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

Welcome to the Arise Q4 Report 2024. [Operator Instructions] Now I will hand the conference over to CEO, Erik Eriksson; and CFO, Markus Larsson. Please go ahead.

Thank you very much. This is Per-Erik Eriksson. I will start with a brief intro on Arise. Arise was founded in 2007 and the first company in Sweden to be listed. First company in the sector in Sweden to be listed in 2010 listed on Nasdaq. We are currently some 73 employees in 5 different countries. We have 3 different business segments. You could say that the original Arise was the IPP business, the Production. Currently, we have some 172 megawatts installed. I could also mention that during '24 also added 33 megawatts from Lebo. So we increased the capacity in '24 and this is corresponding to some 430 gigawatt hours annual production. The second business segment is the Development business. Currently we have some 8,850 megawatts in pipeline. I could mention that we added during '24 some 2,000 megawatts, which we will come back to later on and we have since inception divested some 1,500 megawatts. And the third leg or third business segment is the Solutions business where we currently have some 2,000 megawatts under asset management and under production some 380 megawatts, 2 projects. One is Kolvallen, 277 megawatts, which we expect to have commercial takeover first half this year and then we have also Fasikan project, 105 megawatts under construction. With that, I hand over to Markus.

Thanks a lot, Erik. So the fourth quarter was announced this morning and we had net sales for the quarter of SEK 153 million compared to SEK 191 million in the same quarter last year. Q4 this year positively impacted by the sale of Pajkolen, but also bearing in mind that the comp number included the Fasikan sale the previous year. EBITDA came in at SEK 47 million and EBIT at SEK 24 million. We had a profit after tax of SEK 33 million, which represented SEK 0.86 per share. Solid operating cash flow during the quarter of SEK 94 million and the cash flow after investments amounted to SEK 40 million. Our own production generated 97 gigawatt hours with an average income of SEK 525 per megawatt hour. The Board also today proposed an increased dividend of SEK 1.25 per share. Chart about the segments' performance in the quarter. Development posted a somewhat weaker EBITDA compared to the same period last year where we had this Fasikan transaction, which contributed significantly. Erik mentioned the portfolio growth a bit. In the quarter alone, it grew by 750 megawatts and projects are also maturing according to plan or even better than plan specifically in Finland and the U.K. We had higher Production in this quarter compared to the same quarter last year with the inclusion of Lebo. However, there was still low wind speeds and lower market prices also than the same period last year. So the realized price, as I mentioned, SEK 525 per megawatt hour compared to SEK 727 per megawatt hour in Q4 2023. We also announced that we had entered into a settlement with a previous service provider, which impacted EBITDA positively by roughly SEK 10 million. Within the Solutions segment, pleased to see another stable quarter, stable earnings in line with what we've seen for now a number of quarters. And in this segment, we think we now are pretty well positioned for profitable growth. In January, we announced the successful refinancing. We entered into a facilities agreement with DNB, which consisted of a green term facility of approximately EUR 52 million, which is you can see just a replacing or us prolonging the existing financing, which we have connected to our production assets. And in addition to that, we have also access to an RCF of EUR 40 million, which provides us with a very flexible and cost-efficient solution. All in all, this increases the capital allocation flexibility and decreases the annual financing costs. End of January we redeemed the green bonds, which were a nominal amount of EUR 50 million. which ran at an interest of 3-month EURIBOR plus 5.25%. So we redeemed that with our existing cash position. This gave rise to a onetime cost, which will be recorded in Q1 2025, of approximately EUR 1.6 million mostly related to the break fee for the bond. But all in all, we also realized now kind of net interest savings of EUR 2.5 million. So very happy with that refinancing exercise in January. Going to the portfolio, as we mentioned also in the report, there was some very positive development of the portfolio in Q4 as we mentioned previously. We saw growth in Sweden, Finland and U.K. and I would say a significant maturing of projects in specifically Finland and the U.K. So if you look at the full year 2024, we increased the late stage by 450 megawatts and we really expect to see project sales now in 2025. So we have for the past few years invested quite a bit in Finland and U.K. specifically and that's now what we're seeing results from right now. And then I'll hand back over to you, Per-Erik again.

Thank you, Markus. Looking at the market development in 2024. Starting with the spot prices, you can see the graph to the upper left. The blue line is the system price in the Nordics and the orange one is SE4 prices. We can see during the fourth quarter that prices were picking up with winter demand, which is quite normal, but quite a good pickup during the fourth quarter. Looking over the whole year, we had a bit mixed weather over the year with some shorter periods with very high spot prices due to low production and also we had in general during '24 quite low demand and quite strong exports due to high prices in Continental Europe. We've also seen some impact. As the flow based coupling was introduced during the year, we have seen some impact also with some increasing price area differences. A bit early to give a full statement on that. But indicatively, we can see some impact from flow based coupling. Looking on forward prices, it's very much about low demand combined with quite strong hydrological balance. So quite low prices during the year. However, we have seen some quite big decrease. We started up winter period with quite big or high hydrological surplus, which decreased quite rapidly during the beginning of '25. So we had some 18 terawatt hours entering the winter period and now we are down at 8 terawatt hours. So it's a quite material decrease in hydrological surplus. If we change slide and look a bit some future, some outlook on what we expect for the coming year and of course it's very much about the price drivers here. And the keys are very much continental pricing and the hydrological balance. And if we start with continental prices in basically German prices here, you can see in the red dotted frame in the upper left graph. You can see the red dotted frame from November to February this year and you can see a quite big pickup in gas and also power prices in Germany. The blue line is power prices in Germany and the Y-axis is the left one and the orange line is gas prices and the Y-axis is the right one. So you can see a quite big increase in power prices and gas prices during the recent months and that is very much -- it's a really big correlation between power in Germany and gas prices, which you can see clearly by the graphs. And the reason for gas prices picking up is very much connected to the filling levels in European storages. You can see -- down in the left below graph, you can see looking at the same way in the red dotted frame. You can see the orange line decreasing line. We are moving to the lows in the storage level, which is seen in '21, '22. So storage levels are decreasing rapidly and as we see, this means that German prices will stay elevated for a while, power prices as well as gas prices. And of course we have a bit of a sensitive system and an extreme or record level gap between Nordic prices and German prices, which would suggest that we see some potential on the upside. And the combination that we see decreasing hydrological surplus now in the Nordics means that we see a clear potential upside on power prices for the coming year or coming years, I would say, even. And due to this, we have, as we said earlier, that we are monitoring the market closely and we are looking into hedging opportunities when markets pick up. And as a consequence of that, we have placed the first hedges now in quarter 4 this year and quarter 1 '26. So we started up that quite recently due to the pickup we have seen. So with that, I think we flip slide. When we entered into '24, we had set an agenda to accelerate projects to ready to build status, to grow the pipeline. to integrate support acquired companies and the acquisitions we did in '23 and as always, keep focus on capital discipline. The outcome we had. We said that we should do at least 1 project sale in '24, which we did. We did buy Pajkolen BESS project 40 megawatts. Continue advancing early stage projects to late stage, we have now increased the late stage portfolio by 450 megawatts. We also stated a focus to grow our pipeline in selected geographies through greenfield and acquisitions. And so far during '24 we managed to deliver some 2,000 megawatts and increase the pipeline, which we're happy about. Integrate and support acquired companies, yes, we have. That is an ongoing work and continuously ongoing work, but we have done some changes in the organization. For instance in project development to coordinate and to prioritize and to secure that we use our resources, capital and people in an optimal way. Key focus on capital discipline. That has been something that we have been focused on for a number of years. I could also mention on that topic what Markus just said that we have quite much lower financing cost due to our refinancing. Short-term outlook, we can see signs of transaction market returning in the Nordics. We had a quite slow market in '24, which we expect to improve during '25 mainly driven by return requirements. We see lower interest rates and with some delay that always has an impact on return requirements and we also still see that there is a lot of available capital to be deployed. We see some signs of increased appetite from infrastructure investors as well as we have seen increased activity among utilities in the Nordics and other markets as well. As just said, we expect some improvement in power markets driven by the price gap between continental Europe and Nordics. Just an example, we see now calendar year '26 in Germany traded around EUR 100 per megawatt hour. In the Nordics, we are around -- is less than half that number so quite big gap. We see the hydrological balance in the Nordics weakening during the winter, which also is a strong driver for higher prices and especially big gap to continental Europe. We think we are well positioned for a successful year in all segments. We are harvesting from the strategy of diversifying and maturing projects. We see ourselves as quite well positioned for transactions. We have a strong financial position with low leverage in our production. So we have quite cost-effective production. When it comes to our Solutions segment, we have developed and we have a quite efficient way of working and here we see a growth potential as well. Agenda for this year. We have a strong focus to deliver on our financial targets especially when it comes to project sales and portfolio growth. Obviously we will keep our targets also on EBITDA margin for production more than 60% and also when it comes to equity ratio and we expect to be a dividend case also for '25. One important thing as well is that we have a commercial takeover of Kolvallen, which is a big project and important project for Arise. We will continue to focus on maturing early stage projects to late stage in order to realize also our longer targets achieving some 500 megawatt project sales per year in the period 2026 till 2028. We also continue to work with integrating our acquired companies. We have, you can call it, a one-company approach where we focus to prioritize the market, make sure that we use our resources in an efficient manner when it comes to capital, when it comes to people. And 1 good example is that we did some changes in the project development organization where we coordinate all the markets together and focus where we see the potential best outcome. That I think is it. So thank you very much.

So turn the floor to questions then.

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

Just a few questions from me. In the report you say that SEK 1 million per megawatt should be viewed as kind of a blended average over time. But can you split what you expect between different technologies and can you give us any kind of current average for wind specifically across the different geographies?

Yes. It's not the easiest question to answer, Kaleb. But in general if we start with comparing the different technologies, I would say that wind is the most profitable where we can see the best development premiums, I would say not by far, but clearly. We also see that BESS projects will develop in the coming years. We have 1 data point of course when we did Pajkolen as it was in October I think, right? So that's 1 data point and that market is still quite young and I would say and a bit immature. So we will see how that will develop. But I think we see fairly good profit margins in BESS as well. Looking at solar PV, I will say that the Nordic market in current price environment is a bit challenging. But we see if you look for instance in the U.K., it's a bit different since we have power prices on a much higher level versus what we see in the Nordics. I think the blended million is a pretty good number. Obviously there will be, as we have seen in recent years, that prices can fluctuate very much between 2 years. It's a bit difficult to give you any more exact answer than that, Kaleb.

Okay. That's clear. And just a follow-up question. Because you said divestments this year is going to be centered in Finland and the U.K., how do you think the mix is going to look for the projects you divest this year? Because mostly in the late stage portfolio, what you have there is battery and wind, is it fair to assume it's going to be 50-50 then?

Yes. Definitely we are aiming for some BESS projects and that is something that we have been focusing as you have a bit -- you can develop fairly quick and fairly quick to realize. So BESS, definitely we expect to have some transactions on. But also we have some solar that also could be not in the Nordics, but we expect something to happen on that as well in the U.K. or can happen and also we have some wind as well. So we have a bit of a mix, both BESS, solar and wind. Markus, it's a bit difficult to have to split. Yes, we have a number of alternatives.

Exactly, time will tell. But maybe worth mentioning that the U.K. transactions market is a bit different to the Swedish one when it comes to solar specifically. So it's not totally necessary to actually develop them all the way to ready to build and construction ready, but there is much more appetite for somewhat projects that are in somewhat early stages or portfolio projects and so on.

Yes. And it's a bit -- I would say in the U.K., there are more and more utility transactions in the U.K. versus what we have seen so far in the Nordics. So it's a bit different market behavior I would say. But I would say that we would realize in the range of SEK 1 million per megawatt as landed.

Okay. So it's fair to assume you're probably going to divest something from the early stage portfolio as well not just the late stage in the U.K. specifically?

Yes.

Okay. And on the Production segment this quarter, operating cost per megawatt seems to be slightly higher or it has been slightly higher in the past 3 quarters despite Lebo coming in which I imagine having a lower unit cost. Is that simply due to lower utilization year-over-year or am I missing something?

I would say part of that explanation is that we have done some extraordinary maintenance. So basically we have improved quality in part of the fleet when it comes to a lot of connected to blade bearings, basically replaced quite poor quality blade bearings with high quality. So we expect that number to decrease during the year and we also expect that we have some positive effects from doing this improved quality.

Okay. And just 1 last one for me. If I heard you correctly, you said that you've secured hedges for Q4 this year and Q1 next year. And sorry if I missed it, but what price levels and what volumes are we talking about here?

Yes. We've done the first tranches and we always working. Normally we'll try to build up portfolios over time in tranches. We have done Q4 about EUR 60 per megawatt hour, in Q1 '26 about EUR 70.

And how much volume are we talking here?

Quite small volumes, around 10% for the quarters, but this is something we've not...

The next question comes from Hanna Grimborg from Handelsbanken.

Hanna here. So I have a couple of questions. And the first one is with electricity prices being materially higher outside of the Nordics, wouldn't it be interesting to focus development outside of the Nordics or how do you view that? I mean is the Nordic market really as attractive? And the second thing is if you could say anything about the project sales in 2025? Should we expect that to be back-end loaded or if you could give any details there?

Yes. Starting with power prices and Markus sort of focus on development. I would say that we're already doing that since we have a quite big focus in the U.K. and we expect to have some outcome from that as well during the year. We are looking into other markets as well. But you should also be aware that if we take a snapshot right now how the Nordic markets look in comparison to Germany for instance and over time, this could change rapidly. And I think in the long run we are optimistic about the Nordics as well as we see. One thing is that we see that we expect that demand will pick up even though it has been a lot of negative attention for the green change in the industry. We believe that, that will pick up again and on top of that, there are some question marks on quite big scale offshore wind as well for the period to come. So all in all, we are quite bullish on Nordics as well and we believe that the Nordics will be a good market for Production, but also for Development in the coming years. But with that said, we are looking into other markets as well and we really like to be a bit diversified since for instance now we have a bit slow market in Sweden, then we can capitalize from other markets instead. That was the first question. And the second was?

On the project sales in 2025 will pay out back-end in distribution?

Yes. I think I would say that the majority will be back loaded, but we have some hope that we will have something in the first half of the year as well to come. So I wouldn't expect that we have everything in quarter 4. I think we will see some results before that as well.

All right. And just 1 last question. I think maybe you mentioned this, but in that case I missed it. But just when it comes to selling projects, how have the prices developed there in the last quarters? Is it still relatively unchanged from the beginning of 2024 or how does that look?

I would say that '24 was a quite challenging market in general. Obviously you didn't see many transactions in '24 and that was the reason by low power prices in combination with interest rates I would say or return requirements. And we believe that we will see better conditions for this year versus last year. We're actually quite convinced about that return requirements with some delay following interest rates now. And as explained earlier, we believe that we will see some pickup in power market as well and that should suggest that we would have some better development margins in '25. Obviously looking at the U.K., we already have higher prices as I would say that we have already now decent premiums in the U.K., but also it's a quite competitive market. But all in all, we have high expectations for '25.

The next question comes from Mattias Ehrenborg from Redeye.

Mattias here from Redeye. Obviously a very solid development in the Development segment where the portfolio keeps growing and maturing. I think this gives great support for your '24 to '25 targets. But I was hoping that we could sort of start off by dissecting the Q4 numbers. Is it fair to assume that you have revenue recognition from Fasikan and Kolvallen in the same range that you have reported historically or have there been some sort of pass-through costs related to these projects in this quarter or are those related to Pajkolen, which were also supposed to drive the earnings in this quarter? Because I mean we have seen quite steep increase in both revenue and COGS.

Yes. That's kind of difficult to foresee this. The revenue recognition is as previously. The COGS, you're right when you talk about the pass-through. I think we had also in Q3 the grid work we're doing for Fasikan where we had a subcontractor and then that's passed on to the Fasikan wind farm. So that affects the external costs and the revenue. So there is no EBITDA impact. That's probably around SEK 15 million. And then the Pajkolen transaction, you can see it was kind of SEK 15 million as a share purchase price and then we were also reimbursed for kind of intragroup loans or basically prepaid CapEx, which was SEK 30 million. So that's in the cost of projects and in the revenue. So I guess that's the bridge to your number.

Okay. That makes good sense. So just to summarize. The gross margin, if you want to call it that, is weaker; but the gross profit in total number stays the same pretty much for these projects. You mentioned that Finnaberget is progressing, but the grid connection is still somewhat uncertain in terms of capacity and you also mentioned now that you could come to build a project in 2 stages. Could you shed some light on what this could look like in reality in terms of timing and capacity and sort of the transaction structure-wise, if that changes anything?

Yes. We expect to have the line concession in legal force second half this year. I would probably -- my guess would be a bit late second half. But it's a possibility that we will manage to do a transaction with Finnaberget already this year anyhow, we'll see. The reasoning behind the 2-step approach is that we now got some more clarity on capacity and we have capacity for the first leg around 100 megawatts. And then we got some information that there will be more capacity available. I think it's 20, 30 [indiscernible] something like that where we have another -- where we can fill up with the remaining part of the maximum capacity in the wind farm, which is around another 100 megawatts. So we expect to have 100 megawatts as a starting point, which means that we will take part of the site and then the next step will be the remaining part roughly 4 or 5 years later.

Okay. And in terms of profit potential for this project, I know you don't want to be too specific perhaps and maybe it's difficult to tell. But I mean comparing Finnaberget to the number that you referred to in the report of SEK 1 million per megawatt, is it possible to do a comparison for this project to that number or perhaps even relative to the Fasikan transaction that took place last year since it's also in SE2?

Yes. Of course it's very much depending on the development on power prices and perhaps not the power prices in short term. It's also very much about what happens with the long-term forecast. But looking back, we have seen that the correlation between the short-term market and the long-term forecasts are quite high. So I expect that we will see some improvements also in the long-term forecast given that our scenario will be the reality, which we believe and hope. So I think there are some upside potential on valuations there given that we see what we expect some improvements on power prices. And also the other part that is quite big impact is the return requirements and of course if we see a percentage lower return requirements, that will have a big impact as well. So the hope we have at least is that, that transaction will be more than SEK 1 million per megawatt.

Okay. Sounds promising. Regarding Kolvallen, is that project progressing according to plan would you say and what's your strategy for your equity stake in this project once it has been commissioned?

Yes, it's more or less according to plan, a couple of months later maybe than what we foresee in the early construction. When it comes to our stake, I would say that. We don't have any immediate thoughts on keeping it for a longer period of time and given the minority. That it's a minority stake, only 9%, we're somewhat in the hands of the owner, right? If they would sell the project if it's a good valuation, then I would expect us to tag along really. So I think the answer is pretty much we really see it as a financial investment at the moment. So we will keep it forever as a 9% stake, probably not right?

Okay. Understood. Final question for me here before I get back in line and will hopefully get back with a few other questions in the end. But since Q1 2018, 28 quarters have passed, of which 20 where production has been 5% under budget or worse and only 2 quarters where production has been 5% over budget or better. The total production during this period was also 12% lower than the budget on average. I know wind conditions haven't been exactly great during this period. I mean they've been quite weak to be clear. But what are your thoughts on these numbers and what expectations should investors have about the production going forward?

Yes. Obviously if you look back to the recent years, we had quite poor wind years definitely. We did some analysis, I think it was 3 years ago when we looked back and did a bit more deeper analysis looking back 10 years and that analysis showed that we were basically on par. But if you would add the recent years, we will definitely be below par. I would say it's a bit too early to say with the available data for this year that things become worse when it comes to wind resource. I think that's too early to have that conclusion. I think basically, that's it. Do you have anything to add, Markus?

Not really.

So we've done some work on this obviously. But it's very difficult to say really if we see if it's the climate change or whatever it is or if it's just a coincidence that we have a few years with less wind, difficult to say.

I understand. But in general term speaking, you feel quite confident in your budget as such given the P50 scenario where the most likely wind speeds that you anticipate. But of course wind speeds will delay during the year.

We don't see any reason to change. We have done the homework and we had even external calculations or analysis on this. We don't see any reasons today to do some changes. But obviously if this clearly will be that we can see a trend, then we need to of course consider to adjust the numbers or do another analysis based on a new set of data.

While we're waiting for the next question, maybe I could chip in 2 questions from the feed. From [indiscernible]. I was wondering why the profit after tax for the full year is higher than profit before tax? And the reason is basically that in the Q3 of this year, we recognized previous tax losses carryforwards on the balance sheet, which gave a kind of positive tax effect of SEK 37 million. And then from Roald at Clarksons, who wants us to elaborate a bit on opportunities in Ukraine and how they are progressing and in light of the recent weeks talked of peace negotiations, what timeline we do envision from a potential end of conflict to projects being initiated and realized? And I think if I start, Erik, and you may chip in. I mean in Ukraine at the moment given the circumstances, we have consciously been running it extremely capital light with a clear focus on the western parts of Ukraine where we're trying to kind of secure our position and secure a portfolio or at least leads to a portfolio at this moment. And until a potential end of the conflict, we wouldn't invest heavily in the projects I would say. But on the other end of your question, well, if there is a potential end of the conflict; in terms of timeline, the permitting is much, much faster than the Nordics for instance when it comes to wind. So I think we're kind of ready to hit the ground running if that would happen. And then I think we're talking maybe 1 to 2 years' time that we would be able to realize projects in that case. Do you agree, Per-Erik?

Yes, yes. As you say, the realization times will be shorter and the demand will be on a much higher level versus what we see here obviously now with what's happened with the infrastructure in Ukraine. So basically the whole idea is that to be established in Ukraine when the market opens up and of course at the moment, the risks are on a different level versus the rest of Europe. But we can see -- I think we have some development currently. So we'll see during the year if we can add something to the portfolio officially as well.

The next question comes from Mattias Ehrenborg from Redeye.

Just a few final questions for me on the financials very briefly. The total loss carryforwards amounted to nearly SEK 500 million by the end of 2023, I want to recall according to your annual report. Is it fair to say that the loss carryforwards by the end of '24 should sit at around SEK 350 million given that you have reported nearly SEK 150 million in net profit for '24?

Yes. Give or take, that should be a more or less correct number, yes.

Okay. Great. And unallocated costs on a group level are down around SEK 6 million year-over-year. Is this due to Fasikan being behind the numbers last year?

No, the reason for that -- at least the major reason for that is lower outcome in the variable remuneration program compared to last year.

Okay. Great. And also net financials were quite positive this quarter, which we also saw last year. Would you just want to shed some light on why that is the case?

Yes. So the net financials, we have the kind of interest income on the cash position and the shareholder loans to Kolvallen, some negative FX on the bond and the production financing partly offset by the FX on cash. And then we also had the milestones that are recognized to the sellers of Pohjan Voima where we have made a kind of fair value recognition of that, which has decreased that position and the reason is not that the projects are being delayed, but the actual payments will be more deferred than previously.

Okay. Can I just get back to then the Pohjan Voima earnout. Has anything been paid out as of today into that transaction?

No, it has not. So it's a [Technical Difficulty].

Okay. And relating to the CapEx in your report. What was the main driver behind that? If I could recall, it was around SEK 50 million or something like that.

Yes, exactly. That's somewhat I wouldn't say out of the ordinary, but it's somewhat higher than what you would expect going forward. And mostly that's explained by grid connection fees that has been paid during the quarter. The positive take on that is that we're talking on very well progressed projects. So I would say half of that maybe would be more of a kind of recurring basis.

[Operator Instructions] The next question comes from Orjan Roden from Carnegie Investment Bank.

A lot of questions have been answered. But if you look on the late stage development portfolio, the total number there is quite different from kind of your short-term guidance. On what time frame would you say that this late stage development should materialize in if you were to decide?

Yes, yes. The definition we have is that those are projects that can be realized within 2 to 3 years. So within a 2- to 3-year time frame, those can be realized. And when we have them in late stage, we also feel certain that these projects will happen.

So 2 to 3 years, that's the time frame you're having in mind here?

Yes.

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

Thank you very much for listening. Yes, some final comments. All in all looking back at '24, we experienced quite challenging markets, but I think Arise showed strength by delivering good results in this market environment both when it comes to power markets, but also transaction markets. So we are quite happy about the outcome really. We are doing well as a company and we look forward to '25 as well and we expect '25 to be another good year for the company. With that, we say thank you very much. Happy Valentine's Day and a good weekend.

Thank you.