are basically all over the place looking into this as well. When it comes to timing, -- we are at the moment, I can say, we are working with a few projects in parallel. And if things turns out well, it might very well be that we do more transactions in the short term. But definitely, in the coming 2 years, we expect to have a few more transactions on BESS. That's clear. And it has a quite big advantage when it comes to permitting process, for instance, if you take Pajkölen as an example, from start of project until transaction, that was just a bit more than 1 year. So that's quite a quick process. And during that process, we are securing grid connection, we are securing land and having all the permits in place. So quite interesting projects in terms of timing, but also, I think it's a decent valuation of project as well. So we have a quite big hope that the 650 megawatts we have that will grow, but also that we will realize projects in the near future.

Could you also say anything about the timing for the projects you have named that is very close to be sold, I think about Finnaberget and Tomsdale.

We start with Tomsdale we are in permitting process. You could say it's an appeal process ongoing. We expect to have that project permitted -- finalized the permit during autumn '25. And with that said, we will basically have that project ready to build by end of '25. If we manage to do a sales transaction or not, we'll see. We hope to have that transacted during '25. And we believe that is realistic as well. Looking at Finnaberget, a bit similar situation, you could say, with the difference that the permit is in place, but we have under line concession ongoing. As we see it, we will have the line concession. It's just a matter of timing. And unfortunately, authorities are quite slow in handling these issues. But we expect to have that permitted in all the line concession in legal force, basically the same timing as Tomsdale. So we are preparing for transaction of Finnaberget as well for '25.

And then a couple of detailed questions to Markus. I believe, the investments were a little bit higher than I expected in the quarter. Can you drill down a little bit what that was and if there is any impact on this going forward?

Orjan, the investments optically somewhat higher, obviously, than you expected, and that's mostly driven by the grid CapEx for Kolvallen. And that's been booked in the quarter. It's been paid in October and then repaid at closing in November. So it's a kind of zero-sum game, but it makes investment spike a bit in the quarter. Underlying kind of CapEx sort of project [indiscernible] is more like SEK 15 million to SEK 20 million.

And I also saw that your short-term debt increasing your long-term debt decreased. Can you explain a little bit what is behind this movement in your balance sheet?

That's just a consequence of the fact that the loans that we have connected to our production assets mature in July 2025. So just by that, it's per definition, it's less than 12 months to maturity, and that's why they are reclassified as short-term liabilities. But we are in discussions to prolong the duration of that. And as I think we mentioned in the report, we expect that to be in place in the next 1 or 2 quarters.

The next question comes from Mattias Ehrenborg from Redeye.

I was just wondering if you could shed some light on the revenue breakdown for the Development segment apart from the EUR 3 million that you mentioned earlier related to the Kolvallen earn-out. Are there any FX effects coming into play here? Or what does it look like?

Mattias, I kind of see what you're trying to reconcile. It's EUR 3 million from the additional Kolvallen. Then you have the sort of monthly traditional, which I'm sure you're having at around EUR 0.5 million for Kolvallen per month, EUR 100 million or EUR 200 million from Pajkölen. And then we also have a -- related to the Pajkölen project, so we're actually responsible for kind of constructing the connection line to the project Pajkölen, which is just a pass-through to the project company. So there is another SEK 9 million, I believe, on the top line, but also mirrored in the OpEx with no EBITDA effect, just a pure pass-through to the customer.

And also, you mentioned in the report that Germany is an attractive market and that you're looking at various greenfield projects and also product rights. Are you looking to build an organization in the country? Or what does potential road map for you look like in Germany?

Yes. We are doing that work now to evaluate what to do if we are going to do something in Germany and how we will do it in such case. We have a guy working for us now to develop our business plan for Germany, and then we will see if we go for that or not. So we are still in evaluation mode. But quite soon, I think we will have a decision if we will go for Germany or not. And obviously, it's a quite interesting market. It's one of the most mature market in Europe. But in Germany, they also have very strong commitments for -- to add a lot of new renewable power production capacity. And they also have feed-in tariffs, which is quite secure. You have a bit secured revenues in Germany, which is a bit different from the Nordic market. So Germany is definitely interesting. And also culture-wise, it's quite close to the Nordics as well. So interesting market. I think beginning next year, we will have a decision what to do.

Could you also just share some thoughts? I mean, what's your view of the market's attractiveness or something like that, if you compare today to 5 years ago or 3 years ago?

Which markets are -- Germany, you mean?

Yes, Germany.

If you look back, they had a massive -- I remember from 10 years ago when it happened in Germany, it was a massive build-out of both especially solar PV. It happened quite rapidly in Germany and also on wind. So the market is a bit different in terms of, for instance, when it comes to wind power, it's a more diversified in terms of smaller scale wind farms if you compare to Sweden. And the supplies market is also a bit different in Germany. But there is really a strong push and strong political commitment to increase renewables in Germany from a quite high level. So we believe it will happen. And of course, you never know what happens in politics, but that will be part of the decision-making if we believe this will be the reality for a long time or if it's a big risk that there will be changes. But so far, it looks really interesting, I would say.

I could add also, Mattias, that looking at power prices, if you compare German prices and also U.K. prices, the Nordic prices, we are on a quite much higher level as well as a starting point.

I mean, expanding on that, obviously, you haven't deployed your first project there yet, but from a profit level perspective from our eyes, is there anything you could say there comparing it to the Nordic market perhaps?

It's too early to say. Obviously, if you put in German prices in the financial models, the outcome will be a quite high valuation. But on the other hand, there is a busy market as well and a lot of competition. So it's too early to say that will be part of the analysis we are doing or what we could earn. And I think if we go for this, then we will present to the market as well, what we are doing and what we expect as well. So that is to come if we go for this.

The next question comes from Kaleb Solomon from SEB.

Congratulations on a good quarter. Just a few questions from me. First off, given that the time was very short from the point Pajkölen entered the late-stage portfolio until it was divested, can you tell us something about what to expect for the remaining battery projects in the late-stage portfolio? I mean, is it fair to assume it shouldn't take more than a couple of quarters? Or will it be kind of more in line with historical averages?

As I said, we are looking into a few opportunities in parallel now. So it might be that we succeed to do another transaction in the shorter term. But also, as I said, we are trying to optimize value as well. So it's a bit depending on what values we see in the market. And when it comes to battery storages, I would say that the market is a bit immature still when it comes to valuations. We have a strong belief that this market will grow, especially when we see not only ancillary services in the business model, there are other revenue streams in this as well like trading, but also there are yes, intra-day trading. And when we see that -- I believe that will be the business case in the future, and we will see a quite a lot of development on technology as well. But answering your questions, I believe that we will see at least some transactions during next year. That's my best guess. If you are lucky, something can happen already this year. But I think a realistic approach is next year.

And just another question on hedging. You said you think there's more risk on the upside than downside for 2025 contracts. But can you tell us anything about what's been happening on that side in the past month? Like how far are you from the targeted levels? And are you expecting to sign new hedges in Q4?

I think one good thing now is that we have the flexibility to decide by ourselves what we think adds value and also do some analysis on risk and reward. But as said, we have some target levels around EUR 50 on SE3 and EUR 60 in SE4 to place the first hedges if that happens. With that said, we will monitor and analyze the market at that time as well. So it's not given that we do that if we have a strong belief that markets will peak during '25. I think looking on fundamentals, I don't think we will have a super strong market in '25, but I think we will have a better market in '25 versus what we have seen recently because now we have been in a really low price environment. So compared to 2024, we have expectations that '25 will be better. Will it be fantastic? Probably not. But looking at that that could also change rapidly if we see a very cold and dry winter and then we have a totally different ball game. And also, if you see that the industry will pick up consumption, especially in Continental Europe, where it's quite low at the moment.

And just a question on the impairment test you carried out during the quarter. It showed an excess value of EUR 70 million compared to the book value, and that's EUR 10 million higher than it was last year. Can you just split how much of that increase is kind of due to Lebo being included this year? And how much is a positive or negative revaluation of the remaining assets?

I cannot give you an exact split of the impairment test. But I think it's fair to say that a vast majority of the increase is from Lebo. And then the other 2 parameters that impact is the lower discount rate, which is somewhat offset by the price forecasts coming down a bit on the rest of the parts.

And just the last question. The government said no to about 13 offshore wind projects, which roughly translates to 135 terawatt hours. Can you tell us anything about your view on what that kind of does to the long-term pricing curves? And what, if any, impact you think it will have?

I'll say it's very difficult to quantify the impact. But obviously, it will have a quite big impact on all the price forecasts prepared by different analysis. So I think this will push valuations up quite much especially on what's available in the market that is basically onshore wind and solar in the Nordics, especially Sweden and Finland. So I think it's difficult to say how much, but it will be a material uplift, I think.

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

Question from Roald at Clarksons. Can you give some color on timing of Pajkölen and revenue recognition? And broadly speaking, I think you could expect that to follow the same kind of pattern as for solar wind farms where of the SEK 15 million that's expected in -- when the grid connection is in place, maybe above -- we take off some contingency buffer. Typically, historically, that's been around 30% and then we will recognize the earn-out as revenue for the months up till the connection date. So maybe we would expect SEK 1 million to SEK 2 million per month as long as it goes according to plan. Second question from Roald. I think we've answered that with the Swedish government denying a significant number of Baltic Sea offshore wind developments, do you think this can spark greater interest for onshore wind to cover some of the shortfall. And I think that's a pretty firm yes on that. From Erik at DNB Markets, question on the preferred refinancing option for our operational assets and whether the debt related to Lebo also is short term and likely refinanced together with the other debt tied to operational assets. And without commenting in detail on the refinancing process, first of all, yes, Lebo is included in that package. And our expectation is to prolong the duration and maturity for that. And that's about it in terms of comments on the refinancing. With that, Per-Erik, I think we've gone through all the questions. So maybe some closing remarks from you.

I can just conclude that we are happy to be able to deliver another quite solid quarter, and we look forward to finalize the last quarter of '24. We hope and believe that '24 will be another good year for the company. We are pleased for that. Thank you all for listening. See you next quarter. Thank you.