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

Welcome to the Arise Q3 Report 2024. [Operator Instructions] Now I will hand the conference over to the speakers. CEO, Per-Erik Eriksson; and CFO, Markus Larsson. Please go ahead.

Thank you very much. I will start with a brief introduction of Arise, starting with our 3 business segments. We have to the left, the development business. We have currently some 9,500 megawatts in our pipeline, closing the gap to 10,000 megawatts, which is our financial targets to reach this year. We have since inception, divested some 1,620 megawatts, so that's the development business, our production business, IPP business. We have, at the moment, 172 megawatts in home production corresponding to an annual production, budgeted annual production of some 430 gigawatt hours per year. And the third leg is our solutions business or services business. We have currently some 2,350 megawatts under management and currently 105 megawatts under construction for second project. We think we have a quite robust and complementary business model. With that said, we can flip to the next slide. This shows our current focus areas by geography and also shows how Arise developed during the last 5 years. If we start to the left in '21, we mainly had operations in Sweden only focusing on wind. And now we have operations in 6 different geographies covering wind, solar and BES. If we start with Sweden, which still is the center of gravity for Arise, we cover all technologies, wind, solar PV. We have, as mentioned, our own production assets. We do the develop -- we are -- act as a developer, we do asset management and construction management. U.K. we started up operations in U.K. in 2022. We cover all technologies, mainly focusing on development. So we do wind, solar and BESS. Finland, the same scope acquired Pohjan Voima in 2023. We cover all technologies focusing on development, and we also have quite material asset management operations in Finland as well. Norway and Ukraine, we are focusing on development, greenfield development, only wind, quite low spend in Ukraine and Norway, I just mentioned. And at last the latest geography in our eyes is Germany, focusing on BESS and acting as a developer in Germany. And Germany, I will mention more in the next slide. We are continuing our diversification journey. This will show 2 good examples that demonstrates that we are a fast-moving organization rapidly capitalizing on our know-how. The first example is the entry market entry into Germany. Actually, we started up last year to do a market analyze second half of '24 and concluding that we see business opportunities in BESS in Germany. And now we have 3 employees by end of third quarter. We have a fast-growing pipeline. We did the first acquisition of project [ rights ], 3 projects in total 120 megawatts. And on top of that, we do greenfield development in Germany, and we can see a quite good growth already. We have quite ambitious targets to do the first transactions already next year. Another good example is data center development. We see quite clear synergies and a quite natural evolution of our development business to move into data centers as well. Key features are a bit the same, require land data center require land, access to land, access to grid and fiber infrastructure and of course, a permit in the end of the day. And all this is within our normal scope. First project is already in early stage in Finland. We have secured land. We have a good understanding of grid capacity and also fiber infrastructure that it's available. We have an estimated capacity of some 400 megawatts, which is a large scale, and I learn it's defined as a hyperscale data center. If we manage to do this or to take this transaction, we believe that we could see a quite significant profit potential in this. With that, I hand over to Markus.

Thank you, Per-Erik. Yes, we released the Q3 numbers this morning and net sales for the quarter decreased to SEK 88 million. This is a decrease that in all aspects, derives from a lower revenue recognition within the development segment, which trickles down to EBITDA and EBIT, which came in at SEK 22 million and minus SEK 1 million, respectively. This was also affected by the extraordinary cost in July of approximately minus SEK 15 million, which is related to the acceleration of the Kölvallen project. This results in a profit after tax of minus SEK 9 million or minus SEK 0.18 per share. On the other hand, a very strong operating cash flow during the quarter of SEK 322 million, majority obviously driven by the earn-out in Kölvallen and cash flow after investments amounted to SEK 251 million. Our own production generated 64 gigawatt hours with an average income of SEK 434 (sic) [ SEK 454 ] per megawatt hour. If we look into our segments, development posted SEK 25 million in EBITDA, mostly driven by the Kölvallen earn-out, which I mentioned just on the previous slide. The earn-out contributed to EBITDA by EUR 3 million. At the same time, there has been no revenue recognition in project Fasikan due to some uncertainties in the project costs for Fasikan. We don't -- also, we don't expect to make any further revenue recognition in Q4 either. Late-stage portfolio increased by approximately 500 megawatts, mostly driven by the projects -- just mentioned in Germany and Finland. Production posted SEK 18 million. EBITDA, saw a slight decrease in both production and realized prices. In addition, the grid that we now own between Fasikan and the connection point to the regional grid was commissioned in Q3, and this had a positive EBITDA impact of approximately SEK 3 million in this quarter. Solutions back on track to SEK 3 million in EBITDA due to the full quarter effect from the Kölvallen [ OMA ], which came into force in June. So this is the first quarter, where we had the full effect. And in addition, we announced the assignment with EIP and Fortum of 350 megawatts, which will be in force as of this month in November and contribute going forward. The portfolio, as I mentioned, increased by 500 megawatts, largely due to the German vessel and the Finnish data center. I think overall, we're seeing very strong progress in advancing all the late-stage projects. In U.K., for instance, we submitted several late-stage projects into gate 2 of the grid reform process, which is very, very positive. And overall, I would say that we are well on track and pretty confident that with this portfolio will meet the 10 gigawatt financial target that we have by the year-end. And then, I hand back over to you, Per-Erik.

Thank you, Markus. The market development, looking on power markets. We have during the quarter seen increasing forward prices driven by a normalized hydrological balance in the Nordics. We still see some surplus in the North, but also deficit in the south of the Nordics. Fuel prices continued rather stable and by saying fuel prices, I mean gas and coal. European forward prices sideways in general. Looking to the bottom left, you can see the graph. And in the bottom, you can see, I'm a bit color blind, but the blue line is system price and the gray is -- as the gray and the orange one is SE4 prices and on top you have the year-end prices representing the Continental European prices. And you can see at the second half of this year that the [indiscernible] prices have started to move upwards, and very much driven by the hydrology in this case. Looking at spot prices, you see the graph to the upper left, you can see that the prices -- this is showing system price, blue, gray is SE3 and orange one is SE4. You can see prices picking up. This is the monthly average prices picking up second half this year. And yes, we should also mention that the balancing market here, still volatile, but somewhat calmer over the quarter. So I would say that the amplitude in the swings in the balancing market has become smaller. Continental European prices, as said, quite stable, and driven by gas prices. We had during summer a continuous injection in gas storages that held up the prices. There are still a lot of macroeconomic uncertainty and still low energy consumption, especially on the industrial side. We still see the gap, the quite big gap or even huge gap between Nordics and Continental Europe that it remains. And as we see it, if we have a bit colder winter than normal, if we see industrial consumption picking up again, that this could be a driver of the upside in the Nordics. So we see some upside or hope for some upside in Nordic Power. With that said, we take the next slide. Ending 2025, we have less than 2 months left of this year. To start with, we have some ongoing transactions that we already mentioned, solar and best projects in the U.K. development portfolio and the best project, large-scale best project in Finland, those transactions are ongoing in a structured manner, where we have advisers having a structured process. We have still -- we have the target to reach 400 megawatts by the end of this year, 400 megawatts in total '24 and '25. That target remains. We think we have a good traction in the sales processes. But obviously, we have a quite challenging time perspective here, only less than 2 months left. If we fail in closing the transactions this year in worst case, it's likely that we have a good start of '26. But as said, the aim -- the target we have is to close this year. Our strategy with diversification continues and is expected to contribute going forward and contribute in terms of transactions. We have -- we are very happy to conclude that we have the means both for organic growth as well as selective acquisitions. We have a solid cash position and also cost-efficient access to a EUR 40 million facility on top of that. So we think we have a very strong financial position in general. We have also a strong track record and an excellent in-house resources in all key resources are in-house. And I would especially mention that we have built up the organization in M&A. So we have quite strong M&A team now. All in all, we are well positioned to catch opportunities in soft markets. So I think that's it, and we leave the floor for questions.

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

Just a few questions from me. First, on the pause revenue recognition for Fasikan, what kind of cost uncertainties are we talking about? Can you give some more color on that? And also, is any part of it related to delays in the construction time line? And are you expecting to recognize revenue again in Q1?

When it -- in terms of -- if I recall them correctly, the first question related to the type of cost kind of overruns or uncertainties, and it's mostly related to the turbine supplier, where we see -- where we expect to see some cost increases. The second question in terms of timing. Timing does not impact the earn-out in Fasikan. It's just kind of cost -- actual cost versus the construction budget.

And are you expecting to recognize revenue again in Q1?

No, I wouldn't expect to recognize any further revenue until full takeover, when it's -- potentially then when it's finally settled.

Okay. And on the impairment test, I noticed that the impairment that you carried out in the quarter. It showed an excess value of EUR 40 million, which is quite a bit below the EUR 70 million last year. So can you give a bit of color on what factors explain that given that the discount rate seems unchanged?

Yes. In all material aspects, that's related to price curves. Yes, some effects also from a lower FX, lower euro to SEK, but probably 80%, 90% or so, I would say, is related to the price curves.

Because you usually say a 1% change in discount rate is about EUR 10 million on the impact on the excess value. So what kind of movements have we seen in price curves? Is it 1%, 2%, 5%, 10%, like how much?

Hard to quantify in terms of percent given that it's 50 years of data points or whatever it is. But I would say it's maybe much more conservative on the front in the short term, which has some impact, of course, in addition to overall lower curves.

Okay. And just a last follow-up on that. Can you sort of break out how much of the book value is attributable to the producing assets right now? Or can you just remind us?

Sorry, can you take -- pretty much book value is production.

Just below SEK 1.5 billion, I would say.

Okay. And on the price contracts that you disclosed this quarter, can you remind us how much of that -- is any of that new? Or is it the same one you signed last quarter? And then kind of as a follow-up to that, are you expecting to secure anything for the rest of '26 as well?

Yes. I mean we have a short-term perspective, when it comes to hedging, trying to basically to be -- we are monitoring the market on a daily base and try to catch opportunities in the market. I won't say we are speculative, but we have some target levels where we do some hedges. So I would say, if we see a bit prices continue to pick up, we will do more price hedges. And we have some target levels already now that we are working on. So I believe we will do more price hedges during winter, yes.

And there were some were done during Q3.

Yes.

Okay. And just lastly, on the volume targets, they imply you're going to sell another 235 megawatts in Q4, since you're reiterating them. And then you sort of said ongoing sales processes exceed that volume. So my first question is, I mean, I appreciate it's hard to give an exact answer, but sort of how confident are you in that figure? And second, can you give some more color on what the mix could potentially be, both in terms of technology and maturity of those projects? Is it mostly ready to permit or ready to build?

Yes. Yes, starting with the last question. When it comes to the best projects that we have under transaction in Finland, that is ready to build. We have all the permits in place. We have a grid connection agreement in place. So that's just set to start construction works basically when everything is arranged with financing, et cetera. So that -- when it comes to the U.K. portfolio, it's a bit different story. That's a development portfolio, meaning that we would -- if we manage to do that transaction, we expect to have an upfront payment and then it will be milestone payments based on performance in development. That was the last question. What was -- what did you say earlier, what we expect?

How confident...

How confident? Yes, that's a tricky question. Definitely, I am confident that we will be managed to do this within, let's say, half a year. If we manage to do it within 2 months, question mark, but we believe in that. It's doable, but it's challenging. And that's the current timetable. Yes. So obviously, we are working hard like I almost said hell, but we are working hard to do that. And we have ongoing -- we have people engaged trying to do everything they can to manage that. But it's a challenge. And of course, the market environment has been quite soft for a while. But we see good traction at the moment, and we definitely believe that the transactions will happen.

Okay. And just one last follow-up, and then I'll leave you to it. Because you said it was ready to build, but it was a battery project in Finland and in the U.K. portfolio, it's sort of more ready to permit and followed by milestone payments. Is it fair to say that the sort of average blend pricing-wise is well below EUR 1 million per megawatt, maybe somewhere closer to half?

Yes. Yes, of course, it's difficult to say, since it's a bit of moving targets. But in that range, I don't think that's totally out of range.

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

Maybe I could take some of the written questions, a bit on [indiscernible]. One of the questions is how much the 120-megawatt battery rights were acquired for? And I would say, ballpark below EUR 100,000 in total. Another question is, if we intend to utilize the remaining SEK 27 million in authorized share buybacks? Not really a resolution for management. That's obviously a Board matter. Do we have the financial means to do more buybacks, if that's the case? Yes. But again, it's a question for the Board. I think that's basically what's relevant to answer on the written questions. I think we have another one and done. Yes. That's it. If we don't have other questions on the line. Okay. Thank you. Then perhaps it's time to sum up. So some last comments from my side. Arise continued to perform well. Of course, the bottom line results could be better. But on the other hand, we delivered an extremely strong cash flow that has created a very solid financial position. We have the means to continue our journey to grow and look forward to end 2025. So thank you very much for attending.