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

Hello, everyone. I'm here today to provide an update of Hexicon's developments and plans as well as providing an insight into the world of floating offshore wind, an industry forecasted an exceptional growth. My name is Marcus Thor, and I'm the CEO of Hexicon. Welcome. And the agenda for today is to first present a brief of both floating wind as a segment and Hexicon as a company. And this will be followed by an operations update and then ending with a look ahead. So let's get to it. And I'd like to start to outline the case for floating wind in general. On our quest towards net-zero emissions, the by far most important task is to transform the energy production. And the challenge here is to deploy renewable power at the significant scale that is needed and doing that in a way that people, industry and nature can coexist. And it's in this context that floating wind makes perfect sense and why I'm sure that floating wind will lead to be a significant part of the future global energy mix. In using floating technology, there is virtually an unlimited resource. Of the total global offshore wind potential, some 70% to 80% is estimated to line waters deeper than 60 meters. And using floating systems, one can be more flexible in siting projects not constrained by water depth and, as such, place them further offshore. This means higher average wind speeds and more stable winds, all in all, increasing capacity factors. And the floating turbines installed to date have recorded capacity factors up to twice that of onshore wind. The increased flexibility in siting floating wind projects further increases the possibility of avoiding impacting the environment, be out of site, and ultimately, enable sustainable coexistence with other maritime stakeholders, such as fisheries, commercial shipping, the military and so on. And lastly, floating offshore wind holds all the prerequisites to effectively be industrialized. And I believe that the 10 or so years that it took commercial projects of fixed-bottom wind to hit a more substantial decline of cost will be shorter for floating wind. And there is a tremendous growth expected for floating wind, and we are right now seeing a race to secure suitable seabed in attractive markets. And to briefly just put floating wind status in perspective, there are over 10,000 turbines installed globally on the seabed, whilst there's not even 20 full-scale installations on floating foundations. And I'm sure there's a window of opportunity right now where there are new markets popping up on a monthly basis that are -- such markets that are not yet fully regulated, meaning that one can secure seabed through bilateral applications to regional or central authorities. And these are the type of markets where we've been typically acted in, securing seabed ahead of legislation, just like we did well timed in South Korea as, an example. Over time, I believe, however, that more and more markets will go towards being fully regulated through high-priced auction schemes. So in parallel to securing seabed rights in unregulated markets, we are also establishing a slightly tweaked business model for regulated markets. And this, in a nutshell, is that Hexicon complements our generic skill set in Stockholm with the local skill set needed to come out on top in such a bidding process locally. And this skill set is then offered to porters capable of participating in such auctions in return for a slice of a project. And the U.S. is a great example of such a market where we are adopting this strategy. And as seen on this slide, for the next few years, it is projects of a few hundred megawatts that will come online when we talk about floating wind. And during the second half of this decade is when we'll also see gigawatt projects. And here, our project in South Korea with Shell, the MunmuBaram Project, is one of the first. On to Hexicon. And I'd like to view Hexicon as an enabler and accelerator of this shift into floating offshore wind. Hexicon is both a project developer and a foundation technology provider for deepwater offshore wind. We focus on the origination and early-stage developments of projects for high value creation, and we do this in a partnership model with both local and industry partners. We have our own IP for a dual turbine floating foundation, the TwinWind, which enables an efficient energy production in deep waters and with minimal footprint. Now these 2 legs of our business model provide independent revenue streams, but at the same time, being synergetic. Projects provide an update -- or sorry, provide an opportunity to install the technology, and having our own IP opens markets and project opportunities. And it's -- in the short term, it's a 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. And in our vision for 2025, floating wind is an important part of the energy mix. And Hexicon has capitalized on our early-mover position and evolved to a leading player within this sector with a tested technology that is the obvious choice for developers. By 2025, we aim to, for projects, have revenue-generating operations in the 3 key offshore wind regions being Europe, North America and Asia. For technology, have gone through the technology roadmap to the point where the TwinWind is verified and tested with all benefits confirmed; and on the financial front, for Hexicon AB's entire operations to be EBITDA positive. And this is forecasted to be achieved by '25 from project divestments only. The key building blocks to get us there are to continue to work with best-in-class partners; mature, optimize and scale the technology; getting it in position for serial fabrication; and enhancing the organization to be able to capture the value potential of this growing industry. And to describe where Hexicon is in its development, I'd like to see Hexicon's journey split in 3 phases. There is a first phase of mainly investing to grow a meaningful portfolio. The second phase is when having reached a diversified portfolio, especially in terms of maturity, to then also start realizing sizable divestments, and as such, recycle capital. And lastly, the third phase of also having the technology verified. And we are right now at the very end of the first phase, transitioning over to the second. And in fact, in parallel to pushing forward certain projects through some near-term milestones, which I'll come back to in a few slides, we are preparing for selected divestments as well. And what this slide shows is the typical value enhancement curve across the development of a project. Hexicon acts from inception through the development phase where the relative value increases the greatest, at which timing projects are later divested, will be decided on a project-by-project basis. And as mentioned in the previous slide, we are now at a point in time where our portfolio is well spread across this development phase marked in light blue here on this figure, which makes us plan for not only investments but also meaningful divestments across the near term. Then on to our technology, the TwinWind, which is essentially a triangular-shaped floating steel structure that carries 2 large wind turbines. It's moored to a turret at the front corner, which is a standard component from the oil and gas industry, and it's basically just a big bearing. And this allows the complete unit to freely rotate with the wind direction around that point. And that then ensures that the 2 turbines do not disturb one another. And this is the key feature enabling the use of 2 turbines on the same structure and the key part of our IP. And what 2 turbines on the same structure entails is that we can install more power in a given area compared to the competition, which reduces costs as well as further increases the possibility of coexisting with other stakeholders as we're occupying a smaller area. Ultimately, our 2 main design drivers are, one, the lowest possible cost of energy; and two, the lowest impact on the environment and surrounding activities. And the TwinWind is completely agnostic to the supply chain, including turbines, and it's fully scalable to the largest of turbines. So then on to an update of our own operations. And I'll start by summarizing the quarter in 3 different themes: One, the general geopolitical landscape as well as specific events, such as Nord Stream sabotage, continue to affect the way we look at energy supply and especially the importance of energy independence, which calls for growth in the domestic fossil-free energy sources. The second theme. We've been very active in pushing forward along our technology road map. And as communicated earlier, the government support win in the U.K. triggered an overview of both technology projects. That is both the TwinWind project in Norway and the TwinHub project in the U.K. And the decision was then made to focus on the TwinHub project in the U.K. only. And here, we have syndication efforts ongoing for an operational start in 2025. The TwinWay demonstration project in Norway will, therefore, discontinue. And a few main reasons are that the version of the TwinWind technology that we are proving is a larger commercial size in the U.K. when compared to Norway. So it proves more. Secondly, the government subsidy secured entails revenue for the U.K. project over 15 years; and three, the METCentre testbed area and that's where the Norwegian project was planned to be installed. And this is independently run by Norwegian authorities and they suffered some time delays. And this has reduced the one clear advantage in Norway with a shorter time to insulation. So I'm going to come back and dig into this a bit more later. As a third theme for the quarter, we have, during the period, made considerable investments into our core projects, specifically the MunmuBaram Project and TwinHub. And this was an exceptional period in terms of investments, and it's really about positioning ourselves ready for the next phase and getting us to the next phase sooner. So additional investments, on top of MunmuBaram, have gone into the TwinHub, and that's to obtain the definition and packaging that we deem necessary to close the syndication of funding partners as well as confirming the supply chain and getting technical work streams to a mature level. And in this context, we only during the quarter as well confirmed and communicated the preferred wind turbine supplier, being Mingyang. And here is our portfolio of projects and prospects. And the distinction between a project and a prospect is made by a number of criteria, the main one being site control. And below the table, I've provided both the gross and net numbers. And the reason for both being of interest is that the gross numbers reflect the potential volume of future technology sales, whilst the net related to how much revenue can be achieved through project divestments and it's within this portfolio that most of our efforts go to as well as where most of the company value sits and most of the forecasted near-term revenue will come from. And notably here is at two sites totaling just over 2,500 megawatts in Italy or since last quarter matured from being prospects to projects, mainly as for these, we've recently secured site control. And overall on the prospects list, we have progressed well in further defining such opportunities and most of them have progressed through the typical early works, such as site selection, establishing a plan to site control and permits and to get that plan under way. And I'll do a little bit deeper dive into some of the key projects. So in South Korea, we're, together with Shell, developing what is targeted to be the largest floating wind farm in the world. It will be roughly 1,300 megawatts and located outside the industrial city of Ulsan on the East Coast. And this project is well advanced with wind and seabed surveys completed and its so-called electricity generation business licenses in place for the full project. This project targets a final investment decision in early '25 and the key near-term milestone is to get into a grid connection agreement with the country's transmission system operator, Capco. And it's quite fascinating how this project has grown. So when we started this project in late 2018, we ramped this up with a handful of people at Hexicon and another 5, 7 or so in the Korean team. And I lived there for the first year to ramp things up. And over time now, as Shell continues to invest in this project, they also add resources to it. And today, Shell has over 30 full-time equivalents in this project. And what worth mentioning as well is that South Korea is the only country in the world that pays more for the electricity, the further off the coast projects are and also the deeper the water is. And this is a way by the Korean government to promote projects further off the coast and as such, avoid conflicts with other maritime stakeholders, such as fisheries and shipping because these activities are typically more intense closer to the shore. In Sweden, we're working together with Aker Offshore Wind or as of recently named Mainstream Renewal Power through the 50-50 joint venture for offshore. And we're developing multiple sites in Southern Sweden, both on the East and West Coast. And three of our projects here are currently in the Environmental Impact Assessment stage, following the successful completion of general consultations. And if we look at Sweden's net-0 targets by 2045 and the electrification of industry along the way, that calls for a range of opportunities to supply electricity from floating wind, examples through commercial PPAs, to produce hydrogen and to the grid. Now projects in Sweden will, however, take some time, but we're pushing quite hard forward, especially on the permitting workstream to submit the first permit application to the new government shortly after the new year. And one thing is sure, in my opinion, and that is the Sweden will, over time, need many different fossil-free energy sources and the offshore wind needs to be a part of it. And especially worthwhile noting is the offshore wind projects, whether that's floating or fixed, can be built in a relatively short time. We're talking about 2 to 3 years. Over to Italy, which is a rapidly growing market with very high ambitions. And Italy, as opposed to Sweden, but similar to Korea, Italy offers a process where one, through bilateral applications, can secure water rights early in the process. There is still definition needed in the overall legislation, but the prerequisites for a large floating wind markets are here. And Italy has clear offshore wind targets and almost solely deep waters, which means that it needs to be floating. We are here working together with Avapa Energy, a local onshore renewables developer, who has taken the step offshore with us. And here, we managed to recently secure site control for 2 large areas, in total, just over 2,500 megawatts, and we expect additional sites to be secured in the very near term. And onwards, this is one of the projects where we're actively considering bringing in additional suitable partners to either our joint venture or individual projects. Now on to the TwinHub project. This project was originally developed for Wave power. And after years of development, the owners couldn't get that to work and decided to repermit the site for floating wind and sell. And last spring, after thorough due diligence, Hexicon bought the site, including permits and the electrical infrastructure already in place. And our aim was clear. It was to reach the level of maturity and comfort needed to bid into this year's auction for the U.K. tariff scheme named Contracts for Difference. And that would, for the first time, have an allocated budget for floating wind. And that meant that we still had work to do. We needed to get a last and final permit for the project, the so-called marine license, that was achieved early last year, and we needed to run quite a lot of technical work and engage with the supply chain to ultimately determine how low we would be able to bid. And this work has been a key focus during the past year, and we were absolutely thrilled when the results were announced in early July. The TwinHub project was the only floating wind project to be awarded funding to the CfD scheme. And the scheme works in such a way that the project will receive a fixed amount of revenue for every megawatt hour it produces over 15 years. And with the offtake confirmed, a thorough review, again, of both the TwinHub project and the Norwegian TwinWay project was conducted. And as mentioned earlier, -- the decision is now made to focus our efforts on TwinHub only. And the 3 main criteria of this decision are: One, what do we verify? Well, the U.K. project contains larger platforms with larger commercial turbines when compared to the single unit in Norway, which means that it can be directly replicated to commercial projects. And adding to that is the location of TwinHub is in the most mature offshore wind market in the world. And secondly, economics. So the government supported revenue over 15 years, make TwinHub in the U.K. a more financially attractive projects. And lastly, schedule. This was a key argument in favor for the Norway project. However, during the year, METCentre has suffered certain delays. And again, METCentre is the testbed area on which we have a slot in. It's run independently by Norwegian authorities, and these delay, which are out of our control, has led to that advantage in time of Norway when compared to England now having been reduced. So the wind in the U.K. shifts our efforts now towards TwinHub, and we're pushing forward with predominantly design and engineering here and some other technical work streams as well as finalizing the supply chain to be involved. And I do expect to be able to announce new partnerships during the coming months, all in all, to advance these projects towards FID next year. Now lastly, just ending by looking ahead. As we're entering the next phase of our developments now with a diversified portfolio in terms of maturity, we'll prepare for selected planned divestments within the portfolio to start recycling capital towards additional greenfield developments, and that's really where our core skill set lies. We'll continue to push the TwinHub project forward, including working through this syndication with funding partners. And lastly, I want to mention that with an organization that have now grown recently, we're now finally a complete management team in place as well. The focus entering the next phase is to allow that organization to settle in and streamline it for maximum output. And with that said, I'd like to say thank you for listening and now welcome questions. Thank you.

Thank you so much, Marcus, for that presentation, and let's head into the Q&A session. And we've received some questions during the presentation, starting off with one focusing on the TwinHub project and the recent supplier there. Why do you work with a Chinese supplier when there are European players who are world leaders in the field?

Good question. And there's, I guess, in some ways, several answers to that and several aspects, pros and cons. So if you compare -- first of all, there's many different Chinese suppliers. And some of them have come quite far if you talk about adopting Western standards when it comes to health and safety or quality, et cetera. And Mingyang is one of the really top ones in that field, and we've seen various types of audits on both Mingyang and some other Chinese suppliers as well in the past. So that aspect, we feel fairly comfortable with. Secondly, Mingyang is a company, again, comparing to the 3 large ones, General Electric, Siemens and Vestas, that is more aggressively pushing for market position in not the least Europe. And that makes them more open to, as one concrete example, to work with us engineering-wise, to optimize the complete system. And we won't get that to happen, at least not in the earlier small-scale projects with the likes of Vestas. So Mingyang would then open up and work together with us on engineering, optimizing the system because there's no point in optimizing a tower separate from a foundation from the mooring system. So it all needs to work as one. And here, they're putting in a lot of efforts in this project.

All right. And one more about the TwinHub project. Can you explain the revenue support confirmed for TwinHub? And especially, please comment on any risk with current inflation rates.

Yes, absolutely. So -- and that's quite interesting where it is right now. So the revenue support confirmed for 15 years is actually indexed to inflation. And so there's definitely a cost element that runs the risk of higher cost as inflation grows, but there is an increase in revenue at the same time. And these, more or less, balance each other out. Now on top of that, and especially in the U.K. with this project, is we're actually seeing right now forecasted over the next few years, electricity prices that are higher than what we won the CfD level at. So we're looking at -- actually pushing the start of those 15 years of the government support revenue ahead as far as possible to just go on merchant price for the first few years because right now, it's forecasted to be higher than the CfD.

All right. And some media outlets claim that we might need to raise more capital already this year ahead of the prognosis. Is that true?

Well, first of all, the -- I think in relevance to this, the past quarter was investment heavy and purposely so. So it was to position ourselves and the portfolio ready for the next phase. And the next phase will include meaningful divestments and -- which are already planned. And worthwhile noting is that the investments made in Q3 does not, in any way, represent the standard level going forward. So on the contrary, it positions us to sooner get into Phase 2. So it was an exceptional quarter in that aspect. And so to get us to the next phase, we are, right now, considering best options to do that and in a way that is as good as possible for all existing shareholders. And this I feel comfortable in, and it will be communicated within short.

And one question here about the projects. When do you expect the projects that Hexicon is currently running to make a profit?