MPC Energy Solutions N.V. (MPCES) Earnings Call Transcript & Summary

Good afternoon, everybody. I have the pleasure to welcome you to today's webcast for MPC Energy Solutions. In our webcast today, we will discuss the preliminary results for the year 2024 and the outlook for 2025. The corresponding documents have been published this morning, and they are available on our website. If you have any questions during the presentation, please feel free to type them into the text box, and then we will answer them later on in a quick Q&A session after the call. The webcast is being recorded, and we will publish it later together with a transcript on our website as usual. So just as a reminder, we will be making certain forward-looking statements in this call. Please refer to the disclaimer included in the presentation for the background and limitations for these forward-looking statements. And now I would like to introduce Stefan Meichsner, who will lead you through the slides.

Thank you so much, Heike, and good afternoon, everyone. I'm very happy, glad that you're joining us today, taking the time. While the agenda looks rather short, there's actually quite a few details that we will go through today, and it will be separated into 2 sections. The first part concerns the review for 2024 and a disclaimer here already. The numbers that we are sharing are preliminary, meaning that they are still unaudited. The audit is currently ongoing. Historically, there were very minor differences only between audited and unaudited financials. But just to bear in mind that the numbers might ultimately change. The audited results will be published in the middle of April. And then we will move and look into 2025, the goals that we have for this year, the priorities that we've defined and also the financial guidance that we can share today. Just a very quick reminder, I won't spend much time on this. For those of you joining for the first time or needing a slight refresher, MPC Energy Solutions is a full cycle independent power producer. That means we're a company in the renewable energy industry that focuses on developing, on building and on operating renewable energy projects at the moment, solar PV plants, but ultimately also with the idea to branch out into other technologies. This business that we launched over 4 years ago is mainly conducted or only conducted in Central America and to a lesser extent, the Caribbean, which we define as our target region. The portfolio that we have operational today consists of 4 projects. It was 5 projects last year, but we sold a project at the end of 2024. So currently, 4 projects, all solar PV projects in 3 different countries are operational. And we are constructing a very big and very important plant for us in Guatemala. It's a project that has the size basically of the entire existing portfolio. We started construction in early 2024. I will give an update today on how that is progressing, and we target to connect it to the power grid and start delivering energy by the middle of this year. Most of our projects are trading in U.S. dollars. To a large extent, everything is U.S. dollar-denominated. And the average lifetime of the delivery contracts that we have is around 16 years for the current portfolio. If you're tracking the slides that we uploaded, I will now skip 2 slides and continue now with a review for 2024. So 2024, looking back at the operational results, was actually a very good year for us. especially the fourth quarter was quite exceptional, which also helped us to actually beat the revenue guidance that we shared a few months ago and to end up at the upper range of the guidance that we gave for the operating profit. So if you look at 2024, one of the clear highlights is that across the board, across the key metrics that we track like energy output revenue, operating profit, which we measure as EBITDA and also the operating margins, we improved significantly. In part, that is because we simply had more projects under operation. But even the projects that were already operational the year before, they all improved in terms of output, revenue and profits. So even in a like-for-like comparison, it was a very good year. In addition, we managed to very substantially lower our overhead expenses year-over-year by 30%. Now this is something that we launched at the end of 2023 and where we said we were trying to save as much as 30% year-over-year. And I'm very happy to report that quarter after quarter and also for the full year of 2024, that worked. We showed a lot of discipline. We showed a lot of dedication to making this happen. And with this effort and combined with the great operational performance of the portfolio, if you look at the impairment adjusted group EBIT, we came very, very close to breaking even in 2024, which was ultimately one of the goals that we shared earlier that year. Another highlight for us is the progress made on construction in Guatemala. I can share a few impressions from the site later on in the presentation. But for now, it's just important to note that we're on time, we're in budget, the EPC contractor, our team, everybody on site is doing a great job. And there's, at the moment, no indication whatsoever that we shouldn't be able to connect by the middle of this year, which means the project, this large project would also contribute to revenues and to profits and cash flows in the second half of 2025. Another important milestone that we successfully concluded right on the 31st of December actually last year is the sale of our combined heat and power plant in Puerto Rico. Now we lost money ultimately on that project, but I'm still considering it a highlight for a number of reasons. Number one, it helped us return significant cash back to the company, bolster and boost our liquidity and create greater flexibility than we already had. So that was very important to us towards the end of 2024. And in addition, we must admit that there was a time when it seemed like we would lose the entire investment for the simple fact that from the moment that we started operating the plant, the offtaker had a very low energy demand. They constantly went through restructuring. There was a very low visibility on whether they would recover and how long it would take. So ultimately, we decided let's sell the project, let's recover as much money as we can. In this case, it was USD 4 million, which have mostly already been collected. And we just take the loss on the investment. It's better than spending years and years waiting for a recovery or spending this time in court or ultimately losing much more money. So we consider this sale a highlight. And last but not least, not everybody might see it this way. If you looked at our preliminary financials in detail that we published this morning, you will also see them later in this presentation. We took quite a lot of impairment charges on existing projects, on discontinued projects, on some legacy projects that we unwound when management was changed in the middle of 2023. So the balance sheet cleanup that we've done over the past 18 months or so has now been concluded. It's certainly painful if you look at the net result only. But if you understand why we're doing this, and we'll dive into it, and that this is a noncash impairment, you look at the adjusted figures and you understand that we're now looking at a very clean balance sheet, a solid balance sheet as a start for 2025, then I think the picture becomes different. Then I think you understand that this is necessary to really free up the company for the foreseeable future. Nonetheless, the impairments that we took, they are the clear low light of the year. We took impairments after the sale in Puerto Rico. We also adjusted the value of our investments in Colombia and our investment in a microgrid developer in the U.S. that we still have as a legacy from the very beginning of MPC Energy Solutions and certain obligations and discontinued development expenses that we capitalized were also written off, which overall distort the total result, while operationally and adjusted for these impairments, the numbers look much, much better than in 2023 and are right in line with what we predicted, a little bit higher actually in some cases. Overall, the net result for the year is negative because of these impairments. Something to also bear in mind, and our thoughts go out to everybody involved in this. Unfortunately, Colombia in recent months has seen some unrest, certain groups fighting for, let's say, domination in certain areas of the country, which at the moment doesn't affect us directly. Our plants are still operational, even the plant that is within that region is operational, and we are doing everything we can to protect the site and especially our staff, of course, reducing site presence as much as possible and especially traveling into the region. But there is a certain volatility. There is a certain uncertainty around this. And at the moment, the only negative impact that we see is that we had to put the divestment activity for one of the projects on hold until the situation stabilizes and hopefully improves quickly. So we still have the target of selling this one project in Colombia this year. But at the moment, traveling to the region, conducting site visits, et cetera, is made very, very difficult. So temporarily, we are slowing down the divestment process. For the other Colombian projects, it's progressing as normal. So here, we see that we should come to conclusions soon actually. And if you've followed our press releases, we already sold the first project in Colombia in January of this year. So let's see that everybody stays safe in the region and that we can pick up the divestment process in the coming weeks. Overall, I would say, again, a very good year 2024 for us, certainly a record year when it comes to all key metrics and adjusted for the impairment charges, as you will see later, it's a significant improvement also on group level for 2024 compared to previous years. We're looking at the exact numbers of what I just mentioned, the growth, the higher operating profits and margins, we were able to increase our energy output by more than 30% despite the fact that there was basically no contribution to this by the project in Puerto Rico. So the other projects did a great job of compensating for it. And this growth, as you will see in our outlook later, is going to continue. Consequently, project revenues are also higher. We ended the year with proportionate total revenues of $12.8 million, which was above the $12 million that we guided for the year. We simply saw terrific performance from our projects in El Salvador and especially Mexico, higher than anticipated, which led to this significant increase. And then project EBITDA and margins also a significant increase to nearly $8 million, which was at the higher end of the guided range that we shared last year. And what's most important is that the operating margin also improved substantially from 49% to 61%. This is still, of course, below what we consider normal for renewable energy projects. But when you factor in the special situation in Colombia, when you factor in the special situation in Puerto Rico, it actually doesn't look that bad, as you can see here as we drill down into the projects. So we had a very good 2024. We had a very good fourth quarter in particular. And our projects in Mexico and El Salvador, they are really standing out as the 2 ones that are contributing most of the revenue, most of the output, most of the profits, given their size, but also simply given that they are the ones that are operating normally and in a proper manner and the margins also indicate this. To a lesser extent, we saw a good contribution from our Colombian projects. While revenues were overall okay, the margins remain substantially lower than expected. In part, this is due to the security situation, which leads to higher security costs. We have to hire firms and we have to hire advisers to make sure we are taking the right steps to protect the staff, to protect the sites. But we are also still seeing that the spot market is distorted and the trading that we have to do to deliver energy under certain contracts simply relies on us trading in the spot market. And while we improved the profit from -- in Los Girasoles, for example, where we lost $700,000 last year, now we reported a profit of over $0.5 million, the improvement is there, but it's still far away from where we wanted to be. But if you remember that we reported in quarters previous -- in certain quarters last year, an operating margin of around 10%, the 26% that we ended up with are actually not that bad at the end of the day. So from a project perspective, Mexico continues to do great. El Salvador continues to do great. We also had a great start there into the year 2025. Puerto Rico is now no longer a factor. And in Colombia, we're seeing continued improvement still so that we think the worst year is behind us. I already mentioned our efforts and success in reducing overhead expenses. And actually, in the first quarter of this year, meaning in January 2025, we took additional steps to bring down overhead expenses further. These steps will become visible from Q2 onwards as we are currently having some breakup fees to pay and other, say, extra costs to make sure we can actually bring costs down, get out of certain contracts, et cetera. But the ambitious target, but certainly achievable target for 2025 is to save another $1 million. And we will track this carefully, and I hope that the team will help us deliver this additional saving going forward. Thanks to cash back from certain projects, thanks to the sale in Puerto Rico for which we have partially collected the purchase price, our free cash position at the end of the year after going down throughout 2024 as we met certain capital commitments has also relaxed. We are on a very solid footing at the moment with lower costs with no capital commitments with cash coming back from certain sales activities, we're looking at a very solid free cash position, which will increase as the year progresses. If we leave the, let's say, project and overhead side and we look at the pure consolidated figures, I won't spend too much time on this because the message is very much the same. We increased revenues, we increased operating margins and operating profits. You look at group EBITDA on a consolidated basis, the improvement is from a loss of $700,000 last year to a $3.8 million profit. If you look at the group EBIT on an adjusted level, it's the same story. We nearly lost $5 million last year. We're approaching breakeven this year, especially if you consider the noncash impairment charges we took for what's in the past. Looking ahead, this won't happen again. So I think for 2025, after having delivered a record year 2024, we will see further improvements, and we're targeting a group EBIT positive, both adjusted and unadjusted in 2025, as you will see later. Quick look at the balance sheet. It's very much unchanged. We still have a solid equity position. We have free cash of $4.3 million. If you look at the consolidated cash position, including everything that's also in our project entities is around $12.5 million. So these are very solid numbers. And adjusted for the impairment charges and FX effect, we're also approaching a positive earnings per share number, which last year was nearly a loss of 40% -- $0.40, sorry. So the negative $0.05 per share are also reflecting a significant improvement. All right. So what's next for us, which brings me to the outlook for 2025. We have defined clear goals. Goal #1 is very simple. We want to continue to improve our free cash position, our liquidity. And the second goal is that we want to start generating positive free cash flows also on an after overhead charge basis. To that end, we have defined the following priorities, which are in part already being implemented. Number one, of course, it's very important to complete the construction in Guatemala on time and in budget by the middle of this year. That way, we can ensure that this huge project with -- which is substantially bigger than everything else that we've built, can contribute to output revenues, profits, cash flows in the second half of the year. On top of that, to strengthen our liquidity further to create greater flexibility, concluding the sales in the Colombian -- of the Colombian projects is a top priority. Our development project is already sold for the joint venture that we have in the region, we are approaching the final discussions with a potential buyer. So we believe we can close the deal here provided that the terms are right in the coming weeks. Actually concluding the sale will then certainly take a little bit longer. And once the situation for our other projects stabilizes security-wise, we will also push that divestment process further and the intention is to sell all Colombian projects by the end of 2025. To achieve the second goal, positive operating cash flows, we need to further reduce overhead spending and be very, very selective on development spending. And as I said, the measures have already been implemented. They will become visible from the second quarter onwards. And even though the goal is ambitious, it's totally achievable. All of this is ultimately targeted at starting to return cash to shareholders. Now we haven't defined in what way. We haven't defined the exact amount. That certainly depends on how the cash position is growing. throughout the year. But nearly 4 years after or a little bit over 4 years after the IPO, starting to return cash to shareholders is an absolute priority for us. And this is why it is one of the focus areas for 2025. Before I underline this with the projections for 2025, I'd like to give a few impressions on our construction progress in Guatemala. The project is called San Patricio. As you can see here, it's a huge site. The modules that you're seeing here that have been installed actually only reflect 1/3 of the plant. The rest is currently ongoing. The good thing is all the equipment is on site. There's no more delivery risk on components. There's no more price risks. Everything is going really well. And at this time, really 1,000 thanks so far to the contractor, to our team who are making this possible. And there is, as I said before, no indication whatsoever that we shouldn't complete the project on time and in budget. What can you expect from us financially in 2025? We are sharing our predictions on the key metrics here. It's important to note that these projections do not include any contribution from the Colombian projects. So even though they are still part of the portfolio, they're actually generating revenue, they're actually generating profits. We do not consider them in the forecast. What we will rather do is we will update every quarter the guidance a little bit upwards for the simple fact that at the moment, we don't know how quickly the sales processes will ultimately go and when we can conclude them. So we found it prudent to not consider them at all and then rather consider them as an upside for our guidance as we move forward. The main impact that we see here is, of course, the connection of San Patricio and that the project itself will contribute half a year of output revenues and profits. This overcompensates the, let's say, sale of Puerto Rico. This overcompensates even not factoring in the Colombian assets. So on an energy output side, we are expecting a roughly 20% increase. On the revenue side, we're expecting to end up in the same range as this year as in 2024. And because the project in Guatemala is expected to deliver a much higher margin than what we had in Puerto Rico and Colombia, we should also see an uptick, not just in the absolute terms on operating profit, but also on the margin side. That is the goal that we have for this year. It's a fairly conservative outlook given the fact that we're not factoring in Colombia. But at the same time, it is something that we consider realistic and that we would like to be benchmarked against. If these numbers come, that means on a group level, we will report group EBITDA between $6 million and $7 million for 2025. And under normal conditions, normal depreciation, normal amortization, we should then end up with a positive group EBIT as well of around $1.5 million to $2 million. So after having had a record year 2024, what we're looking at is a record year 2025. The start over the first 2 months has been quite well, which we will report at the end of April with our Q1 figures. So that's the prepared remarks for today. Solid 2024, looking ahead into a very, very promising 2025 with clear goals, clear priorities. And with that, Heike, I hand the call back to you, and I'm happy to take any questions that the audience might have. Thank you very much.

Okay, Stefan, thank you very much for the presentation and for the transparency provided. Now let me just look at the questions you received. And please, if anybody out there has any further questions, there is still time to type them into the question box. All right. Let's get started with the first questions. Okay. So some of the questions, I'm trying to group them into one here are obviously focused on the topic of impairments that you raised. So the question is, you reported large impairments in 2024. What triggered these impairments? How do you judge remaining balance sheet risks? Can we expect additional impairments in 2025? And there is also a follow-on question. If you could perhaps split the impairments across the related projects, Stefan?

Absolutely. Yes. Let me bring up the slide that also contains part of the information already one moment. So most of the impairments, nearly 90% of the total value are related to real-life events. You can see that in the text box here on the lower right. So we sold the project in Puerto Rico. That project was sold at a loss, and that loss is being recorded as an impairment. And that is by far the largest amount of a little over $5 million. Then we corrected the value of a joint venture investment we have in Colombia for the simple fact that we have an ongoing sales process. We know what the buyer is willing to pay. And even though the negotiations are not completely finalized and even though there might be upsides for us down the road, we found it prudent to adjust the value on our books to the amount that we believe we will ultimately collect. And then in the U.S., where we still have a legacy investment into a microgrid developer, they restructured their capital structure. And as part of that, we agreed to take a certain loss on our investment. So at the end of the day, these were real-life events that were triggered by certain -- yes, by certain instances. The remaining amount here is related to Colombian development projects, the Jamaican development projects, a project in the Dominican Republic. There was also still a remnant on our books from the Saint Kitts project, which we divested in 2023 already. So this is basically how it all breaks down, yes. And the question about balance sheet risks. So we did this to clean up the balance sheet. To the extent that we can estimate the fair value of our investments, we believe the balance sheet is clean now. So we don't foresee any additional impairments. Of course, ultimately, especially looking at the Colombian assets, it will depend on the final sales price. If that sales price turns out to be below the book value, there will be additional corrections. But it could also very well be that we're collecting a little bit higher amounts so that we can actually report a profit. And when you look at the balance sheet entirely, certain fair market value adjustments like for El Salvador, for, to a certain extent, Mexico, especially Guatemala, where we know the projects are worth more in the market than what we have on our books. We need to keep in mind that we only report the negative side, the upsides are not considered until they're realized. But there's never no risk at all, I want to make that clear. I think to assume that would be foolish. But we feel very comfortable at the moment. And I would think the risk for additional impairments after 2024 is very, very low.

All right. Thanks, Stefan. Now let's move on to Colombia. First of all, the question is, do you expect to be able to sell the Colombian projects at book value?

After the value adjustments that we made, that is the target, of course, at minimum.

All right. And then maybe moving on to the outlook for 2025. It was noticed that you did not include the Colombian projects in the outlook. What is your guess on the upside of the projects that remain in the portfolio for another 6 months or so? Is there an upside related to that?

Okay. So it's not just a guess. I mean we have a budget and a projection for both projects. On a full year basis, both projects, and this is our economic share in them, should deliver around $2.5 million in revenues and around $1 million in operating profit. So if we take that in half for the first half of the year, then we're talking $1.2 million revenue, $0.5 million in operating profit, which we will ultimately see because we won't be able to sell them next week. But since the timing for the sale is a bit uncertain, this upside just needs to be kept in mind, and we will update the projection as we go through the year and have greater clarity.

Okay. Now moving on to cost savings. First of all, the question was how you could save such a huge amount on your expenses?

Well, in 2024, the savings were that we simply got rid of, let's say -- how do I phrase this? So we had certain growth ambitions, and we built a structure, especially with certain service providers in many different countries that was targeted at supporting that growth. And we also had some special expenses in 2023. So getting rid of all of that and really focusing, narrowing down on what is necessary for the current setup and for what we had planned, that was the big lever. This is what we actually implemented. And for the next round of savings, we're doing the same thing. We're taking a very hard look at what is 2025 all about, where should we make adjustments to the service setup also in part to our team. And that is ultimately what will or should allow us to bring down costs further. I don't like the word rightsizing, but that is ultimately what we're trying to do.

All right. Okay. The next question that came in is, do you expect to be able to sell the Colombia -- no, sorry, we already have that. Sorry. Okay. Right. Are there any projects moving to FID in the near term? I guess is the next question.

No. No, the development pipeline that we have is still very early stage. So -- and we are spending very, very selectively on this. If we were to move this forward as quickly as we can. I think the next FID wouldn't have to happen before 2026, middle of 2026.

All right. Now on Guatemala, are there any PPAs on the Guatemala project? And have you looked at farming that down partly already?

So there's one PPA that we signed for the entire output over a 16-year period with a local offtake. We've published that also in previous reportings and press releases. So that is a bilateral PPA. We don't have to trade in the spot market or use the market as a vehicle even if we could, as a fallback option, so to speak. And in terms of selling a stake, I mean, we've communicated openly that we are in discussions with potential buyers. And the process, I mean, has been much, much slower than what I would have usually anticipated. And at the end of the day, it's progressing. Ultimately, what we will need is finding offers from interested parties. And then we will sit down and we will discuss whether the offer reflects our own expectations, our own valuations. At the moment, it looks like it. There are also strategic considerations that we need to take. So there is value in keeping a 100% stake in the project from different perspective. There's also value in collecting a substantial partial purchase price now at a development fee. I personally have not reached a final conclusion because I don't have a final offer on the table that I can judge. But when the time comes, we will sit down with the team, with the Management Board, with the Supervisory Board, and we will discuss whether farming down part of the asset is the right step. And then we will inform the investment community, of course, once the decision has been taken.

Okay. From the same person, another follow-up question. In the future, what's the cash conversion rate on project EBITDA?

Well, ultimately, in a steady state, we would expect that if we have project EBITDA, you only discount, let's say, the overhead, the debt service and then a certain amount on withholding taxes and the like. And ultimately, if I look at the guidance for next year, where we are predicting, let's say, the $9 million project EBITDA we're looking at $6.5 million group EBITDA and then accounting for the debt service and the withholding taxes, we should be slightly positive already. And then starting 2026 onwards when Guatemala is kicking in and delivering a full year of operations, we should see very, very steady free cash flows for the group in the range of USD 2 million until we grow further.

Thanks. The next question, now moving back to the sale of the Colombia projects. Do you have a range for the expected net sale proceeds net of debt from the Colombia projects?

We do, but we will not share that until that is secure.

Understood.

The remaining -- I can share this, the remaining book value of our investments at the moment is around $16 million, and that is what we ultimately target to at least get out of any sale.

Sure. So as a last concept, let's move on to development projects. So what development projects do you currently focus on? And do you intend to start new constructions this year?

The answer is we will not start any new constructions this year. The pipeline that we have on the development side is still relatively mature, so it will require money and resources to move them forward. The core markets that we have our pipeline in are El Salvador, Guatemala and Panama. I would say the pipeline is around 200 to 250 megawatts, but we will be very selective on spending that we do in that area. For example, in El Salvador, we are fairly close to getting an interconnection permit. That's, of course, a great value generator, and it doesn't take a lot to get to that point. So ultimately, also to increase the value of the company, this is what we will do. But otherwise, we will remain selective. We will look very, very carefully at how our operational performances, our cost savings materialize so that we always retain sufficient flexibility on the free cash side and also achieve our target of returning money to shareholders. So we need to find the right balance, and that will ultimately define how quickly we evolve the development pipeline.

All right. Now as a last question for now, do you consider selling development projects to shore up additional cash? I think you partly answered that already, but maybe just to round it up.

I mean if there's interested parties, especially for those projects that we discontinued where we said, okay, for our return requirements or for our strategic purposes, we no longer consider them core. We are keeping our eyes and ears open and we're talking to interested parties. In Colombia, this has worked. We sold the development project there recently. So it's an idea, but given that the pipeline is relatively immature, the upside would have to come later on. So I don't expect that we will collect millions now upfront. But if somebody purchases the project and we can find an agreement where, at certain milestones, we get certain payments, that's doable. But we should focus on selling the operational assets in Colombia because this is where true cash sits.

Thanks, Stefan. So I think this concludes the Q&A session for today. This is all the questions we received, and we're also nearing the end of this webcast. So we'd like to conclude the webcast now. Of course, if any of you have any further questions that we have not covered today, please feel free to send them to us via e-mail at [email protected]. And we will, of course, get back to you after the webcast. So thanks, everyone, for joining us today and enjoy the rest of the day. Thank you very much.

Thank you. Take care. Thanks, Heike.

Bye-bye.