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

Hello, everyone. Thank you all for joining. I want to provide an update of Hexicon's developments and plans as well as providing an insight into the world of floating offshore wind. My name is Marcus Thor, and I'm the CEO of Hexicon. Welcome. The agenda for today is to first present the brief of both floating wind and as a segment and recent market developments. And this will be followed by an operations update, and I'll be ending with a look ahead. So let's get to it. And to start off, is a high-level summary of our key activities during Q4. On the financial front, very pleasing was that we put in place a convertible loan of SEK 82.5 million, which shall be seen as a bridge facility to get us into the next stage of our journey. And this next stage that we are now in will contain partial divestments of selected projects, processes that have already started. And looking at the cash outflow across the year, just over half has gone towards developing the project portfolio and just shy of 40% towards the technology, and I'll come back to this in a bit more detail. Operationally, we've crossed some big milestones across our portfolio, especially in Italy, where we've secured site control for an additional 2.5 gigawatt as well as grid capacity for over 7 gigawatts. And this work is conducted through our 50-50 joint venture with local developer Avapa Energy. Over in Korea, within our MunmuBaram project together with Shell, we'll now enter a preferred supplier agreement with Vestas, which is their first agreement of the sort for a commercial scale floating wind farm. And lastly, the European patent office announced its intention to grant us our patent application for our unique thought mooring system. And if we look ahead across this year, we'll continue to invest in our growth, both developing projects as well as progressing the TwinWind technology, mainly through the TwinHub project in the U.K. And in addition to this, we'll also ramp up our revenue line from the project development side of the business through divesting parts of selected projects. Now a few slides on the industry and recent market developments. There are over 10,000 turbines installed on the seabed around the globe. But as of yet, only 20 or so turbines are installed on floating foundations. Floating offshore wind as an industry is on the verge of commercialization. Several gigawatt projects are being planned with construction start from 2025 and onwards. And this growth is expected to be exponential. A key driver for this growth is the obvious increasing demand for clean energy, but also combined with the fact that onshore space is limited, most of the global demand is near coastlines and that natural waters across the globe are to 80% deep. If we look across the segment, that is floating wind, we are seeing signs of a commercial industry taking shape. More transactions are taking place, both government-led seabed lease auctions as well as private development phase sales. More and more institutional capital is entering the space and have concluded that floating wind is not only attractive in terms of growth potential, but now also comes with an acceptable balance between risk and reward. And here is looking at a few specific market developments. The U.S., which under the Biden administration has increased its offshore wind ambitions drastically. They in December held its first-ever deepwater seabed auction in California. And this auction brought in around $750 million from major developers such as RWE, Equinor and CIP. So this is for floating wind only. Here in Europe, more and more countries adopt policies and plans for floating wind. Such examples are Greece, Portugal and Norway. And finally, out in the far East is perhaps we will see the first large-scale projects being built with South Korea and the lead, but also Taiwan is now preparing for new areas for floating wind as well as Japan likely conduct its first larger deepwater auctions in 2024. So where is Hexicon in all this? Well, we have a strong presence in most of these key markets. From a senior team, positioning both legs of our business model over in the U.S. to over 10 projects developed in various stages and with various partners across Europe and over to Asia, where our operational team of 15 people in Korea is not only in full force developing the MunmuBaram project with Shell, but are also developing additional sites in Korea as well as Taiwan. Now just a brief on our own Hexicon -- on our own business model. And to start off, I'd like to view Hexicon as an enabler and an accelerator of the ongoing transition into commercial floating offshore wind. Hexicon is both a project developer and foundation technology provider for deepwater off shore wind. We focus on the origination and early-stage developments of projects. 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. And these 2 legs of our business model provide independent revenue streams but at the same time being very synergetic. Projects provide an opportunity to install the technology and having our own IP opens markets and project opportunities. In the short term, it's 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. In our vision for 2025, floating wind is an important part of the energy mix, and Hexicon has capitalized from its 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 road map 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, which is forecasted to be achieved from project divestments only. And 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 to drive portfolio growth. That's projects. So mainly through pursuing additional and not yet regulated markets where we're through legwork and bilateral applications rather than big ticket auctions, [ connective ] site control and permits. And to describe where Hexicon is in this development, I'd like to see Hexicon's journey split in 3 stages. There is a first stage of mainly investing to grow a meaningful project portfolio. A second stage is when having reached a diversified portfolio, especially in terms of maturity to then start realizing sizable parts of it and as such recycle capital. And lastly, the third stage of also having the technology verified with some key milestones achieved within our project portfolio recently and a diversified portfolio as a whole, we've recently entered the second stage of this journey. So then on to our technology, the TwinWind, which is essentially a triangle-shaped floating steel structure, that carries 2 large wind turbines. It is more to [indiscernible] at the front corner, which is a standard component from the oil and gas industry. And this is basically just a big bearing. This allows the complete unit to freely rotate with the wind direction around that point. And this 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 with 2 turbines on the same structure entails is that we can install more power in a given area when compared to the competition. And this, as such, reduces cost as well as even 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 is fully scalable to the largest of turbines. And what this video has shown is how the TwinWind weather veins from no wind, it shows how when the wind picks up, one of the turbine starts operating to rotate the units towards the wind as quickly as possible for them, both turbines to operate fully. And this rotation is driven completely by the wind, just like a bolted anchor that will align with the wind direction. Now on to an update of our own operations. To start, here is providing a summary of our expenditures across the year. 2022 was very much an investment-intense growth year. Just over half of our cash outflow went to growing the projects portfolio and around 40% towards the TwinWind technology. And this is very much a representation of our strategy and dual-legged business model. The money is spent on building value across the projects portfolio and maturing the technology towards deployment offshore. What can also be noted is that only a portion of these amounts are reflected on our balance sheet as of today. And this is because we're adopting a rather conservative policy when it comes to how and when we capitalize costs. Out of our project expenditures in 2022, only around 40% had been capitalized. And this is very importantly, not to say that the remaining 60% of project expenditures isn't driving market value, but that we have clear milestones needed to be achieved before capitalization occurs, typically linked to permitting, which involves very long lead times. And this in itself is important in the context of Hexicon now entering what we've denoted as the second stage, which will include an increase in project divestments. And jumping over to project developments. Here's looking at the overall portfolio and the change within the project portfolio during the year. And this in total now, our portfolio is over 9 gigawatts of net holdings. So that is the shares of projects that are in direct Hexicon ownership. And the notable difference during the recent period is a rapid development in Italy. Our joint venture, AvenHexicon has secured 2.5 gigawatts of exclusive rights to Seabed and over 7 gigawatt of grid capacity. And this is an extremely swift development in a market that is now one of the hotter floating offshore wind markets in Europe. And I look into some specific projects. Starting with the MunmuBaram project in South Korea. This is a project that was originated by Hexicon Korea. And since 2019, co-developed with Shell. The ambition is to develop and build the world's largest floating wind farm. Hexicon owns 20% of this project and Shell, the remaining 80%. And looking ahead, the next key milestone is the grid connection agreement with local transmission operator, [ Capco ], which is expected before the summer. And looking backwards slightly, this is a project that has secured its so-called electricity generation business licenses, a power permit, which secures the sea area, have done ground investigation works and a lot more. What we also managed to achieve very recently during the period is that the project secured a preferred supplier agreement with Danish turbine supplier investors for the supply of 84, 15-megawatt turbines. And this is quite interesting. So this is the first large-scale floating offshore project for Vestas. And the turbine that we're talking about here, the V236-15 megawatt turbine is an impressive machine to say the least. And just to give you a flavor of it, each blade of this Vestas turbine is 115 meters long, which entails a total swept rotor area equivalent to 6 soccer fields. The total tip height will be just try of 260 meters here in this picture compared to the Eiffel Tower or for our locals here in Stockholm, it's around 100 meters taller than [indiscernible]. Over to Sweden, where we're working together with mainstream renewable power, formerly known as Aker Offshore Wind, and we're doing that through the 50-50 joint venture, Freja Offshore. We're developing multiple sites in Southern Sweden on both the East and the West Coast. And 3 of our projects are currently in the environmental impact assessment stage following the successful completion of general consultations, and the first of these permit applications will be handed into the government within weeks. Sweden's net 0 target by 2045 and the electrification of industry along the way, drives a near-term need of more electricity. And with floating offshore wind, one can place these wind farms further off the coast and away from this turbines. And I'll give you a slight example. So this picture down the bottom here is an actual visual representation of our proposed wind farm Mareld off the West Coast of Sweden. And this [indiscernible] will be part of the permit application, and it shows what it will look like using the largest of possible turbines at this future time as well as it being on a perfectly clear day. So the key here is that a large part of the opposition of wind power in general, and in fact, the key reason of permit applications being declined is a consequence of visual impact of the turbines. So with floating wind, one can place these turbines further off the coast, irrespective of water depth and not disturbing the view. Over to Italy. So Italy is a rapidly growing market with high ambitions. And 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. Now there's still some definition needed in the overall legislation, but the prerequisites for a large floating wind markets are here. Italy has clear offshore wind targets and almost solely deep waters, which means it needs to be mostly floating. And here, we're working together with Avapa Energy, a local onshore renewables developer who has taken the step offshore with us. And we've managed to recently secure site control for 2 large water areas, in total, just over 2.5 gigawatts, and we expect additional sites to be secured in the very near term. Additionally and even more recently, we've secured grid capacity for 7.1 gigawatt, and this is for 6 out of a total of 7 offshore sites that we are currently developing. And looking forward, this is one of the projects where we are looking at bringing in additional suitable partners to progress to the next stage, which is the environmental impact assessment stage. Now on to the TwinHub project. And just as a recap, 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 [indiscernible]. And in the spring of '21, after thorough due diligence, Hexicon bought this site, including permits and the electrical infrastructure already in place, and their aim was clear, it was to reach the level of maturity and comfort needed to bid into last year's auction for the U.K. tariff scheme named contracts for difference. And that scheme would for the first time last year, have an allocated budget for floating wind. And there was still a lot of work to do, such as securing a last and final permit for the project, a so-called marine license and to run quite a lot of technical work and engage with the supply chain all in all, to ultimately determine how low we would be able to bid. And the results from this auction were announced in July last year, and the TwinHub project was the only floating wind project to be awarded funding through 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 our winning bid was at GBP 87.3 per megawatt hour. And that's a bit complicated denoted in 2012 prices, however, indexed. So our estimate today is that it will be around GBP 124 per megawatt hour at operations start projected in 2025. And this project is now in late-stage work, preparing it for construction start, both through engineering and in parallel supply chain engagements. And the key supply here on the turbines, where we will in the TwinHub project be using 2 pieces of 8-megawatt turbines on each floater. And that will make the TwinWind in this project, a 16-megawatt floater, the largest capacity on a single floater in the world. Additionally, well, during the coming period firm up the funding partnership structure around this project, which I will come back to during the spring. Now as a final slide, a brief look ahead. We are now shifting gear into revenue mode, and we are in process to realize selected parts of certain projects, to recycle capital, to continue to grow. And this process requires careful consideration on a project-per-project basis. It's about balancing a certain projects accomplishments with future spend and future milestones. Additionally, we also need to keep in mind the portfolio view to ensure that we, over time, spread out our divestments and continue to add to the portfolio. We'll continue to focus on the TwinHub projects and push forward towards FID. We're in process to set the funding partnership of the projects and are engaging heavily with the supply chain. And lastly, most of our efforts remain focused on the project portfolio. It's the growth of the portfolio that across the near term will continue -- sorry, contribute most to the value build of Hexicon. And now that we will see selected divestments take place, it's important to also ensure a steady growth of the portfolio going forward. So with that said, thank you all for listening, and I now welcome any questions there may be.

Thank you, Marcus, for that update -- sorry. So we received some questions during the presentation, and let's start off with this one. The war in Ukraine has strengthened the trend towards renewable energies. Can Hexicon see an increasing interest in its floating offshore wind projects?

Absolutely. I think both in projects and more in general. So what we are seeing is a definite strength or increased interest across the globe. The slight exception perhaps just now would be the Baltic Sea, especially from a military perspective, with a war in that close. But an overall scale of things, yes, absolutely. And it's an argument that have come up -- in addition to climate change, et cetera, is domestic supply. So security of energy supply has come up really high on the agenda. And quite interesting a conference, Wind Europe conference just a year ago, NATO was actually there as a speaker and really encouraging and promoting offshore wind as an energy source for a few reasons. One is, obviously, you have that domestic supply. It can be built in a rather short time. And I think it's also -- it's less sensitive to tax and something similar where you want to neutralize a energy system. So it's really fascinating to see. I've never seen that before.

And on that note, can Hexicon also saw an increasing interest from industrial companies that ask for PPAs or pension funds, insurance companies that want to make long-term green investments?

Absolutely. I think we're both seeing interest in commercial PPAs. Some industries, I'll take Sweden as an example. There's plenty of industry that is driving electrification right now, and everything from green steel to batteries, et cetera. And for many of these, it's not a -- or not only at least a debate or discussion around power prices, but it's about power supply as well, where we have a deficit in certain regions. And offshore wind in general has an advantage of being able to be built in a rather short time. And you can build a really large-scale wind farm in 2 to 3 years. So yes, we're definitely seeing that. I think on top of that, as I alluded to in the presentation as well is that we're seeing interest from pension funds, institutional investors, et cetera, in general, where the view of floating wind has become -- I'm not going to say mainstream yet, but it's certainly reduced risk levels. So that balance of risk and reward is becoming acceptable from a lot of institutional capital right now.

And a question here about the TwinWind technology. You seem to make big improvements in terms of building your project portfolio. Can you give some insights into which projects are also considering using Hexicon's TwinWind technology?