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

Good morning. I'm here today to provide an update of Hexicon's operations over the last quarter and also providing insight into the world of floating offshore wind. [Operator Instructions] My name is Marcus Thor, and I'm the CEO of Hexicon. What I thought we'd go through today is, first, a few pages of floating offshore wind. What it is and my argument for why I think this is going to be extremely big in the years to come. And then we'll go on to describing Hexicon, a business update and then end with looking ahead. So let's get to it. And I wanted to start with this picture first. I usually provide a few slides of floating offshore wind. And this is just to provide a similarity to another industry, which is oil and gas, and the same evolution steps that we're now seeing in wind, which has been the case for offshore oil and gas -- offshore oil and gas in general, which are 3 main steps. Going from onshore wind to offshore wind in shallow waters and then onto floating. This is exactly what offshore oil and gas did, but a few decades earlier. And this is also my background. So I started off my career within oil and gas designing oil platforms. And in fact, the first floating semisubmersible production unit within oil and gas was delivered from a shipyard on the West Coast of Sweden. So this third generation of wind power, which is floating wind, is different from all other forms of wind power in a few key aspects. First of all, and the maybe key reason for it is the virtually unlimited potential. Some 80% of what is around the globe and the wind resource is located in deep waters. Not only is the resources, but as you go further off the coast, wins are stronger and steadier. All in all, increasing the efficiency. Secondly, with an ability to not be constrained by the shallow water areas, you have more flexible in where you cite these projects, be able to get out of stakeholder conflicts, not the least the visual impact, so be able to place these wind farms beyond the horizon. So today, we have this technology. You do not need to see offshore wind farms anymore. And lastly, an ability to industrialize, I'll give you just a few examples. We've got a shipyard industry across the world that is ready to build floating projects in series. And if you consider a really large wind farm, you can actually blueprint copy every foundation across this entire wind farm, which is not the case for bottom-fixed projects where you do need to every or every second foundation need to adjust the design because of variations in soil conditions and variations in water depth. So what's going on in floating offshore wind today? Well, I thought I'd give a short update of the market. First of all, it's an industry that is just about to take off commercially. Floating turbines have been tested around the globe for a bit over 10 years. But we still haven't seen and deployed in full scale a lot more than 20 or so units, which can be compared with a fair bit over 10,000 turbines that are installed in the seabed. So it's a maturity difference compared to fixed bottom offshore wind, but it is really picking up speed now. And there's a lot of gigawatt plus projects that are in the development stage today that will begin construction somewhere from the middle of this decade and onwards. So if you look at this graph, we're expecting a tremendous growth -- sorry, growth over the years to come, starting from somewhere in 2 years. Secondly, I do have to mention, which I think many of you have read in the newspapers recently. There's certainly a headwind ongoing in the industry. So this industry, as many other industries, is affected by interest rates and inflation. And I think some of the key things that we're seeing here are supply chain cost increases. Obviously, cost of financing has increased, but also a constraint in being able to deliver within the supply chains. And I'll give you just one example, which is that offshore wind turbines have gone up somewhere around 40% in the last 2 years. So this is, of course, serious. And we have seen big developers and utilities such as Ørsted and Vattenfall, having written down and abandoned projects, both in Europe and over in the U.S. With that said, a small comment is that a lot of these projects that have been hit are mainly ones that are closer to FID, so being able to lock in and actually go into contracts for actual delivery of physical components. Projects that are early in the development cycle, like a lot of our products in our portfolio are not hit as great as here and now. Secondly, with that said, there's an enormous push politically across the globe still, this is not affected. On the contrary, perhaps even a greater push today than it was just a few months ago. Auctions, all of the globe are still taking place with mixed results, however. So 2 auctions that were not so successful recently in the last quarter were one over in the U.S., in the Gulf of Mexico, but also in the U.K. Both are floating wind that didn't receive any bids simply because developers around the globe in this case in the U.S. and the U.K. couldn't get their economics to line up; however, we've similarly seen a lot of success in auctions as well. So the largest to-date auction that Germany has ever held was held in the last quarter of 7 gigawatts in total that was successfully subscribed, and this is in total, almost as much as the country has built out and deployed to date across the whole country. We've also seen the first of the Baltic states to conduct an auction, which happened in Lithuania, 700 megawatts with 2 winners. And lastly, I wanted to mention that as an added push and a plan in real force, the EU announced a few weeks ago, their so-called wind power action plan, which really aims at accelerating the shift to renewables and specifically offshore wind. And amongst a lot of details in this, one should mention that it's a great push to accelerate, so to reduce the time for permitting, but also to increase the access to financing through the EU Innovation Fund directly, but also through certain derisking guarantees with the European Investment Bank. So this was a game changer to some extent from an EU level that was announced just a few weeks ago. Over to Hexicon. And just to frame Hexicon in, before we go on to the next slide, Hexicon has got a gross portfolio of just over 7 gigawatts to date, and I'll come back to a few more details of that. A net holding of about half of that, so Hexicon's share of these projects. We're present in 4 continents, and we've got the TwinWind patented in 20-plus countries. And as a reminder, our business model, which is pretty important in this industry because we are slightly differentiated in our business model by the fact of doing both technology and projects, so we are a technology provider on the one hand with a patented foundation design that I'll describe in just a few slides. The business model there and the revenue path is through license fees when produces a technology, we make money. On the other hand, we're also a project developer, which can be using our technology, but also not. So it's a product development play, which aims at investing our resources and money into projects that grows over time in value and we're able to sell off at higher valuations. And maybe I should just mention quickly as well, regardless of if it's technology provision or if it's project developments, one thing they both have in common in this space, and there's no way getting around it is that lead times are long. It takes time project because it's infrastructure to build developments in terms of getting permits, et cetera. There's a lot of prerequisites that leads on to then dependencies on others such as local and central governments to issue permits. So lead times are long regardless of which leg we stand on. And where is Hexicon right now? And where are we going? Well, we've spent several years investing in the growth of Hexicon, growing mainly the technology maturity and the project portfolio to a stage we're at now where we enter our second stage of a 3-stage development process going from investing only and developing to now not stopping to invest but also divesting and scaling the business. So this is the phase we're in right now, and I'll come back to a few aspects of that. And then to be then led on to the third and final stage, which is also the commercialization of our technology once we've got a verification project off the ground. Now going from one stage to the next does not mean that we abandoned the previous one. One continues to build on the previous one. And right now, we're in this stage 2 of a 3-staged journey. And on to a short description of our technology, what it basically is, is a semisubmersible structure, triangular shaped, made out of steel. It floats on its own. And what sets it apart from a lot of other technologies is that it hosts 2 turbines. So we've got 2 turbines on the same foundation. And the key feature that enables that is that the whole platform can rotate, so it weathervanes with a shift in wind direction. The whole unit rotates, this ensures that these 2 turbines stay out of the wind of one another. So they're not hurting each other or they're not -- the one is never behind the other and therefore, being hit by turbulent air. And this is the key thing. How do we make it work? Well, beneath the front corner that you can see here, the one that does not host the turbine, the more in system is attached through what's called a turret. This is basically just a big bearing that allows the whole unit to freely rotate. Why do we put 2 turbines on the same foundation? Well, there's 2 key arguments: One is cost of energy, and that's the obvious. That needs to be prioritized above all else. So with 2 turbines on the same, we can split certain costs and reduce them on a per megawatt basis or a per turbine basis. Secondly, having 2 turbines on the same foundation that can rotate. This can obviously place a lot closer to each other than were the case if you were to deploy them on single turbine foundations. What that means in an overall wind farm is that we can install more turbines in a given sea area. And this has a lot of merit. It's a direct cost decrease to a certain extent of some inter-array cabling, et cetera, that is reduced. But perhaps more importantly, we can be even more flexible and assure that we stay out of conflict with other stakeholders because needing to occupy a smaller area. Whether that's again visual impacts or conflicting with shipping lanes, aviation, military, et cetera. This is, I think, a key consideration. It's not top of the priority list today, but as more turbines get installed over the next few years, it will become more and more important. And these endless oceans that we see out there, when you start layering different stakeholder interests on top of each other, they're not endless anymore. And just a quick representation of where we are as well across the globe. So we are present in quite a few markets. Ones that we have selected that have certain prerequisites, and it's several projects in Europe. We've got presses and projects over in the Far East and Asia as well as South Africa, and I'll come back to a few of these. On to the business update. So just highlighting a handful of points that recently are fairly important. First of all, in May, we put in place a development loan agreement with a U.K. fund manager called Glennmont Partners. This was a facility up to EUR 45 million, which is earmarked to go into projects. So that's money that will be used to projects to mature them onwards and develop them to future milestones. To complement that, we during the summer set a credit facility in place with the Wallenius Group, amongst others, to ensure also that the company had working capital to continue through this next phase. Secondly, the MunmuBaram project over in South Korea, so this is the one we're working together with Shell. Shell owning 80% and we're 20%, has now hit the level of maturity where we're actually starting to capitalize those development costs. And we're rather conservative in the way we do capitalize cost and not doing it for any other projects, except the technology project. So the MunmuBaram project hitting this stage is a big thing for us and it's a testament to the persistency, I guess, of us as a company. We started this project already in 2018. Over in South Africa, not a great offshore or a large offshore wind market today. We started about 2 years ago with developments there. And we've now taken the next step into the environmental impact assessment stage, which qualifies this ambition from a prospect to a project. And in fact, when we started, there weren't any other activities in the offshore wind space at all, and now we're seeing them pop up. So this was a well-timed move that positioned us ahead of the curve. We have needed due to the various implications across the industry, we haven't been hurt that much cost-wise in TwinHub, but we have been needing to adjust the time line slightly. So instead of a construction start in Q1 next year, this is now planned for Q4. And lastly, just after the period, we submitted a third permit application in the name of Freja Offshore, a joint venture in Sweden with Mainstream Renewable Power. This was for the Dyning wind farm of the East Coast in Sweden. Looking at the project portfolio, this has grown consistently. We're now at a gross project and prospect portfolio of just over 20 gigawatts, net holding of Hexicon, which is just over 10 gigawatts and this has approximately doubled if you compare it to last year. And if anything, if we look forward now, a big focus will be to mature this consisting portfolio rather than add more to it. And I'll get back to that as well. So if we look at our key projects, I wanted to give a short update on each of them, but also provide a visualization of where they are in the development cycle. And first of all, it's important here to recognize that Hexicon's activity is not into construction. So we operate in the development phase, so from starting a project until what we've denoted here as FID or final investment decision. So that is actually taking the decision to start constructing. Money goes up to a whole another level from development costs that are a lot smaller than what they are of building a project. That doesn't mean that if we're only divesting at FID or construction start, but we'll be doing that gradually along the way. But it's within this from start to FID that Hexicon operates, and this is trying to visualize where these projects are roughly between those 2 milestones. Now all projects and markets are different, so it's rather hard to compare this on an apples-to-apples comparison. But you can at least here see where we are, and we've separated or divided the whole development cycle into 3 stages. If you look at MunmuBaram, that's an over 1.1 gigawatt project working together with Shell. It's a mature project. It's got its electricity business licenses in place, so that is more or less the power permit. We've got a turbine supply agreement. The first that was announced at this scale for a floating wind project with Danish Vestas, and the Environmental Impact Assessment is currently at its late stages. Over in Italy, we've had an attempt together with a local partner, Avapa Energy to develop multiple sites across the country. In total, slightly over 9 gigawatts, 4.7 out of those 9, so roughly half are secured, so seabed have been already secured. And we've prioritized across this portfolio and the 2 most or highest prioritized projects in total 2.5 gigawatts are recently progressed into the environmental impact assessment stage. In Sweden, we completed the EIA and submitted the permit application for 3 wind farms, Mareld on the West Coast, Cirrus on the South Coast and now most recently, the Dyning project on the East Coast. In total, these 3 projects have a potential to deliver 30 terawatt hours of clean electricity per year, which can be compared to roughly all of Sweden's wind power onshore today. Over in the U.K., the TwinHub project already mentioned, we're needed to slightly adjust the time line. Nonetheless, this project carries on in a lot of speed and momentum at the moment. We are in FID. so we're doing the design of what this whole project looks like in collaboration with the supply chain, not the least, the turbo manufacturer Mingyang and paving the way with supply chain and engineering mainly towards construction start in Q4 next year. This is a project, just as a reminder, a project that has all permits in place since before. And lastly, down in South Africa, one of our sites down there, the 800-megawatt area of Richards Bay, so the Northeast -- of the Northeast coast of the country, we're developing a project there together with local partner, Genesis Eco-Energy. And this has just recently now been stepped into also the Environmental Impact Assessment stage, so we're doing a lot of service over there. And what's interesting with a country like South Africa is that it has a lot of prerequisites for us wanting to believe in floating offshore wind. It's got really good wind speeds. It's got deep waters and it's got a big demand base across the coast line. And short visualization, I've shown this before for another project, but the same is with this project as compared to Mareld on the West Coast. This is a visual representation of what the project looks like from the nearest point on the coast. And as you can see, you don't see a lot more there than water, and that's the whole point. And I think especially for a country like Sweden, this is important. We call it power production beyond the horizon. We do not need to see these turbines from the coast anymore. Mentioning a few numbers from the report, and I wanted to give an explanation of 3 key ones. First of all, is the operating loss that was reduced about half and that has a lot to do with us now capitalizing the development costs over in South Korea and our MunmuBaram projects. The other one is our cash outflow, in this case, from operating activities. That was fairly high in the period, and that's actually a timing impact from investments occurred in previous periods. That relates to both investments. There was a second installment of the purchase price of us buying or increasing our share over in the Korean project from last year, but also cash calls meaning our pro rata share of development costs in some of our key projects. And lastly, I wanted to mention the cash balance that we've shown here just over SEK 40 million. That is not painting the whole picture. So add to that, we have agreements secured both this development loan with Glennmont Partners for projects and also the credit facility here with a group of investors here in Sweden, that we've just started to draw upon. Ending up with looking ahead, what do we focus on going forward? What is a few areas? First of all, we continue to actively engage with potential investors for selected projects, and I hope to be able to come back to you on this quite shortly. It is a fact that the current environment has led to longer lead times to divest some of these projects. We are hit by that, but we've still got high hopes of the value potential within these projects, and we're working with that. Secondly, continuing to prepare to TwinHub project for FID with a slightly modified time line, nonetheless, getting that to hit its next really big milestone, which is FID next year. In this industry and in this time, we will increase our cost focus for us, meaning that a greater focus will be placed on prioritized projects and maturing developing them rather than necessarily adding a lot more to the portfolio. This is more important right now in the next period to come. And lastly, as being 2 of our key projects that are now entering this next stage, we will ramp up the EIA or the Environmental Impact Assessment work in both Italy and South Africa. So with that said, a bit over time, really want to thank you for listening, and now we go into some questions and answers.

Thank you, Marcus, for this very thorough presentation as usual. So let's do some question and answers then. And please continue to send your questions into the webcast and I'll try to read them out loud. So I have one question to start off with. As you mentioned that there has been some turbulence in the industry recently, and we have seen some big players doing some write-downs of some projects. Do you see any similar risk for you doing that in your balance sheet or so?

That's a good question. First of all, yes, as I said, definitely seen turbulence and headwind in the industry. No is a short answer, we're not seeing that risk for ourselves right now. And I think that it's a big difference. Where we have our portfolio on the stages of the projects within the portfolio are early and mid and in some cases, now starting to become late stage, but they're not needing to make these commitments to the supply chain to go into construction at the moment. So I think if anything, with this type of portfolio, not really hit to the same extent here and now, if we're able to see this through and keep this through this period of turbulence, and I don't know how long that will be, it might actually be the case that we end up in relatively stronger position on the other side of it.

Good to hear. You mentioned a little bit of your U.K. project, the TwinHub, and you have done some adjustments to the time line. Could you maybe give us some more flavor on that? Will you -- have your economy, the project economy changed somewhat? Or what do you see?

The economics hasn't changed to any greater extent. We did need to adjust the time line, and that's obviously related to the other parts of the macro climate that we're seeing. And -- but 2 reasons I would say, where we haven't been hit as bad on that project economically wise is, one, a lot of the supply chain partners in the projects are not only in a project like this for economic reasons, strategic reasons as well. So we've been through such partnerships, been able to keep costs capped or not increased to the extent that a lot of other costs have been doing. That's number one. Number two is that the CfD is secured last year, so the revenue stream with the U.K. government is linked to inflation. To be very detailed, it's linked to consumer price index, not producer index, which would have been even better, but it's certainly a great mitigator of not the worsening economics of a project in this period of time. So those are the key reasons why we're not seeing any dramatic changes to the economics of the project so far.

All right. Let's go to Sweden then. You have submitted 3 applications, permits -- permit applications this year in Freja, your joint venture. So what should we expect now? I mean how long will it take to get maybe an approval?

If I only knew that. That's a good question. But I would say that we're optimistic with how things have been going recently. The new tone, I would say, in the political discussions around permitting these days. So I would say that the first permit that we applied for Mareld, we're optimistic to get a positive response during the first half of next year. After that, I'm very much subject to the timing of all these permit awards. We have the ability to deliver all these projects within this decade, so that they're actually operational before 2030. Again, it is out of our control in terms of the timing of the permit award. But if anything, I think we're optimistic that we'll get them approved and especially the first one already in first half next year.

Okay. So let's read out the question from the webcast then. You have redefined your activities in South Africa from prospect to project. What opportunities do you see there for Hexicon in the near future?

Well, I think, with -- any real early stage developments are a bit of a bet, but I think what we've done -- managed to do successfully in a country like South Korea, and I'm now hopeful that we'll be able to do in South Africa is this early positioning really before the market takes off. But obviously, based on looking at that market, seeing that it has all that needs to be there in place. And I mentioned it before, good wind speed, deepwater and a big load base that is near the coastline, both industry and other. On top of that, it's a market today that has this load shedding, they call it. So on a regular basis, they cut off power here and there in different parts of the country. So it's got a lot of reasons to think that offshore wind makes sense, and it needs to be floating because it's so deep. And in fact, only across the last few months, for the first time, we're seeing some other developers being active in the offshore wind space there. So it's looking to go in the right way, which is why we dare to take this next step and go into the EIA as well.