Photon Energy N.V. (P7V.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. It's my pleasure to welcome you to the Q1 and half year results conference of Photon Energy Group. And as usual, we will guide you through the presentation. To my left is our CFO, David Forth; and myself, Georg Hotar, the CEO. Just a little technical information. Some of the invitations had a link to the presenter link of our webcast. So some of you when they log in are presenter and not attendees. Our support team will automatically transfer those who entered as presenters to the attendee bucket. So just as that you're not surprised. Not everyone, but some invitations, unfortunately, went out with the wrong link. So just as a quick explanation. So let's move on to the presentation. The obligatory disclaimer. We will use the usual format. I will update you about the business results in the second quarter. David will run you through the financial results. And as usual, we have space for questions and answers in the end. So I will start with the -- our most significant contributor to group EBITDA, which is our Investment/Electricity Generation segment. That is our IPP portfolio of operating PV plans. In the second quarter, we did not commission any new power plants. In Q1, we commissioned three power plants with over 5 megawatts of installed capacity. But over the last 12 months, the total is over 16 megawatts, which includes 10.7 megawatts peak in Romania and 5.7 megawatts in Hungary, including -- that also includes our behind the meter power plant there. But at the same time, we also in the last 12 months disposed of our two operating assets in Australia, which had a combined capacity of 14.5 megawatts peak. So year-on-year, we have increased our total capacity only slightly by about 2 megawatts peak. But since the beginning of the year, we actually added 5.1 megawatts, which are those three power plants connected in Q1 in Hungary. The overall Electricity Generation in the second quarter declined year-on-year, and that is driven by two factors. One is the sale of our Australian assets which, despite the fact that the second quarter in the Southern Hemisphere essentially represents autumn. And the year-end, it was still contributing significantly in terms of generating electricity a year ago. But also the second factor, which are temporary TSO-mandated shutdowns of our power plants or some of our power plants in Romania, which is part of -- partially part of the licensing process and partially due to certain regulatory changes. But we are well on track to have all our power plants. I mean, some of them got connected already. And until the beginning of the fourth quarter, we expect all our power plants to be connected to the grid and be generating revenues. But as we'll be seeing later, it has had an impact also on our financial results. The output decline was mainly concentrated in our merchant portfolio as that's where we had the changes. So our two Australian power plants were running on a merchant basis, but also the new additions are in Hungary and Romania are all operating on a merchant basis. And where we are seeing an outperformance, I think an increase year-on-year is the part of our portfolio that is running based on a support scheme. And this has also helped us in compensating to a significant degree this decline in generation volume. The specific yield in the second quarter was also lower year-on-year. And here again, it is due to the mix because the power plants in Romania that were not operating, but also our Australian power plants were built on single-axis trackers, which have a higher specific yield than how the power plants that we built until approximately 2021, all of which are fixed mounting structure power plants. So this is the main driver in terms of -- the weather was not that significantly different in the second quarter of this year compared to last year. And as I mentioned before, in May, we already managed to connect Aiud and Faget 3, so two of the power plants that were in this case partially not contributing to revenue generation in Q2. And in August, we managed to reconnect Sahateni. We are also -- as we are getting to the finish line of getting the operating license, we may still have some temporary shutdowns of some of our power plants. But as I said, by Q4, we expect all of them to be up and running. The overall revenues for the second quarter from our IPP portfolio reached EUR 8.1 million, which represents a decline of about 5% compared to last year. So basically, going back on the slide there, we had a decline in generation volume of 11.6%. But in terms of financial terms, it was below 5%. Again, thanks to the outperformance of power plants that are running on feed-in tariff, which generate higher revenues than the average and then the merchant portfolio. Year-to-date, with EUR 12.3 million, we have essentially matched last year's performance. Looking at the average revenues per megawatt hour, we have seen approximately 7% increase compared to last year from EUR 158 million to EUR 169 million. And -- but as you can see, those revenue numbers per megawatt are relatively widely spread from EUR 57 in Romania, which is due to a price cap of a maximum of EUR 80 power plants that are in the scheme before we get the operating -- the generation license all the way to the feed-in tariff in the Czech Republic, which is more than 10x that amount. And another contributing factor is that with the Australian power plants not part of the portfolio this year and revenues in Australia were also rather on the low end. As you can see this blue line. The remaining asset that we see here with EUR 181 is a small rooftop that runs on the feed-in tariff of about EUR 180 per megawatt hour. But last year was still 99% of our installed capacity were our two operating power plants, which had significantly lower revenues per megawatt peak and they are not part of the portfolio. So that's these are the drivers. And looking at the EBITDA for our generation portfolio, we had a decline of 4.6%, which is essentially in line with the decline in revenues on a year-to-year basis. The next segment is Engineering, where we have had revenues declining by 8.5% compared to last year. The main contributing factors or areas is C&I in Australia. It is our project in New Zealand, in Pukenui, and the beginning of works for our largest EPC project to date in Romania for Hyperion for renewables. And we have seen a very difficult first half of the year for our C&I activities here in Central Europe, where our focus is mainly the Czech and the Slovak markets. So the whole market has been essentially in standstill, but there is a lot of pent-up demand, and we see that materializing as we speak. So we expect a significant contribution to come from this part of our business in the second half of the year. Coming back to our project in New Zealand, we have been able to energize the power plant in terms of getting all the permits to export to the grid and start of export to the grid before the end of June, and we are now in the process of handing over the power plant to the investor. So the good news is that we have managed to deliver this project essentially on time. And works are starting on the project in Romania. And we are in discussions with multiple clients on additional EPC opportunities across the markets where we're active. I mentioned -- or in the C&I segment, in some of the markets, in Australia, we see a recovery and also confident that in the second half of the year, we'll see an improvement compared to the first half. Looking at the EBITDA level, there is a significant year-on-year improvement where in relation to our external revenues, we've been able to essentially turn around and go from a EUR 1.6 million loss in the first half of -- sorry, in the second quarter of last year to a positive EBITDA of EUR 226,000 in the second half -- second quarter of this year. And we expect that picture to continue between now and year-end. In New Energy, we have had a decline in revenues from the capacity market primarily. So as you can see, looking at the trading volumes, which is electricity that we offtake from mostly PV plants and sell into the market. But also mainly in Hungary, we have a supply business. There you can see a significant year-on-year increase. But on the capacity market based on the lower contracted volumes, but also lower prices we've seen a significant decline in the second half of the year. Just as a reminder, the capacity auctions in Poland are always conducted on a quarterly basis. So in the first quarter, we had high revenues in the first quarter, we are also profitable. But the second and third quarters were expected to be weaker. And in the fourth quarter, then there's a recovery. So this is literally a snapshot of the second quarter with the lowest prices contracted throughout the financial year 2025. So the good news is that we are winning more offtake contracts. So we have been able to add additional capacity in Hungary and also in Poland. We also recently published the news that we signed an offtake plus battery optimization contract with one of the largest energy project developers in the Polish market. And going to the last point, this will -- this optimization will, as soon as it will be certified, which we expect to happen during the third quarter, latest beginning of Q4, will also include ancillary services. And we still believe that we will be the first -- either the first or the second provider of these services in the Polish market. And we're also working on certification for ancillary services in the Czech and Hungarian markets. So this is a very important puzzle part of our offering and should also drive the appeal to be an offtake from not only battery storage projects, which are slowly being implemented in the Polish market, but also across the region, but also from PV plants, wind farms and biogas plants, which can be used for the provision of ancillary services. So even on ancillary services, our focus is primarily on renewable energy sources and batteries. But of course, in some cases, may also include other assets, but the focus remains on renewables. In terms of EBITDA, as I said, on the back of the low volume and prices contracted for the second quarter, the external EBITDA in the second quarter was almost minus EUR 1 million, or which is in stark contrast to last year's EUR 700,000 -- nearly EUR 700,000 of positive EBITDA. Which takes us to O&M. This is an area in which, as you can see, we are driving continued growth. And in terms of megawatts under management, I think one important development I would like to point out which you can see from this bar is that while we have added pure solar O&M contracts and we continue providing central inverter O&M services, there's a new category that has been added, which is asset management. And this is something that is developing quite rapidly. It is something that -- a service that we -- where we are essentially responding to demands from our customers in markets like Hungary and Romania, where they are -- based on the fact that we are an IPP and we manage our own portfolio of power plants in these countries, that we are good at operating or managing these assets. So we've been able to win two major contracts in Hungary so far, and there's likely more coming in Romania and potentially over time in other markets. But it simply adds a different dimension or a different offering to what we've been offering to date. And while speaking about this, the next area that we -- where we see a lot of growth potential for our O&M division is the operations and maintenance and possibly also asset management of battery energy storage systems. So the very positive development is that we've not only been able to win more volume on O&M and, here, it's also important to point out that we are in tenders that we are participating in quite successful. We are winning, I would say, the top names of investors within, but also from outside the region that are building PV and energy storage assets in the region. So this growth dynamics is something we expect to continue and also become more visible. One of the things -- this graph could actually -- this growth curve could actually, already by now, look more dynamic. But what we're seeing in the market is that a lot of the assets that we -- where we sign up the O&M have delays in commissioning. And sometimes it's a few months, but we also have a case where it's now over a year since the projected commissioning date, and which leads to a situation where we have signed a contract, but we only start booking revenues after commissioning and after we take over these power plants. But the pipeline of projects is very healthy, and this is definitely an area of business that will continue growing. In terms of revenues, and here -- and this is the way we are presenting it. These are, what we're presenting here, only the external revenues. So the revenues that we charge to our own NE division charges to our own proprietary power plants is excluded. And as a result, however, the cost base of our NE division is mostly fixed. And as a result, we are reporting negative EBITDA more or less in line with last year. But at the entity level or the business unit level, we actually have positive EBITDA if we increase the revenue line by those intergroup revenues. So another way of looking at it is that this negative EBITDA is essentially the cost of operating our portfolio. Another area that has developed very positively is the segment of technology trading, where we changed our approach at the beginning of the fourth quarter last year with a new team that came onboard. And as you can see, we have, particularly in relation to modules, seen very, very significant growth in terms of megawatts sold to our customers. The one area that is not visible here but what we're seeing now, particularly in the last 2 to 3 months, is dynamically growing demand for batteries to which we are responding. So I believe that by the time we publish the Q3 and then the end year results, we'll also see a very positive dynamic on the volumes of batteries distributed to our customers. I think a very clear picture is visible when we look at the external revenues, which have year-on-year for the second quarter almost tripled. And as a result, you can also see that our external EBITDA has again swung from minus EUR 460,000 to plus EUR 450,000, so more or less or slightly more than EUR 900,000 year-on-year. And we have all reason to be positive about the growth prospects of technology in the second half of this year. What is changing is the business mix. So we are seeing more and more of batteries contributing to the revenues. And due to the fact that they also were able to achieve higher gross margins, it should also further drive the profitability. This leads us to our Photon Water segment, of which we have been talking quite a lot recently and which is, where a lot of the effort we've put in over the last several years is coming to fruition. One, for us, quite significant milestone is that in two jurisdictions where we have filed for a patent for our in-situ remediation technology, we have been notified about a positive award which is, to our slight surprise, the first country was China, the second one Japan. We have the patent application process is pending in Europe, in the U.S., in Canada, Australia, Korea and India and the United Arab Emirates. So there, we expect decisions over the next 6 to 12 months. But I would say the very important element is that two of the so-called big five patent offices, so next to China and Japan, that is U.S., Europe and Korea. So two out of these big five have awarded us a patent, which for us is verification that our technology is novel and unique. And we are in multiple discussions with potential customers and also in tender processes both in Australia and Europe to deploy this technology for the removal of groundwater -- PFAS from groundwater. We are also already very advanced in developing a technically not too dissimilar approach to this groundwater remediation for remediating soil from PFAS chemicals. And that is something where we are quite confident that before year-end, we will actually have to have our first pilot project in Australia. Last time we spoke about the filtration unit for PFAS that we installed with a customer in the Czech Republic to filter PFAS out of their industrial process, which uses carbonization, a very common source of PFAS contamination. And so we were able to filter our PFAS and send 70% of the water back into the industrial process for reuse, saving significant costs on water and sewage charges. And the second unit that you see here is a mobile unit that we have commissioned in Australia. And we've also obtained an Environment Protection License by the Environmental Protection Agency in New South Wales, which allows us to bring this unit on site and clean or remove PFAS from various water sources. And here, we have already one pilot project starting with Fire and Rescue, so the firefighters of New South Wales. And we believe there's going to be a lot more. We are -- we have over 10 or 12, around 12 municipalities in Australia that need PFAS coming from landfills, so leachate water. So this is an activity that is gathering this team as we speak. So in financial terms, we believe that still this year, but then particularly for 2026, we're very confident that Photon Water and remediation will start contributing materially to our financial results. So this concludes the business part, and I'm handing over to David to guide you through the financial results.

Thank you, Georg. So on finances, I'll just get the slide out. Our 2Q revenue performance is slightly better than in the comparable quarter of '24. Within that Electricity Generation, as Georg has just said, revenue is slightly lower. And that's come about from us having the shutdowns in Romania and, of course, selling the Australian plants. But the prices have mitigated that to some extent, which has helped us. In terms of other revenues we've got growth. That growth mostly comes from the technology area. In that area, because we've got this new team, we've really managed to expand the sales of that business and also the profitability. And so sales have actually tripled comparing these two quarters. Elsewhere in that other segment, New Energy revenues are lower to EUR 5.2 million compared to EUR 6.2 million last year. Again, that's because of the more difficult performance within the second quarter. Comparing the two periods, the revenues have increased in trading, but again profitability hit. The Engineering business is more or less flat. The income from that is mostly from Australia and New Zealand at the moment. We're expecting it to increase in the second half from our C&I work in Europe and also because of the Hyperion project, which we signed in May. From the point of view of profitability, the Investment segment slightly down on previous quarter at 6 -- previous year's 2Q at EUR 6.3 million. The Engineering sector, a small profit compared to a EUR 1.6 million loss in the previous comparable quarter. New Energy, unfortunately, a EUR 1 million loss on EBITDA level compared to EUR 0.7 million in the previous period. But Technology, again, very good news. It's turned around from a EUR 0.5 million loss in previous year to EUR 0.5 million profit, and this business continues to grow. And we expect profitability to improve, because they were clearing out some old inventories during that period. EBIT is negative in this year compared to the previous period. The other comprehensive income, we've benefited from a revaluation of our Hungarian plants. But of course, it's still negative driven by the low EBITDA for the period. Aside from that, if we look at the half year results, total revenue is higher, down in 2024 half year. Generation is about the same level. Much higher revenues in the other aspects of our business, once again, driven mostly by the technology business but also on the Engineering side. And that would be the financial results in terms of revenues and profitability. On the balance sheet side, we've increased our fixed assets mostly by the commissioning of the solar projects in Hungary and the revaluation in Hungary was -- of the total assets in Hungary. In terms of the current assets, that's reduced. This is mostly because we've been running down inventories, which has been very successful. We also had a reduction in the other receivables number. Equity is impacted by the lower EBITDA result. The equity ratio, which is very important to us, is 25% in the standard calculation, but we benefit from the carve-out arrangement that we described in the full year accounts. We also mentioned in the last quarter, if we take account of that, we have an equity ratio of 25.9%. Obviously, we expect and hope this ratio to get stronger as the business becomes more profitable. The long-term liability side have increased, and that's mostly due to a reclassification out of short-term relating to part of our EBRD loan. And that's the main driver of that. Current liabilities, once again, moving with that reclassification, what has happened here is we've collected -- on the receivable side, we've collected some VAT, which is outstanding for a long time from the Romanian authorities. And we had a loan supporting that. We're able to reduce that loan in the second quarter, which is also positive current liabilities being reduced. In terms of adjusted cash flow. It's been a difficult quarter in terms of cash. On the operating cash side, we've cleared some of the inventories. Payables have increased. The increase in payables is quite a bit due to the entire waking up our EPC business. That means that we have increased our activities, which means that we owe contractors more money, and that results in a higher number. In terms of the investment cash flow, we've completed the Hungarian projects. So we spent money on those. And we put money into our growing EPC projects. In terms of financial cash flow, we have had quite considerable reduction in borrowing, and that's come about partly from the standard second half repayments and also EUR 3 million from reducing those VAT loans. This is really beneficial, because the VAT loans are effectively overdrafts and carry a higher interest charge from our standard financing loans. At the end of this means that we closed the end of June with cash down EUR 4 million from the end of last year. Since the end of June, we've completed the sale transaction of Yadnarie, which we've received some of the sales proceeds there. And we've refinanced, we've topped up our funding for the Hungarian power plants, which also brings in cash. So we will see improvements and we have seen improvements during the current quarter. And that's really a run through the financial situation. So I'll hand back to Georg, and we'll open for questions, I think.

Yes. Yadnarie, maybe I'd just like to add last two points. So the Yadnarie, transaction which coincided also with obtaining the development approval for the Yadnarie project coincided -- actually coincidence. It looks like it was linked, but it was actually a coincidence, with the signing of the sale of that project to AGL, the largest energy producer in Australia and a fellow shareholder in RayGen. That transaction was signed on the beginning of July, so in the third quarter. And therefore, the P&L impact of this transaction is not reflected in the Q2 and half year figures. And there we expect -- there will be a positive impact from this transaction. And secondly, we published information about this financing top-up for part of our Hungarian portfolio in our monthly. So this transaction brought EUR 5 million of liquidity into the group. And what we did there is that with our financing bank, K&H, we amalgamated two credit lines from the past, and we extended the maturity and essentially a standard re-leveraging transaction which is happening regularly. And basically have them properly leveraged. And as a result, we got EUR 5 million in -- almost EUR 5.1 million in total cash, of which around EUR 3.5 million were an increase in financial debt. And the balance is more or less evenly split between gains from unwinding and hedging transactions, so they should also have a positive impact on our results in the second half. And actually a release of a reserve account, which is essentially our cash, just we could not use it. So there's an increase in financial debt, which I would assume by the end of the third quarter may be neutralized by the repayments, the regular repayments of project financing across our portfolio. And there's a positive P&L impact that should be visible in Q3. So I think this concludes our presentation. And of course, we are open to your questions.

Yes. In terms of '25 guidance, at the moment, because there's a lot of movement going on, we would expect revenue to be higher than last year, probably in the area of EUR 110 million. And in terms of EBITDA, it's going to be pretty much at the same level as last year. That would bring it in at about EUR 9 million. Yes, of course, our goal is to -- yes, our goal is to -- so I think, that's the...

There's many moving items, including when our Romanian power plants back to the grid and start generating. But of course, it's also a question of when we can book revenues on our utility-scale PV projects in Romania, how much was the pent-up demand of C&I in the CEE region we can realize. The next question is -- I will address. One part is, our bond buyback in 2 years, they're actually maturing in at the end of November 2027, which we're, of course, fully aware of. And it is something that, of course, we have on the radar, and we have this time line. And clearly, at this point in time, while we are looking at the various options-- started to look at the various options, it is clear that the number one priority is to improve our financial performance, and, in particular, in 2026. So this is -- we are currently focusing on setting the stage for a significant improvement in our financial performance. And as you've seen in some of our business lines, this is already becoming visible. But of course, it has to be more and actually a lot more. And this is what we are working towards as much as we can. So over the next couple of quarters, the main focus is improve our financial performance. And we -- so we're not taking this lightly. Of course, we fully understand the situation. And the starting point is significantly poor financial performance. The question is, when we're expecting earnings before tax to be positive. That is something that -- this is a form of guidance we cannot give at this point. The motivation is as soon as possible. So next question is on the New Energy Division has been loss-making in the first half of EBITDA level, due to the capacity market or that's something we could expect during the takeover of that, and whether the unit could become EBITDA profitable for the full year? Well, this is definitely the goal to end in positive EBITDA territory. While the capacity market for this year is set, everything is contracted. So the additional revenue streams that growth can come from still this year is electricity offtake and supply, where we have, for example, signed a major offtake agreement in Hungary starting July 1. So that is not in the first half year and Q2 numbers. And there's probably also more going to be -- more coming in Hungary itself and in Poland mostly. And then it's ancillary services, where we have faced delays, but they -- we expect them to start contributing to our top line and also margin contribution between now and the end of the year. So a lot will depend on that contribution. And I will swiftly go, because it is connected, I will move on to -- the question is whether we can explain the dispute and regulatory issues in the capacity business mentioned in the reports of risk associated? Well, there are two topics. I'll start with the one that's EU related. The Polish capacity market and mechanism is considered by the EU Commission is considered state aid. So when Poland introduced this mechanism a couple of years ago, it had to be notified to the EU Commission and the EU Commission had to approve it. The main driver why Poland, it's important to say, there was the first country in Europe, not to say EU, in Europe at the time, probably still before Brexit. Well, they introduced such a mechanism in the market was the U.K., and then Poland followed suit. And the main motivation for the Polish government to set essentially, so lastly we copy this mechanism from the U.K., was to find an additional revenue stream for the coal-fired power plants. And so when it was -- a couple of years ago when it was set up, it was approved by the EU Commission. And as of this year, there was a plan to -- by the Polish government to introduce additional options for the PSE, the Polish transmission system operator, to run -- to contract more capacity in almost ad hoc auctions. That means, auctions that could be -- that are more flexible in whether they can cover on a quarterly base for certain quarters and lack of flexibility in the grid. And the auction that -- the first auction of PSE was held in April this year, where we participated with 20 megawatts. But we're also cooperating with another player in the market who has assets to provide flexibility, but essentially for the third quarter needed someone to buy that obligation to provide capacity, which was us. So we, in total, contracted 95 megawatts of TSR capacity. And this additional auction also needed to be notified and approved by the EU Commission. So the first submission by the Polish government was in February this year. So essentially, in time, given the starting date of providing these services from July 1, but it seems like there has been -- there have been several rounds of requests for digital information by the EU Commission to the Polish government. And as a result, that this additional auction and this scheme was approved only on the 11th of August, so also essentially 9 days ago. So after the starting date. So essentially, we -- this auction was conducted. The winners were announced. We actually assumed 75 megawatts out of those 95 megawatts will be bought in a secondary market transaction, so we can essentially buy this obligation, and then we will be getting directly paid by PSE. And because the notification came later, there is now a question mark hanging over whether we -- us and a lot of other players in the market that have participated and won in this additional auction are entitled to this compensation. Where it appears from the decision of the EU Commission that they are essentially fine, that it's applied retractively the 1st of July. But there are certain provisions in the Polish capacity market law which blur that picture a little bit. So essentially, this is now a discussion happening in Poland as we speak. And so we believe our legal opinion -- I mean, our opinion and also several law firms is -- and also other marketplaces is that we should get this compensation paid out for July and also then ultimately for all of August. But in a worst-case scenario, we could lose this capacity. The second case is linked to emissions limits in relation to providing demand side response capacity on services in this capacity market. Because while the coal-fired power plants in -- or their owners in Poland provide capacity by letting coal-fired power plants run ready to ramp up, we are actually providing the exact opposite service demand side response. We aggregate the flexibility to reduce demand. And this demand -- this flexibility can be achieved. So this demand-side response, the consumption reduction can be achieved by our customers, which are companies from relatively small to steel producers, can be achieved either by reducing switching off certain equipment. It could be achieved by basically taking less from the grid and covering the energy needs for a battery or an additional source. And if that -- and of course, these additional sources can include also diesel generation, diesel gensets. And there's a limit by EU, which is 550 grams of CO2 per kilowatt hour produced. There's an exception for those commissioned before 2019, but they have to adhere to this if they're commissioned after that. And -- but then it's quite complicated essentially. But if this equipment is not used in the test calls by PSE, then essentially, it's also covered. So we have a situation where one of our units, unfortunately, it's a very large unit. We have one customer who has a genset, where we have, essentially, the statements from the customers and that they have not been using it in the TSR responses. But regulations are such that if there is a violation by any of the units that are used in this aggregation block, then that leads to a return of remuneration for the entire block. We have had a difference of opinion with PSE. And we have filed a complaint with the regulatory office in Poland. So that is still pending. It's important to say we have had disputes with PSE in the past, and so far, we have succeeded with the Polish regulator, with argumentation. There's no guarantee that this is the case here as well. We feel it's a very strong case. And as a last resort, we can also take this to court if necessary which, again, has an open outcome. We feel very strong about our case. If we have to take this route, and that would mean that, that worst-case scenario that we were describing in quarterly would probably only materialize well beyond the end of this year.