Hexicon AB (publ) (67T.F) Earnings Call Transcript & Summary

Hello, everyone, and welcome. And today, I want to give you all an insight into the world of floating wind. There is so much happening right now, not only in Hexicon but also in the industry in general. So my name is Marcus Thor, and I'm the CEO of Hexicon. And this is our operational update for the fourth quarter in 2021. Let's go to Slide 2, please. So the agenda for today is that I'll give you all a brief of Hexicon in terms of what we do and our business model, followed by a market update and an update of our operations. And I'll be ending by looking ahead. So let's get to it and turn to Slide 4, please. At the start off, I want to give a brief of Hexicon. Hexicon is both a developer and foundation technology provider for deepwater offshore wind. And when it comes to the project development side of it, we focus on the origination and early stage development of projects. And we do this in a partnership model with both local and industry partners. And by focusing on early stage developments and sharing risk and financial burden with partners, that's our way of keeping the capital intensity low of our operations and that's how we're able to scale the business model. Hexicon is currently developing projects in key offshore wind markets across Asia and Europe. And we're looking to add new markets to that list within short. We have our own IP for dual turbine floating foundation, the TwinWind, which enables an efficient energy production in deepwaters with minimal footprint. As a technology provider, it's about ensuring that, that TwinWind foundation technology is kept cutting-edge, protected and adopted for product specifics. It's about maturing the technology for it to be used at large scale. And these two legs of the business model, being both a project developer and a technology provider, are strongly synergetic. Not only that perhaps obvious that project developments and tail opportunities to install the technology, but the other way around is also a fact, that market opportunities arise, thanks to having our own patented technology. In the short term, over the next few years, it is the value increase of the project portfolio that will contribute most to the value build of Hexicon. This will then over time change to more coming from the technology offering as this matures and is implemented in greater volumes. Over to Slide 5, please. And I'll jump straight into this. This is where we're heading. So this is our vision and goals for 2025. And first of all, it is important to recognize that Hexicon is on a long-term journey. The lead times involved in the offshore wind space are long, regardless of it being projects or technology developments. What the industry offers, however, in combination with Hexicon's position in it, is an opportunity to grow this company into something really meaningful. But that will take a few years. There's no way getting around that. So Hexicon is a company with an enormous opportunity with its early position and by being exposed to the value potential in both project developments and technology supply, again emphasizing that takes a few years. So in our vision for 2025, floating wind is an important part of the energy mix. And Hexicon has evolved from its early position to a leading player within this sector with the technology that is the obvious choice for developers. And for goals 2025 more concretely, weighing to within projects, have revenue-generating operations in the 3 offshore wind regions, being Europe, the U.S. and Asia; and for technology, have gone through the technology road map to the point where the TwinWind is verified, tested, confirming all benefits; and on the financial front, for Hexicon's entire operations, to be EBITDA positive. How are we then going to get there? Well, the key building blocks to get us there are to continue to work with best-in-class partners, to deepen the collaborations that are in place already and adding new ones. It's about maturing, optimizing and scaling the technology, ultimately getting it in position for serial fabrication, and continuing to grow the organization to be able to capture the value potential of this growing industry and extending it to the key geographies around the world, where we are active. Slide 6, please. Hexicon is very focused on building a pipeline of projects in attractive markets, and we're doing this for several reasons. First of all, it provides a revenue stream in itself as project value is enhanced through the development phase that then can be monetized through developer fees and product divestments. And this is ahead of our technology being verified and implemented at larger scale. Secondly, each project developed is an opportunity to license the technology down the line. The long lead times that offshore wind developments are all about means that a project initiated today might not make its technology decisions until several years later. And lastly, by putting a core skill set to use of originating early stage develop -- sorry, originating and early stage developing projects in core markets and with Tier 1 suppliers and partners, that's how Hexicon builds its brand as a credible and leading offshore wind player in the floating space. And let's remember that floating offshore wind is at its very beginning of an expected tremendous growth. And our portfolio is well positioned to be part of this upcoming first round of commercial-scale projects that we do expect during the course of this decade. And we pride ourselves with the work done to date of having already achieved a significant portfolio and several solid partnerships that we've created along the way. Slide 7, please. Our TwinWind foundation technology is essentially a triangular-shaped floating steel structure that carries -- and this is the differentiator, it carries two turbines on the same platform. It is moored through a turret at the front corner. And that's a standard component from the oil and gas industry, which is basically just a big bearing. And this allows the complete unit to freely rotate around that point. And that's the key enabler to using two turbines on the same platform and ensuring that they do not disturb one another. And what two turbines on the same structure entails is that we can install more power in a given area when compared to the competition. That reduces cost as well as even further increases the possibility of coexisting with other stakeholders as we're occupying a smaller area. Ultimately, our two main design drivers are lowest possible cost of energy and the lowest impact on the environment and surrounding activities. And the TwinWind is completely agnostic to the supply chain, including turbines and is fully scalable to the largest of turbines. Slide 9, please. Floating wind as a market is really expanding at an incredible rate right now. And as a market update, I've today chosen to mention three significant events. First off, here in Sweden, just a week ago, the Swedish government announced a new Director to the Swedish Energy Agency to produce a new and increased marine spatial plan with an annual target of an additional 90 terawatt hours of offshore wind. And although there's certainly certain information that I would have wished for, for example, the timings associated with this goal, I still look very optimistically at this. Because let's remember, this is the first time we've seen a significant goal for offshore wind in Sweden. Over to the U.S. A few months ago, the Biden-Harris administration made some significant announcements, a lease auction program over several years and 7 different auctions. And in fact, the first 1 out of those 7 is today in the state of New York. And the momentum that has gathered recently, we think, leads to the timing being here and how to position ourselves in the U.S. And we were, therefore, delighted to announce the recruitment of Adrienne Downey as our country manager for the U.S. and Canada a few weeks ago. She most recently comes from New York state's nation-leading offshore wind program with a solid network in both state and federal governments. And lastly, we can't give a market update without mentioning Scotwind. Over to Slide 10, please. So Scotwind is the most recent Scottish government lease auction, which companies from around the world have been preparing for years. This was included a few weeks ago with astonishing results of 25 gigawatt offshore wind and 15 gigawatt of that being floating. A few notables within that, in addition to the scale of it, it's worth noting that Danish Ørsted, the world's largest offshore wind developer, is now for the first time part of a floating project. And if you also look at the option fees that developers paid for the areas, those -- that price difference between fixed bottom offshore wind sites and floating wind sites was very little. So the industry values deepwater sites highly even though it is still a lot more immature. And in this context, it's worth mentioning and noting that there are over 10,000 turbines on the seabed around the world, but there are only 18 on floating foundations. Hexicon has not been part of any of these bids, which has been a conscious decision as we've needed to focus elsewhere over the last 2 years. However, what this means for Hexicon is that there is now an additional 15 gigawatt of potential to supply our technology. And the lead times involved in Scotwind mean that we will have verified and proven our technology in advance of any technology decisions being made in these Scotwind projects. And over to Slide 12, please, I'll go into an operational update. So across the period, we've taken some important steps forward. And some of the main ones during the fourth quarter are that in South Korea, in our Project MunmuBaram, together with Shell, we have been awarded our first so-called Electricity Generation Business License, basically a power permit. And that's 1 out of 3. And the subsequent 2 ones, we're expecting within very short. In the TwinWay demonstrator project in Norway, we, during the period partnered, with global contractor, Worley, to commence the engineering and subsequently the fabrication of the demonstrator units. In Italy, an expected big offshore wind market and one of the main recipients of the EU Green Deal, we, during the period, partnered with Avapa Energy to develop floating wind opportunities. And lastly, CoensHexicon secured 4 new areas in South Korea with a combined potential of 1,700 megawatts. Over to Slide 13. This slide is to show our current portfolio of both projects and prospects, and reminding again you all that we focus on the early stage developments for high value creation. And we do this in particular in markets that are not yet fully regulated. Such markets where one can obtain seabed rights through bilateral applications is where we with local partners lead the early stage developments. To then grow this into what it is today is a result of partnering relatively early with industry player that adds both competence and funding. And I've, in this slide and table, provided both the gross and net numbers for the portfolio as the net number is relevant for project development revenue, that is divesting shares of our portfolio, whilst the gross number is relevant for future technology use, and therethrough, the potential for license revenue. And in subsequent slides, I dive a bit deeper into the defined projects. And we'll, for sure, have reason to get back to you all with updates on several of these prospects as well within short. So Slide 14, please. In South Korea, the government has recently increased its support for floating wind, but not only as before, offering a premium within green certificate schemes to projects further off the coast, but now also for projects in deeper waters. And encouraged by the government's growing ambitions, the project is pushing forward hard and now targeting to be the first large project in the area to reach financial flows. The project during the period secured its first Electricity Generation Business License and 2 more are expected to be awarded within very short. And combined, they provide the power permits needed for an estimated 1,300 megawatts of floating wind. The seabed over the complete project area has during the fall been investigated through so-called geotechnical and geophysical surveys. And that is a major undertaking. For example, it includes drilling down into the seabed and taking soil samples. And to give you a feel for the scale of this, this complete project area is roughly the size of the entire municipality of Stockholm. Near-term work in the project includes working towards a grid agreement as one of the bigger milestones during the year and continuing to ramp up the Environmental Impact Assessment process. Over to Slide 15, please. Up in North Scotland, the Pentland Floating Wind Farm that we are working on together with Copenhagen Infrastructure Partners is in the middle of the permitting work, a very focused work on the Environmental Impact Assessment. And that has actually just recently been amended to include even bigger turbines, now with the rotor diameter of up to 260 meters. And it is the completion of the EIA and the subsequent permit application that is the main focus of this project looking ahead. And subject to the timing of all this, the project aims to take part in one of the upcoming U.K. government subsidy auction rounds that previously was planned for every second year and is now being intensified more regularly to probably every year going forward in the U.K. Over to Slide 16, please. In Sweden, as mentioned in the market update, the debate is hotter than ever right now around offshore wind. And it's looking to be on top of the agenda for the upcoming elections later this year. And we're pushing forward hard here. Our 50-50 joint venture with Aker Offshore Wind, named Freja Offshore, has during the period continued the developments of three large areas on both coasts of Southern Sweden. Those are named Mareld on the west coast and Dyning and Kultje on the east coast. And following the public consultations for these three sites, the ramp-up and initiation now of the Environmental Impact Assessment phase is currently ongoing. Over to Slide 17. The only way to reach a commercial-scale use of our TwinWind technology is to verify it in full scale and prove its benefits. This burden and proof lies with us. And the technology road map for Hexicon is a two-stage approach. The proof of concept will be achieved within the TwinWay project in Norway. In Norway, our demonstrator project is moving full steam ahead. The project will be a single demonstrator using two Vestas 3-megawatt turbines. The project is at a level of definition needed to start planning the fabrication, and this is ongoing right now. That work is led by our fabrication partner, Worley, which I was extremely pleased about to conclude as they provide the experience and credibility as a Tier 1 contractor to execute that fabrication phase. And the project is on track to start the fabrication very late this year and an operational start at the end of next year. And slightly behind the TwinWay project in Norway is the TwinHub project in England. And this project is a so-called pre-commercial array, which is basically a stepping stone project towards commercial-scale deployment. The English project is in active phase right now, preparing for the upcoming government subsidy auction, which, for the first time, has an earmarked budget for floating wind. And this work is done in partnership with Bechtel, which is a U.S.-based global contractor that will also fabricate this project in England. And as a stepping stone, this project is really ideal. It sits in the most mature offshore wind market in the world. And it sits in a region, being the Celtic Sea, where The Crown Estate has recently announced new leasing rounds of 4 gigawatts of floating wind. So the longer-term ambition is to use the knowledge and regional network that we gained through TwinHub to build the pipeline of additional prospects in the Celtic Sea. So these two projects are quite different in nature and complementary in what they provide Hexicon. The TwinWind project in Norway is a true proof of concept, using a single foundation and with secondhand turbines as a way to reduce time and cost. The location in Norway is about 200 meters of water depth in harsh North Sea environment. And the TwinHub project in England, our stepping stone project towards commercial-scale deployment, is in a different set of environmental parameters when compared to Norway, consist of two foundations, larger turbines and stand on its own commercial ground. So Norway gets us to a verified full-scale version, demonstrating the performance and benefits of the technology, and TwinHub project in England further expands our learnings of how the technology scales and operates in a wind farm scenario. And to conclude, over to Slide 18, please. And looking ahead near term, we'll continue to focus on maturing the technology and developing our project portfolio. With regards to the technology, it's very much preparing the design in the TwinWay demonstrator project for construction start towards the end of the year. A significant focus is also placed on developing current projects and prospects further to enhance the portfolio value to provide long-term pipeline of opportunities to license the technology. And we'll continue to originate and develop new opportunities in attractive markets. And we'll continue to ramp up our organization and capacity, both locally here in Sweden but also abroad, to make sure that we capture and can keep up with enormous pace of the developments that floating wind market is now experiencing. So with that, I'd very much like to thank everyone for listening, and would now welcome any questions there may be. And I would also like to take the opportunity to say that I am accompanied here by our CFO, Sebastian Robson, for the Q&A session. Thank you very much.

I just want to check with the operator. We don't have any in the e-mail, I think, at the moment. If there are any other ways to get questions through. Okay. Just if you're hearing me, operator, if you are seeing any questions that have not come through e-mail, we haven't seen any in our e-mail at the moment. So if that's not the case -- so here, we have one question. Regarding Scotwind and the potential, with 15 gigawatt floating wind announced, what is the potential for Hexicon here in terms of number of turbines that you could supply? And what is the revenue potential for you? Well, I haven't done that -- and this comes from Sparebank 1 Markets from Tommy Johannessen. And we haven't done that math, to be honest. But let's just say it's enormous. 15 gigawatt, and out of all these projects, most -- a lot of the global developers are there and it's a really big number. So I mean, imagine if we were able to capture just a portion of that, it could quickly go to hundreds of turbines. But we haven't done the math, so I'll have to get back to you with numbers on it. The importance is to recognize the scale. And it's important also for Hexicon to recognize the timelines involved, which means that we have ample of time to verify our own technology. And the second question here is could you shed some more light on your expansion plans in North America? How big could this market be for you? And what can we expect on news related to North America going forward? So first of all, I think that North America is one of the really big long-term markets. And what's happening now with the Biden administration deciding on the multiple lease auctions over the next few years is to make sure that whatever happens after his 4 years, if he continues in office or not, those auctions are there and decided upon and set. So he's really speeding this up, that offshore wind will happen in big scale. So it's a really big in terms of market. In terms of the way the market is and the prerequisites to operate in the market, it is slightly different than several of the markets that we have been active in so far, where we talked about Hexicon leading and developing early stage developing projects in the more unregulated markets. The U.S. is certainly not an unregulated market. With BOEM deciding on lease auction in areas, this is the place to go place your bids. So it's a different model, where a company of Hexicon's size is very unlikely to go in by itself and lead and think that they can have a chance of winning an auction. So again, it's a partnership approach. And I think, if anything, which was part of the question, what one can expect in terms of news for the North American market, it's around partnerships that creates the possibility to partake in these future auctions. And let's see, one more question, it was Sweden recently launched increased floating offshore wind plans. How does this impact your projects in the country? What is the next step for you here? Well, certainly an increase, and as I mentioned, the first time we've seen a target like this for offshore wind in Sweden, so that is very positive, still a lot of uncertainties. But the fundamental need and the driver for us in Sweden is the huge electrification of Sweden as a society and industry and the shortage of good solutions to provide that electricity. This is offshore wind in general. And we think floating wind makes a lot of sense in the Swedish market to be part of that energy mix going forward. So we are continuing full speed ahead on these three sites, two on the east coast and one on the west coast.

[Operator Instructions]

And here is -- one more question here. What about Italy, the growth potential here and steps forward? Well, what we're expecting in Italy -- and there is a reason for joining is that we are seeing a lot of attention on it being one of the main recipients of the EU Green Deal, and that we expect later in the year potentially already for legislation to be in place in Italy. So this is an early stage positioning that we think is the right timing now. And our partner, Avapa Energy, have been very successful in the onshore space. So this is a typical partner that we're looking at for the early stage developments, where balance sheet is not the most important thing, but it's the experience and network locally in that market to develop renewable projects. So we're full speed ahead in the site selection phase and defining some of the top-ranked sites at the moment. And those are all the questions we have in so far.

Yes, I think there was a problem from other operators, but that's it.