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

[Operator Instructions] Now I will hand the conference over to the CEO, Marcus Thor. Please go ahead.

Good morning, everyone, and welcome to this presentation. My name is Marcus Thor. I'm the CEO of Hexicon. And I want to spend around 20 minutes here plus some questions to address some of the key events and developments in our market being Floating Offshore Wind as well as our operations at Hexicon. And let me just check with the controller here. I don't see a presentation on my screen. Here we see something loading. There we are. Apologies for that. Now to it. So as part of the agenda, I will provide an update on where the market is going, some trends, obviously, some significant events during the quarter and also touch base on some of our key projects and the technology before wrapping up with a look ahead and priorities going forward. So with that said, perhaps as a reminder to a lot of you, but I just wanted to provide a glimpse of where the evolution of Offshore Wind is and particularly floating wind. And why I'm doing this is to just get a feel for how mature floating offshore wind is compared to traditional bottom fixed offshore wind and also onshore wind. So this is an evolution and developments that have gone from onshore to offshore bottom fixed in shallow waters deeper and deeper, and now we're at this shift from bottom fixed into floating. And it's really driven by a need to harness wind power in more areas than are available in bottom fixed sites. With that said, there has been a few years now of a market downturn and delays in the development of floating offshore wind. So if you look at the status of it today, there are somewhere over 13,000 turbines on the seabed, so bottom fixed around the world, only around 50 on bottom fixed -- sorry, on floating foundations. So it is still a big difference in the maturity of these 2 technology types. With that said, this is what we're looking to see now in the next few years, our commercial wind farms on floating foundations. And that leads me to this next slide, which I think says a lot. So if we go back and look at the evolution of floating offshore wind, the first ever turbine, full-scale turbine on floating foundation was installed in Norway in 2009. This is the same year as Hexagon's founded. Then you had somewhere 10 years of really favorable market conditions, low interest rates, et cetera, there was a clear hype and drive for cleantech. You had some really high valuations of cleantech renewable projects. Floating wind expectations were extremely high. Somewhere around end 2020, early '21, you had that peak. This coincides more or less with Hexagon's IPO as well. And since then, for a lot of reasons, COVID inflation, rising interest rates, a war, et cetera, this really turned down. To a place where we are today, in our view, we see that we are at what we believe is the bottom. The difficulty is determining or judging the pace of how fast the market will come back up. What we also do see is that I think there's a more robust realism built into the expectations and valuations of projects today. So I think we will -- over the next few years, as floating projects are being built on commercial scale, which we will see happening now over the next few years, that will gradually improve. Again, how quickly this will happen is very hard to say, but we are seeing a bottom of the market. We are seeing things moving back up, political initiatives, we are seeing some -- or expect some increase in transactions over the next few years and then slowly onwards to a real commercial state of this industry. And a few things that have happened here. I mentioned that we are seeing signs of recovery. And I'll give you a few examples, which are not transactions as such, but I think clear signs that improve the industry and that leads to transactions in the next few years. So the first one is that last year, we saw almost 2 gigawatts of commercial projects on floating wind being auctioned in OECD countries. Those are last year spread across the U.K., France and South Korea. We're also seeing some political initiatives in various countries. The U.K., as an example, that are looking to not reach their near-term renewable targets are therefore boosting their regulatory framework for floating offshore wind and offshore wind in general. So the U.K. as an example, we are hearing now discussions around improving the CFD scheme over there, potentially the length of the revenue scheme being CFD that you might get in the U.K. So there are initiatives that push forward even in this market where we haven't clearly seen delays in the last few years to make sure that we can catch up in the next few years. Again, and I mentioned this before, I think that over time, so long-term forecast, they are not so changed. They look more or less the same as they did 3, 4, 5 years ago, but we are definitely seeing, and we have witnessed a delay in the deployment of commercial scale floating wind in the last few years. Back to ourselves and the quarter. As always, a busy quarter, but I do want to highlight 2 big events during the quarter. The first one is in January when our project Mareld that is held by our joint venture, Freja Offshore that Hexagon runs together with Mainstream Renewable Power, received the Natura 2000 permit from the County Administrative Board. This is a project of somewhere 2-gigawatt, 2.5 gigawatt that spanned off the West Coast of Sweden. With that in place, it's just a matter of receiving the final permit from the government. At the end of the quarter, so this is end of March, Hexicon signed a sale and purchase agreement with Ingka Investment and Oxan Energy to sell our stake, which we held a 50% stake of 2 Italian projects. And this -- I'll come back to this in a bit of deep dive to go through some of the details of the transaction. That was signed at the end of the quarter and transaction was closed just in the first few days after the quarter, so in April. And if you look at the project portfolio today, it's very much still a decent sized portfolio. There is -- if we compare this to the same period last year, there is a decrease in the capacity stemming from 2 things. One is what happened in early November in Sweden, where all I should say, which was 13 projects in the Baltic Sea that were in the application phase were rejected by the government arguing for military reasons. And the other is an internal decision to cancel 2 projects, very early-stage projects in Korea called Pohang 1 and 2. So these 2 reasons reflect a decrease in the capacity from last year same period and this period. With that said, and especially comparing to Hexicon and the size of Hexicon, this is very much a sizable portfolio still that requires a lot of our resources to develop, push forward on to next milestones. Looking quickly at South Korea, which remains our most mature large-scale commercial project, one that as of last year, went through quite a lot of changes as oil major Shell pulled out of the industry more or less, a top management decision that led to us finding the ways to take over this whole project, went through a regulatory change of control process as well. So that took a lot of efforts last year. It's finally concluded at the end of the year. And we were about to, at that time then, go forward and divest that project and find new partners for it. At that time, there was an imposition of Martial law and subsequently political turmoil in the country led to impeachment in April. All these have caused delay in that process. We're continuing to push forward on the project itself. We still very much believe in the project. We very much believe in the market. The process of finding new partners, investors into this, that has really suffered delays because of this. And just to give you 2 examples. We've been talking to a lot of potential partners into this. A lot of the international companies that we're speaking to have more or less said that, hey, look, this is a promising project. We would like to look into it, but we prefer to wait until the political turmoil is settled. While some of the local, perhaps more low-hanging fruits that we've been speaking to are state-owned companies, they cannot even make decisions in times like these. So we have suffered delays. What is promising right now, if you look forward, there is an election that will be held on the 3rd of June. So this is next week. That's good, a, obviously to get out of the uncertainties and chaos and the fact that there will be a present going forward. But on top of that, as the polls look today, everything is pointing to the opposition party, the Democratic party in Korea and their frontrunner, Lee Jae-myung winning the presidential seat. And why is this good for us? Well, the Democratic party is significantly more pro renewables and offshore wind compared to the current government. So we would be surprised if that's not the outcome of the results and the elections next week, continue to closely monitor that. That means that once that's done, we are ready to ramp up the speed again and go forward with Department search. A quick update on our technology as well. We haven't shared a lot of news around the TwinHub project. And the reason for it is we are looking at ways to progress with that project. There's no secret that it's challenging. So the safety level that our project won back in 2022 is a lot more challenging today with what's happened with cost increase across the sector. So we are looking at alternatives for that, that I hope to be able to come back to you with shortly. But what we have been able to progress and verify, I should say, is the technology itself. So we have been able to run a so-called integrated load assessment with turbine manufacturer Mingyang, which I think that it might be the first time or one of the first times at least, where a turbine OEM has conducted an evaluation of this kind for a floating foundation that hosts 2 third-party turbines. So there's a lot of interactions, thousands of cases back and forth. And all results so far indicate that low performance is as we've expected. There are no significant risks identified and basically confirming this works, there are no obstacles for it. Going forward, it continues to be an optimization procedure, of course, that never stops, but at least having crossed this first milestone is a significant event that very few to date have been able to successfully achieve. So that gives us a lot of comfort on the technology itself. How we go forward with the TwinHub project, we'll have to get back to you on or if there will be another route to market for the technology. A quick deep dive into our divestment recently now with our Italian project. Obviously, where we sit today, a key part of our business model and receiving money in is related for the divestments. In the market and where it's been over the last few years, it's been more challenging than before. There are buyers, but there are fewer. So I think that to be able to achieve this with this type of buyers, I think we are extremely pleased about. There's both, of course, the fact that we think that in this market, we received a good and reasonable payment for our projects, but it's also a matter of who buys our projects. And why that is important is that the transaction is not only an upfront portion, but it's also a milestone payment over time. So it's very much I believe and trust in the partners that come in, both in competence and financing capacity to drive them onwards through milestones where we will receive additional payments. And this, I think we found a perfect match in the buyers being Ingka Investments and Oxan Energy, where they are -- the combination of them provides significant capital and significant competence, not only governing projects, but actually operating, running project developments, a lot coming from the technical teams in Oxan Energy. So this was a -- to summarize it again, it was a purchase price of EUR 2.5 million. This was received upfront and plus milestone payments that in total with the upfront payment can be in the order of EUR 20 million. So if the project goes forward in the size and capacities they are developed today and then go through EIA and later on CFD -- securing CFD in Italy, then Hexagon can receive up to EUR 20 million. And we've illustrated here a few divestments from earlier as well. These are presented in our quarterly report as well for anyone wanted to look more into them. Now wrapping up with where we sit today and our focus going forward. Starting with projects. Yes, and I've talked about it a lot. We are continuing not expanding the portfolio right now. We're focusing on our key projects as they stand today, ensuring they preserve or improve value through additional milestones with a parallel focus on divestments. And this is very key. It is the core of our revenue-generating capacity lies in divesting projects. There have been fewer over the last period of time. We did -- if you asked me a few years ago, when I had not seen the market downturn as it turned out to be, we were expected to and hoping to divest more projects than we have so far. Extremely pleased to have done the Italian transaction now just a few months ago. And we are seeing an improved market in the next period of time. So this focus remains and very much I do expect to be able to get back to you in the short term with some additional announcements. On the technology side, I talked about the TwinHub project. I will get back to you on that once we've nailed down how to go about that. With that said, we want to and have been able to recently confirm the performance of our own technology. We want to ensure that we maintain that technical asset as it is and the value of it. And if it's within or without TwinHub, establish a route to market. So how do we commercialize the technology? This is obviously key. And I have a hard time seeing that it can go through any other way than a full-scale demonstrator of some sort in some way. So to be able to get back to you on that a bit later. And finally, I have to mention financing, of course. We are definitely in a strained situation. The market has led to, as I mentioned before, not being able to get projects divested at the pace and the valuation we had hoped for that you were able to do a few years ago. So what have we done then and what are we focusing on? Well, improving our operational efficiency, so we've been able to cut costs and increase our focus and efficiency. We are continuing, as I said, on projects as well. Definitely, a core focus remains on divestments. The tricky thing, not the least in this market is to judge the timing, the exact timing of these divestments. But our portfolio holds a significant inherent value, I'm absolutely certain of. And over time, that will be able to be realized. But the exact timing of it is really hard to predict. So we need to ensure that we establish sufficient runway for ourselves. If that's only then through divestments or if it's additional financing means, I cannot say for sure right now. I can say that we are progressing and discussing in several parallel tracks at the moment that includes more or less all of the above. And of course, we'll get back to you as soon as we have matured something and selected amongst these alternatives. So with that said, I'll thank you for the presentation part. I will go to questions here that I will read out myself and then answer them.

So I'll just read them as they have come in here. What is the time frame for the first potential milestone payments for the Italian deal? So that would be when we have an approved EIA. So those projects when they were sold were sort of midway through the EIA work. So this is the environmental impact assessment. And we are expecting that somewhere during next year that, that will be approved. So handling end of this year or the next something and then somewhere mid next year or Q3-ish, we expect that next milestone payment, which is EIA. And then the final one, which is the potential to be the biggest one as well, which is related to securing the CFD, so the offtake in auction. And that can be anything, I would say, between 2 and 3 years from now. And let's see. You are in a financial strain situation. Do you see a solution or what does it look like? So again, I think I said in my last slide, I definitely see a solution. I think we're working on across multiple tracks, which one it will be, I can't say for sure. I don't want to give an impression that it's -- point either this or that. The focus is always on divestment. There will be additional divestments. Will that be complemented by something else? I'll have to see, and we'll get back to you on that. So I definitely see a solution. There are alternatives. We haven't finalized something yet. When do you expect to divest the South Korean project? Is the plan to sell the entire project or will you retain a part of it? I think that is not set either. I can -- I mean when we managed to secure the process taking over shares from Shell, getting that approved by the authorities in Korea, we literally went out to market to, at that time a plan to attract a main owner, an industrial, probably complemented by a minority or being more of the financial character. What all the political turbulence have caused now is that we have -- that's the ultimate goal. We're still having that as one alternative that we will ramp up now following the elections. But we've complemented that because of that and having lost half year, we've complemented that with -- which might be a more likely scenario that will bring in a, call it, more of a development partner, so a minority investor that helps us ensure that we can make it through an auction. So there are offtake auctions in Korea as well that we secure all the revenue that makes the whole business case of the project. Those are scheduled throughout next year. Beyond that, there will likely continue to be a scheme of some sort, but we don't know what it is yet. So we think it holds a lot of value to be able to secure an offtake auction during next year. So the idea will then be to bring in a minority partner now that is -- can support us with financing and competence and whatever is needed to go through an auction and then do the bigger transaction post auction. So that's a 2-step approach then with something smaller now in the near term, get to an auction, a bigger transaction post that, which will then be somewhere during next year. We're pursuing both in parallel. But if anything, that might be -- as I see it right now today might be a more likely option for us, pushing that project forward. Let's see here. You mentioned milestone payments on several occasions. When do you expect to start receiving revenue through these? So yes, on the Italian one, I mentioned what that looked like. There are additional ones from other projects as well. And most near term, I think, is related to the Yeonggwang project over in South Korea that we sold, is it now 1.5 years or even 2 years ago. And that first one is related to that project securing so-called EVL, so electricity business licenses in Korea, which we do expect somewhere after the summer Q3 this year. That's, however, a deal made with Hexicon Korea, so a joint venture company in Korea. So those revenue will come into Hexicon Korea. But it's really a key and important one, the milestone payments and the schemes because the more transactions we do, and they are in -- they've always been, I would say, in these type of projects, but more so in a market like it is today, we are seeing more and more milestone payment schemes rather than heavy upfront payments. And the more transactions we do, obviously, the more milestone payment schemes that we are in, the more regular cash flow we will receive in -- it's not the type of business where it's regular per se on a weekly, monthly basis, but it becomes more regular and more frequent and more milestone payment schemes that we are in, of course. So they continue to be very important. How do you perceive the development of willingness to pay for offshore wind projects? Are investors willing to pay less now compared to a few years ago? I think the short and honest answer is yes. I think we're seeing -- there are buyers, but there are fewer buyers. So in a market like this, there are certain buyers that pull back to more mature technologies, onshore wind, bottom fixed and so on. However, there are definitely buyers. Valuations, yes, they've come down across the last few years. Costs have increased. So I think with that said, what we are seeing and expecting, not the least with some political initiatives as well in countries like the U.K., more auction results in OECD countries that happened across last year, more projects coming into the fabrication phase of actually building commercial scale offshore floating wind farms. We expect that to come back up. It's going to start increasing more or less from now. How quickly? Very uncertain. But there are investors, are they paying for the same amounts they were a few years ago? No. I expect that to come back up. I'm not sure of the pace of it. Let's see, there's one more here. Can you elaborate a bit on your potential earn-outs related to Munmubaram and Wave Hub? If you were to divest Munmubaram, how much would Hexagon retain after earn-outs? So I'm not able to here now provide that number, but I can say that first of all, we don't know what the structure will be at that point in time, how much upfront, how much is related to earnouts. We do, however, expect that if you look across our portfolio, Munmubaram is the one that holds the highest value. It is the one that is of larger scale compared to the -- and combined with the majority of it and in a market that offers a lucrative revenue scheme that is certificate-based that is not only -- it's a certificate scheme that you get more certificates per megawatt hour, the further off the coast and the deep the water is. So it's very much a premier floating wind market. You can achieve revenue. If you combine certificates with merchant, you can achieve revenue that is north of $300 per megawatt hour. It's not the best wind in the world, but that revenue size very much calls for a lucrative market. So that's where the majority of the value is. I unfortunately, cannot share here now values that we expect through that deal or if the combination of upfront milestones, how that will look like. And again, that's where the majority of the value is in a divestment or site sharing scenario of TwinHub, equally so, I can't share. Clearly so that the Korean project is of much greater value compared to TwinHub. I have time for maybe one more. Back to Italian deal. When is FID expected on that deal? It sounds like FID is not connected to any milestone payments. Is that right? Yes, that's correct. So maybe it can be to be technical, but it's more or less related development milestones that is EIA and CFD. In the odd scenario or chance that the project would secure an offtake that is outside the CFD, we can potentially secure that, but later stage at the FID phase. But no is the short answer and the most likely answer, which means that it's related to EIA and not CFD, and not FID. And with that said, I think that I've reached the half hour, I managed to get to, I think, most of the questions at least. So very much a big thank you to all that have been listening, and we will keep everyone updated as we go along and progress here and look forward to seeing you all soon again. Thank you very much.