Eolus Aktiebolag (publ) (0R8F.L) Earnings Call Transcript & Summary

Welcome to the Eolus Q2 2023 Earnings Call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Per Witalisson; and CFO, Catharina Persson. Please go ahead.

Welcome all to the presentation of Eolus Q2 report. I'm Per Witalisson, CEO, and with me, I have also Catharina Persson, our CFO. We are very happy to sum up a record strong quarter for Eolus, where we reached the net sales of more than SEK 1.7 billion and with a net profit of SEK 422 million. That means that we had an earnings per share close to SEK 17. We're also in a very good financial position, I would say, where the equity-to-asset ratio increased to 58%, with a net cash position amounted to SEK 870 million, which equals roughly SEK 25 per share. This strong result essentially comes from 2 events that took place, and they were communicated during the quarter. The first one is the sale of the Swedish wind project, Skallberget/Utterberget, Tjärnäs and Rosenskog to the Swiss utility BKW. We had both revenues from sales of the projects and also revenues from the construction management agreement that we entered into. And these projects are, as communicated before, quite advanced, and they are planned to be taken into operation and finally hand it over to the customers during 2023. The second important thing was the large milestone payments that we received for the U.S. solar and battery project, Centennial Flats, where we reached an important milestone payments. So just a quick introduction to Eolus, we're the developer of renewable energy in Europe and the United States. We developed projects from greenfield. We sell them. We construct and operate on behalf of the investors. So the main idea is not to be a utility or producer of electricity but to be the developer of projects. We're active in the Nordic countries, in the Baltics, Poland and in the U.S. We've been in business since 1990, so more than 30 years of experience and more than 700 wind turbines constructed. We also have an asset management team, which currently has more than 800 megawatts of operating assets under their management technically and commercially. Technology-wise, we're working with the techniques that serves the markets and the purpose best. So we're obviously in onshore wind. Offshore wind is an increasing part of our long-term portfolio, and the solar PV projects and battery storage projects are increasing in significance. And we have also, in July, decided to invest in a new battery storage project in the U.S. I'll come back to that later. And as you know, listed at Nasdaq Stockholm Exchange, traded at the mid-cap and with roughly 36,000 shareholders. So the first main event, which was announced on the 26th of June was the sale of 125 megawatts Swedish wind power projects to BKW, the Swiss utility. The projects were, as mentioned, already under construction. They are all located in the attractive price area 3 in Sweden. The transaction was done at an enterprise value of EUR 189 million, and that means the entire investment that the investor is doing, that is then being CapEx for the construction, the price they pay to Eolus for acquisition of the shares of the project companies and the construction management fee that we received when constructing the projects on behalf of them. So we received share purchase price of EUR 19 million, and revenues under the construction management agreement is estimated to EUR 29.5 million, which we recognize in accordance with the percentage of completion method and which until they are finally in operation and handed over to the investor. And since they are in under construction already, we communicated about the expected degree of completion in the press release. And in the Q2 report, we note that we have reached 78% (sic) [ 55% ] degree of completion for Skallberget/Utterberget and Tjärnäs and 55% (sic) [ 78% ] for Rosenskog. We have also been entrusted to provide technical and operational and administrative services for the wind farms on a long-term contract. The other important deal that has -- a project that has impacted the revenues and the results of the quarter is the Centennial Flats project in Arizona. It's a solar PV and battery storage project with up to 750 megawatts in total generation and battery capacity. This project was sold by us in the autumn of 2022. We receive revenues -- or we record revenues as we receive milestone payments. So no cost of goods will be recorded in Eolus' profit-and-loss sheet for this project. And as communicated before, there is a wide range of expected total revenues from the project, ranging between $104 million and $190 million. And the reason for that wide range is due to the final design of the project and how it will be finally financially structured by the investor. But we received 10% of the revenues in the lower figure in the interval during 2022. And in this quarter, we received another 30% roughly. The rest will be paid when milestones are achieved up until expected final completion during 2026. So we have accumulated now -- received 40% of the figure in the lower of the interval. We have been active in the U.S. since 2015. We have sold and constructed one wind project. We have developed and sold one stand-alone battery storage project in Los Angeles. And we have, as mentioned, developed and sold the Centennial Flats project in Arizona. So in our Q2 report, we are highlighting our activities in the U.S. especially. And more than 5 gigawatts of our total portfolio, so roughly 1/5 of our total portfolio is located in the U.S. And I think now, everything we do is based on the -- all our experience is from development in the countries since 2015. And the portfolio is developing good. And so we expect that this will have a substantial contribution to Eolus' earnings over the coming years. In the Nordics, our portfolio in Finland grew significantly mainly due to that we made an agreement with the Finnish landowner, Finsilva, where we acquired the right to develop projects with a potential of more than 600 megawatts on their land. We are continuing to invest in both projects and organization in Finland. And we're very happy to -- that our new country manager, Tiina Partanen, have joined the organization in August to lead that work. So looking at our projects that are under construction, we are having 61 turbines under construction in Sweden. All of them are expected to be commissioned and taken into operation during 2023. Besides the Skallberget/Utterberget, Tjärnäs and Rosenskog that were sold to BKW, it's also the Stor-Skälsjön project outside Sundsvall, a 260-megawatt project with 42 turbines where Eolus owns 51% of the projects and -- the project and the remaining revenues from the construction management agreement. It is a partnership with Hydro Rein, and the final investor to the project is MEAG and Hydro Rein. Construction is generally going well. We have a slight delay in Stor-Skälsjön, which we are doing everything we can to catch up, but also in Stor-Skälsjön, today, more than half of all the turbines has been erected. In addition, we have the battery storage project, Cald, in Los Angeles that were sold to Aypa Power earlier. And that project, we foresee that it will be taken into operation beginning of 2024. In July, we also communicated that we are doing a strategic review of our offshore business. Definitely, a lot of offshore wind will be needed in the energy transition in the decades to come. We have several projects under development. We are growing our offshore team. We are investing heavily in those projects. And to be able to stay on long term, we have initiated this review, and to -- the purpose is to create the best conditions for permitting and realization of the projects. And this includes the option to search for a strategic partner. And the total offshore portfolio now amounts to roughly 10,000 megawatts. And the offshore projects are maturing, and also in July, so after the quarter, we filed the permit application for the environmental permit for the 1,000 megawatts project, Västvind, located west of Gothenburg. And the permit was -- application was handed in both to the land and environmental court and to the Swedish government. We have a strong local support for this project. I would say, as an example, demonstrated by that the port of Gothenburg, who's the largest port of the Scandinavia and decided to invest in a minority stake in the project. So our total portfolio has increased by roughly gigawatts over the quarter. And it's spread over markets and the technologies as shown in this slide. So offshore wind now amounts for the largest portion of the total portfolio, followed by onshore wind, roughly 8 gigawatts. Sweden is still our largest market, with close to 50% of the total portfolio, but a significant increase, of course, now in Finland with the acquisition of the projects from Finsilva. Since it is really long-term projects, there are long lead times for the project, both in permitting, grid connection and construction. We communicate about our late-stage development portfolio displayed in this slide. So this is what you could expect from Eolus in the midterm. So we update this list of projects each quarter. And thereby, I hand over to our CFO, Catharina Persson, to comment the financial figures. Are you there Catharina?

Yes, I am here. Can you hear me?

Yes. So I hand over to you for -- to comment the financial figures.

Thank you, Per, and hi, everyone. We have had a strong second quarter with high activities, as Per has said. It includes divestment of Swedish wind power projects with ongoing constructions and achievement of milestones for our U.S. solar and battery storage project, Centennial Flats, and, of course, the investments in the project portfolio on all Eolus markets. And I will guide you through and highlight some of the figures for Eolus' second quarter 2023. Net sales was SEK 1.742 billion, an increase with SEK 294 million in comparison with the corresponding quarter 2022. The sale of Skallberget/Utterberget, Tjärnäs and Rosenskog to BKW has contributed both with payment for the sales in the project companies and with revenue recognition from the construction management agreement. And the construction management agreement fulfills the requirement for accounting in accordance with the percentage of completion method, and revenue recognition has started in the second quarter based on the degree on completion. The construction is proceeding according to plan, and percentage of completion will continue until final completion of the wind farms when it's handed over to the customer, and that is estimated to take place end of this year. A significant milestone payment for the solar and battery storage project, Centennial Flats, was received during the quarter after achievements of important milestone in the development of that project. And this has also contributed to the net sales and profit during the second quarter, and total estimated purchase price for Centennial Flats is between USD 104 million and USD 190 million. And Eolus has now collected about 40% of the lower amount in that range, and the remaining payments are expected to be received in stages up until end 2026. The construction management agreement regarding Stor-Skälsjön is included in the net sales according to the current degree of completion. And for the second quarter, the increased degree of completion was 13%. And the construction is ongoing according to plan and is expected to be finalized late 2023. Operating profit was, for the quarter, SEK 517 million and is the result from the selling of Skallberget/Utterberget, Tjärnäs and Rosenskog with a high degree of completion and, of course, the milestone of the solar and battery storage project in U.S. And in comparison with the second quarter last year, the operating profit has improved from SEK 220 million, which is an increasement of almost SEK 300 million. When it comes to expenses for Eolus Group, they are higher also in this quarter than the previous quarter and also in comparison with the same quarter last year. And the increased cost is overall according to plan and our ongoing expansion. Net from financial items for the second quarter was minus SEK 14 million, and most of that amount is interest cost referring to loans during construction. And net from financial items for the comparison quarter last year was plus SEK 1 million. Net profit for the second quarter was SEK 422 million, which is SEK 197 million improvement from last year. And also I want to highlight Eolus' net profit of SEK 437 million in rolling 12 months, and that includes the period 1st July 2022 until end June 2023. And also mentioned that we are having fluctuations in the business between the quarters, which affect the result in the quarters and sometimes also between the financial years. And when it comes to the balance sheet, we had total fixed assets amounted to SEK 125 million compared to SEK 133 million end quarter last year. Inventories and work in progress was SEK 696 million, and advanced payments to suppliers have decreased during the quarter to SEK 48 million. And the sum of these have increased compared to end second quarter last year. These items include ongoing constructions. And since we have sold the major parts of the projects that were under construction, the work in progress and advanced payments to supplier have significantly decreased since first quarter this year. Cash of SEK 1.347 billion end of June, and the cash position is mainly related to the selling of the Skallberget/Utterberget, Tjärnäs and Rosenskog where the customer reimbursed Eolus of the incurred cost, and the payment referring, of course, to the milestone achievement in project U.S. has also contributed. We have total assets amount to SEK 2.496 billion, and total equity of SEK 1.456 billion, and the increased total equity comes with a high net profit for the quarter. We had interest-bearing liabilities of SEK 477 million. And if we look at the key figures, we have net sales for the quarter 2 divided into Eolus 2 segments. The first one is net sales from project development of SEK 1.736 billion, with operating profit of SEK 519 million. The other segment is asset management, and we had a net sales of SEK 7 million, with an operating profit of minus SEK 1 million. Earnings per share for the quarter, SEK 16.97, and that should be compared to SEK 4.12 same period last year. And equity share is about SEK 56. We have net cash of SEK 870 million and has -- that has increased due to the selling, again, of the Skallberget/Utterberget, Tjärnäs and Rosenskog and milestone payments. Dividend for financial year 2022 of SEK 1.50 were paid to shareholders in May, and that was a total dividend of SEK 37.3 million were paid. And we continue to increase the number of employees to have the capacity to leverage the potential in our large project portfolio and to reach the targets in our business plan for 2022 to 2024. And average number of employees for the first 6 months during the year is 100, and that should be compared to 67 people same period last year. We have an order backlog of SEK 845 million, and we have asset management assignments of 817 megawatts. And Eolus has a role of sound balance sheet, with equity asset ratio of 58% and also a good net cash position. And with a high-quality project portfolio across several markets and technologies, together with our growing organization, we are well prepared for the future. And last number is return on equity after tax. And that was 37% compared to a negative figure last year. And I would also like to share the degree of completion of the projects under construction. In total, we have 514 megawatts under construction quarter end this year. Project Stor-Skälsjön had a degree of completion of 13% for the quarter and, in total, 42%. And Skallberget/Utterberget and Tjärnäs contributed with 55% degree of completion and Rosenskog with 78%. And the constructions are following plan, and we are expecting them to be finalized late 2023, and the remaining degree of completion will be accounted for during the rest of this year. And then I hand over the summary to Per.

Thank you, Catharina. So I would like to end this presentation with repeating that this is a record strong quarter for Eolus, where results and net sales essentially are derived from the sale of the 125-megawatt wind power project in Sweden and the substantial milestone payment for the U.S. battery and solar project in Centennial Flats that we received. And some other events worth to repeat are the continued growth in Finland, which we expect to be a very interesting long-term market, and the strategic review of the Eolus offshore business and the hand-in of the environmental permit application for the Västvind project. So to conclude, Eolus has an expanding and high-quality project portfolio spread across several markets and technologies, a strong and growing organization and a sound balance sheet. So this means that we stand strong even here in times of cost inflation and the cost increases. And I'm looking forward to continuing this exciting journey where we are now constructing projects in 2 continents. Thank you all for listening in. And we'll now hand back to the moderator and open up for questions.

[Operator Instructions] The next question comes from Olof Cederholm from ABG Sundal Collier.

It's Olof from ABG. Congratulations on a very, very good quarter. I have a question regarding the near term going forward. I mean you have a late-stage portfolio, which is pretty big, but some of those revenues have sort of started to be recognized as well. So just wondering, how should we think about revenue recognition going forward in Q3 and Q4? Will that be enough from sort of ongoing projects to turn in an EBIT profit? Or do you need to sell projects to make money during the remainder of the year? That's my first question.

Yes. Thank you, Olof. Yes, we expect a good second half of the year. We can highlight the figure regarding order backlog that Catharina mentioned of SEK 845 million. And that is mainly remaining revenues from the construction management agreement for the 61 Swedish wind turbines that we expect to complete this year. And since we have no cost of goods for those agreements, all contracts are owned by the SPVs that were acquired by the investors. So we expect a high -- if all goes to according to plan, we expect a high margin on those contracts. We are, of course, also aiming to do new deals. Next upcoming batch, we -- of the projects we -- in Sweden, we expect to be around 100 megawatts in -- a cluster of 100 megawatts in Southern Sweden, where we will start procurement -- the procurement process soon. And we have also communicated that we intend to sell the American -- the battery storage project, Pome, of 100 megawatts before the year-end.

Excellent. And could I just have a follow-up on the order backlog number? And you say that there's no cost of goods sold in those agreements. Then what's -- the order backlog, is that a 12-month forward-looking order backlog? Or is that a shorter period? How should we think about that? And also in terms of margins here, it's easy to get super excited when you say there is no cost of goods sold. So I'm thinking, is that a 70% margin? Or what are we thinking about? So could you maybe help us a little bit with indicating a margin when those revenues are recognized?

Yes. We are not commenting margins in specific projects. But of course, if there is no cost of goods, the only reasonable cost that we would have on our end would be for our own personnel, I would say. So in general, high margins, it could be expected. But of course, we are taking some kind of risk in the outcome of the projects if there would be cost overruns or delays. But it's quite limited, I would say, in these projects. And it's -- the order backlog is all the expected remaining revenues until the projects are completed so they could...

Including Arizona?

Yes.

Okay. So it's not all 2023?

No.

No. And then my last question is on the Arizona project. What are the key catalysts that need to happen in order for the project value to go up towards the higher end of the value range that you've given?

It's mainly due to the final layout of the project, how much generation capacity the investor will decide to do. So how much solar panels they will install compared to how much battery storage capacity and what revenue streams that will be most valuable to try to capture when they come to final investment decision for the project. And it's also related to the production, tax credits and the investment tax credits that were expanded and extended through the Inflation Reduction Act last year, which also will require some interpretation from the U.S. tax authorities.

Okay. So timing-wise, when will we know where we go with this?

We expect financial investment decision for the projects to be taken late 2024 or early 2025 and the entire project to be completed and in operation during 2026.

[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.

Thanks. We've also received some questions in the chat, and one is about the energy mix going forward. What will happen with -- when we have more wind and solar in the system? And how will we react and act on that within Eolus? For -- I would say that for all projects that we are developing in all markets, we evaluate the possibilities to do hybrid projects, including several technologies, being wind, solar, battery storage and potentially hydrogen production to make the facility more valuable and to be able to deliver more valuable projects to the grid and, thereby, increasing the value for investors. There are some more detailed questions also in the chat. But we will make sure to -- for instance, regarding accounting questions, we will make sure to reply in e-mail to you on those. So thank you all for listening into our presentation. I wish you all a nice weekend.