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Edited Transcript of SSO.OL earnings conference call or presentation 18-Oct-19 6:00am GMT

Q3 2019 Scatec Solar ASA Earnings Call

OSLO Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Scatec Solar ASA earnings conference call or presentation Friday, October 18, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mikkel Tørud

Scatec Solar ASA - CFO

* Raymond Carlsen

Scatec Solar ASA - CEO

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Conference Call Participants

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* Jørgen V. Bruaset

Nordea Markets, Research Division - Senior Analyst

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Presentation

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Raymond Carlsen, Scatec Solar ASA - CEO [1]

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Okay. We're here to present third quarter results for 2019. It has been a busy quarter, maybe I should say as always, but particularly busy this third quarter 2019, and I'm proud to share with you that we reached almost 295 gigawatt hours in the quarter. And for those of you that remembers back from 2018, this is slightly below what we produced for the whole of 2018. So it tells you quite a bit about the growth trajectory that we are climbing up at the moment.

In terms of EBITDA, we're seeing an increase over -- compared to third quarter last year of NOK 133 million -- up to NOK 133 million. And in third quarter, we reached commercial operation in Egypt, Ukraine and Mozambique. Just a few weeks back, we have -- we decided to have a Capital Markets update, where we have decided to increase the target installed during construction by 2021 to 3 -- 4,500 up from 3,500 megawatts. And then we also had the very successful rights issue.

If you go back to the power production by country, the contribution over the past quarters are coming from Brazil, Ukraine, Egypt, Mozambique and Malaysia. And not all of those plants had a full quarter production. So in fact, if you look at the plants on the production in the third quarter, it's actually higher than the 295 that we show here.

This project is worth a slide -- It's actually worth much more than a slide. It's the biggest project ever that Scatec Solar has conducted. And if you compare it back to 3 years ago, we had 300 megawatts in operation. Now we have finished one project for almost 400 megawatts. This is also a very -- a technological achievement in that we decided to install bifacial panels. And the bifacial panels produces electricity from the front but also picks up the reflective light from the ground. And you will have an increased efficiency or output from the panels of 10% to 15%.

We had almost -- we had 4,500 only peaked during the execution of the project, and I'm extremely proud to share with you that we have only one person that had a day off due to an injury, out of 7,500 hours. If you look at that, that's sort of a more common way of presenting it. LTI, this was 0.1. So that's extremely significant. That it means that also we have been successful in implementing our HSE policies and following that up locally. And keep in mind that 70% to 80% of the people that work on our projects are unskilled workers. And there is also a direct link in between the HSSE performance and the quality of the plant.

I've seen that from a previous life. If you focus on safety and are successful, the quality of the work that these people do is also better than when you are not focusing on the health, safety and environment.

I mean it's 420,000 households, if we were to feed them directly from these plants, so that's quite a lot as well.

And the annual production would reach 870 gigawatts hours. In terms of avoided CO2 annually, 350,000 tonnes, what does it mean? It means 76,000 cars and what they emit during a year. So there you go.

Now this is the long-term cash flows. In fact, these are the plants that are in production at the moment. They have contract periods -- remaining periods between 10 and 25 years. So you will see that when more and more projects are being added to our revenues, you will see that this will be stable and producing both revenue and bottom line over the next, next 25 years. And of course, we will have plants that will be added over the next 2 or 3 years as well, which is a part of our 4.5-gigawatt target.

We are still constructing plants on 4 continents, and we have been doing that now for the couple of years. We have tested our execution model, and of course, when you do that, you always find areas where you can actually improve. Ukraine, we are at the moment constructing 5 projects at different locations. The first one is already in commercial operation and several plants will follow suit.

In South Africa, we have 3 plants, nearby Upington, north -- in northern part of South Africa. They are approaching -- the first one on these plants are approaching mechanical completion and then testing will start and then the next 2 plants will follow suit.

Argentina, this is very high up in the mountains. It's, sort of, Norwegian climate, cold. It's actually more windy, so we have to strengthen the structural design of the plant. That you can see here as well, it's going well. And this is a project where we're doing together with Equinor on a 50-50 basis, both on the ownership but also on execution.

And then we have Malaysia, 47 megawatts. We have finished 3 plants, as you are aware of. This is the fourth plant in Malaysia, and we are also in the middle of constructing that, as you can see.

And then to the financial review, and I give the word to you, Mikkel.

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Mikkel Tørud, Scatec Solar ASA - CFO [2]

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Thanks, Raymond. So let's just look a bit more in detail into the results. And we are happy to report another set of solid results and in line with our expectations and the growth plans that we've had.

And if we start now by looking back at the last 12 months, revenues reached NOK 6.4 billion and EBITDA now close to NOK 1.5 billion on a proportionate basis and the cash flow that we've generated approaching NOK 800 million. And we will continue to report growth here as Power Production is growing, and we maintain a stable development and construction business.

And there are current assets base of 1.9 gigawatts, represents about NOK 60 billion of contract value over the next 20 years. So it's a significant portfolio of assets now reaching operation.

Then bit more on the Q3 results. Revenues of NOK 1.5 billion, EBITDA of NOK 433 million. And again, you can see here, revenues and EBITDA increased compared to the same quarter last year. It's up 68% EBITDA year-on-year. And 70% of the EBITDA is now coming from Power Production. And with a stable D&C business, we'll see an increased proportion from Power Production and the long-term contracts again in this mix. And that will also improve the EBITDA margins overall for the group on a proportionate basis.

Again, on the Power Production side, a very steady growth, solid growth year-on-year, obviously. Production is up significantly and revenues reached NOK 357 million, EBITDA, NOK 296 million and last 12 months revenues passed NOK 1 billion and EBITDA, NOK 800 million.

And it's -- the new plants in Mozambique, Ukraine and Egypt that have mainly explained this but also Malaysia have contributed over the last year for this growth. When it comes to O&M, smaller part of our business but very healthy margins, also reporting growth in this segment this quarter, reflecting the larger O&M portfolio that we now are operating. And you also see a bit of a seasonality here in the results. We see second and third quarter normally a seasonally higher than the other 2 quarters, due to the contract structures that we have in South Africa. So we'll expect to see that same pattern also going forward, yes.

And then on the development and construction side, continued high activity. It's been fairly stable over the last few quarters, as you can see here. Looking back at the last year, revenue passed NOK 5.2 billion, EBITDA NOK 659 million. And then if you look at the accumulated progress across the construction portfolio, it was 51% at the end of third quarter. And of course, we continue to mature a wide range of projects in our backlog and pipeline, and we added 80 megawatts to the backlog and close to 400 megawatts to the pipeline in the quarter.

When it comes to our balance sheet, obviously our financial position have now further strengthened with the equity raise and that is certainly giving us capital to fund further growth with the new growth plans that we have presented to you, both within utility scale but also within Release concept.

Overall, if you look at the consolidated assets, it stood at -- sorry, NOK 20.4 billion at the end of the third quarter, up NOK 6 billion almost since the end of last year.

Consolidated cash in the group was NOK 3.5 billion roughly or -- yes, and group -- cash at the group level of NOK 1.5 billion. And our revolving credit facilities remain undrawn. And the book equity strengthened now to NOK 4.9 billion and the equity ratio reached 87%. This is based on the methodology and -- we have and the definitions we have in the bond and loan agreements.

Looking at the -- bit more on the movements of cash in the group for the quarter. Obviously, the equity raise stands out in this graph, NOK 1.3 billion of cash coming in. Then I will mention that we also received NOK 73 million of distributions from our operating plants. We, year-to-date, received NOK 175 million of distributions from the operating power plants, and we expect that to increase also in the fourth quarter, so it will be a solid contribution overall from operating power plants. That's important for us as in -- to -- of course, as a proof of the business model and the model here in terms of operating plants.

Cash flow from D&C, bit more than NOK 100 million. And then we invested equity in new projects, again, mainly Ukraine, NOK 300 million in the quarter. And then lastly, we had a working capital movement -- a negative working capital movement in the quarter of NOK 170 million or so. And then you can -- yes, we see the cash balance ending at NOK 1.5 billion.

A bit on the short-term guidance. The O&M revenues, NOK 110 million to NOK 115 million with an EBITDA margins of about 35%. This is slightly up from the 30% we have guided on previously.

Then when it comes to the D&C value of the construction portfolio, the total value of this is about NOK 3.9 billion and the remaining not booked value is NOK 1.9 billion, i.e. this is the revenue that we are expecting to recognize from the third -- or fourth quarter onwards related to this portfolio.

We are guiding for increased production into the fourth quarter. This is based on the plants that are already in operation at the end of the quarter, so there will be some additional production also from the last plant in Egypt that we announced this week that was reconnected, yes.

And then I thought I could also repeat some facts and figures from our Capital Markets update related to our portfolio. I mentioned the NOK 60 billion of contract value for the 1.9 gigawatts that we are currently completing. If you look at this from a currency exposure perspective, I think it's important to remind you about the currencies here, it's Euro and Dollars, more than 50% of the portfolio is linked to Euro and Dollar. When it comes to ZAR and the Brazilian Reais, these PPA tariffs are also inflation-adjusted. So that's also important to keep in mind when looking at the contracts.

And then we're now basically having assets in 11 countries. And from an EBITDA and cash flow perspective, South Africa still important, Ukraine and Egypt also important in this mix but well-diversified portfolio. And just to explain the graph, the colors of the countries are then also indicating what currencies they are in when you read the 2 pie charts here together. So we have, for instance, in Jordan and Honduras and Egypt, Dollar-denominated tariffs.

And lastly, the remaining contract period for the PPAs, on average, 20 years. 10 years in Ukraine and Czech Republic is also 10 years remaining but quite a lot of new plants that have just started production.

Okay. So I'll give the word back to you, Raymond.

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Raymond Carlsen, Scatec Solar ASA - CEO [3]

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Thank you, Mikkel. There a lot of simulations that are trying to predict what the future is going to look like and how quickly the world in terms of energy generation and consumption is going to change. I've decided to use Bloomberg here. But there are others, Statkraft, yesterday, the NBGL that are actually even more optimistic if you look at the changes in that type of context.

Here you will see that by 50-50 (sic) [2050], 50% of the generation capacity is going to come from wind and solar. For solar, it means that it will increase from 2% to 22%, but then keep in mind the total new electricity additions are going to increase by 62%.

Now is that all for solar? No, it isn't. Because what will also happen is that some of the installed capacity will have to be transformed from diesel heavy fuel oil into solar or wind. For example, in South Africa -- sorry, in Africa, you have almost 250 gigawatts of diesel-generated power. In world -- in the world in total, almost 600 gigawatts.

So looking ahead, it's -- I mean, if you only look at those numbers, I mean, it's a bright future. But of course, it doesn't come by itself. You have to develop a business model that are actually able to extract opportunities that are translating into a positive contribution on the bottom line and also the company's ability to transform not only applying new technology but also applying new business model -- models, like Release that I'm going to come back to.

By the way, I had a meeting, I'm not going to share exactly who that was, but they discussed -- we discussed peak oil demand. And 2 months ago, that was in [2035]. We met 1.5 weeks ago and new simulations have been carried out. And peak oil demand in that model was [2028], meaning that it's not peak oil, it's demand. So the demand curve is going down. So it's something to think about if you're in that part of the energy business, how do you actually take advantage or tackle such a situation?

Most of the growth that you see here is going to come from emerging markets. OECD will remain with a moderate growth. I mean they will be electrified, so there'll be a growth in that. But of course, 98% of the growth is going to come from emerging markets. And if I dare to call it our whole market, I will call it that, but at least this is where we are focusing for the time being.

So I think that -- I think the most challenging picture here for the energy industry as a whole is how to be able to foresee, tackle, implement and transform the companies and the business into something that is going to be long lasting. We have -- it has had an impact on the way that Scatec Solar has organized themselves. Of course, we have the long cash flows, that Mikkel talked about, the utility-scale project. We had also set aside a specialist group in our company 2 years ago to look at new opportunities that we see in our markets. The Release concept is a product of such an exercise.

If you look at our backlog and pipeline, it has increased quite a lot. And if you look below sort of the big number and if you look at the various projects that we have access to, of course, we also see that the quality of the pipeline has improved and that gave us, sort of, the motivation, as we shared with you all in the Capital Markets update, to increase the target by end of 2021 from 3,500 megawatt to 4,500 megawatt.

So the market environment -- and as I said, most of the growth of the next 30 years will come from emerging markets.

Now if you look at the segments that we're going to concentrate on, utility-scale solar is, I guess, more or less all of the 4,500 megawatt, also the additional 2,500 that we will build from our -- until end of 2021. But there will be different types of long-term contracts. It will be feed-in tariff, it will be power purchase agreements, bilateral agreements. It will also be, as we see, and I've talked about a few -- over a few quarters, an increase in corporate and industrial opportunities.

And in many markets right now, you're not doing your job if you're looking at -- not looking at alternative energy. You may not be too focused on the CO2 emittance but, of course, everybody should be focusing on how to save money on operational budget by cutting cost, operating the plan. And today in many markets, I mean, we can right away, offer opportunities that can reduce the energy bill by 50%. So I know that in a lot of boardrooms, this is being discussed as we speak and we have been contacted by many, and we are in negotiations with many.

We presented Release redeployable solar to address a market that has been there all along, but it doesn't match utility-scale market that we've been in. Meaning that these entities weren't able to enter into contracts that were 20, 25 years long. They had a different business model. It could be that they had a license that lasted for 5 years. It could be other things. They didn't have any investment budget and that kind of thing.

So Release is an answer to a customer demand, shorter contracts, something that can be charged to their operating budgets, something that can be redeployed. Because if their run -- contract runs out after 3 years, we can redeploy the equipment at a different location and then start up again. So we have received quite a lot of response, good response, and we are very hopeful that this will develop rapidly in the coming years.

Now if you look at the way -- or the road ahead towards end of 2021, right now, we have 1.2 gigawatts in operation. I mean that's up 4x compared to 2 or 3 years ago. So it's quite substantial, and you've seen that manifesting itself into the production of power and the long-term cash flows. The same amount is under construction at the moment and which will be completed these projects, over the next 8 to 9 months, I believe, give or take. And then we have near-term growth. The near-term growth that will bring us up to a level of 4,500 megawatt by end of 2021. Now where is that coming from? Well, it's coming from the slide that I showed you previously, the pipeline of 5,600 that has, compared to previously, been improved in quality. We'd taken out some projects, for example, in Iran, for natural reasons that you may appreciate and some others, to allow us to even further concentrate on the 2.2 gigawatt and the delivery of that.

Now we have also, of course, looked into the D&C contribution. This is a number we have shared with you from the very beginning. It shows our ability to generate cash from development and construction activities that will be reinvested into the long-term cash flow as equity. So we're just slightly making adjustment of that number to 12% to 14%.

In terms of the returns that we're expecting from sale of electricity, we have also made a slight adjustment to that. Also keeping in mind that, as Mikkel shared, most of these projects, or at least 50% of the ones that we have now or maybe even more in future, are in the currencies that you are familiar with, U.S. Dollars and Euros. So we have adjusted that to 12% to 14%. And then we talked about what is going to happen after 2021 and we have given a number of 1.5 megawatts -- sorry, gigawatts in addition for every year. I mean -- and if you look behind this, this is the organizational capacity that this company has as well. But of course, it's not easier to increase that. I mean we have shown that we can grow fairly adequately in terms of organizational capacity in different locations of the world. And then on top of that, when Release is really getting traction, we can add another 300 to 500 megawatt from 2022 and onwards.

I've talked about the organization. We have 45 different nationalities now, 400 fixed employees. I don't know, there are 200 to 300 of short-term people that are helping us with the project, plus the several thousand people that are actually doing the very, very important work, operating the plant together, 4,500, as I mentioned in Egypt.

Now I think statistics have been good on the HSSE side. We continue to focus on the long-term relationship with the communities that we're in. Not only with communities, we're also cooperating with universities. We've done that for the past 5 years in South Africa, sponsoring renewable program and also letting the master and doctor students to research on our plants, and frankly speaking, we're benefiting from that from -- because the quality of work that we do is actually excellent.

I believe that that's the formula that is going to, I think, work also for us in Vietnam. Vietnam, for us, will be an extremely important growth market. But of course, we'll get back to you once more details are being -- can be revealed.

I guess that concludes my presentation for today, and Mikkel's, and we're happy to take any questions that you may have.

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Questions and Answers

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Jørgen V. Bruaset, Nordea Markets, Research Division - Senior Analyst [1]

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Jørgen Bruaset, Nordea Markets. So just between you and me, Raymond. Release. When do you think you will see the first contract being signed? Do you think it's going to be this year or next year?

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Raymond Carlsen, Scatec Solar ASA - CEO [2]

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Yes, it could either be this year or next year.

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Jørgen V. Bruaset, Nordea Markets, Research Division - Senior Analyst [3]

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Okay. Good enough. And just a question on Argentina and Malaysia. It looks like you're delaying the time line by 1 quarter versus the guidance from Q2. Is there any specific explanation to that? Or is it just normal operations?

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Raymond Carlsen, Scatec Solar ASA - CEO [4]

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Argentina, we had some startup issues, ground conditions. I mean these are huge areas, and I mean, as I mentioned to my Board yesterday, I'll try to explain why we had to make an adjustment. And it's a -- if you drill in, sort of, sand compared to granite, it's slightly different, it was more like granite type of ground conditions. So we had to change the approach, which made sense, of course. And that's -- so the best thing was to make an adjustment to the time schedule. So there's nothing big. I mean it's just common sense, execution of projects. It's normal to have challenges like that. You heard it in South Africa, dolomite, you could look it up if you're geologically interested. I mean it's hard stuff.

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Jørgen V. Bruaset, Nordea Markets, Research Division - Senior Analyst [5]

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And just the final one. On the bifacial technology on Benban, we've talked about this 10% to 15% output increase for the last few quarters. Do you have full visibility on how the technology works? So that 10% to 15% is what we should expect also going forward. It's not going to be any surprises either on the upside or downside from that 10% to 15% range we are talking about, right?

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Raymond Carlsen, Scatec Solar ASA - CEO [6]

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That's kind of a leading question, and I like the leading questions. Because we have had confirmation with preliminary analysis is that we are actually around 14% compared to the previous models. But I mean, I can't tell you. That is going to remain for our future. This is also linked to procedures that we're doing for the first time. Panels have to be cleaned. This is in desert area. I mean -- and that's in our financial model, how often do you clean? What is the reduction on performance? You have to clean on the backside too. So we still have still to perfect some of these processes. But I hope that it will confirm what I just shared with you 14 -- around 14%.

And of course, it's very good for us because we're getting high-quality data that we can use on other projects where we're going to implement bifacial. But bifacial, I mean, the sort of the other side of the coin, which is also producing electricity, is linked to something called albedo effect, look it up, it's interesting. It's reflective capacity of the ground. Sand is very good, snow is even better. Lava is not good. So we have to look that into -- take that into consideration and it varies quite a lot.

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Mikkel Tørud, Scatec Solar ASA - CFO [7]

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Okay, doesn't seem to be any further questions here.

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Raymond Carlsen, Scatec Solar ASA - CEO [8]

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Anything from the web?

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Unidentified Company Representative, [9]

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Yes, we can take one from the web.

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Raymond Carlsen, Scatec Solar ASA - CEO [10]

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So you want to read it up?

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Unidentified Company Representative, [11]

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So there is one question about Vietnam. Will the estimated returns from this pipeline still meet required returns if they reduce the tariffs as the government has stated?

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Mikkel Tørud, Scatec Solar ASA - CFO [12]

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Yes, maybe I can answer that one. So just to clarify this, it's been some news articles around the tariff levels in Vietnam, a reduction of the feed-in-tariff. That is a reduction that had been on the table at least for last 6 months and this is what we are using as planning assumptions. So it's nothing other than that, so this is in line with the expectations when it comes to the new tariff level that has been discussed for Vietnam, and, of course, that's reflected in the guidance that we provided when it comes to returns, yes. So this is no further adjustments to the tariffs than what we already had expected.

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Raymond Carlsen, Scatec Solar ASA - CEO [13]

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That's great.

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Mikkel Tørud, Scatec Solar ASA - CFO [14]

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Okay.

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Raymond Carlsen, Scatec Solar ASA - CEO [15]

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Okay. Thank you all. See you next time.