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

Welcome to the Eolus Q2 2025 Earnings Call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Per Witalisson; and CFO, Catharina Persson. Please go ahead.

A warm welcome to this presentation of Eolus results for the second quarter of 2025. Your presenters today will be myself, Per Witalisson, CEO; and Catharina Persson, CFO. Eolus is the leading pure-play developer shaping the future of renewable energy. Please note that we, during the second quarter changed the company name from Eolus Vind to just Eolus to reflect that our business targets several renewable techniques and energy storage. We are positioned to take advantage of structural growth in renewable electricity demand resulting from the worldwide electrification and decarbonization trends. We apply our pure-play business model to create value efficiently in every step of developing our diversified 26 gigawatt portfolio of onshore and offshore wind, solar PV and battery energy storage projects across 6 different markets. Leading energy investors, PPA offtakers and OEMs trust our 35 years of proven experience executing and optimizing market-leading energy assets. I will begin with a walk-through of the Q2 highlights and give an update on our portfolio. Catharina will follow with a closer look at the financials. And I will then conclude the presentation with our view on the near-term outlook before we move to Q&A. And I'm now turning to Page 5 in the presentation. This quarter, we delivered SEK 364 million net sales with an operating loss of SEK 74 million. Despite the positive contribution of the Pienava transaction, provisions following a decreased expected project margin in the Pome project due to a delay caused a loss for the quarter. There are also some negative FX effects in the -- affecting the operating profit but where we have a positive effect in the financial items. Eolus' business models leads to large quarter-to-quarter swings in revenues and earnings since transactions are timed to market demand, buyer needs, permitting milestones and grid connections. And this means that quarterly estimates are inherently uncertain. And also -- even analysts who know our projects well face a challenge in predicting in which specific quarter handover will close or how deals are structured. So annual numbers matter much more. Our value creation and financial performance are best measured on a rolling 12-month or longer cycle basis where the effects of timing even out more. So consensus should be read with this in mind and previews provide a useful benchmark but they should not be overinterpreted as precise short-term forecasts. Catharina will go into more detail on the numbers later in the presentation. We're moving to Page 6, showing our project portfolio that is the core of our value creation, covering more than 26 gigawatts of projects diversified across markets, technologies and level of maturity. And we added more than 0.5 gigawatt of projects during the quarter and made good progress in existing projects overall. And one particularly interesting addition is land secured for battery energy storage in Southeastern Sweden. It is an early-stage 100-megawatt BESS positioned in a good connection spot in SE4, which could provide supporting services to the national and regional grid. So we're excited to finally bring our experience in grid scale BESS projects to the Swedish market. We move to Page 7. So in the second quarter and thereafter, we showed resilience despite soft market conditions regarding new transactions. We sold the 147-megawatt Pienava project to Latvenergo. That is our first project in the Latvian market and construction started immediately after the transaction was concluded. After the quarter, we also sold the project in Fageråsen, which is a joint venture with Dala Vind that we sold to OX2. That offloaded significant upcoming grid connection commitments, releasing resources to recycle into further project development. There is a persistently slow market for projects in Northern Europe, and therefore, PPAs are becoming an increasingly important attractor. Regarding the Pome, the project and the delay, the project has reached a degree of completion of 85% at the end of the quarter. And therefore, the anticipated completion and handover is delayed from Q2 and expected to be completed and handed over during the second half of 2025. The project is fully constructed as of today. Commissioning have been performed. There are some final tests and some final approval from the authorities before we can hand it over. It is like a EUR 200 million project when it comes to CapEx. So of course, any delays late in the project has an impact on project margins. And we have negative impact on expected project margin and consequently also Q2 operating profit due to the provisions made but important to emphasize that Pome remains a profitable project overall from start to finish. So we have adjusted the remaining expected cash flow contribution down to USD 10 million. Regarding refinancing, SEK 550 million senior secured green bond issue successfully closed despite bond market turbulence during the spring. And in addition to that SEK 175 million revolving credit facility and up to a SEK 1 billion project finance facility signed in this refinancing package. This increases our flexibility and gives us more flexibility and for taking on our larger portfolio. We turn to Page 8. Our progress in the value creation pipeline continued steadily in the second quarter, except for the delay of Pome. We have almost 1.5 gigawatt of value in mature projects that we aim to realize over the coming 3 years. Fågelås, Boarp and Dållebo, the construction proceeded according to plan. We have made continued progress on securing a PPA for the projects and are in exclusive negotiations. And this PPA would lock in long-term revenues and strengthen the commercial attractiveness of the projects. The next U.S. battery project, Roccasecca is proceeding in line with plans. We have secured equipment suppliers with appropriate clauses handling potential changes in trade tariffs and we have made good progress on negotiating a tolling agreement, which is the equivalent to a PPA for a BESS project. Fageråsen was sold to OX2 after the quarter and OX2 assumes all rights and obligations of the project and will continue development with the support of Eolus and Dala Vind. CapEx reimbursements and significant additional payments are -- to Eolus are conditional on regulatory approvals and subsequent financial investment decisions from the buyer. We flip to Page 9. Looking now at the overall portfolio development. We added a net 675 megawatts to our development portfolio in Q2 with product -- with new projects in the U.S. making up the largest part of the increase. Pienava proceeded to construction and we removed the divested U.S. solar and PV project, Centennial Flats from the late-stage portfolio but remaining expected revenue from that projects are included in the order backlog. And changes in the portfolio are overall in line with our strategic focus on prioritizing value creation. On Page 10, I'll end this session -- this section with a look at progress towards our financial goals for 2025 to 2027. The negative operating profit in Q2 puts us at SEK 90 million cumulative EBIT. So that's somewhat below the track towards the 2027 total target. Return on equity is at 19% measuring the rolling 12 months period. And our equity-to-asset ratio remains high at 59%. I'll now hand over to our CFO, Catharina Persson, for a walk-through of the quarter's financials.

Thank you, Per and hi, everyone, joining the call today. And I start on Page 12. Our net sales for second quarter amounted to SEK 364 million, yielding an operating profit of minus SEK 74 million and earnings per share of SEK 1.51. At the close of the quarter, our equity-to-asset ratio stood at 59%. And compared to 2024, our sales increased but our profit decreased in quarter 2. Turning to Page 13. We have some overall guidance [ to read ] in our statements, reiterating some points made by Per earlier in the presentation. And as a pure-play developer, our revenue is derived mainly from large project sales. This means key reporting figures can be lumpy and vary widely between reporting periods. EBIT will rise considerably in the quarter of divestment and construction management revenue recognition. And we capitalize project costs on our balance sheet under projects under development, projects under construction and advanced payment to suppliers. And project CapEx for equipment and construction services increase the working capital significantly when we build on our own books. And then working capital is then rapidly reversed when we divest project with high capitalized CapEx like Pome in Q1 2025. And our net debt position is similarly affected. It increases with project cash outflow and use of construction credit in projects that are under construction and then decreases as the project debt is either [ amortized ] from proceeds or transferred to a new owner when the project is divested. Generally, we advise investors to analyze our business over longer periods, rolling 12 months can capture the full investment and sales cycles. Nevertheless, I'll go through the changes in quarter-to-quarter numbers for the purpose of clarity. And just remember that this quarter-on-quarter analysis is not all indicative of a run rate. And on Slide 14, we show change in the operating profit between Q1 and Q2 2025. And last quarter, we divested Pome at 75% degree of completion. So there was a large and expected decrease in revenue in our second quarter. And underneath this change, revenue recognition from Pome and proceeds from Pienava share purchase agreement made a positive contribution. And Pome revenue recognition contributed with 10% progression in the quarter, going to 85% in total. And correspondingly, the level of cost flow through our income statement was much lower too compared to Q1. What this change masks is the negative contribution of the provisions made due to the delay to Pome and lower expected project margin. But all in all, we reached a negative SEK 74 million operating profit for the second quarter. But on a rolling 12-month basis, the operating profit was SEK 433 million in quarter 2. And next slide, looking at the balance sheet on the asset side. We opened the quarter with total assets amounting to SEK 2.841 billion and ended at SEK 2.843 billion and that's a minor net increase of SEK 2 million. The changes during quarter-to-quarter are due mainly to investments in Fågelås, Dållebo and Boarp and transfer of Pienava to Latvenergo. And projects under construction increased by SEK 325 million and that's also mostly due to the construction CapEx in Fågelås, Dållebo and Boarp projects. We invested a net of SEK 40 million in development portfolio value creation even as the Pienava project left the balance sheet. And advanced payments accounts receivable decreased as we took delivery of equipment to Fågelås, Dållebo and Boarp projects and transferred the Pienava project to Latvenergo. On the equity and liability side of the balance sheet, there was a slight net decrease in total equity due to negative operating profit and the refinance increasing current interest-bearing liabilities. Accounts payable decreased as we settled CapEx payments in Fågelås, Dållebo and Boarp. And at the end of second quarter, our equity-to-asset ratio amounted to 59%. Turning to cash flow on Page 17. Opening cash balance for the quarter was SEK 200 million and closing cash balance was SEK 152 million. Operating profit, tax and interest payments contributed negatively to operating cash flow before changes in working capital. And then investments in Fågelås, Dållebo and Boarp contributed to an increase in the working capital for the quarter. Net flows from financing activities was dominated by refinancing and bond proceeds and amounted to plus SEK 278 million but also includes payout of dividends during the quarter of SEK 19 million to shareholders. Finally, looking at projects under construction on Slide 18. Pome has progressed to 85% degree of completion. Pienava has been added at 0% degree of completion following the sale in Q2. And for the Pienava project, the project management agreement differs somewhat from our usual construction management agreement, mainly that Eolus does not view any downside construction risk. And Pienava revenue will therefore be recognized based on predetermined milestones and project management service side as the project progresses. And then handing it back to Per for a comment on the near-term outlook. Thank you.

Thank you, Catharina. I'll now turn to Page 20 of the presentation. We will continue to focus on advancing sales for Fågelås, Dållebo and Boarp since we have a lot of deployed capital into those projects. They are -- in total, they have a CapEx of between SEK 1.4 billion and SEK 1.5 billion. We are making good progress on PPA connected to the projects, which will lock in long-term revenue and significantly derisking operating cash flows. Our late-stage Roccasecca BESS project in Nevada will continue to make progress during Q3 with focus on securing a tolling agreement and to advance the sales process for the project. And of course, in the U.S., our team is working round the clock to mitigate the delay, complete commissioning and handover to -- of the Pome to our customer. In the value creation portfolio, we will continue to balance investments toward prioritized projects, market and technologies in line with our business plan. Overall, we will pay close attention to our financial position and optimize sources and uses to current market conditions while aiming to reduce the corporate net debt. Our new construction credit facility opens up opportunities to deploy nonrecourse debt in mature construction projects going forward when deemed attractive. Thank you for listening. We will now proceed to Q&A.

[Operator Instructions]

Lara here from ABG. You mentioned that the delay in the Pome project reduced your operating profit in the quarter. Is it possible to quantify the effect of the provisions on EBIT?

Lara, we -- according to the report, we expect an overall profit margin of the project of USD 10 million. And we have then accounted for a degree of completion of 85% so far.

Okay. And just to clarify, so the remaining USD 10 million you are expecting to be paid out is project margins. So it's not a reimbursement for project costs?

That is expected remaining cash flow. And since we are accounting for according to the degree of completion method we have already accounted for 85% of the expected project margin. So we have a larger expected cash flow coming than remaining project margin.

Okay. Great. And just a question on Dållebo, Boarp and Fågelås. When can we expect this to be divested? And do you expect to sell the project as a turnkey project since you've already started the construction?

Yes. The sales process is ongoing. It's been for quite a while. So that, of course, shows that the market is soft. All projects are constructed. All of them have now produced their first kilowatt hour of the power. So we are, of course, looking to conclude that transaction as soon as possible during the autumn, which would free up a lot of cash to both reduce our net debt and to give us opportunities to invest in the upcoming pipeline.

Great. And then a question on Roccasecca, it's a similar project to Pome. Should we expect a similar strategy as Pome that you would construct the project and then sell it during or after completion? Or how does this seem to be on that side?

We're looking to do an earlier sale to sell project rights. So we're looking to secure nonrecourse project finance to -- and to sell the project much earlier than the Pome project with a more limited construction scope for Eolus and to secure the tax equity part of it along with the transaction.

The next question comes from [ Marcus ] from [indiscernible].

So I have plenty of questions. And unless you have plenty of American investors on the line, I prefer to both ask the questions in Swedish and the answers in Swedish if possible. Is that okay?

Yes. Yes, okay, for us.

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The next question comes from Orjan Roden from DNB Carnegie.

Orjan Roden, most of my questions have been answered. But can you elaborate a little more on Pome situation? Would you claim that this was very specific to this project? Or should we make any read-throughs to other U.S. projects? What do you think?

It's mainly, of course, the life of a project developer that all risks cannot be so easily put to the investor or other parties. Of course, there are learnings for us in the management and for -- and in our U.S. part of the organization to continue to try to limit these risks. Of course, they are -- there are specific -- project-specific reasons for it as gas emission and the delayed final permits. But mainly, it is when the project size are that large, like EUR 200 million projects, the -- of course, the interest costs in the late phases amounts to -- easily gets to really large amounts that have impact on the margin.

Okay. And final question on Fågelås, Boarp, Dållebo. When do you think production is at full speed? And do you think that is the key trigger to get this project sold? Or is it anything else that could be obstacle in the process?

Yes. We expect the projects to be in full commercial operation during -- at end of October, I would say. And the key trigger for the sales process is definitely to conclude the pay-as-produced PPA that is under exclusive negotiation.

The next question comes from Erik Oberg from DNB Carnegie.

Erik Oberg from DNB Carnegie Credit Research. Following up on Orjan's last question there with regards to the 3 onshore wind parks. If you hold them until completion, what's the remaining project equity that Eolus needs to provide to bring that -- those 3 wind farms until completion which you can't draw from the new construction level facility?

With the PPA in place, I would say that we could have like 60% bank debt leverage of the SEK 1.4 billion, SEK 1.5 billion. The remaining is the equity that comes in both in the form of true equity and the use of the bond proceeds. And we have until today, there are roughly SEK 1.2 billion deployed in the -- in -- accumulated in the in 2 projects -- in the 3 projects. Sorry.

But sorry, following up on that one. In the balance sheet, we see the book value of projects under construction and that is around SEK 600 million, right?

Well, we said what we have deployed so far. That's numbers during August included as well.

And in the balance sheet, it's split between the 2 lines with different headings.

Construction -- projects under construction and advanced payments to suppliers. You should add those 2 together.

Got it. But with that said, how much project equity do you need to invest to bring them until completion?

From end of the July -- end of June, I mean, SEK 150 million or so.

Something between SEK 100 million and SEK 200 million.

Okay. And given the somewhat weaker divestment market tied to those projects, do you consider to sort of change your approach here to actually build on your own books when those projects seems to be harder than expected to sell? I mean, risks seem to be a bit higher and you're not fully compensated for it. How do you go about that?

It is our general aim to sell earlier to reduce constructing risk but we also need sometimes to derisk projects more and to be able to secure the PPAs, for instance. But our general aim is to sell earlier to have investors finance the construction. But the construction facility that we now have gives us the optionality to proceed through construction as well if we deem that a better path.

Okay. On Pome, when did you conclude that the project was about delayed?

It was late June, I would say and the beginning of July when these issues on that site appeared.

Okay. I think this question was asked before but really I didn't grasp the answer. But what was the provision recognized in Q2 related to Pome?

We don't announce that direct number. But we have said that we have a negative result during Q3 on EBIT level that regards to the Pome project.

So we've adjusted the total expected margin for the project to roughly USD 10 million and accounted for 85% of that accumulated until Q2 then. And since we have had recognized a higher expected margin in Q2, we had to make those provisions in Q2. So rough numbers. It has impacted like minus [ SEK 50 million ] in Q2.

I think you touched upon this as well early in the call, but what was the revenue recognition related to Pienava now in Q2?

The full contract, the selling of the shares was accounted for. And the remaining to be accounted for is deferred payments connected to that agreement and also the services we will provide under the project management agreement.

Yes. But how much revenues were recognized in Q2 and mean what's remaining of the share purchase agreements?

And once again, I would say that the full contract has been accounted for the share purchase agreement, but we have a couple of deferred payments are full that we will account for smaller parts during 2025, and then when the project reaches operation expected to happen in 2027.

And none of those are possible to quantify in any way?

Rough numbers once again here. We have recognized a project margin of roughly SEK 50 million for the Pienava so far in Q2.

Okay. And what's the size of project management agreement tied to Pienava?

The project management agreements compared to the other projects, it is a much more limited scope, quite low revenues and very limited risks for us. So the main revenues and project margins will come additional payments from the share purchase agreement as milestones are achieved.

And the largest one is when the project is completed.

Yes, expected in 2027.

Okay. And the more limited product management agreement scope, should we see that as a template going forward as well? I mean this -- the contract management agreement has been a great P&L driver historically. Should we see the more limited approach here and well, less risk as well as the new template or is this a one-off?

It's another tool in the toolbox suitable for more limited risk exposures. But I expect that we will see both contract structures going forward due depending on the risk appetite, both on the customer side and on our side. But this Pienava is a large project in a very small market in Latvia. The customer is the state-owned utility. So it was definitely a structure that fitted well for that project.

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

So this is Harald Cavalli-Bjorkman, Investor Relations Manager at Eolus. We have a very limited amount of time left on the webcast. So I please ask you to get in touch with me via e-mail or by telephone to -- if you feel that there are any further questions you'd like to ask, I'd be happy to help you resolve those. My contact details are available in the press release and in the report itself. Handing it back to Per here.

Yes. Thank you, Harald and thank you all for joining the conference call. And I just want to wish you all a nice day. Thank you.

Thank you.

Bye.