Ceres Power Holdings plc (CWR) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Ceres' second set of interim results for the 12 months ended 30th of June, following our change of year-end to 31st of December. For those of you who don't know me, my name is Elizabeth, and while much of our week remains virtual, I'm pleased to say we have our Chief Executive, Phil Caldwell; and CFO, Rich Preston, here together. They're going to run through the results and we'd be pleased to take any questions you may have at the end of the presentation. You can submit these via the conference call or the webcast. Following the meeting, if you have any questions or follow-ups, please do not hesitate to get in touch with a member of the IR team on investors@cerespower.com. Without further ado, I'll hand over to Phil.

Okay. Thank you, Elizabeth, and thank you, everybody, for joining this morning. So the story of these results, I think they're a solid set of results, driven by continuing commercial progress with our key partners despite the challenging times of COVID. So we've progressed on all major contracts, and that's driven top line revenue to increase by just over 20% to around GBP 20 million, just under. And we're having success with our asset-light licensing model, which gives us sector-leading margins again above 70%, so we're very pleased with that. First and foremost, it's a huge thank you to the team at Ceres and also support of our partners and suppliers that we've managed to sustain performance throughout this period and not just sustained performance but continue to ramp up production and grow as an organization. During this period, we've also been busy investing for the future growth, so we're investing in core technology. We're expanding into new areas such as electrolysis for hydrogen. We're seeing more and more customer demand for higher power systems. And we've started to invest in core technology with a further investment of GBP 5 million into the solid oxide electrolysis side of the business. As I mentioned earlier, our strategy is one of licensing, and really the target we have for this company is to embed our clean energy technology into world-leading companies and their products. And what we're seeing coming out of COVID is huge stimulus packages globally from countries like China, Korea, Germany and the EU, which is really starting to drive demand further for our technologies and gives us real confidence in investment for growth in the future. Just quickly, I'd like to highlight some of the key progress that we've made with partnerships in the past 12 months. So we have 4 partners at the license stage now, Bosch, Weichai, Doosan and Miura. Bosch is our first manufacturing partner that's taken a license to manufacture ourselves and stacks and has successfully done so this year in Germany. So that's a real first for the company. Bosch have also developed prototype systems which are now on trial at different use cases and different applications within Bosch and that's now at 5 locations. And we saw earlier in the year, they've increased their investment further in the company, and we'll talk about that in a minute. Weichai, we've continued the development of the 30-kilowatt range extender with Weichai and having completed the first prototype back end of last year. We've now moved on towards building that into a small fleet of buses this year. We have had some headwinds with COVID around completion of the fleet trials, and there's been some delay now pushing back this formation of the JV into the first half of next year. But actually, the progress that the team has made is significant, and we're very -- again, we're very proud of the work that both we've been able to do and the Weichai team has been able to sustain during this time. Doosan. Doosan have -- are one of the leaders in stationary power globally, and the Korean government has large ambition for deployment of renewable energy and clean energy technologies. We've formed a relationship with Doosan approximately a year ago. And we're making good progress on the CHP development that we announced then. And as we said before, we're hoping to expand our relationship with Doosan into other applications in the future. And then with Miura in Japan, we now have the units on sale through Miura and commercial products. And the first units have been in operation now for over a year, delivering 90% efficiency, lowering the carbon footprint, and Miura are looking at expanding the support team to that to enable further deployment. So that's low volume to begin with but it's been successful 1 year in, and we're very, very pleased to be selling Ceres technology into Japan. So that's a high level of where we are with key licensee partners. Just a few more illustrations. Here, you can see the next slide, Bosch have now developed this hydrogen-compatible 10-kilowatt system, which can run on natural gas, biogas and blends of hydrogen and are using that in deployment in different locations within the Bosch Group. Bosch had come out and said in their annual reports that the market size for this is estimated to be EUR 20 billion by 2030. And as a result of significant progress that we've made, they've increased investments in Ceres by GBP 38 million, taking their investment up to 18% earlier this year. With Weichai, as I mentioned, here's some pictures of the team working in Shandong province. We're making good progress with the 30-kilowatt range extender for the electric buses and also developing the capabilities at Weichai. And really, we're working towards the joint venture which will provide a stage path to providing high-volume manufacturing for the markets of buses, commercial vehicles and other applications. So despite what's been happening with COVID, we're pleased to say we're making progress with Weichai. And again, when Bosch increased their stake earlier this year, Weichai also exercised their non-dilution rights and put a further GBP 11 million to sustain their position in Ceres at 20%. So good strong progress with those 2 partners, and that's really driven the financial performance for the period. I'll now hand over to Richard to give you some more detail on the finances. Richard?

Thank you, Phil. So I think Phil has mentioned some of the highlights, and I'll just touch on these again with some of our key messaging. As he said, we've had really a solid set of results. Revenue up just over 20% and maintaining really excellent margins, gross margins. Clearly, we've maintained a significant and healthy order book and pipeline is just under GBP 70 million. This is natural -- well, naturally flex up and down as you get new orders but it's something that we're -- that's still pretty good. Otherwise, from a cash perspective, we're extremely pleased to have GBP 108 million of cash on the balance sheet, having raised GBP 49 million in the last 6 months from strategic partners. In terms of revenue growth, we've maintained decent licenses during the year. I think as we've said before, these will naturally flex, depending on revenue recognition and customers coming in but it's still a decent proportion, and that's driving the high gross margins that you can see. And again, we can see that our gross margin at an absolute level has moved on significantly over the last few years from where it was. We maintain to -- we maintain investment in the company. And really, the message is on the investment in the company and very similar to those we said 6 months ago, we're investing into the future. We think there's a lot of value that we can get through putting this investment in there, and we're sizing the company so that we can reach these opportunities. And that's why our cash OpEx is increasing and our adjusted EBITDA is fairly flat for the period compared to last year. In terms of cash again, really, the point to note here is the cash we have on the balance sheet is very significant compared to our operating cash flows, which are in a few percent of the balance we've got, and again, this puts us in a really healthy position going forward. Of the cash flow in the year, we've invested something like GBP 8 million in CapEx and in capitalized development. And that's the CapEx is principally finishing off our manufacturing facility in Redhill and increasing our test capacity and a few odds and sods, so that's really what's driving that. And we've talked about the cash position already. So let me hand over back to Phil to talk about the business strategy.

Thanks, Richard. So for those of you that know us, the business strategy hasn't really changed but we are growing. We are expanding as a company. And what we're seeing encouraged by is despite COVID, many global economies are putting in green stimuli packages and we're seeing that in all our key markets, really. So if you think about China, just this past week, they've set out the target of being carbon neutral by 2060 and peak carbon by 2030, which is pretty significant, given that China's dominance really of the carbon impact and agenda globally. And we're seeing more and more stimuli packages in China. Korea has committed something like KRW 70 trillion, GBP 46 billion of green funding, again targeting to drive economic growth. And specifically, they have pretty ambitious targets for fuel cell power generation of 15 gigawatts by 2040, including 2 gigawatts for stationary fuel cells and buildings. So you're starting to see quite granular policies coming out, stimuli packages and specifics on targets. Japan remains committed to a hydrogen future and is a leader in the space, and we're pleased to say we have a number of partners in Japan and further in pipeline. And then in Europe, the EU has come out and announced funding -- huge funding for green projects to 2027. And the statement that all EU budget must do no harm to a goal to become climate neutral by 2050. Germany is probably at the forefront of that and has announced EUR 9 billion in stimuli for hydrogen technologies and again links with fuel cells as a path to decarbonization. So we're seeing big stimulus packages coming through not just in Asia but in Europe. And then in the U.S., it's a wait and see. But again, on the Democratic side, there's big ambition towards decarbonization, depending on the outcome of the U.S. elections. All of that is a strong pull for the kind of technologies that Ceres has. And also it plays into continuing with the ESG agenda really. So -- and that's something that we take seriously at Ceres, given our purpose. So like I mentioned, most of the major governments globally have committed to green initiatives, and we're pleased to say that we have pretty strategic partnerships in all of these areas that we just highlighted. So we're -- at Ceres, we believe we're a big part of making an impact not just in the U.K. but globally on the clean energy agenda. As I mentioned at the start of the presentation, looking after people in this time is important. I'm pleased to say that at Ceres, we haven't had to make use of any of the government support or furlough schemes. In fact, we've actually continued to grow and we've recruited throughout this period. So we're a growth story at a time when there is a lot of difficulty around. And again, the commitment and resilience of our people is fantastic, and we -- a big thank you to them. We've had to adjust in new ways of working. But during this period, we've actually brought up new production. We've managed to continue to work with partners globally. It's very impressive what the team at Ceres has done that underpins these results that we have today. And then on the governance side, we're continuing to get more and more stringent on governance. We've appointed a new Chair this year with Warren Finegold, and we're seeing some new members join the plc Board. And we have more and more scrutiny as we get -- become a larger company on risk and on maturing the business to mitigate risks and to have very strong governance. So it's a big area of focus for the company. We've talked in these results about investment for growth. The way we see this strategically and as a Board is Ceres is one of the few organizations globally with technologies that can have a major impact on clean energy. We've established ourselves with a very strong reputation in solid oxide fuel cells for power generation. And our heritage, we've been coming up in power from single kilowatts to tens of kilowatts, and we're investing now to look to going into hundreds of kilowatts type application to start to address power systems for getting up towards utility scale. We see the residential and commercial sector as just one part of the challenge that we face for decarbonization. When you think about global demand for energy, we have to also think about how can we decarbonize transportation, how can we decarbonize industry? And that's why we're starting to invest in higher power systems with some of the work we're doing with Weichai around 30 kilowatts potentially, looking to increase that further in the future because we see big market opportunities for other applications like trucks, like rail, potentially and e-fuels in the future. And then the -- on the SOEC side, which is the electrolysis side, we've committed initial funding for further development of the electrolysis side based on the fact that we've made very significant progress in the past 12 months with encouraging results on the initial work that we've done on electrolysis. And again, we see a huge market opportunity here for hydrogen and e-fuels, particularly to decarbonize areas of industry such as steel, cement, ammonia production, et cetera. So we see that as a future value creation driver for the business. So that's where we're seeing the business. And as we said, we're extremely well capitalized. We've got one of the best teams globally, and we think there's huge value creation to be made by going into these areas, and it fits with our purpose of providing clean energy for the -- globally. So as we talk about scaling of the business, I've already mentioned this but there's 2 ways we see the business. One is to sign more manufacturing licensing partners with global reach, and the other is moving into more and more diversification of the end applications. So you can see on the right, this is where we are today with the dots, where you can see where we're starting to look at going in terms of future progress into other markets. And as previously mentioned, we're exploring ways of how we partner with potentially with engineering partners to actually take us into these new areas and commercially, how we secure further demand, which will then drive capacity for manufacturing licensees as well. Just a quick one in terms of a reminder for those of you that might not know the company that well. The partnership progression tends to go through joint product development into licensing and then we get royalties per unit sold. We have 6 partners coming at the joint development stage, Weichai, Doosan, Bosch Cummins, Honda and Miura, of which 4 have progressed into licensing and 1 has progressed into product sales. We continue to work with Honda and we're looking to forward that -- bring that relationship forward. With Cummins, we're coming to the end of the current development program with them. We don't currently have a follow-on at that point beyond that. But what you can see is this is like a pipeline so we have more people at the earlier stage, and then as we progress, we expect to go from joint development into further licensed deals. What that's driving in the past few years is the move in the revenue mix towards higher-margin licensing business. And really in the next 3 to 4 years, we expect our partners to come on stream with investments in mass manufacturing production. And that's really what will take us through to royalties where the business really scales into a high-margin licensing business. But in the near term, we're still able to command a high-growth, high-margin business based on the engineering services that we provide, early-stage supply to customers and upfront license fees, which obviously are very valuable to the company in this next 3-year period. So just to summarize, as I've said, the whole climate action emergency that we've got currently hasn't gone away, and it is driving demand for this type of technologies globally. It's fair to say the company has probably never been busier and we're not short of opportunities. On some of our key partners, we're coming to critical stages, I would say, in the next 6 months or so in terms of making good progress on to next steps. So Bosch, we're due to finish the initial phase of our collaboration towards the end of this year, and we expect to move into the next stages with them. Weichai, we're now getting the 5 buses built and into trials in China, and we expect to, again, make progress into JV next year. Miura first commercial units are running well, and we're looking to support Miura as they continue to make commercial sales. With Doosan, we're only a year into that relationship but that's going well, and we're hoping that we can continue to grow that relationship. And we expect to announce further partnerships in 2020. The core business and investments in the strategy, like I mentioned, we've been growing. We've got a world-class team of scientists and engineers. We're starting to diversify and look into development of new technology, not just the core fuel cell power system technology but also on the electrolysis side. And to support that, we're investing in R&D, test and manufacturing capability to underpin that. And we continue to invest in the core business to mature the technology that we have and expand it into further application. So overall, we're extremely pleased with the progress in the past year. We've got a high-margin clean energy technology business that's very well-backed and is well positioned for growth. So with that, I'll hand you over to Elizabeth and we can take any questions.

[Operator Instructions] The first question comes from the line of Lacie Midgley from Panmure Gordon.

I've got a couple of questions on 2 areas, really. I have to put them up, I think, could be easier. On electrolysis, obviously a lot of development in solid oxide market, particularly this year. A lot of company now pursuing that and much of the debate is centered around efficiency versus flexibility between solid oxide and PEM. I'd just be interested really to get your thoughts, sort of high-level thoughts on what you think the main advantages of solid oxide has over PEM and outline. I mean is it purely an efficiency benefit? Do you think there's more to it? Just some color on that from both would be really helpful, first. Secondly, on electrolysis. Just some initial thoughts on what the total required investment will be to commercialize or what you expect that to be. I know it's only days but an idea would be useful. And then lastly, the business model in electronics, will it work the same as the fuel cell licensing model? Or do you think it will require a different approach? That's the first few on electrolysis. I'll let you do those first.

Okay. So to answer the first question, the way we see it is we're not looking necessarily to compete head on with PEM technology. I think we -- you've answered the question yourself. The big promise, the big advantage of solid oxide is really efficiency. And efficiency is important because when you start to look at the cost of hydrogen in the future, it's dominated by the energy costs that you're putting in. So therefore, the efficiency is going to have a big impact on that cost of hydrogen. There are other benefits -- all these technologies have strengths and weaknesses. The other big attraction for solid oxide is because of the operating temperature, we believe there's compatibility with some industrial processes where with closer thermal integration, there can be further efficiency gains as well. So when we're looking at this, we're not necessarily targeting all markets with the electrolysis. We're thinking industrial applications are the sweet spot for solid oxide, particularly around applications like steel, refineries, those kind of higher temperature type processes. So that's how we see the positioning of the technology. In terms of the investment required, I view that what we've done this year really is the seed funding. And I think if you look at how we've managed our business, we've leveraged, sometimes, partnerships to fund core technology and sometimes we're putting in our own capital. Well, I think we're in a position now where we can put in our own capital to accelerate development where we need to. So I can't give you numbers today, but if we continue to be successful in electrolysis, which we believe we will be, we believe this part of the business can be as significant as the core fuel cell business. So therefore, why wouldn't we invest? So that's definitely on a staged approach where we -- the way we think about this. In terms of the business model, I think that's a good question. We believe that the licensing model works well for us, and it's about having the right partners in that value chain. But it is a whole different area of potential end users and customers, so we're moving from the power side to the fuel side. So it will really, I think, depend on the partnerships we form and how the business model applies to that. But again, I think one thing for sure is we'll be looking to do this in partnership or in collaboration with companies with, a, with market access; and b, with the balance sheet strength that you need to really take these technologies through at scale. I think the one thing that you see on this whole clean energy challenge is the size and the scale that you need. And what works well for Ceres is we're able to leverage our partners significantly and go after application of these technologies globally, which we couldn't do if we didn't have this partnering business model. So we will definitely pursue a partnering business model going forward for electrolysis.

Really helpful. I've got just 2 follow-ups just in partnerships, if that's okay, just really quickly. To Doosan, I think you gave a good update in the statement and the presentation. I just wonder what do you think or do you expect to be the next milestone and like some timing of that? And then on Cummins, just to clarify. You said there's no plans for further collaboration at this time. I just wanted to check, does that mean on the current data center program or more generally outside of that? I think it's the first, but...

Yes. Look, I mean, I can't give -- I can only say what we can put in the public domain, so with Cummins, we're coming to the end of the program that we have with them and the U.S. Department of Energy, I think it's going to be a successful outcome. But for -- from where we are today, we haven't got next steps with them at this point. So I think that's a pretty clear statement of where we are now. With Doosan, we're very pleased with the progress that we've made in the past year. And I think when we formed the partnership, we always felt that this one has had greater potential and that -- our view on that hasn't changed and our working relationship is good, and we'll update you when we've got more to say on that. I mean I think you appreciate with the business model we have, we always have to respect the confidentiality of our partners, so we tend to announce things when we've got things to say. But right now, things are progressing well with our partners.

The next question comes from the line of Adam Collins from Liberum.

A couple of questions from me, please. First of all, in the statement, there's a very enticing paragraph, which says you're intending to form a strategic relationship with a global engineering consultancy, which will increase your ability to scale the business. Could you talk a little bit more about that? You touched on the potential for partnerships around SOEC. Does this also take in power? And any more color you could provide on the strategy around that? And then the second question is in relation to the manufacturing JV in Shandong with Weichai, which is going to happen first half of next year. What can you tell us at this stage in terms of the way that might develop thereafter? What kind of investment might you need to put in? What might be the time lines in terms of taking that business to first production?

Yes, sure. So I think in terms of the first question, when you look at the strategy for the company and you see the -- where we see the business in terms of revenue projections going out and getting towards licenses and royalties, the thing that makes this company a global success is really increasing our number of licensee partners. And as we get further in with the engineering programs that we often, a bottleneck for us is how do we originate more and more licensed deals, more and more partnerships. So short of organic growth, and we have grown significantly in the past year, we're now thinking, okay, we may be missing opportunities where people can be bringing those applications and also help us to initiate that through the engineering. So that's really what's behind that. And we've been exploring that as a strategy for the past year. And I think we're confident that's the way forward and I think we'll have more to say on that in the near future. So that's what's behind it. It's particularly focused on the power side at this point because for electrolysis, we're at an earlier stage in its commercialization. So it's really growing the core power business at pace and at scale. I think your next question was about the Weichai JV. And in terms of timing and scale as well as what we're doing on the technology development and the field trials, we also are in discussions around the business plan with that, the business plan that underpins that. What we've said on record previously is we're committed to putting in a minimum of around GBP 9 million or so in this first stage. We think it will probably be more than that, depending on the strength of the business plan. But obviously, it's going to be of a scale that's appropriate to the ambition of the business plan and also consistent with Ceres in terms of our role in that versus Weichai as the #3 commercial vehicle manufacturer in the world with considerable balance sheet and considerable capability. So we'll have more to say on that, I think, again when we get further through the business planning stage that we're currently in at the moment.

We also have a couple of questions that have come through on the webcast. We'll try and get to as many as we can. Probably first off, Rich, one for you. Adam Forsyth at Longspur asks, "Is it possible for us to get a bit more color around the revenue mix and its impact on gross margin? There was a big increase in engineering hardware but a fall in license income, which might have suggested a lower gross margin than achieved. Are you seeing margin expansion or better pricing on the engineering side?"

Yes. Let me try and answer that one. So you're right. The mix has changed from the previous year. And we've got slightly less license revenue than we had as a proportion in '19/'20 compared to '18/'19. There's a couple of drivers going on here. So clearly, license revenue is very high margin. What you've also got -- within engineering services, we've got an increase in output from our factory in Redhill. A year ago, it didn't exist. It wasn't manufacturing. And for the last 6 months, we've just begun to manufacture out of that. That's clearly a little lower margin than engineering services. So what you find is you've got 2 different drivers. Engineering services is still providing decent margin. License revenues are very high margin. And then what you got is -- and that tends to be lumpy. And then overlaying it, you've got an increasing volume of output from our Redhill facility, which will depress margins slightly. But nevertheless, you can see that we're, on average, maintaining very high gross margins.

And another question from Adam, just asking why the drop in commercial costs in Note 4.

This is -- tends to be lumpy again and it depends on the deals that we've done in the period. So what you find is there are some deal-related costs in the last year which aren't repeated this year, and that's broadly what's driving it.

Okay, great. And probably one for Phil, comes from Marc Elliott at Investec. On the fuel cell scaler, the profile is well explained, i.e., moving from hundreds of -- moving up into hundreds of kilowatts. In the context of electrolyzers, how should we think about this in the path to develop commercial systems that would likely need to start out at megawatt scale? Any other insights on the development pathway would be useful.

Yes. I think the -- what we've been doing is really on the core technology side, so at the R&D level to begin with. But I think what's logical is we start to have to build out, in the same way we did with power systems, we'll have to move into prototype systems of sufficient scale. There is an increase, if you like, in power running in electrolysis compared to power generation. So what we anticipate is doing proof points at the appropriate scale, which obviously needs to start to address the megawatt-type applications to begin with in the future. But we will have more to say on that, I think, towards the end of this year when we complete the phase that we're in on the core development side with our electrolysis.

And some questions through from Anne Crow at Edison. She asks, "If fuel cells are going to be part of fully green economy, then gas lay runoff needs to be created in an environmentally-friendly way. At the moment, using electricity from wind or solar to generate hydrogen via an electrolyzer. However, the efficiency of this is substantially less than using batteries and cells. And do you think this will hold back deployment of fuel cells?"