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

Welcome to the Hexicon Q4 2023 Report Presentation. Now I will hand the conference over to the CEO, Marcus Thor. Please go ahead.

Hello, and good morning, everyone. This is an opportunity here for me to provide an update of our business and the market. And typically, we do this from a studio in Stockholm, where we also have video. At the moment, I'm actually currently in South Korea with some activities related to our projects here. So I couldn't be in Stockholm, and therefore, we took the safer bets and have no video here to ensure that at least you can hear me loud and clear. So there won't be any video, but I'll obviously go through the slides and talk to you. So my name is Marcus Thor and I'm the CEO of Hexicon and let's get to it. We are starting off with floating offshore wind market as we look at it today, followed by a brief of Hexicon, I've done this before. I wanted to provide an update of that as well as the ongoing and most recent business updates, ending we're looking at our focuses in the near-term months. And if we start with floating offshore wind and our view of this being the third generation of wind power, followed by -- sorry, after the first generation, as we've called it, which is onshore wind, followed by offshore on the seabed. And now we're into the third generation, which is planned across the globe in several gigawatt scale projects. And 3 key arguments from our perspective, if we look at floating wind. First of all and the key one is the unlimited potential. So approximately 80% of accessible waters around the globe is in deepwater. So it's a huge virtually unlimited potential. Secondly, if you look at the floating systems compared to fixed, the flexibility is a lot greater to cite such projects where it suits best both from a wind power potential to avoid conflicts and not the least to get out of site, which is a key aspect in the objection of wind projects. And lastly, industrialization. So again, the independence of water depth enables the same foundation design across large-scale wind farms. This is not the case for bottom fixed, where it's -- so every foundation or every second foundation is a unique design due to variations in water and soil conditions. And reflecting a little bit on 2023, I want to point out that I don't think it comes as a surprise to anyone. It has been a challenging year. We've seen it driven by interest rate inflation and also for our industry supply chain bottlenecks. So definitely a market -- global market sentiment that have struck our industry as well. I'll give you an example. We've seen, as an example, offshore wind turbines that have increased over the last 24 months or so in cost, somewhere 30% to 40%. So it has been a challenging year. With that said, there have been various results and announcements. What we in general seeing is across projects, certain projects that have been delayed, some that are even being canceled. And we've seen, if you look at policy and global actions, we've seen both some that have been disappointing in terms of participation. We have seen some mainly for bottom fixed that have shown very good results. So it's been a bit of good and bad announcements, results, et cetera. In general, it has very much been a challenging year for the industry. What we have seen, though, towards the end of last year are some announcements and indications that provide tailwind to the industry. So all in all, I would say that if I were to look at the recent period, that has been very challenging, my long-term view of the number of turbines that will be in waters around the globe hasn't changed, but I do think we're looking at certain delays and a bit of a trough here and now. Some initiatives that have been very comforting very recently have been, for example, the European Wind Action Plan with the EU as a consequence to the global market sentiment, have put together quite a strong package, which includes a lot of aspects to the key ones being easier and greater access to funding through EU [Technical Difficulty] as well as strong action to reduce lead times for wind developments, not the least linked to permitting. We also see quite the shift upwards when we look at the CfD program in the U.K. So this is the U.K. scheme of contracts with difference, which basically locked in a price of electricity that the renewable generation receives. And the announcement just end of last year for the round that is taking place in this year, saw quite a substantial increase of around 50% in the ceiling for the CfD prices. So if we look ahead of the market being both offshore wind and floating wind, I think that they're all looking at a delay in a reduced deployment of turbines here and now, but it's very much unaffected, sorry, in the medium to long term. So 2 examples here, Global Wind Energy Council expects it be some 380 gigawatt offshore wind that will be added during the next decade. This is obviously including fixed bottom as well. For Global wind, that forecast is almost 11 gigawatts by 2030. So we're still going from today's very small numbers to very big numbers over the next 2 years, although perhaps some of these projects being delayed, we're really -- it's a transition point ongoing at the moment with several gigawatt projects in plan to hit construction start over the next 1, 2, 3 and so on years. As a quick look into our own business model. As a reminder, perhaps for a few. We've got it [Technical Difficulty] where we're both a project developer and a technology provider. And that allows us to have 2 independent revenue streams that are not in conflict by the sense that you can see one independently from the other. At the same time, they are synergetic. So one open stores for the others. So they commercially reinforce in each other, you could say. In developments, our focused skill sets and our core competence life and development phase of deep waters of floating wind projects. On the technology, it's really a matter of providing a foundation design that is cutting edge and I'll come back to this a bit later. The revenue models are on the product development side, linked to the value increase of projects. So by maintaining -- starting them maintaining ownership those can be divested over time at higher valuations. On the technology side, it's a license revenue model. So when our IT is used, we can make money out of that. Looking at where our project portfolio lies today where we are at a portfolio of gross around 23 gigawatts, including both projects and prospects. They're located in Europe, Asia and a bit smaller in South Africa, where we've got projects across all 3 of these areas, Europe and Asia will have for some time and a growing portfolio. And in South Africa, very recently, have denamed or defined our prospect into a project after having entered the EIA phase. And wanted to show this slide. It's not intended to be read every line, and it's also available on both the quarterly report and on our web page. But we are taking steps now to provide further details to broken down to a lot more detail across our portfolio. And we'll continue to do this and provide more and more details into our portfolio. And this is just to show what this was starting to look like, and this can all really be visible on our web page and in the report. So providing a lot more details into the projects, not per portfolio, but actually per project as well. And how we define them and what the reasoning is behind these definitions. Looking forward, we've kept this, we're now sort of moving in on towards 2023. Our targets remain the same. So first of all, I wanted to mention, absolutely in our development phase of -- the company's development stages, where we are in stage 2 here, which as opposed to the first one where we're focused on only investing and developing and growing the business. We're continuing to do that, scaling it, not the least, but also divesting. And I'll definitely come back to that as well. We're in that phase right now, and we are in talks across several projects about certain divestments. That will be followed by last and final stage, if you will, where we continue to do our activities within Stage 1 and 2, but at a point where we've also reached a verification of our foundation technology that allows the technology to be commercialized as well. As for addition to achieve by next year, it remains to have ongoing revenues from operations in our 3 continents we're active for the TwinWind design to be verified. And to the extent where it's externally investable and we can decide on construction and on the financial front to be positive in terms of EBITDA. A few highlights or where efforts have been placed during quarter 4. Most of our efforts have gone into the development of our key and largest projects. That has been the case for quite some time, and they're really growing and hitting new milestones, requiring more resources and more focus. So that continues to be the primary focal point for the majority of our staff. But more specifically, handing a third permit application for the project, Dyning on the Swedish market. This one we're doing in the joint venture of Freja Offshore, 50-50 with mainstream renewable power. I'll get back to this in a second as well, and also continue with intensified dialogues on project divestments and also come back to this. And looking a bit more specifically on Freja Offshore. So that's the joint venture said 50-50 with Mainstream Renewable Power, where all our projects in Sweden are handled through. So we did, during the quarter, submit the third permit application to the Swedish government. This one is for Dyning. As you can see on this map, it lies south of Stockholm, east of Oxelosund and that one is as well as the other strategically located for -- from 2 perspectives. One is to avoid conflicts of a suitable location to not conflict with other stakeholders at sea, to not be visible from shore, but also to be close to need in terms of power. So we are here in the southern part of Sweden with a high demand and not the least, the proximity to industry as well that is electrifying. And I've shown the small picture there on the bottom left, a little bit smaller this time around. I've shown it before. But it's really a key point, not the least in Sweden, where these allow them to not be visible from shore. And technology now is available with floating foundations, our own, but also others to deploy such projects. So there's no need anymore to see big holes on massive towers and turbines from the coastline. And this one is a key one in our selection developments, we make sure that this is the case. Looking across some of our key projects. I just wanted to provide an update. I will start over in South Korea with the MunmuBaram project that we're working together with Shell, where Shell owns 80%, and we own 20% that's now in late stage of development. We have the electricity business licenses in place. We have a turbine supplier agreement in place and working heavily with Vestas and a very recent big milestone was that we, as fairly recently submitted EIA application to the Korean authorities. That's a result after a bit over 2 years of work that was just now submitted, and we do expect the response on that during the year. If we look at Italy, we've selected out of our portfolio of 7 sites. We are progressing 4 of these onwards into the next stage and 2 of them are currently in the EIA stage. So that means that we have still maintained to have and actively progress about 4.7 gigawatts of secured seabed and adding to that, about 4 gigawatts of prospect. So what we're doing here in this market is to obviously prioritize the list of prospects in all areas looking at which makes most sense from a commercial perspective, from a consenting perspective, et cetera, and progressing them in series rather than all at once. So we're progressing around half of that opportunity onwards into the EIA phase and keeping a few more as a serious subject to how market develops, how those first projects develop, not only to be mindful of market conditions that may change. So it's from a risk perspective, but it's also from a learning perspective to capture learnings through some of the first ones into subsequent ones. In Sweden, I did mention that we had just submitted the permit application for Dyning. So the third project. That means that we've, in total, submitted EIAs for the approval of the government for 7 gigawatts potential projects, keeping a 2.5 gigawatt project that is still in the prospect phase that is yet to be submitted to the government. So if we look ahead here, I guess, key milestones looking forward is the approval. The first one is expected to be the Mareld project on the West Coast. That was the first one we submitted to the government almost a year ago. TwinHub, which is technology demonstrated project using our own technology in the southwest part of England of Cornwall. This is a, call it, technology demonstrated project or precommercial project. That will consist of 2 versions, our TwinWind foundation. So that's in total 4 turbines, 8-megawatt each, so a total project of 32 megawatts. Here FEED is ongoing and not the least part of FEED integrated engineering work with suppliers and not the least, perhaps the most important one, the so-called integrated load analysis, so integrated engineering work with the turbine supplier, which for this project is MingYang. So here, we're looking at the construction start to be planned about a year from now and thereon deployment, the year after that. Over to South Africa. Has been a very positive market development, which is also why we've decided to ramp up some efforts there. And the name this to -- rename this from a prospect to a project for one of our sites there, an 800-megawatt area of Richards Bay on the Northeast side of the country where we have also a few months ago, entered the environmental impact assessment stage as well. So there, we're in full speed ahead now in that space, and we'll ramp up such activities and also look at additional sites within the area. So wrapping up, what are we doing and what are we focusing on over the next few months, definitely remain focused on a continued discussion that we're having around divestment of certain projects. So it is a fact that we are at a stage where we think for a lot of our assets, it makes sense to now also look at divestments. It does not mean at all that we have to exit projects completely, of course, but to start looking at divestments and there are some serious discussions ongoing that I do hope to be able to get back to you within short. Second is to continue the integrated engineering work within the TwinHub project, for our foundation technology TwinWind with certain key suppliers, not the least the turbine supplier, which is a key one in terms of making sure that the foundation technology will work. So there is -- let's remember the foundation technology has one purpose only, Phase 2 turbines for the lifetime of the turbines. So to ensure that we are within the maximum requirements, accelerations, motions, et cetera, from turbine suppliers is a key responsibility of us as a foundation supplier, and this we're in now really the detailed works. And second -- sorry, thirdly, we'll be looking at both from an aspect of looking into divestments from an aspect of where the global market sentiment is and the higher maturity grade of certain of our projects. We are reflecting upon all that, making sure that we have the optimum setup of all our projects. So we're looking at maybe certain restructuring of some of our key projects in the near future. And if so, we'll get back to you on that as well.

Okay. Thank you, Marcus, for the presentation. We have now received a few questions from our listeners. And I will start with the first one. You have mentioned in several reports that divestments are a priority for Hexicon, how come Hexicon has not realized any divestments yet?

Very valid question. So as I mentioned, I think we're definitely seeing that it is taking longer than expected, given where the global market is currently. And that's not to say because I do remain optimistic in the value of our assets, but time lines have certainly shifted and that's also something we did see quite a while back where the general market was going and the appetite. And I guess the resources available to look into investments, which is why while back, we put in part this Glennmont loan facility as well. So part of the reason was definitely to be able to be more flexible in terms of timing not to ever needing to fire sale anything or to lose any positions or projects. So it's an ongoing ambition. It's an ongoing activity. We will see divestments in the near future, but time lines have definitely shifted as a consequence of the market we're in.

Okay. Next question. How would you describe your financial position going into 2024, also taking your credit agreements into account?

Well, again, a good question. So following our plan, as we are continuing to grow our business, making sure that our positions and value of projects continue to grow, that's on the one hand, we also, of course, need to continue keeping a close eye on future capital needs. And such plan is today consists of project divestments that are being planned and that we'll hope to be able to get back to you shortly. But we're, of course, at all times also considering at what point in time in the future, do we need to action backup plans that might be in other forms than project divestments. There aren't any that we've actioned as of yet, but we wanted to close eye on that when as to the timings, we do need to act on those. So we're definitely progressing and hope to, as I said, be able to get back to you on project divestments, which remains a key track and a priority at Hexicon.

Thank you. Let me see here over to next one. There are several players on the market developing floating wind. Where do you position Hexicon's TwinWind solution? And when do you expect to put a demo in the water?