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

Welcome to the Eolus Q3 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 to the presentation of Eolus Q3 report. I'm Per Witalisson, CEO of Eolus and here to present is also our CFO, Catharina Persson. I'm glad to report a strong quarter for Eolus. We had net sales amounting to SEK 127 million with a net profit of SEK 94 million and an earnings per share of SEK 3.79. And looking at the 9 months figures, our net sales was SEK 2.1 billion with a net profit of SEK 502 million. The result comes mainly from 3 activities. Firstly, it's the progress in the construction of our Swedish wind projects, Skallberget/Utterberget, Tjärnäs, Rosenskog and Stor-Skälsjön, where we have the revenue recognition from the advancing constructions. Secondly, there was a good outcome of an arbitration with the civil works constructor regarding the Kråktorpet and Nylandsbergen wind projects, which positively affected our pretax profit for the third quarter with SEK 85 million. And thirdly, we have received the last milestone payment for the battery storage project in Los Angeles called the Cald project. I'll give more details later in the presentation. So first, a short introduction to Eolus. We are a developer of renewable energy in Europe and U.S. We've been in the business since more than 30 years. We have built more than 700 wind turbines. We develop, sell renewable projects to investors. We construct on behalf of investors, our main idea is to add the construction financed by investors, meaning that we have a relatively asset-light business model. We hand over the projects after construction to our investors, but we also have an asset management side where we do technical and commercial asset management services for the investors. We have a development portfolio of roughly 25 gigawatts. We're -- technology-wise, we're working with onshore wind, offshore wind, solar PV and energy storage projects, mainly being battery storage projects and combinations of these technologies that we see is a key going forward. Market-wise, we're active in the Nordic countries, Finland, Baltics, Poland and the U.S. We're listed at the Stockholm NASDAQ Stock Exchange, and we have now roughly 120 employees. We have 61 wind turbines under construction in a quite advanced stage of the construction. It is the Skallberget/Utterberget, Tjärnäs and Rosenskog projects that were all sold to BKW during Q2. So we are performing now the construction services to them. And all turbines are erected, and most of them are taken into operation. And we plan to be able to hand them over to the investor during our Q4. And then we have the Stor-Skälsjön project outside of Sundsvall, where it's 42 turbines, which we have sold to MEAG to Hydro and are now constructing on their behalf. Eolus owns 51% of this project. The construction of this project have been slightly delayed due to unfavorable weather conditions and shortcomings in the supplier's project management and organization. This means that the completion and handover to the owners will not be possible during Q4. We expect it to happen during Q1 2024. The second important thing when it comes to profit during the quarter was the arbitration award that resulted in a profit before tax of SEK 85 million, and this was related to projects Kråktorpet and Nylandsbergen, which we completed in 2019, and the dispute was initiated after that. So it's very good for us to finally have an outcome of this and with a positive outcome and seeing that our -- the reservations and provisions made was more than enough. And we will then have a negative cash flow during Q4 connected to this, and that is due to that we have withheld invoices from the contractor where we have to pay some of them now. But overall, very good to be able to have that settled and cleared now. We have also completed our part of the first battery storage project in the U.S., the Cald project in Los Angeles, close to the international airport. It's the first stand-alone battery storage project, it's a 120 -- that we have done. It's a 120-megawatt project that we sold to Aypa Power. And we have provided continuous development services, and we have now received the final payment for that project. And the project is planned to reach commercial operation during 2024. So it's a successful project where we have gained a lot of the experience. And in the U.S. market, there's definitely a huge demand for short-term energy storage, which is very suitable for battery storage, also providing capacity reserves, spinning reserves and frequency regulation services. So during Q3, we have also made an investment decision for the next projects, Pome in San Diego area. It is a 100-megawatt project with a 4 hours duration. We've entered into agreements regarding supply of battery systems with a major supplier, and we have also entered into a tolling agreement. That's an offtake agreement to like, yes, like PPA, you could say. And construction is planned to commence in Q4 this year. The sales process is ongoing and the project should reach commercial operation during 2024. We have focused a lot on offshore projects during the quarter. We filed the permit application to the Swedish government and to the environmental court for the project Västvind, 1,000 megawatt outside of Gothenburg. We've also entered into a partnership with Volvo Cars which aims at providing them with renewable electricity to their factories and the activities in Gothenburg both to the car factories and to the battery factory that -- Volvo Cars is -- are contracting together with Northvolt. We also announced that we are performing a strategic review of our offshore business. We have like 10 gigawatts of offshore projects in our pipeline. So it's a significant part of our portfolio. The projects are advancing and we are filing applications for permits and when these projects continue to develop successfully, we want to make sure that they get the right resources and the best possibilities to be both permitted, constructed and taken into operation in the best way. That's why we also are sounding the market for potential partners could be both financial or industrial partners to team up with us around these projects. We've also in Q4, sent in the next permit application for the Arkona offshore wind project south of Skåne in Sweden. It's a large project of roughly 1.4 gigawatts with a potential production of 5.5 terawatt hour of renewable electricity in an area which has a large deficit of electricities. In our report, we have special focused theme on the Polish market, where we have been active for 2.5 years now. And while we are seeing Poland as an attractive market is that, of course, it's a large country with 38 million population or so. 75% of the electricity production is coal based. And they have huge targets to increase renewable electricity generation from about -- the target is to triple it until 2035. And then a lot of solar PV, onshore wind and offshore wind will definitely be needed to reach that. At the same time, electricity consumption is expected to grow significantly. And of course, after the Russian invasion of Ukraine, energy self-supply has been put high on the agenda, of course. There are also some political movement, both changes in legislation and the outcome of the Parliament elections in October, will definitely work in favor of renewable energy in Poland. As I said, we've been active there since 2021. We have Swedish -- Polish head our country manager, Daniel Larsson. We have the total portfolio now of 1.8 gigawatts where the main bulk is solar PV, but we're building up a modern onshore wind portfolio there that we think will be very interesting. We're working both with the greenfield development and together with the early phase developers under co-development agreements. We are also -- we have also decided to start the construction of our first small solar project, Krobia and Rokowo that we expect to both sell and take into operation during 2024. Our portfolio stays at 25 gigawatts. So no significant changes during the quarter. As I mentioned, 10 gigawatt is being offshore wind, 7 gigawatt is being made up by onshore wind and 5 gigawatt solar and almost 3 gigawatts of energy storage projects. Geographically, almost half of our portfolio is in Sweden, 1/4 in the U.S. We are expanding the -- growing the portfolio in Finland and in Poland. And then we have projects and activities also in the Baltic states and a partner project in Spain. In the near term, of course, it's important to focus on the portfolio and the late-stage development projects. So we are communicating in our reports and on our website, the status of these projects where we have 1.8 gigawatts now in this phase. And thereby, I hand over to Catharina to present the financials.

Hi, everyone, and thank you, Per. To start with, we have had another quarter with strong results. Revenue recognition regarding the ongoing constructions in Sweden has contributed together with arbitration award that was announced after quarter end. Net sales was SEK 127 million and increased from SEK 111 million compared to the corresponding quarter 2022. The ongoing constructions is proceeding well in Tjärnäs, Skallberget/Utterberget with a degree of completion of 29% and Rosenskog grow with a degree of completion of 17% for the quarter. Revenue recognition has been recorded based on the degree of completion, and we expect to have the projects finalized according to plan before year-end and hand it over to the customer. And the remaining revenue recognition will affect quarter 4. Stor-Skälsjön has also contributed to net sales and profit during the third quarter according to the current degree of completion. As Per mentioned, the construction has been delayed, and we will not be able to complete and hand over the project customer before year-end as planned. During quarter 4, the completion increased with 24% and that's lower than planned for the quarter. And the work that was performed during the fourth quarter will be recognized, but again, lower than expected since the handover will not take place this year. And our assumptions are that we have enough reservations in our projects' budget to secure that Eolus margin will not be materially affected in a negative way by the delay. And as expected, the final revenues from the stand-alone battery project Cald in Los Angeles have been recorded during the third quarter and is now finalized for Eolus' part. Operating profit was SEK 159 million and is a result from the revenue recognition regarding the projects that are under constructions and based on the degree of completion. And the arbitration award regarding the wind projects Kråktorpet and Nylandsbergen in Sweden, which were completed back in 2019 was announced after quarter end, but the award has affected the operating profit during the quarter and it's been divided on other operating income, SEK 48 million, cost for goods and project development with a positive amount of SEK 45 million and other costs -- other external cost positive amount of SEK 3 million, and we had a result from net financial items with a negative amount of SEK 12 million. And in total, it's been a contribution to the Q3 result with SEK 85 million profit before tax. And if we compare -- in comparison with the third quarter last year, the operating profit has improved from a negative amount of SEK 8 million, which is an increasement of SEK 167 million. Expenses for Eolus Group are higher also in this quarter if we exclude the arbitration and also -- than the previous quarter and in comparison with the same quarter last year. The increased cost is overall according to plan and the expansion. If we take a look at the net from financial items. For the third quarter, it was minus SEK 25 million. And excluding outcome of the arbitration, most of the amount is interest cost referring to loans. And net from financial items for the comparison quarter last year was minus SEK 3 million. And altogether, we had a net profit for third quarter of SEK 94 million, which is SEK 105 million improvement from third quarter last year. And something worth mentioning is Eolus net profit rolling 12 months of SEK 540 million. The period includes 1st of October 2022 until end September '23. And also mentioned that we are having fluctuations in the business between quarters, which affect the results, and it can also something -- fluctuates between the financial years. So we have the balance sheet. Total fixed assets amounted SEK 308 million compared to SEK 135 million in the quarter last year. And the property, plant and equipment has increased with approximately SEK 200 million and it is referring to a land agreement in the U.S. project and future payments according to the conditions in that agreement. Inventories and work in progress was SEK 922 million and advanced payment to suppliers was SEK 58 million. Compared to end quarter 3 last year, the sum of these items has increased from SEK 827 million to SEK 980 million. And these items do not include any ongoing constructions at end quarter since Eolus' remaining responsibilities are to manage the constructions on behalf of the customer. We had cash of SEK 980 million in September, and the cash position is mainly related to the selling that took place last quarter and thereafter have been invested in the project portfolio and specific projects that are in late phase of development. Total assets amounts to SEK 2.709 billion. We had total equity of SEK 1.547 million and the increased total equity during the year and also third quarter comes with a high net profit. We have interest-bearing liabilities of SEK 606 million and approximately SEK 200 million is referring to the land agreement in the U.S. project that I mentioned before. And some key figures. We had net sale for the quarter divided in Eolus' 2 segments. Net sales for project development was on SEK 120 million and with the operating profit of SEK 157 million. Net sales for asset management was SEK 7 million with an operating profit of SEK 2 million. Earnings per share for the quarter amounts to SEK 3.79 compared to a negative amount same period last year. And we have equity per share is just below SEK 60, and we had net cash position of SEK 300 million. And we continue to increase the number of employees to reach the targets in our business plan to those set out in for 2022 to 2024, an average number of employees for Eolus 9 first month is 103 compared to 72 same period last year. We had order backlog of SEK 726 million, and we have asset management assignments of 870 megawatts. And Eolus still has a high equity asset ratio of 57% and a sound balance sheet with a good net cash position. And with the product portfolio spread across several markets and technologies, together with our growing organization, we are well prepared for the future. And a return of equity after tax was 45% compared to a negative figure last year for the corresponding period. And then we have information regarding degree of completion. 394 megawatts were under construction quarter end. Skallberget/Utterberget and Tjärnäs contributed with 29% degree of completion and Rosenskog 17%. And in total, 84%, respective 95%. And project Stor-Skälsjön had a degree of completion for the quarter of 24% and in total, 66%. And the remaining degree of completion will be accounted for during quarter 4 this year and beginning of 2024. So I'll hand over to Per again for the summary.

Thanks, Catharina. So to summarize, it was a strong quarter for Eolus, where results and net sales essentially came from the construction of the 61 wind turbines in Sweden, the arbitration award for the 2 Sundsvall projects and the last final payment for the Cald battery storage project in the U.S. As mentioned, there are a lot of things going on in our offshore business. We have submitted the applications for both Västvind and the Arkona project, and we expect more applications to be submitted by us in a very close future. The cooperation with the Volvo Cars is a clear manifest of the industry's need for fossil-free electricity and the strategic review process aims to give even better conditions for successful development, permitting and realization of the offshore projects. Looking outside of Sweden, our business is developing well. We especially highlighted Poland in this report, and we think it's really, really positive with a new government in Poland that most likely will improve the conditions for renewable energy. Projects in the organization are developing well also in Finland and the Baltics. And in the U.S., we finalized our part of the Cald battery storage project and also made an investment decision for the next battery storage project Pome. We continue the development of the Centennial Flats project. We received a significant milestone payment in Q2, and we still have approximately another 60% of the purchase price to collect up until commercial operation, which is expected to happen in 2026. So to conclude, Eolus has a strong product portfolio with more than 25 gigawatts that is distributed across markets and technologies. Of course, there are challenges with cost inflation, interest rates and lower long-term electricity price forecasts that are putting pressure on deals, projects and margins. But we continue to see a strong will and interest to invest in renewable energy. We remain positive about the future based on our long experience, the high-quality project portfolio and the enormous need for new fossil-free electricity. So we have state power and a strong organization, which creates excellent opportunities for profitable growth for many years to come. Thank you for listening in.

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

It's Olof from ABG. I have a couple of questions. First, I was wondering if you could talk a little bit about your late-stage portfolio and how we should see the different projects moving into sales processes and potential timing of transactions? If you could help us with that.

Yes. Yes, the next -- we wrote that in the Q2 report, the next projects that are up for sale is another batch of Swedish onshore with the projects being Fageråsen, Boarp and Dållebo, roughly 100 megawatts. We also foresee to sell the Pome project during 2024 that we have also communicated and the Krobia and Rekowo projects. That are the projects which we have named that we will sell during 2024. We will, of course, need to sell more projects than that to reach our goal.

Excellent. And what's your view? I mean it takes maybe a little longer in sales processes and so forth. And -- but what is your you're thinking on project pricing. You said demand was still good and that there is a lot of interest to invest in this space. But do you think project pricing continues to be good despite maybe a lack of support from high electricity prices at the moment?

Yes. We see still a high project prices for our -- in the sales processes, we are engaged in from a historical perspective. Of course, higher turbine prices, for instance, together with high interest rates put pressure on it, but also long-term electricity forecasts for most markets are also significantly higher than they were before the Ukrainian war, for instance. So we definitely see that the -- that good projects are possible to transact on. It takes somewhat longer time definitely. We see more utilities coming back in the processes. And they are not always the fastest one, so to say.

Excellent. And then my last question is about the offshore applications that you already have sort of filed. What is the timetable of those? When do you think we should -- we will know more about whether they will move on to the next stage of approval?

We expect decisions from the government -- for projects we have filed applications for this year, we expect governmental decisions during 2024.

Excellent. That's all for me.

Thanks.

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

We have a few written questions. The first one is from [ Benzo Pilendol ]. The Arkona project seems to be partly on the same area as OX2 Triton project, who decide which one has first option to this area?

Yes. In Sweden, there is no exclusivity to zones in the early phases. So that is decided after the applications have been filed. And yes, there are overlapping areas for that project with both Ørsted and OX2 and it will be up to the government to decide how to use that area. If it should be split into several projects or if they dare to put it all in one basket, so to say.

And then we have a question from [ Matthias Agenvoy ]. Is it reasonable to expect 100% revenue recognition in Q4 2023 for the SE3 projects under construction, and then you are referring to Skallberget/Utterberget, Tjärnäs and Rosenskog. If they are handed over in the same period or will there be a drag into Q1 2024? According to the agreement that we have with the customer, if we have the wind farms completed and finalized and handed over, then we will account for the total remaining degree of completion. So in that case, it will not be dragged over to Q1 '24. And then another question from [ Matthias ] due to the delays, will the remaining payment regarding Stor-Skälsjön be significantly lower than previously expected or how do the delays impacts Eolus? And we have also another question about the same. If there's any negative financial impact anticipated from the delay in Stor-Skälsjön. And as I mentioned during my presentation, we have made assumptions that we have enough reservations in our project budget to secure Eolus margin. And it should not be as we see it for the moment materially affected by that delay.

And we could add also that since it is the contractor that is delayed the contracts, of course, holds clauses about the delay damages payable from the contractor.

And then we also have another question, and that's regarding the interest-bearing debt that has increased during the quarter, and that's referring to the land lease agreements that will need to -- there are terms in that agreement that needs to be reported as lease agreement debt in Eolus' books during the time that we are owning the U.S. project. And it's actually regarding the Pome that we have made investment decision for during the quarter. And if that is the interest-bearing and it's due to specific calculations we need to do to have the amount set for the lease agreement in the balance sheet.

Yes. This is due to IFRS.

IFRS.

IFRS accounting standards. Yes, we have to -- so we have to have it both on the asset side and more or less the same amount on the debt side of the balance sheet. So there has not been any cash flow connected to this. And both these items will go away when we sell the projects.

I think that was more or less the last question. And actually, we had a question regarding the seminars that Eolus had before. And if there's anything that we are planning to start with again.

Yes. We know that the seminars we had with the -- in connection with our Annual General Meeting was very popular and appreciated. So we are evaluating if we should have them again or in some other format, but we have to come back with that.

Then we have no more written questions.

Okay. So thank you all for listening in. Wish you all a nice Friday and a nice weekend. Thank you.

Thank you.