Good Investing Talks - What are ABO Wind's best markets, CEO Karsten Schlageter?

Episode Date: February 22, 2024

In the second part of our interview with ABO Wind CEO Karsten Schlageter, we discuss the companies' ambition in renewables.

We are patient because we understand that sometimes it takes long or you need to wait for the right moment or regulatory change or government change. But that does not mean we sit there passively. Twenty years back we were almost in the niche market. Now all big companies are renewables. We are in this big segment of renewables. stream. It will not simply go away as it did in the past for some years. Dear viewers of good interesting talks, it's great to have you back with my second part of the interview with Karsten Schlaggeta of Abow Vint. And today we are looking into the

growth chances of the company and I had to quickly pause when I said Abou Vint because they plan to rename to Abou Energy. Why is that so? Why are you planning to change the name of the company. It was always, or not always for many years in the discussion. I mean, we are 27 years now successful in this industry. We started, of course, with wind only. And now we have become a much more broader company. We are now really focused on the energy transition as a whole.

So we are active in wind, in solar, in battery systems, storage systems and hydrogen. So this brought us in the end to the decision, yeah, to rename us, to reflect that also in our name. And ABO Energy KGAA was chosen to be best reflecting this ambition. We take a deeper look into the new additions next to wind. Solar is already well known, but we take a look into this later. But you also have the wish that you want to be a global play in the renewable industry in the future. What does that mean if you put it into practice?

I think we already are. We have a very strong international presence. We have 16 markets. We are, of course, strong in Europe. That's our stronghold. We are in Germany, especially, Finland, Spain, France, of course. These are the four strongest markets. And we also have a good pipeline in many other European markets to complete the picture.

UK, Ireland has a nice perspective to be a strong market. We have medium markets like Hungary, Greece, where we are also very strong. We are on top of that in Poland, which especially with the new government, with a more progressive outlook is very promising and we are in the Netherlands. That is always a frontrunner in the renewables. Europe and that's probably what you mean by global we are with a strong presence in Canada since we spoke the last time we have grown into several other provinces we are in Colombia with a strong pipeline and we build our

first projects there in the solar business or this is also very promising we are in Argentina these are the Americas and in Africa we are North Africa in Tunisia with a strategy that is more and more focused on hydrogen. We are in Tanzania, which is rather a smaller market for us, and very strong in South Africa. So I would say this merits being already branded international or global. Maybe we miss Asia, yeah, but we also want to stay focused at least from a time zone definition of point of view.

Are you planning to add more markets? in this time zones or our strategy that we have designed the last year and also published is to focus on these markets and also we want to do that for for the period that we have defined but of course there might be new markets coming in the future that's not excluded but for the moment we are still in a consolidation in a sense of internationalization we have still market to grow, we have markets where we can invest in a lot, and we have especially markets where there is a huge growth perspective and no need to go to additional ones. So you have this interesting, and the viewers will see this slide embedded into the video, you don't have to show it, you can take a look at it.

It's the growth trajectory of the markets you're in and there's in between seven point, 7% per annum growth till the digital growth in these markets. So what is the general market environment you're operating in looking like? I mean that's come from the very big drivers, from the crisis of mankind. We have climate change. It's not really new, but I think it has become mainstream. in most governments, especially of the European Union, but also the United States came back under Joe Biden.

And climate change is accepted. So we need to come to a net zero environment where we really get rid of carbon emissions. So this is the main driver. Then we have unfortunately had the Ukraine war since we spoke the last time. So we have had the need to substitute all kinds of fossil energies by implementing renewables. In Europe and especially Germany, this has driven a lot, our business outlook, short, medium and long term.

And we have the inflationary pressure. This of course is related. So again, adding the cheapest sources of energy that today are solar and wind resources has become a paradigm of most of the European governments and also of many outside Europe governments. And you're also supported by politics here. Right now, we're at the Bundeskensler amt here in Berlin and told me that you're flying with the economic minister to Algeria quite soon. Exactly.

So we have a lot of tailwind, a lot of support by politicians. Also there have been so many, and I need to say, very successful changes in legislation, in Germany especially to push the build out of solar and also the acceleration of wind. Of course we can always say we need a bit more and refine here and there, but there were many, many groundbreaking initiatives. We are now called to be in the over aching interest of the public. This has changed a lot. This influences court rulings. This motivates many local, decentral governments and civil servants. We have many specific laws that now you have priority next to autoways, auto

So autobahn, a famous German autobarne, or next to the railway tracks, so a lot of disenabled, much faster growth. You're present in the 16 markets. You already mentioned some of them. Investors are always interested in what are the most attractive markets and why. Maybe you can name the three most attractive markets. For the Abawin group from, let's say, ASIS perspective, it's definitely Germany, France and Spain and Finland, if you allow me, I tell you four.

These four are the most important ones, then of course you can also talk about that some of them might become more competitive or more saturated, but Germany and France will definitely stay among the most interesting, lucrative, most profitable markets. Why is that so? Because we need huge, huge, huge local energy production. It's not just that we want to replace the fossil fuels, the carbon. We want to exit from the carbon generation of electricity. We need also satisfy the huge growth that comes from sector coupling.

So we want to decarbonize our industry. So many of that will become by switching industrial processes. from burning fossils to direct electrification. We will see a huge growth in electric vehicles. And we see additional growth that everyone now talks about, but sometimes we do not understand what it means. Artificial intelligence, this will drive data center usage again enormously

and all of this needs electricity. So I could probably add some more sectors that need more and more electricity. So it's not just replaced fossil, it's getting to a much bigger, bigger market of energy we need. In the history we underestimated the electricity market growth. In Germany there was a sudden stop to renewable projects, I think in 2011, with Mr. Rözler as economic minister.

Is there a risk that something like this will happen again? From your perspective? Our sector is very much regulated, so there's always a certain risk that remains. There might be temporary dips, but I think it's now mainstream that renewables are a key cornerstone of our, not just the energy system, but the economic system. So I think this is now no longer really stoppable. It would be half suicide. back to the markets which three are the more challenging markets you can also

name four if four come to mind challenging in a sense of the market environment or in a sense of to make sustainable business there there let's let's start with the markets that are relatively new for us so there it takes years to be successful in the market you cannot you cannot jump into a market and then set up a business in some months. We need to understand that the project development takes years. And in that sense, if you go to market, you start with some projects and you build your pipeline. So it takes years really to make a market profitable.

Let's start with maybe Colombia. We have now a pipeline of 1.5 gigawatt that has taken us from 2017. We now build the first two projects. Of course, then you need to learn to find your right sub-provider, suppliers in the market. You need to learn who the new investors are, so this takes a while. But I'm very positive, for example, on Colombia. In South Africa, we have built a huge pipeline. Then you need to learn how to find the right business models.

We have now sold a huge project, early business. early this year. This of course is subject that the partner to whom we sold it wins tenders with different business models in Europe but it has the prospect of really really becoming a big additional market for us. So these are the market that are simply younger compared to Germany where we are as I said 27 years in such markets we are three four five years only but made they turn now into very good contributors within the group. And then we have some markets where, of course, you have really political challenges. Argentina is one of them. Of course, that's no secret to known investors.

So we have the challenges there that you cannot repatriate your dividends. And so all this needs to be sorted out before serious forward. indirect investment can happen in Argentina. But even in Argentina, you have local companies that still in such a crisis build out renewables. Because again, also in Argentina, renewables are the cheapest source of energy. We have, of course, countries where also you need to overcome much more, let's say, regulatory topics or bankability issues. In Tunisia We had quite a while that we needed to get to bankability for projects because of the ratings of the country itself.

And in the absence of state guarantees, it's practically impossible to finance projects. So these things we sometimes need to wait. We of course actively try to lobby that the right framework gets in place. You don't want to do this, but theoretically if you would enter it. a new market or a market you entered recently, are you better in getting more profitable sooner or profitable sooner, not more profitable? You mean because we learn how to internationalize? Yeah. Yeah, that's a good point and I think absolutely we refined this process a lot. We did our first internationalization steps

20 years ago and this was more by you know someone somewhere and then you simply start. out. And we became more and more systematic in analyzing countries and today I would say we also understand much better what the real long-term drivers are. And long-term drivers, for example, are that although Abo Wind is a mid-sized company, we should still operate in rather bigger markets where you have the chance with a relatively small market share still to make constant and profitable business. markets are more difficult to run. You have a project every some years and that's of course more complicated to get to profitability. So the playbook has become better?

Definitely, definitely we have and you asked me in our first session about our colleagues and employees and of course we have such a much broader and deeper management team that has many of these experiences made for at first hand or brought them from other companies or every process and also the internationalization process I think gets better and it's based on a much broader and deeper experience. How long are you patient with country to become profitable or how do you manage this that if you have a team there build outbuild relationships with the people if it really does not work? We are patient because we understand that sometimes it takes long or you need to wait for the right moment or

regulatory change or government change but that does not mean we sit there passively as you said some of the things when we see that management teams do not work we need to make changes definitely sometimes also we have to reduce or the positive way increase our activities. The best example is Spain. We exited half of the business by around 2012, 2013. We needed to close one of two offices but we stayed. We stayed patient, we invested more selectively but very in the best places and this turned out to be the source of today's very profitable business in Spain. And you see, I mean, even this was 10 years, we are in Spain since 2003, so it goes sometimes in cycles.

It now goes less and less in cycles because we are now with renewables in the heart of the energy sector. Go 20 years back, we were almost in the niche market. Now all big companies are renewables. We are in this big segment of renewables. mainstream, it will not simply go away as it did in the past for some years. What kind of bottlenecks are you facing right now? We discussed some already in our last meeting, which was very intense and very interesting. So one is employees, as we said, I think that's a strong source where we are strong.

We have great colleagues, more than other companies, as you identified. This is a bottleneck in the markets, killed labor. We have a very sector-specific bottleneck, which is grid connections. Grids get saturated, especially in areas where there's great wind or great solar, then this gets constrained. This is definitely a topic where we also talk with institutions that we need to embeds. to build out new capacity in the grid. We have longer delivery times with some components like wind turbines.

So we need to order earlier. You need more working capital also because you pay earlier, you get the money back later. So there are certain bottlenecks. I would say these are among the most important ones. And some markets, of course, still takes too long to get permits. This has quite improved. What kind of IRRs can you make in a different market? We do not think so much about IRAs.

We talk about margin per project. This is a question many investors or analysts ask, and it's a very, of course, difficult question to answer. But we have, let's say, markets where you have small projects, limited numbers of projects and usually high margins like Germany, France, very fragmented markets. These are very interesting for us because we can work with these countries and these environments where you need much more decental teams, you need much closer cooperation on a local level. And then we have markets.

Germany, you have eight offices. This is also an effect of this decentralized truck. Exactly, absolutely. It's very important to be close to landowners, to be close to municipalities, to the local authorities. And then we have markets where you have huge land areas, huge projects, but specific margins being very small.

This is, for example, the case in South Africa, in principle in Argentina. It's also to some extent the case in Canada. So you need to understand that and apply different business models. Coming back to this presence in Europe, how much of your business revenue wise is done in Europe? most. Most are still in Europe. This is where we have an operating umbrella of the EU, which helps. And structures are in some market similar. We have high margins, so that most of the profit comes definitely from Europe. And within that, to be transparent, most of it even comes now from Germany again. Because here we have the highest growth, we have the strongest

political commitment to get the energy transition done which is very positive to us so we have seen acceleration in wind and in solar so again more than half of our profits and turnover comes from germany so how is the margin you're thinking about a lot in european wind and solar projects and how is it lately developed well we do not use to talk about individual margins or so but I can confirm our general outlook that we announce we want to deliver again within the forecast of 21 to 26 million this year for for 2023 so we will deliver that and we stick to our prognosis forecast for 2024 which is between 25 million of net profit to

31. So we can confirm that, I mean, the margins sustain that business even, and maybe you want to go there next with a higher interest rates, with a lot of headwind we have asked for. Yeah. So the margin stays in similar fashion in volatile environments, like interest rates and energy prices jumping up and down. Exactly. I mean, we also need to admit that per megawatt margins in Germany have gone down. I mean, this would be a surprise also if there would absolutely be no effect. I'm always saying we are a bit sheltered, so if interest rates go up then often also prices go up, PPA level, so it's a moving ceiling and flaws we have embedded in our business model. So there are compensatory effects always.

but compared to the very high prices in the last years, in the electricity markets. Now of course this go back to more normal levels. This lowers the value of our projects, also interest rates, lower the project of our values, but at the same time we have increased our volume a lot. So we overcompensate and we have growth driven especially by volume. How much CAPEX does a megabut cost at the moment for you? To build? Yeah.

This depends also on project per project because sometimes you have big grid connections or access roads are difficult to construct. Sometimes all of this is easy. So it varies a lot. I cannot give you numbers now, but I can give you examples, or I mean I could give you exact numbers, but let's say I would rather give general numbers that are known in the market. So we have seen prices of solar modules that have been around 30 cents per watt during the coronavirus where we had supply chain issues. now come to 15, 14, even lower cents per watt.

So you see that a lot of cost pressure has gone out of the solar market again. On the wind side, though, turbine prices have continued to increase quite a bit. So we are much higher now than before the corona level. If you want exact numbers, in wind we are now per megawatt, way above a million, even in low-cost market like in Spain, but in solar, yeah, it varies really, it depends also on what kind of structure you use, if you use fixed-till or tracker systems.

At which point would you think about enhancing your business model, model to also invest as an IPP compared to a pure developer? Is this something you might consider? We discussed that again in all our strategic reviews. As long as there is almost exponential growth in the market, we think we are very well positioned to be a pure plate. MyX is also interesting for investors. You can in our company invest really in the first phase, which is more risky.

but also more returning, of course. Risk and reward goes together. Of course, there is an embedded option to at any time switch. Should the market become flatter, we might do that, but this might be in the medium long run. It might definitely, it's not part of the next year's our strategies to 2027. It's definitely not part of it.

and we think it's for quite a while will be much more interesting and fascinating to invest in project development and drive the energy transition then let's jump into the projects that are in the energy part that's not well known the hydrogen pipeline in the battery pipeline you have 20 megawatts pipeline for green hydrogen what kind of projects are this and where are they Yeah, this is a very different model for us. It's really large volume. It's much more long term and it's riskier. That's why we also show it in a separate category to investors.

We have our traditional pipeline of grid-connected project with 22 gigawatt. And in hydrogen we have built a pipeline of 20 gigawatt. So where are there in the most promising areas of the world where you have extremely high resource endowment, where you have land, vast availability of land, very low density of population, you need access to any kind of infrastructure for exporting these energies, so either ports or pipelines. And we want to use these resource-rich areas of the world to build renewables, you know, volumes of renewables in the gigawatt scale, transform it via electrolysis into hydrogen,

and then depending on what the final carrier is, either transforming it in ammonia, for example, green ammonia, to export it then to Europe. So where are we? Strongest place where we are in Canada, we are in New Finland and New Brunswick, Nova Scotia with hydrogen projects. in relatively short distance across the Atlantic to Rotterdam or Hamburg or other German ports where we could then offload the ammonia, the green ammonia products and consume it here in Europe. We also have such projects in Argentina. They are more long time, of

course, because of the political environment, although the wind resources are even stronger. And we have also made long-term projects in South Africa, exactly close to the Namibian border, where we think we can combine excellently solar resources and wind resources and then export again via any hydrogen carrier. Then we have the north and south corridor, so we develop hydrogen projects in Finland that could and will be connected via pipeline to Germany and from North Africa, from Tunisia and in general North Africa we hope to export hydrogen via pipelines that will be refurbished or added as new pipelines and bring those to the south of Germany, to Bavaria, to the

industrial centers of Bavaria and Barton-Wurtenberg. What is your estimate for the development in the hydrogen space within the next five years? We try to be, let's say, more realistic than many that we think are too over-optimistic. So I think personally for a really large-scale export we need some years now still to develop these projects very soundly. soundly. We will see maybe one or the other even one of our projects that might come up with the pilot. Pilot capacity to start the export, but I think realistically we will see first strong imports from abroad by 2030 and then beyond scaling up fast. You seem to need joint venture partners to develop these projects. How do they have the

negotiations for these projects developed yeah we need that of course our wind cannot of course not build gigawatts scale projects we are mid-sized company we're very bold and ambitious we can do a lot but that goes well beyond our financial and also other capacities so we need partners for that but also even under development you need to invest several dozens or even hundred of million of dollar to develop such large-scale gigawatt projects. You need often harbor infrastructure. You need detailed engineering of chemical plants and balance of plant infrastructure.

You need to develop, of course, all the wind park. You need to develop off-grid. So this consumes quite a bit of engineering know-how and cost. We need to also take some of these consultations. services from outside companies. In short, we need also partners during development. And yeah, we try to find ideally placed companies that either bring local expertise in funds that want to operate it or that want to be off-takers. Infrastructure funds sometimes would like to invest in such assets, utilities or they are different

types of investors but i mean the common thing is they need to bring quite uh yeah uh capital capital strength alongside our own capabilities hey timon here it's great that you have made it that far into the video and i think it shows a certain passion for investing you're having if you want to dive deeper and go further down the rapid hole you're invited to apply to my community good investing Plus. It's a place that's very helpful to people who are ambitious about investing. It's helpful to investment talent as well as Experian fund managers. So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. How should we as shareholders think about the realistic valuation of the hydrogen pipeline? What could this be worth in a few

years. This is a key question and it's of course that's why we separated it. It needs to be evaluated and value differently. I think that's where we are all in agreement. And then I hope that investors see the additional potential. I would put it that way. And then how you evaluate that depends on how you see the future hydrogen market. If you really believe that we need to decarbonize fully, come to really net zero, then hydrogen will have a huge role, and then it must have sooner or later huge value to develop these projects in strategic areas of the world. These are the new oil wells then, you know. But this depends on each of the investors, I would say, how fast they expect this market to mature, to really

become very profitable, self-sustaining. We, of course, think that it has a huge potential relative to our current valuation. I would put it that way. I cannot give it an absolute number. But currently we are valued between 400 and 500 million. I mean, even if you have a low multiple with 20 gigawatts and you believe in hydrogen market, it is a huge additional value compared to our current. company valuation.

How do you decide between like this kind of moon shots where the market is in establishing itself and like the known solar and wind projects how to put capital into batteries or hydrogen? We ask our wind or our energy soon we think that we need to be careful so we invest only a small portion in hydrogen that's also why we announced a strategy that we want to incorporate partners early on even in the development phase that's the focus and the cash flows in the next year's definitely will come from our traditional business let's move to the battery business and what kind of projects do you realize in this business can you maybe give a few examples and how they add value to existing.

Yeah, we have built a first project in Ireland with 50 megawatt. That was really an amazing project. We have won several of the innovation tenders in Germany. We were actually market leader. So these were several dozen megawatt we won there in several projects. And these projects, of course we have a strong learning curve, but are already profitable. Not all of them, that's also true, but most of them are profitable in some because of our learning curve. We lose some money, but at the same time we learn a lot of valuable know-how.

Again, it's about the people we have in the company that learn it and can reapply it in many other markets. So we will see many more of these projects in Germany. We focus the battery business in some key markets. So we will focus in Spain. We have built a series of projects there on the UK islands, Germany. These are among the key markets. And then, yeah, we have in many additional markets,

smaller pipelines. Like also in Hungary, in Greece. We have even taken part with a battery tender in Colombia, but there also we learn it's not really the markets that will be the front runners for batteries. So there you have isolated tenders, but then it's not, let's say, a constant business you could do. That's why we focus more on the markets, maybe including also Canada, where we expect a more constant flow of projects to come. Like, what kind of value does the battery system add to the energy market? It's a bit out of your competence, but like that people can understand why battery projects might be a growing path in a renewable energy system. Or batteries have a fundamental role in the future.

We will have very long-term need to store energy. Probably we use the hydrogen. pump storage, these things will serve to close the long-term gaps when there's no wind and no solar in the system. And then we have the intraday changes, of course we have solar during the day. We have wind blowing in some hours, but you need to shift this energy from these hours to the hours where there is limited or less. wind and solar. So I think that's easy to understand. The volatility of the renewables and the short term, if it's during several days or especially several hours, this will be done by batteries. But then there's another thing that's not so commonly known. Because of the

fluctuation and fast fluctuation sometimes of renewables, you need very short-term net services. so to say is to stabilize the grid and their batteries get additional revenues because they can within milliseconds provide some energy or frequency to stabilize the grid and this is paid for by grid operators so these two sources of energy as two sources of income and energy services can come from batteries again um the thing question as I asked on hydrogen what could this be worth in your opinion like what is the realistic valuation of the battery business for abo wind it's i think that it's much more near-term it's again about margin i mean we look it into a percentage or margin we can do per project

and it's similar to the solar business yeah so we can we can have to give you an idea i don't know 10% of margin on such a project which is lucrative and sustainable. And there's a last question and you will finally also have the chance to add something we haven't discussed but my last question is like you have this target of doubling net profit until 2027. Can you maybe walk us a bit through how you want to get there? Yes absolutely we have grown since we met the last time we have doubled more or less. our pipeline in Germany. So we have now a lot more wind. This will continue to grow. We will realize these wind projects in Germany alone and this will be a huge contributor of value.

We have a big, big pipeline in solar, also in Germany but elsewhere as well. These margins will not increase or even decrease in some markets but because of this huge volume growth we can we can increase our absolute net profit a lot and then and then you have seen and discussed with me the batteries I think batteries is just starting it will have much higher compounded growth much much higher than the others you have shown the slide it's it's even more because we come from low base basis so we will have in the next years the much higher growth the compounded average growth rates you have shown at 2050 but this is not let's say a linear growth

path it's really we will now see acceleration and then it will flatten out towards getting closer to 2050. And in hydrogen, hydrogen is not factored in even in this 50 million. Maybe we have, we can make a profit on one or the other project, but I would not even foresee it in the next years to 2027. So we are conservative there. So investors should be assured that these targets are without the fantasy, the additional, optionality and perspective of hydrogen. So hydrogen on the opposite side even cost you money to develop this project and keep them going? It's investment, yes.

But then we will see hopefully much higher returns also beyond 2027 on these projects. But indeed, yeah, it's a little part of our investments go into this business line, but it has a but it has a huge leverage. I mean, you have seen our pipelines alone a project in Canada of 5 gigawatt, of course, is such a huge volume. You need to see that in Germany we added a little more than that last year of wind in all over Germany. So you can also see what the possible magnitude of one of such a project being successful would be. For the end of our two-part interview, I usually give the guest the chance to add anything we haven't discussed. So do you want to add anything?

Well, I think you have again asked a lot of very interesting questions very comprehensively. Thanks for these great talks. I would rather say really our wind is ideally positioned in the energy transition. We are in wind, solar, batteries, hydrogen. Hydrogen, we have all these energies in our portfolio that will drive the energy transition. We have still a lot to do to get to net zero, used growth paths. So I hope that us investors see the value and the unique position as a pure play of ABO wind, and hopefully when we do the next interviews again two, three years, then it's again

another abo wind abo energy energy then thank you very much thank you thank you and bye bye to the audience i really hoped you enjoyed this conversation if you did please leave a like and a comment and for sure subscribe to my channel traditionally i want to close this conversation with the disclaimer so here you can find the disclaimer it says please do your own work this is no recommendation what we are doing here is just a qualified talk that helps you, but it's no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.