Ørsted A/S (ORSTED) Earnings Call Transcript

Ladies and gentlemen, welcome to the Ørsted Interim Report for the Second Quarter of 2026 Conference Call. I am Haley, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Group President and CEO, Rasmus Errboe; and CFO, Trond Westlie. Please go ahead.

Thank you very much. Hello, everyone, and thank you for joining today's call. The first half of 2026 has once again reminded us how quickly geopolitical tensions can impact global energy markets. The volatility has underlined the importance of European energy independence, which cannot be taken for granted. But these challenges also represent an opportunity for Europe to strengthen competitiveness for businesses through electrification and lowering of energy costs. An opportunity to ramp up production of homegrown, affordable and reliable energy. So global shocks to energy markets do not limit prosperity. Renewable energy is central to this necessary transition. And as a reminder, each of the recent 10 years have been the 10 warmest years ever recorded on Earth. And combined with wildfires across Southern Europe this summer, this obviously further underscores the need for a rapid acceleration of the energy transition. To improve European sovereignty and resilience, increased investments into renewable energy is central and necessary. With the right actions now, offshore wind can provide several significant benefits for Europe and the energy transition as a whole. As we highlighted in our recent paper, the real value of offshore wind the build-out of renewables with offshore wind as a significant component can reduce annual fossil fuel imports by more than 30% of the current import need. Further, these investments can reduce total European electricity system costs by up to 30% by 2040 as the integration costs of solar and wind are marginal compared to the large savings from reduced use of fossil fuels in power generation. Finally, the paper shows that an investment level into offshore wind in line with the ambitions outlined in the Hamburg Offshore Wind Investment Pact can cut annual carbon emissions in Europe by 20% compared to 2023 levels corresponding to 550 million tons of CO2. When we assess the outlook for offshore wind, we see several positive signs for our industry, and we remain optimistic about the prospects for the sector. In the short term, there are several attractive offshore wind opportunities where the regulatory frameworks have improved and contributed to strengthening the investment certainty for future projects. We have seen improvements in the framework across several markets in Europe, including Denmark, U.K. and Poland. And most recently, the budget for the upcoming CfD tender round in the Netherlands was also increased. Our solid progress across our major construction portfolio, where we continue to progress all projects on time and on budget should also give policymakers and other key stakeholders increased confidence that the offshore wind industry can, in fact, deliver renewable energy at massive scale as long as sufficient volumes are tendered out on a recurring basis with the right frameworks. In the mid- to long term, the outlook for offshore wind, particularly in Europe, also remains strong. This is underlined by the 300 gigawatt offshore wind build-out target agreed in Hamburg in January '26. Compared to 2024 levels, this build-out in the North Sea would amount to an increase in the capacity of European offshore wind by a factor of 8, representing a significant growth opportunity for the industry. And at the European political level, the need for an acceleration of the energy transition is also recognized. The recently proposed review of the EU emissions trading system reflects the EU's continued reliance on a rules-based carbon market as its central climate policy instrument. At the same time, the electrification action plan and the proposal on electricity network charges reinforces the commission's focus on accelerating electrification across sectors to strengthen Europe's competitiveness, energy security and decarbonization, highlighting the need for continued investments in renewable generation, stronger electricity grids and greater system flexibility. We are encouraged with the continued positive signs for our industry and we will continue to be a close partner to government and industry peers to provide solutions for the acceleration of offshore wind. By continuing to deliver on our business plan, we will become a more focused, competitive and stronger company and we will assess the upcoming tenders and auctions with a disciplined approach to capital allocation as we are ready to pursue the most value-creating opportunities to remain the global leader in offshore wind. Let's continue to Slide 5 and an update on the strategic priorities and our operational performance. Our first priority is to strengthen our capital structure. And with the closing of the divestment of the European onshore business in April, we have made further progress on this. Also, the divestment -- of the divestment of a 50%-50% stake in our Greater Changhua 2 project is still expected to close later this year following the commissioning of Greater Changhua 2b and 4. Lastly, our continued strong business performance is driving our solid earnings generation, which is supportive of our financial foundation. With the measures we have taken during the last 18 months, we have the necessary robustness to pursue new value-creating opportunities within offshore wind while also reinstating a dividend payout in line with our previous commitments. Trond will cover the details of the dividend policy later in the presentation. Our second priority is to deliver on our 8.1 gigawatt offshore wind construction portfolio where we expect to commission 3 projects with a total capacity of 2.5 gigawatts this year. We have achieved significant progress during the quarter. I will shortly go through the construction progress in more detail. Our third priority is a focused and disciplined approach to capital allocation. As we look ahead for new offshore wind opportunities in Europe, and select markets in APAC, we will maintain our disciplined approach with a focus on value. Our fourth priority is to improve our competitiveness, and we are continuing to progress as planned on numerous measures across our organization to achieve a stronger and more competitive Ørsted. As part of improving our competitiveness, we recently outlined our decarbonization efforts towards 2040 in our net-zero paper, which describes how we -- with our partners, we'll work to achieve cost-effective reductions of key emissions hotspots across the offshore wind value chain. Reducing value chain emissions is essential from a climate impact perspective, and will improve our value proposition in future offshore wind auctions. Turning to the operational highlights of the first half of the year. I'm very satisfied with our operational performance. Our EBITDA, excluding new partnerships and cancellation fees, amount to DKK 15 billion, which is an increase of more than DKK 1 billion compared to first half of 2025. This was driven by ramp-up generation in offshore and slightly higher than normal wind speeds. The performance was also supported by good availability within our offshore business. Our financials for the first half of the year keeps us fully on track to deliver on our full year guidance. When it comes to safety, we have seen an increase in our total recordable injury rate compared to first half of 2025. The increase was primarily driven by an incident related to food poisoning at one of our power plants, which we consider a one-off event. In addition, the organization adjustment undertaking means that a reduced share of our colleagues are working in the offices and relatively more are working directly at our assets. Safety remains a top priority for us and our employees and we continue to strengthen our safety commitments through targeted initiatives and sharing of best practices with suppliers all aimed at preventing incidents and bringing our people home safe every day. Let's turn to Slide 6 and an overview of our construction portfolio. I will start by covering our projects that are near commissioning and subsequently cover the other projects individually in more detail. For Borkum Riffgrund 3, turbine commissioning is progressing as planned. The project is more than 99% complete, and we are expecting to commission the project during the third quarter. For Greater Changhua 2b and 4, the project ensured further progress during the quarter as all turbines at Greater Changhua 4 have started producing power and completed all main scopes. In addition, the project has completed all the onshore works related to the upcoming repair of the export cable related to Greater Changhua 2b. With this, the degree of completion is now at 85%, up from 80% in the first quarter. The project remains focused on the installation and energization of the export cable for the Greater Changhua 2b section. The repair work is expected to be completed in the coming period. And subsequently, the export cable will be energized before turbines commissioning will commence. The project remains on schedule for commissioning at the back end of the third quarter. For Revolution Wind in the U.S., the project continues to ramp up production with the commissioning of turbines. Currently, the project has 61 of the 65 turbines installed and the project intends to install the remaining turbines this year. The project is more than 95% complete and the project remains on track towards full commercial operations in the second half of 2026. Turning to Slide 7 and an update on our Baltica 2 project in Poland. During the quarter, the project has made significant progress, particularly with the installation of monopile foundations. Since the installation campaign was initiated in May this year, the project has installed 103 monopile foundations out of the planned 111, including all 4 of the monopile foundations for the offshore substations. This is a significant achievement by the team and a testament to the execution ability. With the progress achieved during the quarter, the degree of completion has increased to approximately 40%, up from 30% in the first quarter. For the offshore substations, the manufacturing of the structures is progressing as planned. And in the third quarter, all 4 topsides will be transported to the site for installation later this year. The fabrication of the export and the array cables are progressing as planned, with 2 of the 4 export cables having passed final acceptance test. The onshore substation work is well progressed and nearing completion with onshore cables manufactured and installation on schedule. In the coming period, the focus of the project will be the continued installation of the remaining turbine foundations and secondary structures as well as tracking progress on the cable manufacturing. Also, the load out and transportation of the 2 complete export cables will commence in the third quarter and finally, the work on the onshore substation will continue, including termination of the cables to the onshore substation. Turning to Slide 8 and an update on our Sunrise Wind project in the U.S. During the quarter, the project has continued to make solid progress. This includes both progress on the installation of turbine foundations, array cables and turbines. With the progress achieved during the quarter, the degree of completion has increased to approximately 50%, up from 47% in the first quarter. For the installation of turbine foundations, the work has been resumed after the seasonal installation restrictions ended in May. Since the installation resumed it has progressed well, with 77 of the 84 positions now installed. The remaining work on foundation installation is planned to be completed within the current installation window. On turbine installation, a total of 20 turbines and 20 array cables have been installed. On the export cable, all sections have been installed, joint and energized, and the offshore converter station has been energized. For the onshore substation, the converter station and export cable route is complete. In terms of turbine fabrication, all equipment remaining to be installed have been manufactured. In the coming period, the project is expected to complete monopile installation and continue the installation of turbines and array cables. Commissioning works will also continue in the offshore converter station, and the project is expected to start commissioning of turbines later this year. Turning to Slide 9 and an update on the progress at Hornsea 3 in the U.K. The project has made further progress across several scopes. Since the commencement of turbine foundation installation, the project has installed 43 out of the total of 197 positions. With the progress achieved during the quarter, the degree of completion has increased to approximately 30%, up from 25% in the first quarter. Regarding the enabling and reinforcement works at the Norwich Main substation, where the project is due to connect to the U.K. transmission grid, the work is progressing according to the updated schedule and expected to be completed next month. We are continuing to engage closely with National Grid Electricity Transmission and the National Energy System Operator as they work to minimize the delay and mitigate any further delays from occurring and impacting the schedule. On the export cable, the installation work has continued. For the offshore converter station that is already installed, the associated export cable has also now been installed and tested and is ready for energization. For the export cable to be installed at the project's second offshore converter station, the nearshore section has also been installed. The manufacturing of the mid- and far shore section is complete, and is planned to start installation later in the year. In the coming period, the focus of the project is to progress foundation installation according to plan. with the manufacturing and supply foundations on track. Also, the installation of the project's second offshore converter station is planned for the third quarter. And finally, the installation of the turbines is planned to start later this year with 2 installation vessels that are currently active on other projects before commencing work on Hornsea 3. With this, let me hand over the word to you, Trond.

Thank you, Rasmus, and good afternoon, everyone. Let's start with Slide 11 and the EBITDA for the second quarter of '26 and as always, unless I state otherwise, the numbers I refer to will be in Danish kroner. In the quarter, our operational performance was in line with expectations and we delivered an EBITDA excluding new partnerships and cancellation fees of DKK 5.4 billion. Let me walk you through the main developments. For our offshore business, total earnings came in DKK 400 million higher than last year, coming from higher earnings within construction agreements, partly offset by slightly lower sites earnings. Sites earnings came in DKK 200 million lower compared to last year. In the second quarter, our trading business delivered earnings as expected but not to the same extent as last year. During the quarter, a planned maintenance outage at Hornsea 1 during most of June also impacted earnings. And finally, there was year-over-year effect from Gode Wind 1 and Gode Wind 2 gradually stepping out of its subsidy during the first half year and is fully reflected in our full year guidance. This was partly offset by higher wind speeds in the quarter as well as higher power prices. Earnings from offshore sites excluded contribution from trading activities, was approximately 5% higher than the same period last year. Earnings within existing partnership increased compared to last year, mainly related to construction agreement from Hornsea 3 and updates to other construction agreements. In our onshore business, earnings decreased by approximately DKK 200 million to last year. This was mainly due to sale of components in second quarter of last year, which was not repeated this quarter. while earnings from offshore sites were at the same level as last year. Within bioenergy and other, earnings were in line with last year, driven by higher generation and prices at our combined heat and power plants. This was offset by a lower contribution from ancillary services and a provision related to our gas storages. Then going to Slide 12. In the second quarter of '26, we incurred a noncash impairment loss of DKK 1.2 billion relating to our U.S. offshore project as a result of an increase in the long-dated U.S. interest rates. Our net profit for the quarter totaled DKK 700 million. Compared to last year, net profit was impacted by a noncash impairment loss that I just described as well as lower EBITDA from new partnerships in second quarter of '25, that were not repeated in this quarter. Net profit adjusted for impairments, new partnerships and cancellation fees amounted to DKK 1.9 billion this quarter versus DKK 2.1 billion in the same quarter last year. Adjusted for impairment and cancellation fees, our return on capital employed came in at 6.6%, a decrease compared to last year due to lower EBITDA for the 12 months period and higher capital employed. The reported return on capital employed came in at 3.1%. Let's turn to Slide 13 and our net interest-bearing debt and credit metrics. At the end of second quarter, our net debt amounted to DKK 22 billion, representing an increase of DKK 700 million during the quarter. Cash flow operating activities included contribution from our operational earnings as well as work in progress relating to the offshore construction portfolio and changes in other working capital. Divestments mainly related to the sale of our European onshore portfolio. Our gross investments amounted to DKK 10.1 billion, reflecting the continued investment into our renewable construction projects. Our credit metric, FFO to adjusted net debt stood approximately at 45% at the end of the second quarter which is well in line with our target of more than 30%. The increase is driven by an increase in the fund from operations over the last 12 months, the proceeds from the rights issue and closing of various farm downs. At the end of the quarter, we had a total liquidity reserve of more than DKK 115 billion. We remain committed to a solid investment-grade rating. And in early July, we discontinued the rating again with Standard & Poor's as we continuously review the cost benefit of maintaining multiple ratings and concluded that Moody's and Fitch provide sufficient coverage for our investor base. The decision will not change our funding plan or how we will be utilizing hybrids as they remain a permanent part of our capital stack. However, the decision will reduce the administrative burden and fees without affecting our capital market access. Turning to Slide 14. I will introduce the dividend policy within our capital allocation principles. Our capital allocation principles remain unchanged and are in a ranked order. Firstly, to have a strong balance sheet, targeting an FFO to adjusted net debt above 30%, which is aligned with solid investment grade rating, as I just mentioned. Secondly, to reinstate the dividend for the financial year 2026 as we have committed to. And thirdly, a disciplined approach to pursue value-creating opportunities for further growth. Finally, we will consider the shareholder remuneration should we be overcapitalized after 2027. As previously communicated, we target to reinstate the dividend as part of the financial year 2026 with the first payout in 2027. This dividend policy will replace the previous one and the policy will apply for the financial years '26 to '28. The dividend amount will be announced together with the annual report for 2026 in February '27 and formerly proposed by the Board of Directors when calling for the Annual General Meeting in 2027. We believe that within total shareholder returns, we can create more value through earnings growth rather than through higher dividend yield as the fundamentals and outlook for offshore wind across our core markets are strong. As such, the initial dividend level will be set reflecting: one, our continued commitment to a strong capital structure aligned with a solid investment-grade rating; two, the ongoing investments into 8.1 gigawatts offshore wind construction program through '27. That includes, of course, the DKK 90 billion of capital committed through 2026 and 2027. Three, the uncertainties regarding the ongoing regulatory risk for offshore wind in the U.S. together with ongoing legal and arbitration proceedings. And four, our opportunities to invest into new value-creating growth. Within this policy, the dividend amount is expected to start at a modest level and increase each year. As part of our second quarter '26 consensus, we received 13 contribution on dividend per share for '26 ranging from DKK 2 a share to DKK 5 a share. And while no decisions have been made at this point in time, we currently expect that the starting point of our dividend distribution to be in the lower part of this range. Finally, let's turn to Slide 15 and our outlook for '26. With the operational performance and progress in -- on our construction portfolio, in line with expectation for the second quarter, we maintain our full year EBITDA guidance, excluding new partnerships and cancellation fees of more than DKK 28 million. We still expect offshore wind -- offshore business to come in higher than last year and onshore in line with '25. We have changed the directional guidance for bioenergy and other from -- in line to lower due to the lower contribution from ancillary services and a provision related to our gas storages in second quarter in '26. On CapEx, we maintain our gross investment guidance for '26 of DKK 50 billion to DKK 55 billion. And with that, we will now open for questions. Operator, please.

[Operator Instructions] The first question comes from the line of Casper Blom from Danske Bank.

And the first question from my side goes to the slide Trond Westlie almost just presented about capital allocation. And the point about potential rebalancing measures if overcapitalized post 2027. I assume this is a point that you've put in, in order to address the potential situation that you run out of projects to construct when done with the current construction portfolio. I was wondering if you could give any kind of indication as to when you would regard the balance sheet as being overcapitalized? Is there a certain level of debt-to-EBITDA or FFO, whatever measure you would be looking at? Where you would say, okay, now we need to start returning cash somehow to shareholders?

Casper, thank you very much. As Trond also alluded to, we obviously have a prioritization -- implicit prioritization in our capital allocation principles where rebalancing is #4 of the 4. We are -- I am quite bullish about our potential for laying the foundation for profitable growth for our shareholders. We see ourselves as a growth company. We have set a new strategic direction last year. During the first 18 months of our turnaround plan, we have, which is also evident from this quarter, continued to deliver according to plan across all of the 4 priorities that we have as part of the updated strategy. There is nothing that I have seen in -- or let me put it differently, everything that I have seen, especially in Europe on the offshore wind side during the last 18 months have only made me more confident in the attractiveness of the market going forward while obviously continuing to have a razor-sharp focus on value and a very disciplined bidding on our side. So if I look at the opportunities in all of our core markets, there are sort of 5 as an example, tenders coming up during the next 12 months, all with frameworks that make sense to us broadly speaking, there is ample opportunity for us to achieve sufficiently profitable growth for our shareholders. Hence, also the guidance on a dividend that Trond gave before. So sort of speculating more into the future on potential metrics one day that would make you rebalance is very premature from my perspective.

The next question comes from the line of Kristian Tornøe from SEB.

I am just curious to get your view on the outcome of the Danish auction we saw recently. I mean from my side, it's difficult to conclude anything else that Vattenfall was fairly aggressive in its bid. And obviously, this is interesting in regard to the comments you made several times, Rasmus, about value creation. So the centralized auction, I mean, do we need to change the competitive environment before you would actually be able to win capacity with the right value creation?

Thanks, Kristian. So first of all, when we look at new opportunities, new tenders, whether it's centralized tenders, proprietary tenders or whether it's project-specific M&A, we obviously both look at the strategic fit for us, and we also look at value. And obviously, Denmark is one of our core markets, and it is an attractive market for offshore wind. And the Danish politicians has, in many ways, provided a very good framework for the tenders. That being said, when you allocate capital of this magnitude, projects that are 5, 6 years before commissioning, after that, they will be there for, let's say, 30 years, you will obviously need to be very disciplined in in your requirements to also value. And we are -- and that also goes for opportunities in Denmark. As I said before, we are -- if there is one place I am bullish, it is on the prospects for being able to get to that profitability in our core markets in Europe. I'm not going to speculate on the specific outcomes and bid levels in individual auctions. That is -- I focus on what we put forward ourselves. And I said, we put forward at a disciplined bid with a focus on value.

The next question comes from the line of Alberto Gandolfi from Goldman Sachs.

I am curious to see if you are willing to disclose how much is your work in progress. So how much CapEx have you spent for assets that give 0 contribution to your P&L and cash flow? And one of the reasons I'm asking is I'm trying to understand from a valuation perspective, but also your return on capital employed has an extremely conservative definition because you have all this CapEx spent with no contribution to the P&L. I'm trying to understand how from about 6.5%, you can go back to above 13%. And if you could disclose that figure that would be very helpful.

We don't distinguish on our working capital level at that level, Alberto. So there is -- I don't have a sort of a number in my head relative to how that sort of sort of debt capital in our balance sheet relative to the return on capital employed. So...

Can I try a logic to see if it makes any sense. Sorry, I didn't mean to interrupt.

I am ready.

And apologies about that. No, I was thinking that it takes 2.5, 3 years or sometimes longer to build offshore. So if you have DKK 50 billion, DKK 55 billion CapEx per annum, is it reasonable to assume that your work in progress is perhaps 12 to 18 months of CapEx, some excluding onshore and so on? Would that be, you think, a crazy assumption on my side?

I think it -- that assumption is a bit sort of broad in sense because that also depends whether or not we have a construction agreement or sort of -- if you take Baltica 2 50-50 agreement. On Sunrise, that would be right. on, for example, on Hornsea 3, it would not be right. We do have 100% of the CapEx in there, but part of the funding coming from our partner. So I would suggest that you take that discussion with the IR department, Alberto, to come closer on your logic.

We now have a question from the line of Louis Boujard from ODDO.

Just wanting to bridge maybe a little bit H2 EBITDA that should be expected considering your guidance of DKK 28 billion. I understand and I appreciate that you feel quite comfortable with your guidance at EBITDA level, but we need to make sure that apparently, I would expect that you need to post DKK 13 billion of EBITDA in the second half to be compared to DKK 11 billion that you posted last year. We know that you have some commissioning that are expected. But at the same time, I think that some of these assets are supposed to already contribute at the moment because they're already very close to the commissioning date. So I would like to know if there is any sensitivity on your guidance potentially on the wind regime. Do you think that eventually a relatively, I would say, low wind regime in Q3, but most likely Q4 because Q3 is natural would eventually put in jeopardy the guidance for this year?

When it comes to our guidance, you're absolutely correct that the first half has been slightly better than we have expected. That is mostly due to the wind and price, but also as a negative element in -- specifically in the second quarter in bio, slight negative. When we do our guidance, we do guide on the average wind element. So we do not sort of set our guidance up relative to speculation about the wind elements. We do the guiding on the basis of sort of the average. So when it comes to the element, yes, we are in a good position to deliver on our '26 guidance of more than '28. But there is also uncertainties relative to development and also some sort of percentage of completion elements, time elements and other elements that is of decent amount of uncertainty. And therefore, we're holding the more than 28% stable.

The next question comes from the line of Dominic Nash from Barclays.

Previously, I think you responded saying that you described offshore wind as a buyer's market when you were selling assets into it. But given the recent auction outcomes, particularly in the Danish, I think, DKK 67 to DKK 73 megawatt hour, which I think is quite a low return. Is it now more attractive to acquire projects and seabed positions from third parties rather than sort of bidding for them organically? And on that, are you seeing a pipeline of potential attractive seabed leases or partially developed projects coming in as big oil is reappraising its positions or some of the early expansion and exuberance we heard from sort of 3, 4 years ago starts to unwind? And where do you think the most compelling areas for this is?

Thank you very much, Dominic. We see 3 avenues for growth for us. It is centralized tenders -- it is the proprietary auctions in the U.K. as an example, Korea as an example, Australia as an example. And then we see what I sort of choose to call project-specific M&A. So not -- obviously not corporate M&A of any sense, but basically where you enter into a partnership with someone or entirely take over a project that has been won by others or developed by others in one shape or form, but well ahead of FID. Those are the 3 avenues for growth that we are working with and in the sense, it always have been for as long as I can remember. I'm not going to speculate on or share my view on, as I said before, winning clearing levels at individual bids that can be in Denmark. It could have been AR 6, AR 7, it can be in Poland. It is for you -- it is for all of us to just take a look at the numbers. What I can say is that we see a healthy balance starting to emerge in the market, both in my view, when it comes to competitiveness or competition between developers, there are fewer than what we saw 3, 4, 5 years ago, where we also had a lot of oil majors in the mix, and there are predominantly companies that sort of have significant experience working with offshore wind and therefore, also typically looking at the projects in a sort of through the same lens. What is very important from a competition perspective is to ensure that we have frameworks that allow competition to play out. And that is what we continue the sort of that's the discussion we continue to have with the regulators across Europe that you allow competition to play out like you just saw in the Danish tender where you had bidder for -- sorry, 5 bidders for Hessle and you had 2 bidders for the North Sea because that allows a healthy competition. So of course, you should take that comment also in the context of the sort of draft regulatory frameworks that we are seeing in many of our core markets, including in Germany. On the M&A side, I'm not going to be more specific. We see a healthy balance. We see several opportunities coming to market, and we assess what comes, and we have 3 avenues of growth.

The next question comes from the line of Harry Wyburd from BNP Paribas.