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

Hi all, and welcome to Eolus' presentation of the Q2 report 2024. Eolus is a developer of renewable energy projects within solar and energy storage. Our activities are based on close to 35 years of experience from the industry with more than 140 skilled and committed employees, covering our operations in 7 countries in Europe and North America. We have a portfolio of about 250 projects with a potential of 28 gigawatts. Our business model is to develop and sell renewable energy projects to utilities and financial investors. We construct the projects on behalf of the customers. And we are often also entrusted by our customers to perform long-term technical and commercial asset management services for their operating assets. So currently, we also have 967 megawatts under asset management. Our portfolio was more or less stable during Q2 and amounted to 28.4 gigawatts. Currently, roughly half of the projects are located in Sweden and 20% each in Finland and the U.S. The mix between the techniques and technologies is almost 40% offshore wind and almost 30% onshore wind and the rest is solar PV and battery storage projects. And we also have a lot of combinations where these different technologies are used at the same site. During the second quarter, we had a strong focus on the ongoing construction and sales processes for the U.S. battery project home and for the 3 Swedish onshore projects, Fågelås, Boarp and Dållebo. And completion and handover of the Stor-Skälsjön project is also high on our priority list. There were no new transactions closed during the quarter, and revenue recognition has therefore not started for the projects that are under construction and yet not yet sold. This is the main reason why we have a negative operating result for the quarter. So for the second quarter, we have net sales of SEK 54 million. We have a net loss of SEK 50 million. So, the earnings per share was a loss of SEK 1.99. We have an equity-to-asset ratio of 44%. And as you can see, there is a significant difference in both net sales and net profit compared to the second quarter last year. The reason for this is that the second quarter 2023 was the best quarter so far in Eolus' history and included both the sale of 125-megawatt wind power projects under construction in Sweden and a large milestone payment from the customer regarding the American Centennial Flats project. Catharina will elaborate more on this later to give a deeper understanding of the fluctuations. Anyhow, Eolus' earnings will continue to vary between quarters and between years, mainly depending on completed sales processes and revenue recognition for ongoing construction in sold projects. So therefore, we often say that it might be quite relevant to look also at rolling 12 months where we have an EBIT of SEK 203 million and a net profit of SEK 83 million. Near-term revenues and profits and cash flow will very much be determined by a few projects and events is the sale of 88-megawatt wind projects in Sweden. It's the sales of the Pome, best battery energy storage project and completion of the Stor-Skälsjön project and upcoming milestone payments from the Centennial Flat projects. So, I want to do a little deep dive into some of these projects to give a status update. We started the construction and sales process for the Fågelås, Boarp and Dållebo projects in Sweden. Deforestation and construction of roads have started. We entered into a turbine supply agreement with Vestas earlier this spring. All projects are located in Price area SE3 in Sweden, which have good higher electricity prices and forecasts compared to projects further up north, so an attractive price area. And the turbines in Fågelås, they are the highest turbines constructed by Eolus so far with a tip height of 247 meters. We expect to complete the sales process during Q4. Next project to highlight is the battery project Pome in San Diego. It's a 400-megawatt project with 4 hours' duration. It comes with a long-term PPA. Construction is ongoing, and the delivery of battery systems will start in September. As of the end of Q2, the investment in this project was quite heavy for us. And we have entered into project finance with an American bank that we have signed and closed here in August. The sales process has advanced over the summer and sale of the project is expected to take place during the coming months. And commercial operation is planned for to commence in beginning of 2025. The Stor-Skälsjön project is a 260-megawatt project north of Sundsvall in Sweden, where we are 51% owner of the projects. And the project is not yet completed due to technical problems that the turbine supplier has, but all turbines have started producing electricity during the spring. And currently, 37 out of the 42 turbines have passed the test run. We repeat that our assessment is that the delay will not have any significant impact on Eolus' margin from the project since we are covered by late delivery liquidated damages from the supplier and we also received the operating net from the electricity production from the project. During the quarter, we submitted a permit allocation for an offshore wind project in Sweden called Skidbladner. It's located in the Baltic Sea, north of Gotska Sandön. It's a large project with a potential electricity production of up to 12 terawatt-hours per year, so roughly comparable with the largest nuclear reactor in Sweden. I also want to give you an update on what you can expect to see from Eolus, what projects are prioritized in the pipeline and in our ongoing activities. And I'll start with the Pienava project in Latvia. It's a project of up to 158 megawatts. When constructed, it will be the largest wind project in Latvia. All major permits have been obtained. We've secured the grid connection. And construction is expected to start in early 2025 with the commercial operation planned for 2027, and we expect to initiate the sales process in the near future. Next American battery project is a 126-megawatt project in Nevada where we have received all main permits. We have received or secured the grid interconnection agreement at really attractive terms and conditions. We have procured the long lead time components such as transformers and high voltage breakers for the project. So we're now doing the final design and applying for the construction permits. So we expect to run the sales process during 2025, which would give us the possibility to have the project in operation already during 2026. Turning to Finland. We have the Murtomäki 2 project. And this is the most advanced project from the portfolio that we acquired from EEP last year. So I'm very pleased to see this project progressing and maturing. It has the potential also to include some solar PV parts to be added to it to utilize the grid connection and make the combined facility more valuable from a system perspective. The land use plan was approved and gained legal force in July. So we'll now complete the wind measurements and apply for the construction permits to enter into grid connection agreement, which could give us an opportunity to reach commercial operation during 2027. Fageråsen also in Sweden in the attractive Price area SE3 is the partnership with a regional partner, DalaVind. So Eolus owns 49% of the project that in total is 238 megawatts and here, we also expect to start construction during 2025 and round the sales process in 2025. There are a couple of local partners that are interested in investing in this part of the project and also for this project, we plan for commercial operation during 2027. Finally and added to the list is another Swedish SE3 project called Ölme located in the municipality of Kristinehamn, where we have old projects now in place and intend to run the sales process during first half of 2025 and also then start construction. And thereby, I hand over to Catharina.

Hi, everyone, and thanks, Per. Then we turn to the financial slides for the second quarter 2024. Net sales was SEK 54 million, and that is significantly lower compared to the second quarter last year, where we had a net sales of about SEK 1.7 billion. For this quarter, revenue recognition from Stor-Skälsjön based on the degree of completion for the second quarter is included in the net sales with 3%. In total, Stor-Skälsjön has a percentage of completion of 85%. The delays in completion and handover are due to the previous communicated, technical problem with the turbine supplier. Our assumptions are still that the delay will not have any major negative effects on ALS margin as the delayed penalties and net operating income from electricity production will compensate for the delay. And the remaining 15% of the completion is expected to be accounted for during 2024. The significantly lower revenue and profit, if you compare this quarter to the same quarter last year, are primarily due to the substantial positive contribution from the sale of Skallberget/Utterberget, Tjärnäs and Rosenskog projects during second quarter last year. As also passed was the best quarter ever in Eolus' history. Since these projects were under construction, both revenue from the sale of shares in the product companies and revenue recognition from the construction contributed to results in Q2 2023. And the fact that the construction of the projects had reached an advanced stage when the projects were sold that resulted in higher revenues as the customer reimbursed Eolus for incurred costs. And during second quarter last year, we also received a significant milestone payment related to the U.S. solar and battery storage project Centennial Flats, which also made a significant contribution to the profit in Q2 last year. And overall, one of the reasons Eolus net sale is fluctuating between quarters and sometimes also between years is the timing of sale transactions. Another factor is the degree of completion of projects where we have started the construction before they are sold. When the product companies are sold, the shares in the product companies are handed over to the customer and that's a high impact on the revenues. And at closing of the transaction, the requirements are fulfilled for revenue recognition according to the percentage of completion method. And at that point, all incurred cost of Eolus has deployed will be reimbursed and reported as net sales. However, the margin will not be affected by the reimbursement of costs. Only sales price and revenue recognition from construction management agreement, if we have that for the project, will affect the total margin. And for now, as Pome in U.S. and the Swedish onshore wind farms, Fågelås, Boarp and Dållebo are under construction and not yet sold. It will have a significant impact on Eolus net sales and profit once they are sold and the project companies are handed over to the customer. Then the requirements for revenue recognition, according to the percentage of completion method, are fulfilled and the revenue recognition based on the degree of completion will start. And as mentioned, Eolus would also be reimbursed for all incurred costs and report them as net sales. And if we go to expenses for Eolus Group, that is SEK 6 million higher compared to the same period last year and the higher expenses are following the business plan for expansion for 2022 and 2024. However, we will see for the remaining 2024, a lower activity compared to 2023 when it comes to recruitment. We had a negative operating profit for Q2 of minus SEK 26 million compared to a positive amount of SEK 517 million same quarter last year. And the main reason for the negative operating profit is the low degree of completion and that with no selling of any projects has taken place. Net from financial items for the quarter was minus SEK 19 million compared to SEK 14 million minus last year, and interest cost is higher for the quarter because of financing of the ongoing constructions. We had a net loss for the period of SEK 50 million compared to a net profit of SEK 422 million in quarter 2023. And the difference in net profit compared to the same quarter last year are mainly explained by the sale of the projects last year as mentioned. If we go to the balance sheet for Eolus Group, we had total fixed assets amounted to SEK 313 million. And that amount has increased compared to second quarter last year and that's due to land lease agreements in the U.S. battery storage project Pome and future payments according to conditions in that agreement. And when Pome is sold and handed over, this item will be reduced with approximately SEK 200 million. We have a high number for work in progress and projects under development. It was SEK 1.557 billion. And for advanced payments to suppliers, almost SEK 760 million and approximately SEK 1.1 billion of these items is referable to investments in the ongoing construction of Pome in U.S. and the Swedish onshore wind farms Fågelås, Boarp and Dållebo in Sweden. As the projects are not sold, the constructions are on our own books and impacting both balance sheet items and cash flow until the sale process is completed. And as Per informed, we have signed a separate project financing with the bank in U.S. for the construction of Pome, and the project will now be fully financed until commissioning. Also other investments in the product portfolio during the quarter has also contributed to increased work in progress compared to second quarter last year. We had cash of SEK 526 million end of June this year and that is compared to SEK 1.3 billion in June 2023. And the lower cash amount is due to financing of the ongoing constructions, also investments in the project portfolio and financing of the running business. We had total assets of SEK 3 billion and almost SEK 400 million and that's the highest number so far in Eolus' history. We had total equity of SEK 1.493 billion, whereof equity of SEK 73 million is related to minority stakeholders. Also, interest-bearing liabilities have increased nearly SEK 1.2 billion compared to less than SEK 500 million in June last year. And the previous mentioned lease agreement for Pome is included in the long-term liabilities with approximately SEK 200 million. And once again, when the project is sold, the liabilities referring to the lease agreement will be removed. And the overall increased interest-bearing liabilities is referring to loans to finance ongoing constructions. If we have a look at the key figures, we have divided net sales and operating profit in project development and asset management. And to start with the net sales for asset management is SEK 8 million with an operating profit of SEK 1 million. And the remaining net sales is referring to project development with SEK 47 million and an operating profit of minus SEK 27 million. We had earnings per share for this quarter of minus SEK 1.99 and on a 12-month rolling earnings per share is SEK 3.35. Cash flow from operating activities during the quarter was minus SEK 517 million compared to a positive number of SEK 860 million same period last year. And again, the main reason for the negative cash flow from the operating activities in comparison to second quarter last year is referring to the ongoing constructions and investments in the portfolio. Equity per share about SEK 57 compared to SEK 56 end June last year. We had a net debt of SEK 417 million due to capital tied up in projects. And from this quarter, the net debt and net cash is defined as current and non-current interest-bearing liabilities to credit institutions, less cash. And for previous periods, the definition also included liabilities regarding lease agreements. And this means that mainly liabilities regarding future lease payments have been excluded from the calculation. And we think the adjusted definition is a better way of measuring the debt. And also the previous period has been restated, so the net debt/net cash number is comparable. During the Q2, we also paid out a dividend to the shareholders. The amount was SEK 56 million, which is 50% higher than we paid out last year to shareholders. Full-time employees end of quarter were 146 compared to 104 the year before. The order backlog is about SEK 660 million and that is lower compared to June last year, and we expect to increase the order backlog when the ongoing selling process are completed. And also the structure of the transaction will impact the number of backlog. Equity-to-asset ratio 44%, and we're still having a solid platform. But the tied-up capital in ongoing construction is lowering the equity-to-asset ratio number. And return on equity after tax is 6% for 12-month rolling and that's the period of 1st of July 2023 to end of June 2024. And also worth mentioning that Eolus net profit on rolling 12 months is SEK 83 million. And then we had the last slide mentioning the projects under construction. In total, 456 megawatts were under construction end of June. And Stor-Skälsjön had a degree on completion of 3% during the Q2 and in total 85%. And the remaining degree of completion will be accounted for during 2024. And the rest of the ongoing constructions are not fulfilling the requirements for percentage of completion method as the projects has not been sold yet. And revenue recognition will start for those projects when agreements with customers are signed and when the predefined construction milestones are achieved. Then I'm handing back to Per again.

Thanks, Catharina. So to summarize, we had a strong focus on sales and construction of the U.S. battery project Pome and the Swedish wind projects, Fågelås, Boarp and Dållebo. And we also signed a separate project finance agreement of amounting to $175 million for the Pome project in August. No transactions were closed during the quarter, which, of course, have a huge impact on the results for the quarter. Revenue recognition for Fågelås, Boarp and the Dållebo projects will start as soon as the projects are sold. We had several mature projects in Sweden, Latvia, Finland and the U.S. approaching ready-to-build status. So sales processes are estimated to be closed in 2025 for 3 to 5 of these projects at least. We have appointed Christer Baden Hansen as new Chief Operating Officer; and Åsa Lamm as new Chief People & Culture Officer also Åsa will start in September. We'll assume coming to the end of the 3-year business plan, and we are working on the business plan for the next 3 years. And when that is concluded on, we will plan to present new and updated financial targets for the 3 years to come. Thank you for listening in, and we open up for questions.

[Operator Instructions] The next question comes from Lara Mohtadi from ABG Sundal Collier.

Lara from ABG here. Just a couple of questions from my end. I would first like to start off with a bit on the market. Would you say that the market sentiment has changed or improved over the last quarter, given, for example, the potential rate cuts, which could improve the attractiveness of your projects?

Probably too early to see yet, but we have the combination of the last year's increased CapEx prices and cost inflation. But on the other hand, we have the interest rates starting to go down. So yes, I would say that we see signs of increased activities and interest in the projects. I cannot see -- say yet that we've seen it in the investors' valuations, but expect that to come if the trend continues.

Very clear. Could you maybe discuss the most recent pricing and cost trends? Are you confident that the project margins will remain at the healthy good level?

Yes, for best projects, absolutely. Of course, we have also to prioritize within our portfolio and focus on the best projects. But we see prices for wind turbines now being stable for the last half year at least, and we have -- we see significant reduction in cost for PV panels and also the prices for lithium affecting battery storage projects come down significantly.

And regarding your technology mix, how do you expect the mix to evolve going forward? You currently have a significant amount of offshore and onshore projects in your portfolio. Do you expect solar storage to increase? Or how you'll see a similar mix in the future?

Yes. Our main focus on the basis of the portfolio is onshore wind. Of course, when we add offshore projects, it has a huge impact on the size of the portfolio due to the size of each offshore project. When it comes to offshore, we see our position as earlier in the value chain compared to onshore and PV best projects. So we would typically look to exit at permits granted. So I don't foresee under current conditions that we will start any new offshore wind projects.

And just the last one from my end. How is permitting developing would you say? Are there any signs that the times are changing for the better or for the worse, if you could discuss this maybe for both your technologies offshore and onshore, but also how the trends are in the different countries you operate?

We always think lead times are too long compared to what they should be. They are really long in Sweden. They are shorter in Finland. In Poland, permit lead times are shorter, but lead times for grid connections are much longer. But I would say that Eolus benefits in this market also from our long history and our large and diversified portfolio spread over both markets and technologies. So it's important for us to have a constant flow of projects that can compensate for long permitting lead times.

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

I'll start with Centennial Flat. I suppose that is just in the cash flow here. Could you indicate roughly how much that is? Or is it good margin so there's no pointing in highlighting that specific part?

No, remaining milestone payments from Centennial Flat is really, really significant. We have guided -- I don't remember the exact figures for the interval, but the lower end of the interval is for total expected revenues is well above USD 100 million, where we so far have collected 40%, so we have another 60% to collect. The exact timing of the milestones are dependent on our customers' decision to proceed with the project and to make their final investment decision, but we -- and the milestones are spread out from the notice to proceed to COD, commercial operation of the project. So we expect to collect the remaining payments up until 2026.

Okay. Can you say anything how the progression is going relative to the range you've indicated? Are you having any gut feel on where in the range you will land at the end? Or is it entirely still up in the air?

It's much related to the final design of the project. So it's very much up to the investor and what kind of revenue streams they will try to capture and how tax equity will be sized for the project. So I'll have to pass on that question for now. But we'll definitely come back with an update in our reports as soon as we can get a closing on the spend.

And you touched up on the market and the challenges you're facing and looking a little bit outside your own business. I can see that a lot of other companies are striving as well. What would you say would be the key trigger in order to generate the renewed interest? Is it down to electricity prices? Or is it a first cut from ECB? Or is it a combination of everything? What's your kind of sense when you talk to customers, what are they waiting for in order to be more active?

It is, of course, a combination. Interest rates funding possibilities is, of course, of great importance for both doing transactions and also have a huge impact on valuation, of course. Clear political guidance also have an effect on many markets where to invest. And all that, of course, have an impact on the long-term power price forecasts as well.

Okay. And just a detailed question. The lease agreements you have removed from your net debt, how much has that been roughly? Is it single digit or double digit or triple digit?

You cannot [ calculate ] the amount.

Yes, I can help. Approximately SEK 200 million.

So almost SEK 10 per share. So it was not reasonable to include it in the calculation of the net cash/net debt position.

And that is not treated as lease debt according to IFRS 16. Is that correct? How should I interpret that because normally, lease agreement are included in?

But in the item in the balance sheet, we have included it. It's just a calculation for the net debt that hasn't changed and that's for us to have the definition.

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

Okay. Thanks for the questions and comments. We have received some written questions in the chat. We'll try to answer some of them. And for some more detailed questions, we'll try to get back to you with answers in e-mails. The first question is about the project Timmele called Burn in some external publications. It's 2 turbine -- a small 2-turbine project in Sweden, where the municipality retracted their positive detail that they had given in 2014. They retracted that after we even have ordered the wind turbines for the project. There is an ongoing court case about it. We have appeal. And so it's still in the portfolio. And we're also running a parallel track to relocate turbines to another project worst case, but the projects have therefore been quite postponed. Next question is about conditions for wind energy and the concern related to low prices during high wind times and seasons. And this is an expectation of what's called lower capture rates for technology that becomes dominant in the system. So how we work with this and how investors deals with it is, of course, they have to make assumptions of the capture rate, that is, the price that a specific project will receive compared to the average monthly electricity price in that Price area. So investors are already considering that and have done so for years. So it's included in the long-term power price forecast, for instance. So what we can do is to optimize project layouts, for instance, with longer blades that captures more wind during low wind times. We develop hybrid projects where we can include, for instance, a battery component or a solar PV component in the same grid connection to make the combined project more valuable. Our project can also participate on regulating power markets, especially for the down-regulating markets to receive revenues also during hours with very low power prices. And we can also make partnerships with industrial consumers that are interested, of course, to buy electricity at low prices, for instance, for hydrogen production. The next question is what is the most profitable energy storage in the U.S. or standard onshore wind projects? And I would say that there are no standard projects. Every project is unique both when it comes to technology and markets. Sort of both energy yield and CapEx costs and operating costs differs a lot between technologies and markets. But on average, if we would put all Eolus' historical project margins and look at them from the quarterly reports, I guess we would end up at seeing a number like roughly around 15%. And of course, that must be true for also all new investments in best projects or other technologies. Otherwise, if it's not at that level or better, we should not do it. Next question is about the EU wind power action plan, if we see any meaningful benefits from that. And we do. A lot of the proposals and the decisions from the EU are very favorable, but it needs to really be implemented in the member states that can really boost the industry, reduce the costs of both development and the construction of projects that would lead to lower power prices for both industry and consumers. Next question is about prices on battery storage and the prices have fallen quite a lot during the recent year and if it has any effect on Pome specifically. It doesn't affect Pome. The price is fixed since a year ago. And on the other hand, the PPA was signed at the same time. So prices are locked in both on the CapEx side and also the operating revenues are locked in. But of course, it's a positive effect on all future battery storage projects if battery prices stays on a lower level. And of course, the revenues from PPAs, tolling agreements will depend on the supply of battery projects. There's also a question regarding Pome that we guided in the Q1 report that we expected to close the Pome project with the investor during the summer and that will now guide that we expect it to happen later. And it is a complicated project. It is a massive project with a CapEx around USD 200 million. Several of the investors that had the highest bids wanted us to secure both the construction financing for the project and to construct the project. So we decided to go that route since we think it gives us a substantially higher value compared to the risks, compared to just selling it off as project rights with the agreements. There are also some questions regarding the share buyback program that was approved by the Annual General Meeting during -- in May to make sure that Eolus has the most efficient capital structure. And currently, as you see in the balance sheet, there's a lot of resources invested in the projects and you see that from the net debt position. So I would say that probably introduction of -- or launching of the approved share back program would probably require that we sell at least some of the mentioned projects before it's launched. And final question is about the U.S. election. If it matters who becomes President after the election in November? Yes, of course, it can affect the market situation. The Inflation Reduction Act is important for the projects and for the financing system. Donald Trump has some speeches against the system, but we should also bear in mind that it is an agreement between the Democratic and Republican party and also that now a lot of the American enterprises are heavily relying on this way of financing projects and the large American corporations to set off some tax burdens, so our opinion is that it doesn't matter that much. It will be difficult to make radical changes in the system. And also when it comes to legislation, there's very much legislation that is dependent on state-level legislation and not so much on federal level. That was the last question we received. So thank you all for listening in today.

Thank you.