NHOA S.A. (NHOA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the investor call of the ENGIE Eps First Half 2020 Results and Strategic Update. [Operator Instructions] This conference call is recorded, and the transcript will be available on the corporate website, www.engie-eps.com, in the Investors section. We shall now ask Carlalberto Guglielminotti, Chief Executive Officer and General Manager, to address the meeting.

Good morning, ladies and gentlemen. Thank you for being with us today. I'm very pleased to welcome you to the investor call on the ENGIE Eps First Half 2020 Results and Related Strategic Updates. I'm joined here with Andrea Rossi, our CFO; together with Giuseppe Artizzu, our Executive Director, Global Energy Markets & Development. I will start with a few key observation on our numbers and then Giuseppe will provide you with an update about our business. But eventually, I will move to the strategic updates on the ENGIE's group decision to assess strategic options for ENGIE Eps, including the possible divestments of stake in the company. Following the presentation that, as usual, you can download from the pop-up appearing on the home page of our website, Giuseppe and I as well as Andrea will be very happy to take any question you may have. So very quickly, on the presentation, I'm on Page 3. You see in our H1 2020 figures a clear growth path, 89% growth in terms of revenues, even if our H1 revenues would be historically telling of our end-of-year results, but in absolute terms, obviously, marginal. In terms of gross margin, we see a 13% decrease compared to last period -- the same period of the last year. In reality, compared to the end of the year, the 20% reduction in gross margin in reality is absolutely in line with the results, the 2019 full year results. In terms of our EBITDA, we had 31% lower EBITDA, but for a series of reasons that were mainly related to the gross margin, I mean the gross margin is tremendously driven by the major project we had in our top line, which is the project in Mexico brought by ENGIE, which accounts for more than 51% of the first half 2020 revenue. So in those kind of projects, the commodity content is higher, and therefore, margin physiologically decreased. From the net income perspective, we are in line with last year. Big news is from the pipeline and project backlog perspective because we booked 130% growth in terms of pipeline while a 30% decrease in backlog, but we will clearly see in the next couple of slides the rationale behind. If we go to Page 4, we saw the traditional breakdown between regional installation and by product line. We clearly see the impact of the Mexican project if we look to the revenues in terms of regional installation. Balanced sharing between Giga Storage and Industrial Solutions. While in terms of backlog, there is a clear 50-50 share, 49%, 43%, let say, between Europe and Africa and Industrial Solutions and Giga Storage. I'm on Page 5. From the pipeline perspective, that's the largest -- the biggest difference compared to last year, but more importantly because we show clearly that's out of the more EUR 800 million pipeline we currently have, $130 million are represented essentially by 3 projects that we have labeled contracts secured. So that's the biggest difference compared to all the other results we published. We are talking about the Solar-plus-Storage project, 300-megawatt hours in the United States and Guam. We're talking about the 240-megawatt hours project in Hawaii. And the new contract we get was -- come from New England for 50-megawatt hours that increased materially our pipeline of contracts secured, bringing the amount of contracts secured to approximately 600-megawatt hours. So if we compare to any other energy storage player in terms of targets, in terms of deployment and so on, that we are between -- certainly the top 10 worldwide, if not within the top 5 of the technology player active in this space. Then on Page 6, we have some details about the personnel costs, which is actually in line we see an increase in personnel costs and increase in -- slightly increase in terms of number of our total employee. Operating expenses are in line with our budgets with our natural physiological growth of people and operating expenses, which are already ready to scale up to deploy eventually 600-megawatt hours in the next couple of years. So that's a natural physiological growth of our staff, which is in an event obviously marginal compared to the growth we will have in terms of top line. Page 7, we have R&D investments. We clearly see also the impact of the V2G project that we recently announced. And finally, at Page 8, we have a representation of the net financial position. So we drew down other credit lines in order to sustain the working capital. Then business updates, Giuseppe, the floor is yours.

Thank you, Carlalberto. Those of you who have been following us over the last 18, 24 months have seen how our market position matured now we are solidly positioned on 3 verticals. First one is Industrial Solutions, where we sell decentralized energy solution to our clients. Second one is Giga Storage. That is the utility-scale systems located on the wholesale part of the electrical system with large substation, large solar systems, large commercial power plants. And the eMobility platform, where we are at the cusp -- at the juncture between the e-mobility and electric vehicle revolution and the need to interface that with the demand of the grid. So if I say the business positioning from outside at the institutional juncture, I see a company that is a platform across the 3 megatrends that are shaping the energy transition. In the Giga Storage business, of course, ENGIE has been the anchor client that allowed us to move one order of magnitude in the sites of our contracts. And that model can be replicated with any capacity developers at the moment. ENGIE eventually decided to let us out of the group. So this is a proven model, it's not something that is customized on ENGIE. So we work with global developers to participate in large Giga Storage standards to deliver the best solution at minimum CapEx and minimum OpEx. Moving over to the next slide. We do that with an open-architecture technology platform. So we have 1 technology platform that is at the highest and we articulate that into another architecture where we can optimally mix the sites of the storage capacity of our system within our store product line, how quickly and how responsive a way that energy can be delivered in and out of the storage capacity through our convert and connect product family. The intelligence governing this process in our control family and the designation of this platform for interfacing the batteries of electric vehicles in their charging and discharging process with the grid to our mobile family. This is an open-architecture concept that we have developed over the years and that continues to be our winning proposition in the market. Moving over to Slide 12. Over the last 12, 18 months, we have gradually focused our resources on Giga Storage. But with that, because of a matter of resources versus demand from the market, we have never left our decentralized energy solutions behind. A couple of updates on this front -- and by the way, our industrial energy solutions continues to support our origination and conversion effort. And a couple of updates on this front. The first one is we are about to complete the first microgrid in the U.S. We expect commissioning over the next couple of months that is in California. And by the way, there may be a doubling gap of pipeline. I mean you know that California is extremely challenged from a security supply perspective due by -- due to fire events that have seriously challenged the reliability of the grid. This has triggered cascading need for reliability, and microgrids are likely seen as an answer to that. But in addition, the lifting of travel restriction into East Africa is allowing us to get to commissioning of our Phase 1 Comoros project, which will unlock the work also on Phase 2. In fact, on the Giga Storage front, Carlalberto already anticipated that we secured the third large project in the U.S. This is in Mainland U.S., it's in New England. We don't want to give more detail from a geographic perspective because there are a few sensitive aspects, but it's a 50-megawatt project in New England for a stand-alone storage facility that will be located with 2 existing solar plants. In parallel, we are continuing our tendering activity across most jurisdictions that go from the APAC region and in particular in Australia, in the Sub-Indian continent, in South Africa and those opportunities that are gradually arising in Europe and in particular such reserve in Italy that is due later this year. I think this is the snapshot. So whoever looks at us looks at the platform, looks at credentials across the 3 verticals that take the energy transition and looks at a visible portfolio of projects with a high degree of security that could be the basis for significant scale up of this. Carlalberto, back to you.

Thank you very much. Given the time frame and more importantly, the long list of investors connected today that have registered. I would suggest to jumping me actually at me Page 17 of the presentation, we'll essentially summarize the key content from the strategic perspective we have mentioned in our press release. So first of all, if we look -- we all know that on Wednesday night has been issued by ENGIE a press release stating that the ENGIE Group has decided to assess strategic options for ENGIE Eps, including the possible divestment of its own stake in the company. They were saying that ENGIE will continue to actively dabble on battery and new storage globally in combination with renewable and that they were believing with combining technologies essentially in supporting them. Their customer [indiscernible]. I mean I will try to go through the lines of the announcement and then try to answer in advance to a series of questions that we received in the last few hours. First question I received was -- is that a change in the ENGIE strategy? The answer is no. I mean ENGIE strategy was and will remain to actively contribute to a carbon-neutral transition. So the renewable development will continue and remain an essential pillar of the strategy. And then ENGIE was aware -- is aware and absolutely acknowledge today the potential of the storage business, okay? However, the most important aspects to be outlined is that this is from the ENGIE perspective. But that's the most important question I received is that from a ENGIE perspective, their choice has been to position independently from suppliers, system integrators or equipment manufacturers and rather setup case-by-case partnership based on project specific. So they made a strategic review of ENGIE Eps. And in line with this primary choice to position independently from any kind of suppliers or industrial player, they have taken this decision. So the -- in this context, the real, most important message we were looking for that ENGIE confirmed in our press release is that the 3 projects. So one, Hawaii and the new project in New England for a total of 600-megawatt hours is confirmed because those are considered projects that are mutually beneficial. And therefore, we will reciprocally contribute to those projects, which are of a size that, again, position the company now. In a sort of top players list where just really few players in the world in that amount of energy storage under development and execution. But obviously, we mentioned in our press release that future opportunities will be jointly developed when they're mutually beneficial. And while possibly becoming independent from each other, I mean, the 2 companies develop over the past couple of years a deep mutual understanding, trust and appreciation of respective strength. So since 2.5 years that we worked with business unit, we created an intimacy with them and what I can consider long-lasting relations so irrespective of the number of shares that ENGIE has of Eps. So reality is that this new outlook in reality, despite the, first, let me say, hectic, if I may, market reaction yesterday is that Eps has many strengths to prosper even outside the ENGIE Group and even better than today because we know that many projects, particularly in the Giga Storage business segment of Eps, are structured with ENGIE as a developer. But the reality that we all know, a question that I received several times in the last 2 years, is that ENGIE was a limitation for the Eps ability to sell our solution to other players that are also in competition with the ENGIE Group. Then essentially, the situation was also given to us, a tremendous benefit in terms of scale. And in the last 2 years, we have created a value from the industrial perspective and in terms of the size of the project that we now address, but again, reality is that this situation was, at the same time, also preventing Eps to offer our services to potentially much larger customer base in a booming market. And the situation, which is tremendously different from when we have been acquired by the ENGIE Group because the market now boomed definitely in front of our very eyes. So reality is that, in case of divestment by ENGIE, Eps will still collaborate on a case-by-case with ENGIE exactly as we do because it's not a new saying that we have never get a contract from ENGIE simply because we were part of the ENGIE Group. We all know that. I mentioned several times publicly that the ENGIE decision to work with Eps was purely based on the seasonal business units, obviously. Geographical business then was purely based on competitiveness. So we were constantly put under competitive pressure, which is natural and healthy, okay, for us and also for ENGIE. So we have been awarded by ENGIE. We have competed with all the other global players. We've demonstrated to ENGIE to be the most competitive player, and then eventually, we get the contracts from it. This was the reality. So this situation, I'm absolutely confident and I receive absolutely comfort from ENGIE on the fact that our situation, even if a divestment will occur, will continue exactly in the same direction. Obviously, on a case by case, so maybe less structured way. But in any -- the reality is that we will, at the same time, be able to more easily propose our competency and scope of business to a larger number of customers. That I see from this perspective an obvious opportunity in this turning page of our history. So last few question that I promised to answer publicly is that this strategic review made by ENGIE is expected to be completed within a swift reasonable time frame. So sooner, the better, let me say, because obviously we want to limit as much as possible the uncertainty period for the company. But even more importantly for our employees. And then the last point, I saw a couple part going to the press yesterday related to the link between the decision of ENGIE about our shares and strategic review announced in July 2020. The first reaction is that this is totally outside of the scope of the strategic review initiated by ENGIE in July. That is the same thing. I mean it is naturally in the life of a group like ENGIE to review its capital allocation regularly, to review the business model. So do we want to position with a vertical integration in technology, this was the belief of ENGIE when we have been acquired in 2018. Now they reviewed the capital allocation, their play in the market and they've taken another decision. So they reviewed that and this is what they have done with ENGIE Eps. So nothing related to our value, our competitiveness. I mean, I think that our value and our competitiveness is demonstrated in the market. So it's demonstrated by the projects we get and the projects we commission. We will continue with a very constructive approach to work with the business. And let me say that the potential divestment of ENGIE will not touch in any manner the value we created in the last 2.5 years within, and thanks to the ENGIE Group, but even more importantly for the benefit of all our shareholders. So long story short, before leaving the floor to questions, let me say that there is a huge difference between 2.5 years ago and today. The first difference is that meanwhile, we installed and commissioned all over the world more systems that we have a larger installed base. The know-how and the value of the company from the intellectual property perspective, from the innovation perspective, from the unique play perspective is the same. I consider that what we have done meanwhile, e-mobility was something unique that nobody was expecting 2 years ago. So I'm confident and -- that also from the intellectual property and know-how perspective, we have expanded materially our positioning in the market, but even more importantly, our set of competencies. But the real key data in terms of difference between 2018 and today is that we secured 600-megawatt hours for the next couple of years. $130 million of revenues in the next couple of years, EUR 800 million pipeline of projects. We have a clear visibility, COVID aside, obviously, because we cannot predict the future from the pandemic perspective. But COVID aside, clear visibility because of those contracts on our 2020 guidance. In the last few weeks, we also increased our number of secured contracts to $130 million. We have new contracts in New England, additional 50-megawatt hours that 2 hours ago was -- that 2 years ago was 50x the larger systems that we get from this company. So today it's considered the marginal increase in our pipeline of secured projects. Two years ago, it was 5x the largest system we have installed, okay? So the sales -- the value creation we made in 2 years. We have a tremendous, more solid organization. We are playing with a mature industrial play today that started officially with the long-term strategic plan we launched last year. And thanks to the announcement made by ENGIE yesterday, I have to say that the confidence of the management, the motivation, and with no doubt, the commitment of the management team to expand our role beyond the ENGIE Group, leaving now the floor for collaboration with more players give us a level of motivation and confidence that is unbelievable. That's the reason why we expect a long list of potential investors and financial partners to this company with no doubt. And then to conclude, I have just to say thank you very much to the ENGIE Group because, thanks to ENGIE, we have changed a lot. We are more mature, more solid, more industrially oriented. And now there is a book of opportunities in front of us that's unbelievable. And we really thank the ENGIE Group to give us this opportunity, which in the history of the company there's no doubt after the ENGIE acquisition 2 years ago, the largest opportunity. We have a bright future ahead of us that this company has never had. That's my conclusion. And then with that, let's now take your questions. And all together with my team, we are ready to answer to any questions you may have.

[Operator Instructions] The first question is from Jean Belanger with Societe Generale.

This is Jean-Michel Belanger from Societe Generale. Would you say that the change of ownership could be a matter of days or weeks or months? That's my first question. The second one would be, well, if there is a change in ownership, we can reasonably guess that the new majority shareholder will have to do a bid of -- on 100% of your share capital. Is it correct?

Thank you very much for your question, Jean-Michel. On the time frame, as I was saying, the sooner, the better. Obviously, certainly not days and not even weeks for one simple reason: we have managed together with ENGIE this situation in a very, very professional way meaning that once decision was taken, we immediately communicated to the market. It means that no process has been initiated. So by definition, any kind of divestment and strategic review because, again, these strategic reviews so eventually may end with a divestment, but the divestment is not sure, obviously, okay? So meanwhile, the ENGIE Group has officially said that will continue to support not only commercially with the projects already secured and the development of projects we have together, but even more importantly, also financially, right? So obviously, the sooner the better, but having managed this situation in a very professional way, I can say very simply that there is no -- I'm not aware of any bank appointed for this potential deal, okay, to simplify the equation. So meaning that, obviously, a reasonable time frame will be months. We will start working today in shortening as much as possible this time frame. We are very confident that this time frame might be shortened simply because we expect a long list of potential partners through the door, okay? But the time frame will not be days or weeks, okay? That's the first reaction. I didn't get your second question. Apologies for that, Jean-Michel. Can you please repeat it?

Yes. Well, the second question was if there is a change in ownership, then the new reference shareholder would have to do a bid on 100% of the share capital?