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

Good morning, ladies and gentlemen. It's a great pleasure to welcome you today to the Q1 2024 results conference call for the Photon Energy Group. My name is Georg Hotar. I'm the CEO; and to my left is David Forth, our Chief Financial Officer.

Good morning.

And we'll run you today through the financial results, but also some business highlights in the first quarter of this year. So we'll start with the business review, and David will then take over -- running you through the financial results and our guidance for the year 2024. So now our Investment segment encompasses our IPP portfolio that is the portfolio of PV power plants that is in our ownership and where we generate revenues from the sale of produced electricity remains the [ companion ] of our group in terms of revenue, but also EBITDA contribution. We have in terms of installed capacity, seeing an increase or managed an increase of 3.8 megawatts in the first quarter, taking our total to 131. 1 megawatt peak after the first quarter in April, we connected another plant in Romania. So all these additions are in the Romanian market. So as of today, we have an installed capacity of 132.8 megawatts peak that is generating electricity . We still have 10.7 megawatts as work in progress. These power plants are essentially built and just waiting grid connection and commissioning. And there's only 2 power plants Sarulesti and Faget 3. So the third power plant in a location called Faget. And the commission of these power plants should happen at the end of the second quarter still or at the beginning of the third quarter of this year. And this will take out our -- we'll then take our total of installed capacity above 140 megawatts. In terms of Electricity Generation, if we look back the last 2 years, where in Q1 2023, we have suffered a decline by about 10% based on unfavorable weather. We have now between 2023 and 2024, managed to grow our Electricity Generation by over 24%. And this is driven both by a large installed capacity as compared to a year ago, but as well, more favorable weather conditions that we had in Q1 as compared to last year. But the vast majority of this increase comes from high installed capacity. And I think we can comment as well as we've been publishing the April report yesterday in the month of April, we have had a very good month in terms of irrigation and also energy generation and month-to-date in May, that trend is continuing. The declining trend in energy prices that we have been observing throughout 2023 and coming off the peaks in summer 2022 have also continued since the beginning of this year. So this has had an impact on the revenue generation. As you can see from the realized average revenues in the first quarter as compared to last year, we have been more than stable in Australia and in Romania, we've had a lower realized price. There's been a very significant decline Hungary by almost 50% from EUR 124 per megawatt hour that we realized in the first quarter of last year. In the following quarters last year, those realized prices started dropping and EUR 69 in the first quarter, also based on the fact that seasonally typically energy prices in winter higher than summer has been a disappointment, but this is something that we have addressed in the first quarter by switching all our power plants in Hungary that we previously, as of February 1, 2022, had exited the support scheme. We executed the option to return to the support scheme, the feed-in tariff scheme and that became effective April 1, 2024. So we've essentially stayed out with about 40 megawatts peak of installed capacity in Hungary in the market for exactly 2 years, returning back into the feed-in tariff as of effective April 1 this year. That means this -- the effect of this step will become visible in our revenues starting at the end of the second quarter. And the feed-in tariff in Hungary is indexed. The formula is CPI, minus 1%, the average CPI in given year, which in Hungary last year reached 16% -- [ 17.6% ]. So the increase of the feed-in tariff was 16.6%, which is a very significant increase, well above what our initial financial model when we built and which we find our projects we're envisaging. And based on the current exchange rate, the current feed-in tariff for this year is the equivalent of EUR 120. So we basically jump back into a revenue mechanism that is giving us very attractive prices. In Slovakia, price -- all our power plants are in feed-in tariff mechanism, so the revenues remained the same. And in the Czech Republic, we switched to the feed-in tariff as we announced previously as of January this year. Nevertheless, because at the beginning of last year when we were in the Green Bond scheme and were selling electricity into the market, and we are realizing still decent prices on the electricity. The per megawatt revenues have declined comparing the first quarter this year and the first quarter of last year. But again, as 2023 progressed, those revenues per megawatt hour were dropping. So this EUR 640 unless there's a change in exchange rates because the feed-in tariff are paid out in Czech Korunas will remain stable during this year. And coming back to the step in Hungary of going back into the feed-in tariff, this is part of a rebalancing of our portfolio in terms of revenue model, where it is something we've announced as an intention already at the end of last year and also in the Q4 call that will be doing that. So this has been included in Hungary and the Czech Republic before. So as of April 1, we now have an almost equal 50-50 plant split between power plants that are selling electricity based on support mechanisms. And the other 50% the other half is selling on a merchant basis. Where, however, it's important to point out that a significant part of that merchant portfolio, which are mainly our -- which consists mainly of our Romanian assets. There, we have, for a period of 2 years from commissioning a revenue model is an offtake agreement with Transelectrica, which is a Romanian transmission grid operator, and we had paid a 90-day rolling average of based on prices. Of course, the decline in prices has also been reducing that 90-day rolling average, but the benefit is that we're not exposed to intra-day swings, and we've also seen that sometimes I think in recent weeks, energy prices on weekends saw trend negative during the day even for extended period of time. So we are not affected by this intra-day price burst in our revenue model, for the first 2 years of operation. In terms of our second part of our influence business line is our project portfolio or project pipeline, where we have ongoing project development efforts in 4 different countries. The most important one is Romania, where we still have a pipeline of projects in various stages of development of over 200 megawatts peak. This pipeline we are going to bring to the ratable stage. We have Poland, where as you know actually where we are, we have communicated previously, we are in the process of selling those projects that have obtained a great capacity. And here, we are happy to announce that we have signed an agreement with an investor in relation to our largest project in Domanowo, where we have 20.4 megawatts of good capacity. This transaction will fully close once the project gets to the ready-to-build stage, which should be in the fourth quarter of this year. And we are progressing well on the sale of the remaining projects in our pipeline. In Hungary, we -- at the moment, it is very difficult or close to impossible to develop additional projects, given that additional grid capacity for utility-scale power plant is awarded on the basis of auctions. And we did participate in the last auction that were not successful. So the development of new projects is essentially on hold. But from our previous efforts, we still have close to 7 megawatts of projects, which we intend to realize in the Hungarian market. And that gets us to Australia, where the pipeline you see of over 600 megawatts consists mainly of RayGen projects and the 9.8 at the advanced development stage is a project in [indiscernible], which is a hybrid project, PV and energy storage. What is worth mentioning in relation to our ongoing construction in addition to our IPP portfolio, which at the moment is fully focused on the Romanian market. As you can see in the second table, we have signed a financing facility with the European Bank for Reconstruction Development of in total EUR 15 million, of which EUR 13 million are decided to finance the construction of 2 of the power plants, we have at completed or commissioned, namely Faget 2 and Faget 3. And the first 4 that you -- the first 3 projects you see it on a [indiscernible], which we will start the construction imminently. But we have additional projects, which are essentially very -- at editable stage and very close and you can see they can add up to 20 megawatts -- or 25 megawatts. So at the moment, what we're still planning to build in Romania and for which we don't already have or in the process of obtaining project financing, it's another 40 megawatts of installed capacity. Moving on to our New Energy division. The increase in the contracted volume for the demand side response services has -- while in the first quarter materialized. And so we have tripled the volume of contracted capacity as compared to 2023. And as you can see, that has led also to a tripling of revenues in the first quarter as compared to 2023. So a year ago in Q1 2023 from demand side response services from the capacity market, we generated close to EUR 2.4 million, and this has grown to EUR 7.25 million of revenues. The compensation we are getting from the Polish transmission system operator for our services and providing the capacity market, have been countered in the base of auctions and these auctions for 2024 were conducted or all the auctions are conducted on a quarterly basis, so it's not done yet. So there's not a standard unit price, but there is a quarterly price and -- which means that the first quarter and the fourth quarter have the highest prices and therefore, also will be the strongest in terms of revenue generation with the second and third quarter, generating lower revenues for us. And yes, as you can see, we have -- on the capacity side have a significant increase. In March this year, we participated in the auction for 2025. And our first thorough analysis of the demand and supply of flexibility into this -- into a demand-side response -- on the basis of demand-side response. We have decided to bid lower volume than what we anticipated previously. As we -- our analysis showed that if we bid significantly more, which we're planning to, prices would have actually affected in a negative way. So by bidding what we did 350 megawatts. We believe that this was the volume that kept the total supply at a point which overall generated the highest revenues for us for the next year. Looking at some of our other business segments, what we had announced and what we're working on very, very intensive now is to put more focus on external EPC services. It means building power plants or behind limit installations for external customers where our role is to build the pipelines, of course, on the back of that, we are also offering and in most cases, also then providing operations and maintenance services, more and more as well services related to the sale of the generated electricity particularly for utilities in power plants. And however, in the first quarter and most of the EPC activities or construction activities then start in the second quarter and then the second, third and therefore the fourth quarter are very active. But at least in the Northern Hemisphere, there's not much construction going on in the first quarter. So there is no significant dynamics visible there. There is -- and as you can see, so far, most of the EPC revenues are intragroup and related to power plants and the building front portfolio. But in the next quarter, we believe based on the pipeline that we have, both for utilities to scale, and here our core markets that we are already focused in the CEE region or the Czech Republic and Romania, but also in -- for C&I customers, we are behind the meter generation, we will see -- we expect a very positive dynamics in the next couple of quarters. In our Components Trading business in the first quarter of this year has been a very slow start. When we look at the first quarter 2023, that was still at the tail end of the pool that we have experienced and benefited from it in 2022. Looking at last year's numbers also the second quarter was still rapidly solid. The revenues were comparable to Q1 numbers you're seeing here. And then in Q3 and Q4, we saw a very massive drop. So this Q1 numbers are actually better compared to Q3 and Q4 last year than the first quarter of 2023. However, we are seeing no signs of a recovery in volumes, and we do believe our Components Trading business to show more positive results in the coming quarters, particularly compared to the second half of last year. And of course, the financial drop is also -- was mirrored in the dropping volumes in relation to all the components we're trading in the inverters, modules and batteries. And here, it's also important to point out that during 2023, prices have also dropped dramatically for all these items. So today, a megawatt of modules cost about 40% less than what it cost a year ago. And therefore, even the same volume of modules on inverters or even batteries, the financial revenues 40% lower -- as this 40% relates to pretty much all these other components. One of the bright spots of our activities, and this is a business that we have been nurturing and growing for a long time is our Operations and Maintenance. And I think as you can see in the multiyear graph on the left, we have had an inflection point in 2023 where we've been able to sign up a lot of additional megawatts as compared to what we had before, a significantly larger ticket sizes in terms of megawatts. And this is a trend that we see continuing, but is however happening is that very often we sign up practically large power plants before they are commissioned and then they are delays in commissioning. So in terms of signed contracts, we are at already in the higher number, but we have not physically taken over the operation of these power plants. And we do expect in the next couple of quarters, but also years, relatively very dynamic growth in Operation and Maintenance, where often I referred to Operation and Maintenance to being the equivalent to facility management in [ middle ] state. So it is a -- the numbers are, of course, a lot smaller, but it is a very valuable business because on the -- in terms of contracts and customers, it is very stable. It takes a long time to win these customers, but then when you do these job they stay with you for an extended period of time. And we are today the only Solar O&M company that covers the CEE region, at least the 5 markets where we are present. And this is more a becoming a competitive advantage. So while we have competitors in each of these 5 markets. We are at the moment the only 1 who really cover the entire region with our staff. And we are seeing more and more evidence that is this regional strategy and footprint starts bearing fruit with large investors in PV assets where we winning customers in 1 country and then I would say we have significantly higher chances in winning them as customers in other countries. So this has really worked very well between Poland and Hungary. And we see now in various combinations. And therefore, this is a business where we see a lot of additional potential. Going forward, what we expect to be an additional driver of business and revenue expansion for our New Energy division is an extension of services provided to also cover energy storage. So we are working on being ready to provide O&M services to battery systems, which very often will be part of a utility-scale PV system or PV power plant, but also, of course, on a standalone basis. So, we believe, beyond only the growth and installed capacity in the region that will help us drive the growth of this business and an additional further type of technology we'll be able to provide on O&M services front. So to conclude my part before I hand over to David, I will just run you through some of the highlights. So what did go well in the first quarter was we managed to further increase our portfolio. The last power plant commissioned in April after Q1. So we we've grown our portfolio. We have generated a record volume of electricity. We have taken the important and the sensible step of rebalancing our portfolio in relation to its revenue model, given the decline -- with the decline in the general level of energy prices but also more and more pronounced the DAC curve. That means lower energy prices during the peak production hours from PV power plants. And in recent weeks, we have seen really extended periods of time when prices were 0 or even negative. And most recently, even during the week, so it became a feature on weekends where demand is typically lower. But this has now extended into some hours during the week. So this step was definitely the step in the right direction. We have continued growing our net portfolio. We have sold -- of course, that already happened now only in May, but we have sold our largest project in Poland. We have signed the financing agreement with the European Bank for Construction and Development. We continue growing our business -- our C&I business, that means rooftop installation business for commercial customers in Australia. And we are currently in the process of finalizing the installation of our first behind the meter installation in Hungary that is based on the power purchase agreement, in this case, of over 20 years. And well, actually, what is missing on the list is also that we signed our we signed an EPC agreement for the construction of 21-megawatt power plant in New Zealand. So a new market. And this is a project that where we are currently starting the construction, and we expect to commission this power plant for our customer, [ Aquila ] in the second quarter of next year, so pretty much 12 months from now. What don't go as well in the first quarter is that we have suffered delays in the commissioning of 2 remaining power plants that have really been physically built by a couple of months in each case. So that's 10.7 megawatts as mentioned before that when the commissioning and therefore, the revenue generation start has been delayed due to gird reinforcement works. This is a common issue in Romania as now a lot of new capacities being added to the Romanian grid. So in many of these power plants need before they can be [ grid ] connected that the grid lines need to be reinforced and these works take some time as they are commissioned by the DSO, and they have the processes which take long periods of time and sometimes get pushed out. But this is a -- so this is something of a problem for all investors in Romania, but also these days in many other countries are facing. And so there's no problem in the grid connection itself, just of course somewhat later. In the first quarter, we've seen another significant decline in enterprises compared to the beginning of the year. This trend has now been reversed. And here, we mainly referring to forward prices in -- on the EX, where towards the end of the first quarter or early April, we've seen the little low points. But since then, prices have gone up by -- when we look at base load price for next year for 2025, we've seen an increase by 30%, even about 30%. And last number I saw yesterday was I think EUR 92 per megawatt hour of base load in Germany and the prices in our region typically are also a few Euros above that level. So we have had the delay in securing the project financing. So particularly the conclusion of the finance and visibility has taken longer than anticipated. But for the next project, we are working on financing with commercial banks and so they should be back on track. On the PV components, trading the volumes have remained low and prices also remained in the pressure, that's something I already talked about. While I mean low prices for modules and inverters are, of course, very beneficial to us when we build power plants for our portfolio or pipeline for our customers. And they're definitely help in keeping the projects viable in the light of the declining energy prices. But of course, last year we also suffered from a decline in volume. And there, we are seeing early signs of recovery. On the negotiations in relation to the sale of projects have also taken bit longer than the planned. However, with the sale of Domanowo, our largest project in Poland, we have set an important milestone. As I said, we're working on the sale of the smaller projects, the remaining smaller projects. So that is ongoing, and I believe we'll also have some potential results relatively shortly or in time for our next call. And -- but the time line for discussions and the potential sale of our largest project in Romania, that timeline have definitely extended significantly. And they're mostly we'll be able to conclude and close all the sales still in 2024. So I think the next is -- are these your's David? I'll hand it over.

Thank you. I'll take. Yes. So the financial results, revenue is down mostly for the reasons which we've described. But in particular, this has been in the power generation, which as we've seen this is due to lower prices in Q1 '24 compared to what we had in '23 although it's mitigated by us having more plants connected. It's still that this was driven down, and that's running at just under 10% reduction. Other revenues, as you'll see also a decline EBITDA higher, and that's mostly driven by some improvements in our Engineering business, as we'll see, the EBITDA obviously has suffered from the lower energy generation benefits. And also from our PV Component Trading. We've also had some -- we've had some increase over the period in our personnel. That's been particularly noticeable in our new energy business, where we've been hiring people to develop that business. Our total comprehensive income is down by EUR 1 million. This is due to revaluation of some power plants. And this runs through our hedging. Our hedging derivatives have -- in hedging we have gained because of interest rates were both going down. So that's helped us slightly. In ForEx translation, we've had some small negative, and we've written down slightly our rate valuation, and that's really only because of the exchange rate differences. So I think, yes.

I want to just like to add here is, as I mentioned before, the -- in the first quarter, our -- we were suffering quite heavily in the Hungarian market from unexpectedly record low energy prices. And of course, this is what will help us today. But for like-for-like comparison, I think it's quite useful. If we had made the switch to feed-in tariff in Hungary 3 months earlier, so as of January 1, we would have generated EUR 424,000 more. That means that actually, this EBITDA number based on the revenue model that we have as of today, would have been over EUR 1.2 million. So the year-on-year growth would have been much more significant. The good news is as of April 1, there are feed-in tariff but this is not reflected yet in the first quarter. So that swap alone or that change alone would have had an impact of EUR 424,000. And of course, that would have flown straight through the P&L all the way from the revenues as there are no additional costs against that, maybe in the taxation, the EBITDA, EBIT level. So essentially, everything would have been EUR 424,000. That's EUR 1.2 million EBITDA, EBIT minus EUR 1 million. And of course, all the other numbers would've been corresponding with that. Sorry for the interruption.

No. Thank you. So in terms of our balance sheet, fixed assets reduced slightly because of the depreciation of our generating assets. And also, there's a change in the currencies, obviously, we report in Euros, but these assets are held in local currencies. In terms of current assets, we have reduced our inventories. We managed to sell some of the batteries that we're working our balance sheet at the end of '23. And of course, we've had some reduction in our related party loans, both benefited us. Equity has decreased to EUR 68 million due to the impact of the lower results and a small -- and the changing in currency translation reserves. However, our adjusted equity ratio remains higher and in fact, comfortably above the bond covenants of 25%. Our long-term liabilities decreased due to outstanding balance of loans and borrowings because we've got repayments going on during the period. Current liabilities remain really very, very stable and at the end of it, balance sheet in pretty good shape to go forward for the rest of the year. What we see here is the cash flow development. Not really much exciting to report operational cash flow much stronger than in Q1. Mostly because of the translation differences, but also because of the benefits that we've had during the quarter. Investment cash flow pretty much at the same level, and this is about us investing in our in our Romanian projects which are being built. Financial cash flow. We have been carrying on making our scheduled repayments of short-term financing. In Q1 '23, we will have increased our borrowings for funding. So net change in cash, a reduction of EUR 655,000 which is not particularly significant in our cash totals, which grow from EUR 5.9 million to EUR 5.2 million. So you can see that in the graph. This brings us to our guidance. We obviously had a tough time of our guidance last year. We look very carefully at it this year, and we expect our revenues to be within the range of EUR 90 million to EUR 100 million. This would generate EBITDA with expected range EUR 16 million to EUR 18 million. Now we've looked at this very carefully. And one quite important point to make is that going forward, we're going to be doing more of the larger third-party EPC contracts. And the issue with third party EPC is, of course, these are large contracts, and they tend to run for quite long periods and there are periods when due to winter weather and so on, you're not going to be out there constructing things. That makes it difficult if we sign a large contract, and we expect to, during the year ahead, to predict when we can take revenue when we can recognize revenue and when we can take profit on those contracts as we are. As we are bringing them forward, in other respects in there certainly is reflected the improved generating results from the fixed tariffs, which we've signed. But we are not at the moment giving detailed guidance about the individual elements. One thing we are doing going forward is we are reviewing our asset base with a view to strengthening our balance sheet this may well result in some changes in the assets that we're holding. This will increase cash and reduce borrowings but the details of that really depend on whether we can achieve prices which are attractive to us. We do have several options, but they're all in plan at the moment. So I don't think it's wise for us to give too much detail, except to say that we are very much looking at our balance of assets. I think that would be a message on that, which would take us to the next stage.