Tuesday, September 27, 2022

Ceres Power Holdings plc (CPWHF) Q2 2022 Earnings Call Transcript

-

- Advertisement -


Ceres Power Holdings plc (OTCPK:CPWHF) Q2 2022 Earnings Conference Call September 22, 2022 4:30 AM ET

Company Participants

Elizabeth Skerritt – Investor Relations

Phil Caldwell – Chief Executive Officer

Eric Lakin – Chief Financial Officer

Conference Call Participants

Thomas Rands – Investec

Martin Wilkie – Citi

Maggie Schooley – Stifel Nicolaus

Operator

[Starts Abruptly] — Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions] The Company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today, and publish responses where it’s appropriate to do so.

Before we begin, we’d like to submit the following poll, and if you’d give that your kind attention, I’m sure the company would be most grateful.

I’d now like to hand over to CEO, Phil Caldwell. Good morning.

Phil Caldwell

Good morning, everybody, and welcome to our interim results. I’m Phil Caldwell, Chief Executive. And I’m joined today by Eric Lakin, CFO. I’m going to say a few words of introduction before we’ll go through the financial performance of the past six months. And then we’ll revisit the business strategy towards the end, and then we’ll take Q&A.

We have quite a lot of people joining online as well as in person today. So, just as a reminder, a context for who we are at Ceres, we’re a world-leading technology business based on solid oxide technology. And we are a technology business, which basically means that we have unique IP, over a 100 patent families. And because of that we operate a high-margin licensing business model, so we’re quite different from most of our peers in the hydrogen and fuel cell space. And the way we go to market is we collaborate with world-leading companies to deliver clean energy at scale and pace. And scale and pace is important when you think about the urgency of climate change and some of the energy security issues that we now face today.

So, that’s our position. And our strategy is all about executing against that mandate. We are at an investment stage in the company’s growth. We’re scaling up globally, as is the entire industry. And we’ve made some significant progress in the past six months, one of which is our partnership that we announced with Shell for a megawatt demonstrator of our new solid oxide electrolysis offering for green hydrogen. And as many of you know, we are in the latter stages of finalizing a three-way joint venture with our two major partners, in Bosch and Weichai for a China JV to address the very significant market opportunity and decarbonization challenge that China represents. So, that’s how we’re scaling.

We are in a very solid very financial position. We raised significant capital, about 18 months ago, with the express purpose of growing the business. And we are now deploying that capital across the business, as Eric will describe, into R&D, into more infrastructure, into this new business area of SOEC, which is all about maximizing the opportunity for future royalties because we are this technology licensing business. So, revenue in the first-half was just under £10 million, with gross margins around 55%. Again, because it’s a licensing business it’s a high-margin asset-light business. And cash on hand was over £220 million at the half-year.

As I mentioned, investment in R&D is up about 46%, both increasing the offering for SOFC into things like high-power new fuel capability as we go into those hard-to-abate sectors of society, like decarbonization of industry and shipping, and with the new area of electrolysis. So, we are starting to invest and deploy that capital. And to support that we’ve grown the business significantly. We are a high-growth business. We now have over 500 employees, and we’re growing also the leadership of the team with Eric joining us this year, and also new GC Co-Sec, Deborah Grimason, joining, also a very — I think, a very good executive and Board team at Ceres.

I wanted to make clear where we are on the pathway to signing and establishing the joint ventures in China, because this is a very key milestone for the business. And it’s quite a complex deal as you can imagine, three-party deals often are. And we are literally in the final stages of preparing those agreements now. We expect to sign those agreements in Q4 this year. But once we sign those three-party agreements, we then have to get the relevant regulatory approvals. Now, that’s not in our control necessarily. And that can be anything up to four months, so we have to get approvals in Europe and China for the joint ventures that we’re establishing.

We then will establish the joint ventures in early 2023, and consistent with our business model, that’s the point where we unlock significant license fees, around £30 million, which will now be in the first-half of 2023. And then more importantly, we then scale. And from the scale we get recurring future royalties which are 100% margin. So, that’s the most important milestone for the company is how we establish significant global manufacturing capability. We have to get this deal right. It is a very strong partnership when you think about the caliber of the parties in terms of Weichai, one of t biggest engine manufacturers in China, and Bosch as a global industrial leader, and Ceres’ technology. But once we have this, this will be our third manufacturing facility after t plans with Bosch in Germany, and Doosan in South Korea.

And just to emphasize what that looks like for us, building out the capacity, we have now about 250 megawatts in the planning phase. So, with Bosch as our lead partner with their plans to scale up to 200 megawatts in Bamberg, in Germany, in 2024; with Doosan now building the factory which will initially be 50 megawatts, but we expect to grow beyond that again on a 2024 timeline; and with Weichai and Bosch, in China, which will follow, obviously, once we complete the transaction that we just discussed. And obviously, as a business, we are looking to expand. So, once we have those three we are looking to grow geographically as well into some of the areas that have favorable policies and structure around hydrogen and decarbonization.

So, I’d like to hand you over to Eric to talk in more detail about the financials.

Eric Lakin

Thanks, Phil. So, turning over the page to the summary financials for the first six months of this year, total sales of £9.9 million, that represents 43% decline from prior year. And as has been mentioned previously, our revenue is highly dependent on the timing of licensing revenue recognition. This time last year, there was significant element of revenues recognized from the Doosan license fee, so it’s a relatively high comparator. Gross margin in the half was 55%. Again, that’s industry leading levels to reflect our business model. It is lower than the 72% in the first six months of last year. Again, the proportion of license fee income is a strong reflector on the overall blended gross margin for the business.

As Phil mentioned we’re in a strong cash position with £221.6 million as at the half-year, that represents a cash band of about £28 million in the first six months. We continue to invest and grow our employee base, 523 employees, up from 489 six months ago. We continue to invest in headcount in R&D, material scientists, systems engineers, and so on to support future business growth. So, gross profit, £5.3 million derived from those sales. Adjusted EBITDA, a loss of £20.5 million and that reflects relatively low sales compared to the prior-year period, and increasing costs as we invest the fund-raised amount here to support future business growth.

The order backlog, that figure represents all contracted orders across our partner base, of £76.2 million. And that just reflects the known contracted orders; it does not incorporate any future royalty revenue income. And the other metric we think is relevant to show with the KPI is the planned partner capacity, which Phil also mentioned. So, currently, 250 megawatts, that’s what’s currently announced and planned between Bosch and Doosan. And we will revise that figure as new partners come onstream or existing partners increase their capacity. So, for example, once the new China joint venture is established, that will add another manufacturing block of capacity, which is ultimately what lead to future royalty income. So, we are showing the progression of revenue and gross profits over the past four six-monthly intervals. This figure shows the variability of sales. And therefore, gross profit in those times largely influenced by the timing of that license fee revenue recognition. And also, the impacts of the proposed license fee on overall gross profits.

It’s worth noting to reinforce the point around the timing of the China JV license fee revenue. So, we now expect almost all of the £30 million to be recorded and recognized on the establishment of the joint ventures. And that’s expected to be early in 2023 following the signing and following the antitrust regulatory clearances for those joint ventures. The impact of that will mean a relatively low second-half sales similar level to the first-half. But, it does mean a very strong growth in 2023, particularly in the first-half as the £30 million will be recorded.

We really had anticipated around half of that £30 million to be recognized in the second-half of this year. So, in fact we had a shift of £50 million from the second-half of this year to the first-half of next year. All of that revenue would effectively come through to profits as there is no cost associated license fees directly. Not all of that will be reflected in cash.

We’ve mentioned before when we sign the heads of terms that we would expect the £30 million to be paid across three tranches; mostly likely, annually. So, at least £10 million of that will be paid in cash for next year, not all £30 million. So, we would expect a corresponding increase in working capital next year to reflect that recognition of full revenue. This chart shows the revenue mix and how that changes over time. And you can see from the first-half of this year, a lower proportion of license fees of the total compared prior periods, which is also impacting the overall blended gross margin.

But going through for the full-year, we expect a similar type of level. Overall depending on the mix in the second-half, we could expect something of the odd 50% gross margin for the full-year. But going forward to next year, it will be relatively high because of the recognition of the £30 million of license fees in the joint ventures. For those who are not familiar with our business model is this on the right-hand side just recaps different types of revenue that Ceres receives from its business model.

So, license fee revenue we’ve talked about is very high margin; often recognized upfront. Sometimes, it’s recognized over time depending on the nature of that particular agreement. Supply represents prototype technology. So, it’s hardware sales stacks coming from our pilot reference facility in Redhill and sales through our partners to support their growth and industrialization of those products.

Engineering Services encompasses joint development and collaboration with our partners. And that includes engineers and scientists working with the partners. So, effectively it’s business model of over time recognition with a markup on those services. So, the way to look at this license fee revenue is very high margin and sometimes 100%. Supply and Engineering Services is lower margin; still a good margin for the business, but not the size license fees. The one revenue stream that’s not on here yet is royalties.

So, that’s a longer term high margin revenue stream paid by partners on commercial sales on start of their production. So, once our partners sell our products the market from 2024, we will be paid royalties from those products that will increasingly become significant revenue stream in the long run. We’ve talked a bit about investments in the future and particularly that’s been accelerated following the capital raised last year.

And we are increasing our investments. So, what we call investments in the future which comprises of CapEx, R&D spend, and the capitalized R&D increased to close to £26 million from £16.5 million in the equivalent period last year. And, we’ve increased investments both in SOFC, so the power side of the business as well as SOEC electrolysis, the hydrogen segments. We are also increasing capital investments that enhance the capability and capacity of our pilot manufacturing site in Redhill as well as testing.

So, those sums go into things like material science capability, systems engineering, material scientists, investment in our Ceres Power 2 facility CP2, the reference plants. Test capacity is really important that’s a key part of our business supporting our own testing but also supporting and transferring capability to our partners. And as announced earlier this year, we’ve got a partnership with HORIBA MIRA to do some outsourced testing both the production of test stands as well as test as a service. These are important ingredients to support future growth of the business. And we continue to increase that level of investment in second-half of this year compared to the investments in the first-half of this year in line with our plans and the strategy set out during the fundraise. The final chart in the finance section is a reminder for those not so familiar with our business that reinforces the nature of our business model over time.

So, in the purple section you can see the existing parallel SOFC business currently comprising of license fees, engineering services, and hardware sales. And over time, increasingly we get contribution from royalty sales as our partners sell into the market. And then layered on top of that is the hydrogen business, so SOEC. Same model, so we will start with typically technology evaluations and doing developed agreements. So, we are getting license fees, engineering services, and hardware sales. And over time, our partners for SOEC in term will sell into — across these systems into the market, market royalties from that business as well.

So, with that, I’ll hand back to Phil.

Phil Caldwell

Okay. Thanks, Eric. So, just an update reminder on the business strategy, what’s been happening globally, there is many macro issues that influence our business. One is obviously what’s happening in Europe with energy security. And as a result of that, we are seeing more and more policy decisions, more and more support from moving away from traditional fossil based energy towards cleaner alternatives and energy independence.

That’s most evident probably in the EU where we are seeing the awards of the order £5 billion in these programs of common European interest. So, we’ve seen while £5 billion awarded into hydrogen already. And I think today, they have announced another £5 billion tranche which is really starting to benefit the scale of hydrogen and fuel cell technologies in Europe. Now, as a U.K. company because of our model, we indirectly benefit from this because through our partnership with the likes of Bosch. That is good news for the industry. And despite what’s going on in the wider world, we are seeing this one-way trend I think towards hitting that level and the urgency to actually scale these industries.

Moving along, the U.S. I think finally has put together the biggest clean energy bill in its history on to the Biden administration, which is $270 billion. And again, there is about $9 billion earmarked for hydrogen hubs in the U.S. Now, that’s quite recent. But again, what we are starting to see is a pickup in interest and activity in hydrogen and fuel cells in the U.S. as well. So, I think that’s incredibly positive for this global picture. Already we’ve talked about China. And China has a got a challenge to decarbonize. It’s a heavy user of coal as is India. And part of that transition will probably be moving from coal to gas, and then, from gas to hydrogen, or a combination of that and renewables.

Part of what we offer is a better use of natural gas. So, lower carbon, high efficiency power systems. That’s part of what we’re looking at with our relationship with Weichai. And actually, China will increase its usage of natural gas in the coming years from about 8%, about 15% of its energy mix. So, we’re seeing different macroeconomic environments in different parts of the world. And again, because of the portfolio of technologies that we have, and our partnering business model that we have we’re able to play in many parts of this energy transition.

South Korea is obviously a key partnership of ours with Doosan. And again, it’s benefiting from about $30 billion of funding into that, that particular territory and it also has very strong policy decisions on fuel cells for distributed power, and also moving into new areas like decarbonisation of shipping.

India is an interesting area for us because again, similar to China, they’re trying to transition from a coal based society into cleaner energy, and they have ambitions to have 60 gigawatts of electrolyzer demand by 2030. That’s because they want to be exporters of green steel and green ammonia, which again relates to our new move into electrolysis and industrial decarbonisation.

So, when you think about service and our strategy, we’re very proud to be a U.K. technology business. But we really think and act globally. And we do that through partnerships. And despite some of the recent volatility, I think in the markets with inflationary concerns, interest rates, et cetera, if you look at the urgency for decarbonisation, and what’s going on, on the macro scale I think the outlook for this business is incredibly bright, because we are one of the key pieces that can play in this energy transition in many of these different sectors, and in many of these geographies. And if you want to invest or be part of this energy transition in China, in Korea, in the U.S., in India, then it’s through investments and service really, that you can actually benefit from that. How we work as a business, we are a platform technology.

So, we have the core steel cell technology, which we scale with partnerships into a variety of power systems for use in commercial buildings, data centers, utility scale, and transportation applications, run in one direction, run in the opposite direction, we can actually use the same cells and stocks to generate green hydrogen at very high efficiencies, and therefore low cost particularly in industrial applications. And we, as I mentioned earlier, we have our first partnership with Shell. So, if you look at the quality of partners that we keep, and how we actually go to market, we anticipate growing the electrolysis side of the business with the same kind of quality of partner that we’ve been able to secure on the fuel cell side of the business.

Just a few words, many of you already know about our relationships, but Bosch is obviously looking to scale production by 2024. It’s invested around €500 million in the development of the SOFC Technology for its own products, its own manufacturing based on the service technology. I mentioned earlier, this big policy support now in EU, Germany is going to have about €8 billion of funding available because it needs to transition and needs to deal with energy security. And again, through strong partnerships we’re in a good position to benefit from that trend. It’s worth talking a little bit Doosan in South Korea as well. So, Doosan is also on a pathway to building its factory in South Korea by 2024. It’s committing £100 million to build the solid oxide plant. And that’s now well underway.

We’ve already developed 10 kilowatt systems with Doosan. We’re now developing higher power systems, around 60 kilowatt modules that go into 600 kilowatt modules for shipping and Doosan have announced partnerships with Shell and Hyundai Heavy Industries around decarbonisation of shipping, but also those kinds of 600 kilowatt type building blocks are also interesting for decentralized power and utility scale power as well. So, there’s a lot happening. But behind the scenes if you’d like in our partners as they scale.

Just a few words on the SOEC development, the reason why we think this is an exciting technology and why we’ve invested in this is, we believe that solid oxide technology for electrolysis offers about a 20% improvement in efficiency compared to lower temperature electrolyzers that are currently on offer. And that’s important, because about two-thirds of the cost of hydrogen and green hydrogen today comes from the energy input. So, that gives us a pathway to what we believe can be achieved at about $1.50 a kilo of green hydrogen. There’s a slide on this here, which is $1.50 a kilo of hydrogen is something we used to think, up until recently was absolutely essential to compete with fossil based hydrogen. That’s until we’ve seen the change in the energy system globally.

I think it was Bloomberg a week or so ago, estimated that the cost of gray hydrogen, so hydrogen from fossil based sources is hit just under $7 a kilo. So, there used to be this big economic argument about can you make green hydrogen as cheaply as you can make gray or blue hydrogen, that’s gone out the window now. Green hydrogen, I think will be the majority of the future for the hydrogen production. And for us, the big target area is industrial decarbonisation. There’s about 70 million metric tons of hydrogen produced globally today. So, even if we did nothing else with hydrogen, but we just switched the hydrogen that we already have in industry that’s already a very significant market which brings me on to the collaboration with partnerships.

So, what you see here on the right is our first module on test. So, basically, we build the same stacks we use for fuel cells into modules that go into a container based solution. And we’re looking to demonstrate this at a megawatt scale with Shell in Bangalore, in India. So, they will be our first demonstration partner of this technology. As I mentioned, if you can utilize waste heat, which a lot of industrial processes like green steel, green ammonia, petrochemicals have, then you can push the efficiency of electrolyzers up into the high 80s and even 90% kind of level. And that is obviously very attractive for industrial decarbonisation.

Our plan is to start the pilot with Shell next year and it will run for three years. And again, hydrogen will be used in industrial onsite applications. And I mentioned in terms of the overall strategy, why this is an entirely synergistic with what we already do at service. Our philosophy is the same core cell and stack technology, the same manufacturing base that we’ve started to establish on the fuel cell side can also service the hydrogen site.

So, we will continue to expand the business for power, adding to Bosch, Weichai, Doosan, on the power system side, and also start to enter partnerships in the new ecosystem around decarbonisation of energy, industrial decarbonisation, synthetic fuels, et cetera. And obviously, Shell is the first. We hope of many partners on the electrolysis side of the business. So, we just finished with the outlook and the targets for the year ahead, I think it’s pretty clear. We’re very focused near-term on the joint venture in China. We want to get that done and established and then that’s a big platform for us, in terms of how we scale the business. We are continuing to invest for growth in SOFC and SOEC which is entirely consistent with what we said we would do in 2021.

And we are actively supporting our partners as they scale production in Germany and in South Korea. SOEC progression is going well. And obviously, with our first partnerships there, you’ll start to see more, more and more proof points of that technology coming through. And we are working on expansion of the SOFC into new applications such as marine and higher power, and also the future fuel capability of that technology.

Post the finalization of the China joint venture, we also intend to move from the A market to the main domain list of London Stock Exchange as well. We think it’s a natural progression for the company to do so.

So, I hope that gives you an oversight of where we are as a business. And I think we’ll move to Q&A.

Question-and-Answer Session

A – Elizabeth Skerritt

Thanks, Phil and Eric. For those of you who don’t know me, I’m Elizabeth Skerritt, and I head up IR for Ceres. If you do have any questions or follow-up after the presentation you can contact us on the details shown on screen. But for now, we’ll take some questions from the room first, if anyone has any?

Thomas Rands

Good morning. It’s Thomas Rands from Investec. Three quick questions if I may. The first one is just around the SOEC pipeline, obviously excellent to sign up Shell. Can you give us any flavor as to how discussions are going and what sort of timeframes we could hope for, any more big deals before the end of the year?

Phil Caldwell

I wouldn’t be as precise as that. I think, look, we’ve said this from the get-go, I think that when we started moving into electrolysis, I think people — as an industry, people were saying, “Well, why would you do that because it’s all about alkalines, all about PEM?” I think not just Ceres, but you’ve probably seen recently a trend to more and more solid oxide announcements from some of our peer group, some of our competitors. So, solid oxide, scientifically, offers you the highest efficiency move to green hydrogen. So, that’s just the pure science of it. The thing that’s always held it back is maturity and scale. However, as soon as you can offer that there are, of course, a huge number of people who are very interested in that because the easy criticism that you can throw at electrolysis is, well, it’s not very efficient, is it, the roundtrip efficiencies aren’t that good, et cetera.

So, with solid oxide, you have something that actually pushes those efficiencies higher. And, yes, since Ceres has good pedigree particularly on solid oxide technology and our business model in terms of scale and some of the partnerships we keep, there’s a high level of interest now as we’ve entered this market. It’s because I think we’re a credible player in solid oxide. Solid oxide is seen, on most companies, as a technology that will come, it’s on their roadmaps. And I think we’re very confident we’ll have more announcements, additional partnerships to the first one we’ve announced. But I won’t tell you exactly when.

Thomas Rands

Second question is kind of linked with the testing of the ECM, the electrolyzer cell membrane. Are there — and what other kind of stage gates do you expect to kind of see in the next six to 12 months as that fuller system gets created, tested, developed, that we could kind of quiz you on in the future as to when that product will be at a point of being commercial, please?

Phil Caldwell

Yes, so the ECM test level is entire system level, and then — my engineers will hate me for saying this, then you’re just adding modules. But the sophistication is really in that module, so that’s the first key proof point for us because at that point you’re going power in to hydrogen out at an efficiency level, at a system level. But it doesn’t stop there. This is really for us a proof point, first of a kind. Already, we’re starting to look at what else do we do with that module in terms of development at the system level; there’s a lot of IP, et cetera. But I think in terms of milestones, obviously results at the module level, and then the plan is, at the megawatt scale, to begin with, and then we’ll build it from there. But that’s the near-term technology roadmap for the SOEC.

Thomas Rands

Thank you. And then last question just on SOFC, and Bosch, I believe, were rolling out several, I think up to 100 many plant across Germany through this year. Any update on how many they’ve installed, any initial feedback, any kind of data you can share on those initial installations, please?

Phil Caldwell

I don’t — I honestly don’t have that to hand. I know that they’ve gone into a number of different applications. And that Bosch is building, if you like, the order book, if you like, for those use cases. They’re varied, but they’re taking a modular approach, not dissimilar to Doosan, to be honest, as in their standalone power system is highly efficient, and then you can just add to them depending on what application you are going for. But I don’t – I don’t have to hand the details on the —

Thomas Rands

All right, thank you very much.

Martin Wilkie

Yes, thank you. Good morning. It’s Martin Wilkie from Citi. Just a couple of questions on the SOE technology, you mentioned about the much better efficiency. There are some sort of market views that because PEM and alkaline will have higher volumes and they’ll benefit much more from lower unit costs over time. Is that a view you share or can the SOE technology, over time, match them on cost? And just in terms of how you allocate your R&D, presumably a lot of is about efficiency and output. But are you also incentivized by your customers to help them reduce manufacturing costs as well?

Phil Caldwell

So, on the second point first, yes, we are. So, a lot of our joint developments, et cetera, have KPIs in them around cost. And often the way we construct royalty is we don’t want to be penalized based on reducing cost, we want to be incentivized on that. So, we’re always focused on that, obviously. And that comes in a number of different ways. It comes in upgrades to the technology, so increases in power density, meaning you get more work per cell, whether that’s hydrogen or electrons. And therefore, that ultimately reduces the cost of the platform, if you like. And then, obviously, through scale you get what you described is happening, particularly in the alkaline area where as you get more mature technologies you can start to benefit from [learning rates] [Ph] and coming down.

I would say, as a newer technology, there’s a lot more innovation, so you can make bigger steps in the early years with something like solid oxides. In terms of the absolute capital costs, as I mentioned earlier, you’ve got to look at the levelized cost of hydrogen. So, I think alkali will be the lowest cost to be honest. I’m not sure that PEM will get to that level. And the differentiation then becomes more of efficiency. Even if solid oxide doesn’t achieve the same cost point necessarily on a capital basis of alkali, it could still be equivalent or better on the cost of hydrogen because you’ve got to consider the energy input. And that’s why the — it’s the combination of the two that you have to consider.

But in terms of how we see costs, a lot of the work that we’re doing, a lot of the scale that we’re doing gives us pretty good visibility on our cost base for the future. So, that number that we put out of under $50 a kilo, that’s based on $20 a megawatt hour, even if power prices for higher, $40 a megawatt hour or even $60 a megawatt hour, you’d still be at $2.00 to $3.00 a kilo of green hydrogen, which would be very competitive as I mentioned earlier. So, we’re confident in our predictions on what we can achieve as a levelized cost of hydrogen because of the experience that we’re going through as we scale on the fuel cell side.

Margaret Schooley

Good morning. It’s Maggie Schooley from Stifel. And I recognize this is slightly an unfair question because the Inflation Reduction Act benefits your customers and you are a second derivative beneficiary. But a lot of the detail within that act is not completely well understood, particularly the benefits on investment tax credits, which are five years and cash back. Can you help us, in your understanding and with your industry contacts, how even on a second derivative that will benefit? I understand momentum, but where — how do you see this adoption timeframe given that we still have this uncertainty? So, this is a great announcement, but it seems very far off. So, is Europe still your first port of call, and can you help us better understand in more detail that benefit from the Inflation Reduction Act if you know it?

Phil Caldwell

I’m not sure I’m qualified to be really — help you understand that. The way we see it is I think it’s a big positive step because I think if you look at our geographic spread, we have unashamedly gone where the market is. We’ve gone to Asia, we’ve gone to Europe. The U.S. has some key players that are scaling now. And I think that this IRA bill is now giving them, I think, more confidence. From what we know from the conversations we’re having, I think it’s actually incentivizing people to start to plan more capacity in the U.S. It’s probably harder to compete if you’re not in the U.S. on that basis as well. But your question is a great one in terms of longevity of it, but I think it’s certainly given a near-term stimulus of positivity to it. But I’m not — I’m nowhere qualified on the U.S. political scene to know how enduring that will be. Maybe you could tell us.

Margaret Schooley

[Indiscernible]. And the second question is do you have an update on your investments in your — in the [redux] [Ph] for batteries or is this still in the evaluation stage?

Phil Caldwell

That’s still the evaluation stage. We kind of — it’s pretty small scale for us, but we’re — it’s an interesting technology, and it’s one that we’re — we continue to evaluate.

Margaret Schooley

Thank you.

Elizabeth Skerritt

Great, no more questions in the room, I’ll go to some of the online questions. And there’s naturally been a few on the China JV. Phil, could you just recap a little bit on which elements of the JV are taking this slightly longer time to agree and sign? And then — sorry, there’s quite a few questions that have come through. If we could try and just summarize, obviously, the sort of potential scale, over time, where we can, and any risks we see to doing business in China. It’s obviously a common question, I don’t know if you could pick up those three? Thanks.

Phil Caldwell

Look, I’m not going to go into a blow-by-blow detail of these agreements, but they’re very significant investments, and they are very significant corporate deals. And whenever you have an additional party, three-way deals are always harder than two. So, it’s just the complexity of it, and the number of agreements that are actually included in this deal. It’s a very significant amount of legal work that we just have to get through. The hard point in all of these are always IP, particularly because we have got elements of IP sharing in this, we’re going to combine IP with what we’ve done with Weichai, with what Bosch has done at system level. So, there’s a combination, a collaboration that the result of which will be very strong, but obviously that’s a complex thing to navigate.

And then just the corporate side of it in terms of establishment of entities, it’s always — that always takes as long as it takes. I think the key thing that we’ve always said, and we’ve always operated this way at Ceres is, you have to get the right deal because there are long-term partnerships, these are not near-term sales contracts. So, it will be done when it’s right, and that’s why it’s taken us longer than we originally anticipated. But I still think that the result will be the best result for all parties when it’s done.

Next part of the question —

Elizabeth Skerritt

And the scale up and I think just talking to some of the future potential.

Phil Caldwell

Yes. Look, the — this is always a tricky one because it’s not for us to say unilaterally. I think what’s clear is there’s a building bock size from which you would naturally start. So, you’d be looking at what’s been done elsewhere or plans; it starts at that kind of level. But in terms of the opportunity in China, the size of the market, et cetera, the plans for it are to grow significantly in terms of capacity. And we do think that China, if look at predications on decarbonization, et cetera, it will be probably the biggest market for this technology.

And then the last question was about risks?

Elizabeth Skerritt

And then the last question about risks, we often get this, but is there anything that’s new that’s cropping up?

Phil Caldwell

No, there isn’t — nothing that has affected our relationships with Weichai. And again, as a licensing business we’re — one of the advantages we see in the three-way is we’re very much the technology provider with Bosch and Weichai. And Bosch already having very significant well-established businesses in China alongside Weichai, we think that minimizes the operational risk, if you like, for Ceres, so.

Elizabeth Skerritt

Yes, great. And on the same topic, could I come to you Eric, just a question around could you talk through the change in revenue recognition for the £30 million license fee, just to recap on that, from several years to one, and what that actually means in terms of cash flow timing [indiscernible]?

Eric Lakin

Yes, sure. So, just to recap, the bulk of the £30 million, not necessarily all of it but the vast majority is expected to be recognized on establishment of the joint ventures, so following regulatory clearances. So, we expect that to be early 2023, certainly in H1 next year. The cash from the JV license fees will — that won’t follow the revenue recognition. And the best guidance to give at the moment is assume £10 million a year in each of three years, with the first payment being on establishment of the joint ventures.

It’s worth noting as well in terms of the investment, so the other side of it, we guided previously in the heads of terms, we’re expecting a total investment from Ceres to be about £20 million. That still holds true. And we expect half of that to be paid on establishment, so upfront, and the rest to be in later periods.

Elizabeth Skerritt

Great, thanks. Question here just in terms of confidence around regulatory approvals on the JV.

Phil Caldwell

I think from what we hear from our partners, it’s pretty high. I think, strategically, it’s important, I think, to have these technologies for addressing decarbonization in China. So, we don’t — we’re pretty confident we will secure the approvals.

Elizabeth Skerritt

Yes, okay. And Eric, here one from Zoe Clarke at Goldman, she asks, given the high contribution from the China JV license revenue in 2023, I think she’s fair to assume that gross margins are likely to revert higher in 2023. But she asks what is the normalized sustainable level of gross margins longer-term, and what is the target mix of royalties versus license fees?

Eric Lakin

So, on the first part, yes, it’s a good assumption that next year’s gross margins will be high and certainly above 70%. In terms of long-term trends and mix, I won’t — we’re not giving guidance on that. And — but it — obviously, it does. A good rule of thumb, obviously, license fees and royalties are effectively at or close to 100%. Engineering services and hardware are a lower amount, in the range 20% to 40%; I give a wide range because it varies by contract. And so, you can — one can model their own assumptions on future contributions from those four revenue streams, but, obviously, the overall margin will depend on that mix.

Elizabeth Skerritt

Thanks, Eric. If I can come back to you, Phil, just some questions around electrolysis. I think we provided an update on our partnership with Shell. Question around sort of timing, when in 2023 might we expect to see that kind of pilot start? And are we getting traction from other potential partners on SOEC, I think if you can just recap on that would be great?

Phil Caldwell

Yes, I don’t think we’ve given the details of that with Shell. So, I think the — that that’s something we’ll disclose, I think, with our partner. Obviously, again, when you’re deploying it on an industrial site there’s a lot of preparation that has to happen to make that happen. So, I think that would be later in 2023. But don’t forget that we’re getting on with the development of this technology in-house, so there would be more to say on the actual development of the technology ahead of that deployment. I think we’ve already discussed potential other partners. We see a lot of interest — growing amount of interest for the SOEC side of the business, particularly amongst the industrial decarbonization end users.

And, again, our go-to-market plan on this will be two partnerships at the stack level within manufacturing, and then with system integrators and EPC-type partners as well. So, we will say more on that as and when we can. But there’s not much more we can say at this point really.

Elizabeth Skerritt

Great. And I guess on the same theme, Chris Leonard at Credit Suisse was just asking are we seeing more partnership interest for electrolysis coming from the ammonia industry because the [6%] [Ph] of capacity in Europe is shut down at the moment because of the high energy costs? And I guess he — second part to that, he asks can solid oxide adoption benefit from those energy prices staying higher for longer, is that also driving interest in our technology?

Phil Caldwell

I think the underlying trend is somewhat helpful to electrolysis, but we have — but obviously there’s also a headwind about being competitive for power in general, because the energy consumption. But yes, I think there has been this school of thought in electrolysis that it’s all about CapEx. And we’re going to live in a world of cheap energy, and therefore efficiency doesn’t matter.

Now, that’s just totally been blown away in the past six months. And it’s not a great scenario for many parts of the economy. But this is all about energy efficiency. This is all about how much your energy bills are. And we’ve always taken this philosophy, the more efficient your technology, the more economic benefit of this for the end user. So, high energy costs in industry particularly are painful. It’s not just ammonia, it’s steel, it’s petrochemicals, and that’s not going to shift anytime soon, unfortunately. So, I think again, that it’s done where a lot of people are having headwinds, we’re actually seeing an unusual benefit from these high energy costs.

Elizabeth Skerritt

And [Ann Crow from Edison] [Ph] actually asks just with regard to that 20% higher efficiency than other technologies on our electrolysis side, where are we in regards to achieving that goal, proving that achieving that proof point?

Phil Caldwell

But that’s part of what we’re demonstrating now. So, at stack level, already we’re very, very confident on that. And at system level, that’s what we’re starting to demonstrate now. And I think in the future, we’ll publish that data. But it’s, like I mentioned, this is not a scientific breakthrough. If you look at any of the other partners out there, or sorry, any of the peers out there, solid oxide achieves this level of around 45 to 40 kilowatt hours per kilo, whereas your low temperature electrolysis is 50-55 kilowatt hours per kilo. That’s just the nature of it. The actual systems themselves are actually somewhat simpler than the fuel cell systems; you’re not dealing with fuels and catalysis, and that kind of thing. So, the short answer is, we’re very confident.

Elizabeth Skerritt

Great, thanks. Eric, this one I think you’ll enjoy. Why is license fee revenue recognized upfront and not over the license period?

Eric Lakin

Favorite topic, I’ll give you the short version. For more details, please consult IFRS 15 Accounting Standard. The two, broadly two types of license fee, if it’s a right to a use license. So, we’re basically enabling our licensee partners to use our technology, our IP into their systems that is seen as an upfront license fee recognized upfront, because we are under the standard providing our meeting our obligations on the signing of that license fee, enabling the partner to develop their products. That’s a point in time and recognize upfront. So, that’s called a right to use.

There are some cases where it’s recognized over time, so right to access. So, there’s ongoing obligation to transfer knowledge and IP and ongoing development and foreground. Science and engineering, which transferred during the period of the contract, so that’s recognized over time, some contracts, once you’ve gone through them in great detail with our Accountants and Auditors are split into two. So, sometimes combination to two, so final bit of color on the China JV for example, the reason we’re saying it’s most of the $30 million, not all of it necessarily will come down to whether or not we also have in parallel some joint development agreements with those JVs, which might mean as an ongoing elements of transferring IP over time. So, some of that might be recognized over a longer duration of one or two years.

Elizabeth Skerritt

Great, helpful.

Eric Lakin

That is too much. Thanks for the question.

Elizabeth Skerritt

Thanks for the detailed explanation, Eric. Lacie Midgley from Panmure asked, what sort of order should we be thinking about for the total investment in the future for the next three years, particularly this year? Eric, one for you.

Eric Lakin

So, I think, different components that. If you look at the total investment in the future amount, assume that will be a higher level in H2 than H1. We won’t give an exact number. But, that’s continued to trend upwards, and potentially a high level again next year. Just add a bit more color to that. One element that is capital expenditure, it was around [500] [Ph] in the first-half of this year. It’ll be close to double that in the second-half depending on exact timing of procurement spend. And so, it will take to around 50 this year. And it will be that sort of levels 15 to 20 next year on our current estimates.

Elizabeth Skerritt

Right. And a couple of questions here around sort of the human resources side. Someone notes the increasing R&D especially that run through on the P&L. And it’s very human intensive. Just asking around recruitments and sort of similar — in a way and just asking about growing our staff and what specialism are we adding? And how easy is it to find people in the U.K.?

Phil Caldwell

It’s definitely got tighter. There is high demand for good people. We have over 30 nationalities at Ceres. So, we don’t just look in the U.K. We look for world class people no matter where they are. And we have got a real mix. We have got scientists, engineers, technicians, accountants. So, we have got a lot of talented people. And so — the other thing that we initiated this year which is we don’t often talk about is when you are growing fast, that’s hard to do everything inorganically.

So, we are starting to grow our own people. Obviously, we develop people. But we have graduate intern programs now with leading universities. We’ve actually started apprenticeship scheme because again we need highly skilled — if any of you have been to our manufacturing pilot plant at CP2 et cetera. Some fantastic jobs and skills that we provide under the apprenticeship scheme as well. So, we are about to publish our first sustainability report, thanks to Elizabeth, in the coming weeks. And one of the big things for us is actually about developing people and providing good quality of education and development for STEM and engineering-based [MOLs] [Ph]. So, we are a pretty sizable company now in the U.K. We attract a lot of talent because of our purpose. A lot of people want to come and work with companies that are aligned with net zero. So, we attract a lot of [FUGs] [Ph] out of the automotive industry, out of the oil & gas industry who are also personally transitioning. So, that’s good. But also, we have to grow our own talent. Because hiring extensively in the market is always expensive versus growing your own. So, that’s a big push for us.

Elizabeth Skerritt

[Indiscernible] Eric, just are we seeing any wage inflation, cost inflation?

Eric Lakin

Yes, we are. We’ve got inflation across many aspects of the business like other peers in our industry and across most industries. And we are managing as best as we can. Our total spend this year is projected to be broadly in line with what we expected at the beginning of the year through various puts and takes. But overall, we are seeing inflation in materials, supply cost, and employees. So, we are conscious of that.

We are managing that combination of aspects. In some cases, it’s direct intervention, we did apply cost very early during the inflationary situation and overall cost of living increase to salaries across the board back in May – June this year. But also, looking at other areas and not so direct as Phil mentioned when it comes to development, reinforcing the mission, other sort of software in terms of opportunities for networking and [indiscernible] of interests for the staff at all levels, and also deploying where appropriate share of based compensation schemes to reduce the cash burden on the business whilst maintaining the long-term retention.

Elizabeth Skerritt

That’s great. Thanks, Eric. And just to close out, so, we had a few questions just on the [AIM] [Ph] market. Someone asked did I hear that the AIM market move is linked to the China JV timing? And why not stay on the AIM market? What do we see as the main benefits of moving to the premium listing?

Phil Caldwell

So, we want to close out the China JV first. And so, that’s always been our intention. So, that will be a precursor to any move. And benefits first, look I think the regulatory environment on the AIM market is pretty close now to main market anyway. But we operate with a very high level of governance. If you look at our Board and the way we operate as a business, we already operate at a main market level. I think the biggest advantage is probably if you look at our shareholder base, international investors I think recognize the list in a slightly more favorable light than the AIM market. So, that for us is — we are at that stage of evolution of the company that it’s not if but when. And we just feel the time is right to do that.

Elizabeth Skerritt

Great, thanks. If we haven’t gotten around to your questions, we will be submitting written answers to all the ones submitted online. And you can always touch base with us directly. Otherwise, I’ll hand back to Phil. You have any closing comments?

Phil Caldwell

Yes. Thanks, Elizabeth. And look, thank you for your time today both physically and also online. We are I think in incredibly strong position at Ceres. We have got a very healthy balance sheet. We have got a strong order book. We’ve got very strong order book. We’ve got very strong partnerships. We are getting on with executing the business. The macro environments near-term can be challenging. But for us, actually it’s a big opportunity. We are committed to this net zero mission. And the way we are doing that through global partnership, we will continue grow. We are really proud to be a U.K. business. We are actually growing and investing as we said. And I think that’s a virtue that’s sometimes overlooked in the U.K. So, we want to grow world-class technology business in the U.K. And that’s exactly what we are doing.

So, thank you for your support. Thanks.

Operator

Elizabeth, thank you for updating analysts and investors this morning. Please ask investors online not to close the session as you would be automatically redirected to provide your feedback in order to that the management can better understand your views and expectations. This will only take a few moments to complete. But if you would take that time, I am sure that will be greatly appreciated by the company. On behalf of the management team of Ceres Power Holdings PLC, would like to thank you for attending today’s presentation. Good morning.


(Except for the headline, this story has not been edited by PostX News staff and is published from a syndicated feed.)

Source

- Advertisement -

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Related Stories