PNE AG (PNE3) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the PNE AG Full Year 2023 Conference Call. I am Mina, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Markus Lesser, CEO. Please go ahead.

Good morning, everyone, from my side. Thank you for joining us today in this conference call on the results of the fiscal year 2023. Going on, I would like to share with you an outline of the presentation and the procedures of today's call. As usual, I will start with an overview of the operational and financial highlights of the year. After that, I will comment on our financial figures and operational achievements in more detail. I will conclude my presentation with our outlook for 2024. As always, we will then open the line for the sell-side analysts only. [Operator Instructions] As usual, our slides that I will use can be found on our Investor Relations website. Before I comment on business development, I would like to address a personal matter. As you know, I have decided to resign from my position as CEO with effect from the end of July 2024 for personal reasons. I did it on own wish without being forced by the Supervisory Board. My health is okay because I got this question sometimes on the desk. And it has nothing to do with the situation of the company, which is excellent. Having said this, I would like to draw your attention to Slide 3. In operational terms, we had a very successful year and made good progress in all of our business segments. I want to point out that we did this while dealing with a challenging market environment with several external factors that slowed us down. The whole industry was and is characterized by numerous factors that led to delays in projects. For example, delays in transport permits meant that some projects had to be postponed until 2024. The Ukraine and Middle East wars create uncertainty and keep supply chains volatile. Higher interest rates and further increases in material prices also put pressure on margins. In order to count these challenges, we have acted as with Foresight and launched multiple activities to secure price quality. For example, we ordered 11 transformer stations and 700 kilometers of cable a year ago, which we are now receiving at a good price and at the right time. We were also able to secure KfW loans of around EUR 400 million at favorable conditions last year. This helped us and is still helping us at the moment to partially offset the negative effects also helped by the higher tariffs. We are still closing discussions with OEMs, municipalities and politics, and we are pushing very hard to keep those negative effects down to a minimum, what we see now in the moment release on the manufacturer side. In view of these market conditions, we are satisfied with the progress achieved in 2023. Our project pipeline reached another new record high level, reaching 19.1 gigawatt peak. This represents an increase of 61%. We received building permits for 9 wind farms in Germany alone, 162 megawatts in total, and we were successful in all tenders in which we participated. We have sold put into operation or had under construction projects of around 781 megawatt feet at the end of the year 2023. We continue to grow our own wind power generation portfolio from 290 megawatt end of 2022 to 370 megawatts as of December 31, 2023. Due to this increase in production capacities we're able to grow the power generation output by 36%. Construction activity is high despite the delays. As per end of December, we had projects with a capacity of 288 megawatts under construction, mostly intended for our own generation portfolio. We are especially pleased with the performance of our Service segment. It now manage the capacity of around 2.9 gigawatts, representing an increase year-over-year of about 60%. This is an interesting performance behind the number. I will come back to this to the Service segment later. Slide 4. Looking at the financial year 2023, results were impacted by the ongoing investments in our generation portfolio and development pipeline. Driven by a strong year-end business with PV project sales in Italy and Romania and a strong quarter in terms of wind yields as well as the commissioning of further wind farms before year-end, we were able to achieve our clear guidance. Total output grew by 10% to EUR 167.8 million, the highest number in PNE history. This is remarkable considering the hindering factors I just mentioned. EBITDA increased by 30% to EUR 39.9 million. With that, we achieved our full year guidance of EUR 30 million to EUR 40 million at the upper end. Due to the investment in our portfolio in the high construction activity, our cash position came down by circa EUR 31 million compared to end of last year to EUR 90.4 million. It is worth to say that our liquidity position, including credit lines, increased to EUR 219 million. This shows that we are well positioned. Equity declined to EUR 200 million, mainly due to interest rate swap valuation effects. Next slide. Looking at our business over the last years, you can see that we have a strong growth on all KPIs and that we met all scale up targets and sometimes significantly surpassed it. You can also [indiscernible] that our power generation portfolio now has reached a critical size in a positive manner. It means that the positive contribution from the portfolio will out wide the negative effects on our P&L going forward. All this shows how resilient and robust our business model has become over the last years. It shows that we have the right strategy in place, have taken the right measures and executed well. We are well prepared for what is going to come in the future. Next slide. If you look to the expansion of our own generation portfolio, then we see that we still are well in plan. Looking to the Scale Up 1 target -- 1.0 target, we had a target of 500 megawatt, which we significantly surpassed by 30% to 651 megawatts. So we are well underway to meet our targets in 2027 of [1.115 gigawatt] peak. Interesting to know as well that we have an increase of 36.5% in -- compared to the fiscal year 2022 in -- to 695 gigawatt hours of production. And this is done by 370 megawatts of onshore wind projects in operation, which we had at the end of the fiscal year 2023. And the highest number we have ever under production for our IPP portfolio is at all-time high, it is 281 megawatts in Germany and in France, which are intended to put in our portfolio, which are now under construction at the end of fiscal year 2023. Looking to the project pipeline. We made a big step forward. We have always to consider that the areas for the project side are ready. And -- so therefore, it's absolutely necessary to secure them on early stage and we do greenfield. And so therefore, it is absolutely necessary to do it when you have the chance to do it and increase your portfolio. That's what we did. So our total pipeline grew to 19.1 gigawatts, which is an increase of 7.2 gigawatts. That means in wind onshore closed 1.6 gigawatts in PV to 3.1 gigawatt peak. And in offshore, we're working on 2.5 gigawatts, which is big increase of 61% on a year-on-year basis. Basis for our IPP production and portfolio is the wind project pipeline, especially in Germany and in France, where we have 697 megawatts in permitting phase and have a look to the Phase III projects, 499 megawatts. This is a new high, 499 megawatts in permission status. At the end of the year, I can tell you that we have just right now the higher number, that means that we have -- we are on a good path to increase significantly our IPP portfolio with these kind of projects, which are now in the last phase of the permission status. We increased the portfolio. And with 10 wind farms in Germany, 270 megawatts under construction and one project in France, 11-megawatt under construction with the projects for our IPP portfolio already defined. We finalized the project in [Gode wind] with 60 megawatts, and this was sold in 2020 and is now ready. The pipeline in PV increased dramatically high 3.1 megawatt peak, and we see also on the sales side that we have -- now the success out of these PV activities, you see in Italy, we sold 12 PV projects. And in Romania, 5 projects to total energies and another project with the 611-megawatt peak is a whole PV projects and see that we make the first -- that we get the first income out of this PV activities. Looking to the P&L, we can see that the investment in our development pipeline and the investment in our [indiscernible] portfolio impacted P&L heavily as well as the swap effect. We have a total output, which is -- which grew by 10% to EUR 267.8 million. As I said, the all-time high EBITDA increased by 30%. The operating performance and earnings are driven by, and you see this overview results from power generation, which increased the project sales, yes, and certainly, the strong performance of service business and the internal sales related to the buildup of generation portfolio. Personnel expenses increased. Yes, we have higher salaries. So very good trained people are still have [indiscernible] in this branch and needed. And so we have to pay higher salaries and increased our numbers of employees due to the fact that we have a higher amount of developed projects and a higher amount of project development. Interesting is the situation about the swaps. And I know the -- all the time we sit together and always explain the swap situation, which affect us that heavily. So the financial result comparison year-on-year are hugely distorted by the valuation of the interest rate swaps and loan liabilities. This time, we have a negative impact from valuation of minus EUR 32 million. And this is a big effect related to IFRS issues and this has nothing for me. It has nothing to do with the [indiscernible] operative business, but it's always affect our net income. We have the total output growth in all segments. If you look to the segments, the product development output increased by 3%. The EBITDA decreased to EUR 17.9 million mainly due to project delays. We had to face that the projects have been postponed. So it's a bad thing and a good thing. The bad thing is that we couldn't manage to get the payments last year, but the good thing is that the projects are postponed and not gone. So -- and one example is that Siemens said that they want to make a technical review on the SE170, which is still ongoing, which led us to change machines in some projects, which cost us 9 to 12 months. Nevertheless, this project will come, and they will come in 2024 and start their construction -- the construction will be started in 2024. The services output grew to EUR 30.8 million, plus 21%; EBITDA, plus 7%. The differences might be driven by the investment in critical infrastructure regulation forced us to invest in software and people. So this is what we can see here, and we will be affected this year as well in service areas due to this fact. So the power generation output increased by plus 7%. Why only 7%? Because the installed base is higher now, but -- and we have a good wind yield, but the situation was that the prices for the power -- the power prices went down. So the larger installed base and the improved wind fields are overcompensating this lower power prices. EBITDA increased to EUR 60.3 million to [indiscernible]. So on the balance sheet. We waited for this is EUR 1.1 billion now. It exceeded the EUR 1 billion mark. The cash position went down due to the fact because of the development of project pipeline and the construction issues and the construction of wind farm, the equity went as well because of this down. The noncurrent debt is increasing, liabilities to banks, mainly nonrecords and liabilities from leasing contracts, the usual thing, the more projects we have in IPP, the more increasing numbers do we have. But again, nonrecourse the current liability of the same, EUR 53 million nonrecourse and liability from leasing to EUR 7.5 million. I think this is a specialty. Ladies and gentlemen, this leads me to the outlook. In the last conference call in November, I said that we are starting to see a light at the end of the tunnel with regard to the issues we were seeing in the market. I can say today that these positive signs were confirmed. Our counter measurements have taken effect and our [indiscernible] business model is helping to cushion the impact. For our guidance for the full year 2024 for the group EBITDA in the range of EUR 40 million to EUR 30 million, although we confirm EUR 40 million to EUR 50 million. We are planning to sell projects in international markets in wind as well in PV. So in U.S., U.K., Romania, we will continue to build up our IPP portfolio. If it runs according to our plan, this is somewhere between 100 and 120 megawatts to be completed this year, which we would result in close to 500 megawatts in operation by the end of the year. We can also confirm our scale-up targets. We want to achieve by 2027. With the work we have done in the past years, the foundations of achieving our ambitious targets have been late. We are still very positive that they will be achieved. So ladies and gentlemen, before I conclude my presentation, I would like to say something about the United States business because this was one bigger thing. This U.S. activities are part of the planning with a lower [one-digit million] amount of EBITDA. It is not related only to the sale. We don't [say] we think we can get it can get it this EBITDA with sold projects because we will work furthermore on the project development. So we had -- we are now in the sales. On the sales part, as you know, end of December. One customer stepped away when he was in the last moment of sales. So now we have one where we have an LOI, and the negotiations are ongoing. Ladies and gentlemen, this concludes my presentation. Thank you for your attention. We are now open for questions.

[Operator Instructions] The first question is from the line of Holger Steffen with SMC Research.

First, I have one question about your segment development. Despite higher revenues, the EBITDA of the Service segment was weak in the final quarter only round about EUR 150,000. Can you give us some information about this development?

Yes, it is one thing that we have to make investments in the software of [indiscernible] and in people in [indiscernible], and this was one step or one reason why it came to this point. So we expect in total for [indiscernible] for the critical infrastructure, we have this law in place that we have to secure the critical infrastructure by measurements in our software and everything that has to do with the connection to the wind farms. We are now expecting cost of EUR 1 million to EUR 2 million about this -- related to these issues and the first costs are taking place -- took place in December.

Okay. But we will see a normalization in 2024 to former margin?

Yes, we will be affected this year, again, from this as well from the [indiscernible] only partly this some went into the service segment last year. So we will be affected by this and by this amount for the year.

Okay. Okay. When we see the strong expansion of your own portfolio, the EBITDA outlook for 2024 seems to be careful. What must happen that you may exceed your guidance?

Yes. Like usually in the business, we have -- it's always the same. We have sales activities. The sales activities there were in most of the sales activities in U.K., Romania Panama, we are in negotiations. And there's always a chance that this -- that the prices can be higher as we expect, that is one hand. And certainly, I think this is a situation that we have to manage costs in a special manner. It is mainly driven by the increase of developed projects, which give us some real advantage for the future, but as well for the high activities, as you mentioned, in the construction. And I hope we see the first projects are coming now where we have -- for example, we have now one project gotten earlier as expected. It was not planned this year. So it's another 10 megawatts. So we get additional megawatts in and get additional amounts of -- and get it out of this range. So therefore, I think -- we are on the EUR 40 million to EUR 50 million range, but I think there are always opportunities to exceed it. But as well as usual, there are always opportunity -- always issues maybe to that this will not be [near led]. That's why we are between EUR 40 million and EUR 50 million. We are always careful. But now we are -- again, we are on the upper side of our last guidance from last year from therefore, we always meet our guidance, that's important.

Okay, fine. One question about Germany. In Germany, PV projects with a planned capacity of 119 megawatt reached Stage 3 in the final quarter of 2022 to 2023. What will happen with these projects? Will you sell them in 2024? Or will you add a part to your own portfolio?

We have not decided yet what we do within the portfolio or not. So this is something when we have the final permission on the desk and have every requirement on the desk, then we will decide on that.

Okay. My last question. You've mentioned the effects of swaps. And in your report, you have written that you've changed the accounting of these swaps beginning with last October. Now they are accounted as hedge instruments. What will be the probable effect on your financial results in 2024?

To be honest, we want -- we would like to lower the effects on swaps we have all the time. Every quarter, we talk about the high influence of our results due to the swap effect. If we hedge them, we want to lower these effects. In how much and how big this effect will be, I can't tell you in a moment. We are just working on this, yes.

The next question is from Guido Hoymann with Metzler.

Yes, one by one if possible. So the first question would be how long is your existing own production portfolio hedged by tariffs or PPAs or the other way around? Are there old wind parks or solar parks included which run out of subsidies soon? I'm asking that to see us to understand how much you are exposed to the decline in the electricity prices we have seen recently. That would be the first one.

Yes. So -- yes, what we did in the past was that we tried to fix a lot of projects with the PPA and PPA prices. So 58% of our total energy production is related to -- it is connected with PPAs. So we get additional fees out of PPAs. So -- and especially for projects which are out of the EEG. We made it happen, sure. And you can imagine that with every year, so it's 58%, we are now having under contract in 2024 -- for 2024. And this will be lowered, I think, around about 35% in 2025, and then it's lower in 2026. So that is the status now. We are steadily working on this to still work on PPAs and get PPAs. If you look to the projects which are out of AG that are not that much in total, it had been 60 megawatts as [indiscernible] now we step out of Papenrode. In January, we stopped all machines, and we now deconstructed Papenrode, which had been around 22 megawatts, I think where we just right now started the construction of Papenrode and the new project. And so therefore, we lower steadily these kind of projects because they are always planned as repowering projects. But we have -- in all of these cases, we have PPAs of more projects which are out of AG. And usually, the price is higher as we have in EEG prices just right now.

So that means 60 megawatts are already, let's say, beyond [subsidization]. That means that the other 300 are still part of the EEG scheme also.

Yes. Yes, exactly.

And the new ones you're building, they will be, of course, also subsidized then for another 20 years, right?

Yes, exactly. So this is -- we get -- you have always to consider that with the new machines, we have higher megawatt hours per year, higher production per megawatt, yes. So it's much higher than the old one. And the 60 megawatts -- 10 megawatts of old projects of the small machines bringing much less megawatts than if you have the 10 megawatts with the new machine. So it's a real difference. So that's why we heavily increased our gigawatt hours, yes, even if we are -- if not that much megawatts, if you -- in the relation you don't get -- you maybe get 10% more megawatt, but 36% more gigawatt hours.

Okay. understood. And the next question would be what prices can you achieve these days for PPAs? Are they close to the forward prices? So if somebody wants to get a 3-year PPA, he's looking at the forward price and then paying a certain percentage above that level? Or is every contract different? So how do you perceive that negotiations these days? So is there a premium you can achieve if you -- when you're selling PPA?

Yes, the good times are gone in this respect that the high prices from last winter are not any more available. So they're coming closer to the EEG prices with the PPA prices, but they still have an advantage. So there are enough companies in the market and still increasing numbers of PPA projects and companies in the market who wants to secure for 5 to 10 years, the energy prices from green energy. So this is a tendency which is upcoming, and we see a much higher market on this, not anymore with these high prices of EUR 0.12 per kilowatt hour, something like that, but still an advantage in opposite to AG.

Okay. All right. And the last two, did I get you right when you said that you expect a single euro million amount for the U.S. business? And is it...

Single -- double million -- on a low end, a double million effect on EBITDA.

Okay. So a low double-digit -- okay. And this is part of your guidance?

This is part of our guidance, but -- we think if we don't sell it in this amount and we still have an advantage to the progress of the projects we just have in development. And if we make a [pure cell] of them, we can get this amount as well. But nevertheless, this is -- we would like to sell a step out of this business. This is our target.

Okay. Okay. And the last one is, how do you see a position in relation to the turbine and component manufacturers these days? Can they impose higher prices on you because I think there is sort of an oligopoly. You mentioned the problems Siemens still has with its onshore turbines. So do you feel like they can push through higher prices? Or how do you perceive the situation here?

I think they are -- let me say it other way around. We had an increase in prices, and we had two effects which happened. One effect was that the [indiscernible] cost and other costs went down. So the -- and the price is still stick on this higher level. But secondly, we have now new machines on a new level. An example of 170 meters rotor diameter or above 6 megawatts, however you call it, and they are more efficient. So, for us, it is an advantage now to get these more efficient machines per produced kilowatt hours. We have a lower cost. On the other side, they have still the situation that the prices of logistics are not anymore there in this amount, for example, and other prices are lower. So therefore, I see increase of the margins in the -- for the manufacturers. It would be my personal issue, but it is not my business. It's only my estimation. I only tell what I think, but they should call how they see the business.

No, [indiscernible] rather concerned about your margins and -- but you perceive the situation to be still, let's say, net-net bottom line unchanged you get more efficient machines, pay maybe a higher price, but...

It's always a matter of the quality of the project depending on stops because of [indiscernible] effects or other issues, yes. And there are wide variety.

We now have a question from the line of Karsten Von Blumenthal with First Berlin Equity Research.

First of all, I would like to know, do you intend to participate in the remaining three German tenders with onshore wind projects and how many megawatts do you intend to put into the tenders? Because the Federal Grid Agency has significantly increased the tender volume of the last three tenders in this year, remaining three tenders. So I think chances are good to get high prices there. So could you give us a figure on what you intend to put into the tenders this year?

Yes. So just right now, we went already with three projects to the last tender, which was an amount of around about 26 megawatts. And we got a building permission for the project Lutau, which is the next project was 28.5 megawatts where we intend to go into the next tender in May.

And beyond that, still...

Yes, we have our -- we have a regular base. This year, we will get a lot of projects permitted according to our plan. So -- and you see the production is increasing. Last year, we've had a permits of 162 megawatts. This year, we expect certainly a little bit more. So the first 52 megawatts are already there -- 54, sorry. I mean we have the first quarter. So therefore, we will see.

So as soon as you have received the permits, you will try to take part in the remaining tender?

Absolutely. Absolutely. The next tender is always our target to get that. So we have been 3 days [indiscernible] for our permission from [indiscernible], thanks to the permission authorities. So now, we have to go to the next tender.

All right. You mentioned that there is a 6.6-megawatt project under construction for an external investor. Is that a project you want to sell this year and to complete this here? We can expect this to reach your P&L?

Yes, this is already completed. And I think -- we have -- we are in a final stage of -- that the customer takes it over, yes.

So basically done.

Yes, it's done.

So okay. And then we will, of course, see it in your P&L. Okay, that means that is something for the second quarter probably.

Yes. [indiscernible] Yes, exactly.

Okay. You have very large amount of wind plants under construction currently for your own plant portfolio, 281 megawatt. Is it fair to say that it is very likely or guarantee that by the end of 2025, all these projects will be connected to the grid and operating?

Yes and no. We have some projects where we have to -- where we are in the situation that we have the delivery of the machines to expect in 2025, but they finalized the construction in the beginning of 2026. So, in total, I think all these projects will be ready according to our plan and should be ready according to our plan, beginning of 2026 in the first quarter or something like this, yes, if everything runs right.

Okay. And for how many megawatts can you say from now that it is very likely that they will reach operation before the end of 2025?

These numbers I have not on my desk in the moment, but we can send it to you. We will look at it.

Okay. Perfect. Then one last question to your Power Production segment. You had a very strong result this year given that -- last year, sorry, given that pricing came down. Do you expect the Power Production segment to top last year's result given that pricing will be not as favorable as last year or what is your expectation? So what do you think is the most likely [event]. I mean, it depends on the pricing of the rest of the year, but have you feeling for segment?

Yes. We're now in the stage that the first projects are finalized this quarter will be finalized or finalized this quarter. So that means we get -- we are now in a higher amount than 370 megawatts, we are close to 400-megawatt -- now close which are constructed or ready now or in operation, let me say it like that. So -- and additionally, this 400-megawatt -- now the projects are -- we have some fast running projects where we still can we finalized, can finalize project this year. As I mentioned before, it's around about maybe 120 megawatts in good case that we finalized the construction of 120 megawatts they put in operation this year. Hopefully, we have not too much problems related to the transport in Germany and transportation permission, that's was a little bit careful. But it is always a matter of month. So this is -- but nevertheless, this is the plan. And so we had the first quarter, and I think the first quarter, we finalized already. So we are still in plan.

I may say that I regret very much that you leave PNE and thank you for all the years of good cooperation and wish you all the best.

Thank you. But maybe you see we hear as one time that is the next quarter discussion. So then maybe you can repeat it again, and I will be surprised.

We now have a question from the line of Jan Bauer with Warburg Research.

I have two questions left. First of all, regarding your service segment, which you were quite strong in 2023. Do you expect this development to continue in the next years?

Yes. Yes. I think maybe we have this year a little bit lower expectations due to the fact that we have to invest in [critics] and others and personnel and around this. And -- but again, this is an investment in a very positive manner because not everybody can deliver this [critics] requirement. So therefore, this will give us better position opposite to our competition from their -- from that point of view, it's a good investment for the future.

Okay. In the past, you acquired a few smaller service companies, do you have any further targets on your bucket list or [indiscernible] of growth come from your company?

We are focusing all the time on situation -- focus on the issue that we say we don't want to do blue collar work and we invested last year in a 51% of [indiscernible], which is an Artificial Intelligence company and has a product, which now where we see the first really good results in meeting issues related to predict maintenance and optimization of our wind farms. So this is something where we would like to go. We invest in these kind of companies where we have -- where we get a better knowledge, but better knowledge will be paid in the future. This is the idea.

Okay. Last question regarding your balance sheet. You just assume that you sustain your growth path. The balance sheet might look pretty stretched in a few years, in particular, as you're not able to [indiscernible] reserves. Do you have anything like a funding strategy or just a little bit of light on what options do you have in the current market situation?

Yes. I think we are successful. We have a lot of options. And from this point of view, you have always to consider that we have an amount of above EUR 200 million as hidden reserves, if we would have sold it, it was many more price we would have gotten for the market. So there is a real value behind this. And from that point of view, I think there is always issues and we discuss on regular basis, if what we could do in terms of strength in our financial needs. But nevertheless, this is not an issue where we have any special case now. This is on regular basis discussed and where we have a finalization or we have a need on this, then we will come back to the market.

Ladies and gentlemen, this was the last question. I would like now to turn the conference back over to Markus Lesser for any closing remarks.

Thank you very much for your interest. [indiscernible] us again. See you, and have a good day.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.