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

Hello, and welcome to the Ceres Power, Doosan agreement. Should you wish to read through the presentation of the call, you may download it from the Investors section in the Ceres website. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'll now hand you over to your host Phil Caldwell, CEO, Ceres Power, to begin today's conference. Thank you.

Good morning, everybody, and thank you for joining this call today. I'm very excited to talk about the latest strategic agreement that we've signed this morning between Ceres Power and Doosan. And I'll be referring to the presentation material as mentioned, which is on the Presentations section of the Investor Relations part of our website. So I'm just going to step through this to explain to you the details of this collaboration. So I'm moving to Slide 2, the strategic rationale. This is an incredibly strategic deal for Ceres because Doosan Fuel Cell is the world's leader in stationary power fuel cells. And today, we've signed an agreement that gives them a nonexclusive license to manufacture the Ceres SteelCell technology in South Korea. What's exciting about this deal is it's a second major manufacturing licensee after Bosch, but it's actually going to 50 megawatts capacity by 2024. So quite a significant ramp-up in scale for this technology. What's also very strategic for us, and I think I've indicated this to you before, is we strategically want to go into higher power systems. And the South Korean market has a very attractive market for fuel cells, which I will explain in a few moments at a utility scale. And this is exactly in line with our plan. So again, more scale leads to future license and royalty revenues. Doosan is already established as a leading player in the South Korean market with over 377 megawatts installed to date and has just announced the world's largest 50-megawatt hydrogen power plant. So it's definitely the world leader in this technology. Moving on to Slide 3. The total value of the deal to Ceres is up to GBP 43 million with license fees from technology transfer, joint development revenues of GBP 36 million over the next 3 years, plus an additional GBP 7 million contingent on meeting certain KPIs. As usual, the agreement also includes the license terms for royalty streams, which will follow the production launch and the commercial sale of the 5-kilowatt SteelCell stacks into future products of Doosan. And this builds upon the initial 2-year collaboration and license agreement we signed just over a year ago with Doosan, which was to develop a 5- to 20-kilowatt power system. So that was an initial GBP 8 million deal. This is an additional GBP 43 million new deal today. If you move to Slide 4, just to illustrate how these collaboration agreements come together. So we're more or less halfway through the first collaboration on the 5- to 20-kilowatt system-level license for a combined heat and power unit. Today, we're adding 2 key agreements to this. One is to actually take our technology and scale it into higher power systems for utility scale applications and also the license to manufacture the SteelCell technology in South Korea with an initial 50 megawatts of capacity. Once those deals come to product launch in 2024, we expect to receive royalties from systems sold, from CHP units and also royalties from stacks manufactured. And our royalties are based on a per kilowatt basis. If you go to Slide 5. Many of you that follow the company will have seen this slide before, but what we've indicated before is the revenue evolution of the company. And you've seen in recent years, we've had significant revenue growth based on both engineering services and also on license revenues coming through. This latest deal over 3 years takes us again into that near-term growth phase but also has a first commitment to full market launch in 2024, which then gives us line of sight to those future royalties. So it's very significant because it's adding more scale at higher power and also the commitment for scale of mass production of our technology. Moving on to Slide 6. Just a few words about Doosan. I mentioned Doosan is the world leader in stationary fuel cell power. It's recently spun out its fuel cell division and listed this on the Korean market. So it has a current market cap of around GBP 1.85 billion, and it has 70% market share of the South Korean market. And it's built this based on existing technology that it's acquired several years ago from United Technologies in the U.S. And that's based on a phosphoric acid technology, which you can see there, the PureCell, which is about 43% electrical efficiency. What strategically it's doing with this agreement is adding solid oxide to its portfolio to increase electrical efficiency to 60%. So quite a significant uplift in efficiency. And Doosan is very ambitious. It's planned to achieve revenue growth from GBP 283 million today or KRW 450 billion, targeting KRW 1.5 trillion, just under GBP 1 billion of revenue by 2023. And you can see in the pictures on the right, the PureCell system it has today and also the world's first 50-megawatt power plant that is just inaugurated in South Korea. Let me talk a little bit about why the South Korean market is so key for us. Probably, it's got the most progressive regulation incentives anywhere to encourage the deployment of hydrogen and fuel cell technology and is targeting 16 gigawatts deployment by 2040. As I mentioned, the 375 megawatts of installed plants already in South Korea account for 35% of global installed fuel cell capacity. Unlike many regions and countries,that we're seeing, post-COVID, it's committed to a new green deal, which is GBP 46 billion of investment by 2025. And that's part of a national strategy to transform the Korean economy from being carbon-dependent, support industry and jobs and tackle climate change. It's also progressive in its future vision for hydrogen and has initiative to convert 3 cities to become hydrogen-powered. If we go on to Slide 8. Also, what's fueling this growth is some of the policies that they have in place. The renewable portfolio standard means that utilities must source at least 7% of total power production from new or renewable sources, and that figure rises by 1% each year from 2020 up to 10% in 2023. Now fuel cell installations count as double towards these targets. So hence, you're seeing this introduction of fuel cell power for utility scale. Also, they have a hydrogen economy road map with the new green deal transitioning Korea to hydrogen-reliant economy by 2040. And the hydrogen market in Korea is set to double to KRW 27 trillion or GBP 17 billion by 2030. And that's through a combination of targets around fuel cell power plants rising to 15 gigawatts, residential fuel cells rising to 2 gigawatts and a plan for something like 79,000 fuel cell vehicles by 2022. So very progressive, very ambitious policy for adoption of fuel cells. Moving on to Slide 9. Why it's exciting for Ceres is it's carrying out the strategy that we've laid out for the business. So there's 2 prongs to this. One is we are aiming to have a number of partners as world-class global-scale manufacturers of our technology. And the South Korean market being such a strategic region for us, it makes sense that we go with the market leader, and that's Doosan. So we're very pleased to announce that they will scale manufacturing of our technology in South Korea. The second thing is if you look at the right-hand side, our technology has several different applications. And today, with this step forward, we're looking to support Doosan to introduce this into higher-power applications, which will have benefits for increased power for distributed power generation and also be able to apply to the utility scale generation market. So very significant capacity and production, which, again, leads to very significant future royalties for Ceres. So in summary, on Slide 10, this is a very strategic deal for Ceres today worth up to GBP 43 million over the next 3 years. It's a key manufacturing partner in the world's largest market for fuel cells. As I've mentioned, Doosan plans to build the facility, which should come on stream to 50 megawatts by 2024 with support from Ceres on the technology transfer. And Ceres and Doosan will work together to develop power systems to target larger utility scale applications. And we'll see revenue streams than anticipated to come on stream for us post-manufacturing launch in 2024. So with that, I'll take any questions that you may have.

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

Phil, can you hear me okay?

Yes, I can. Go ahead, Lacie.

Congratulations on the announcement. It's great news. And I just think -- first one for me is, was this sort of a natural sort of partnership development following the initial sort of CHP agreement you had with Doosan? Or I'm just trying to get my head around because, obviously, there's a bit in here with Doosan Corp and Doosan Fuel Cell. And so I'm just trying to understand if that follows on from that initial agreement or if there's -- that was quite separate from that, if that makes sense. I guess just trying to understand how some of the moving parts are working.

No, I think it's a good question. Most of new strategic relationships take several years to develop. We started with Doosan probably 3 years or so ago now, as a usual first step of technology evaluation. And then we went into joint development of the first product, which was the 5- to 20-kilowatt CHP we announced last year. However, if you think about solid oxide as a technology and you think about their portfolio, so Doosan already have PEM technology for lower-scale applications, and then they've got phosphoric acid for higher power. Solid oxide as a technology can go into all of these markets, all of these stationary power markets. And I think what's happened is -- right from the beginning, we always anticipate that if things went well, we would expand this relationship with Doosan. And I think the CHP contract was a first step, but we always felt that the big opportunity was to broaden into higher power and mass manufacturer in South Korea. And that's where we've got to today. And I think if you think about the product portfolio, I think it can go into several other applications as well in the future. Because if you have solid oxide, you have the highest efficiency of all of the technologies for power generation. And I think that's why it's strategically important for Doosan.

Yes, definitely. Okay. That's really helpful. And then just secondly would just be sort of on the phase-in of those GBP 43 million. I don't know if you can give any color on that over those 3 years.

They're kind of running in parallel. I mean there's quite an intense period now where we do technology transfer. And what does technology transfer entail? That's where basically we will get together with Doosan, run sessions where we actually teach them how to make our technology help them support the supply chain and actually bringing up manufacturing. And so there's an intense wave of technology transfer and then there's a long support period. And then on the development of higher power systems, that's something that Doosan will take the lead in, and we will play a supporting role in. So the revenue streams will flow over the next few years, but we'll give more details on that, I think, in future forecasts.

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

Phil, can you hear me okay?

Yes, Adam.

Three quick ones from me. What are the largest power systems you think that SteelCell could be targeted at by Doosan? Are they interested in hydrogen SteelCell? And what do you think the main non-Korea markets they're interested in is?

Sorry, Adam, can you repeat the last question?

Yes. Where do you think the main interest from Doosan is internationally? I see there's a blob in your geographic chart, which looks like North America. Is that one of their international aspirations? And where outside of Korea beyond that, do you think that they might be targeting these things?

Sure. Okay. So in terms of the size of the units, I think it's probably -- this technology is very modular. And if you look at the modules that they deploy today, they're in the range of 200- to 400-kilowatt-type modules. So I anticipate something similar in terms of power -- in the hundreds of kilowatts. That's obviously to be determined between the 2 companies. In terms of Doosan's ambitions, obviously, the Korean market is a large market. But Korea, as a country, has pretty ambitious targets to actually become the world's leading exporter of fuel cells as well, just as they have with battery technology. And in terms of Doosan's presence, obviously, they have Doosan Fuel Cell America, so they already have a pretty strong footprint in the U.S. as well. So I think when we announced these deals, people shouldn't think of Doosan as a pure Korean play, in the same way they shouldn't think of Bosch as a pure European play. These are global companies with -- and this is a global market that's emerging. So I think for Doosan, it's obviously the world leader and the #1 in South Korea. But obviously with a footprint in the U.S., I think that's obviously a key market in the future. What was your second question, Adam?

Hydrogen. How interested are they on hydrogen?

Well, I think the answer to that is they are interested in hydrogen. And you've seen in the presentation, they've just built the world's largest 50-megawatt power plant running on byproduct hydrogen from an industrial process. So hydrogen, I think, is a key part of South Korea's road map in the future. And technologies like solid oxide, which are fuel flexible and can be one of these key transition technologies that can run on natural gas and run on hydrogen and the transition of blends in between, I think, is a very important feature for them as well. But I do think Korea will be one of the first countries to move towards hydrogen, and therefore, future proofing of technologies is important.

The next question comes from the line of Anthony Plom from Berenberg.

Phil, most of my questions have actually been answered. I suppose maybe just a very simple one to start with. Would you mind maybe just discuss in a bit more detail to what we actually mean by utility-scale applications? In terms of the size, obviously, looking at multiple hundred kilowatts. But what is the fuel cell displacing here? What's the biggest barriers to adoption? Who's the likely customers? And just any sort of color on that would be useful. And then just on the KPIs. I suppose what are these based on and maybe kind of give it explicitly and what sort of things we're looking out for?

Sure. I think when we talk about utility scale, as I mentioned in the presentation, that requirement on utilities to source increasing amounts of new and renewable power up to 10% by 2023 has created a growth market for fuel cells in those kind of applications. And if you look at how they're being deployed today with the current technology, you've got hundreds of kilowatt modules being applied into megawatts and tens of megawatts scale when you look at that 50-megawatt power plant. So I think it's -- it doesn't mean that you have to build megawatt scale fuel cells. You can build modular, multi-hundred kilowatt systems, and then just add them together to make megawatt scale. So that's what we mean by utility scale. In terms of KPIs, I think there's a balance of several KPIs, which are all around sharing some of the targets that we have for the cost of fuel cells produced, the quality and the -- and those kind of pretty standard commercial metrics. So I can't divulge all of the details, but what it's around is Ceres, once we've transferred this technology, making sure that what we say the potential is for what that production facility can do and what the technology can do is delivered to Doosan.

The next question comes from the line of Marc Elliott from Investec.

I was curious to know your thoughts. You now have 2 stack level agreements, Bosch and Doosan. And just thought you could share with us some color around how you see that sort of level of agreement with those 2 partners opening up additional system-level partners, let's say, in there. I know you said they're both global. But let's say, you got Doosan opening up the Asian market; Bosch, okay, global, but let's say, European and North American, opening up new markets, but the system level through their sales channels and thoughts? And also whether your -- is this about the right kind of number of partners with whom you'd want to stack level agreements? Or would you be looking to add 1 or 2 more in the next sort of couple of years or so?

I think if you look at the scale of the market opportunity and where those markets are, it's always been our strategy to have several manufacturing licensees at the stack level. So we would look at additional manufacturing licensees in the future. In terms of the additional commercial opportunities that this may bring, I think what it does do is, if you think about our model, we have system-level licensees, for example, like Mura. And then now we have manufacturing licensees like Bosch, like Doosan. What it creates, this ecosystem is, on one hand, we're creating more and more call for the technology from system-level partners and licensees. But now we also are fulfilling that demand through potential supply through the likes of Bosch and Doosan to fulfill demand elsewhere as well. So I think what it does is it gives increasing confidence to people who maybe want to use this technology but maybe don't have the capability or the ambition to take on manufacturing themselves that there will be a global manufacturing supply of this technology in the future. So I've used the analogy before of the chip industry with ARM. It's a similar approach. We're creating an ecosystem of demand for the technology, and then looking to have a number of trusted partners at the manufacturing level but with a global presence that can fulfill that demand. And I think, obviously, strategically, in the future, there may be key regions of the world where it makes sense to localize manufacturing with the right partners. So it's -- for us, it's all about having global scale for our manufacturing.

The next question comes from the line of Edward Maravanyika from Citi.

Just had a quick question on that royalty number will be upfront. And can you maybe discuss how sort of how it prepares to maybe add some royalty that you've discussed before.

Sorry, can you just repeat that question, please? It broke up for a second.

Yes. Sure. It was just around the royalties. Just to confirm if you have -- already have predetermined the number upfront and whether it's a flat royalty number or whether there's some kind of a scaling or whether you can sort of expand on that.

Sure. So yes, the royalties are already agreed in these contracts similar to most of our agreements. And the levels of royalty, while we can't divulge the exact nature, they're pretty consistent with our other licensee partners. So the royalty rates are probably in line with what we've described before.

The next question comes from the line of Sanjay Jha from Panmure Gordon.

Most of my questions have been answered. I was just trying to get my head around Doosan's strategy because I noticed that Bloom Energy did a deal to sell units into South Korean market via SK Group. And I was wondering whether -- are you still able to do deals with other South Korean companies after this deal?

Well, it's a nonexclusive deal. But I think our focus is obviously with Doosan because we think that Doosan are the market leaders and probably the most important partner for us in this region. But you're right, I think the SK collaboration with Bloom actually creates some healthy competition now. And you've now got 2 major corporations in South Korea moving towards solid oxide. I think that's very good for solid oxide as a technology in general. A lot of analysts are very familiar with PEM and people talk a lot about PEM in the transportation sector. And sometimes, I feel that the stationary power market is somewhat overlooked. But now what you're seeing is large-scale deployments of solid oxide particularly through Doosan and now with SK and Bloom. So I think it's healthy competition in this kind of region. There are other applications, of course, that our technology is applicable to. And like I said, this is a nonexclusive agreement with Doosan. So it doesn't limit Ceres from obviously creating more partnerships in the South Korean market in the future. But today, we're very, very happy with Doosan. And as the 70% market share in that particular market, we think there's no better partner.

And I'm guessing that your strategy is different from Bloom because Bloom is making the units. You presumably will just supply the sort of the stacks or whatever to Doosan?

Yes, it's a different strategy from Bloom because we're actually licensing Doosan to manufacture the stacks in South Korea. So that's quite important, I think, particularly for the South Korean government because I think they want to see as much localized manufacturer as possible. So our business model of licensing is very attractive to Doosan.

The next question comes from the line of Anne Margaret Crow from Edison.

Congratulations. I've got a couple of questions. But they are kind of more regarding Doosan strategy, so I appreciate it if it's not something that you feel fully able to comment on. One of them -- the first was whether Doosan would be phasing out their phosphoric acid technology in favor of solid oxide. And then the second was whether Doosan are being -- actively putting technology in place to enter availability of hydrogen derived from renewable sources going forward.

So I really can't comment on Doosan's strategy for its phosphoric acid business. I think if you look at their own Investor Relations reports, I think they say a lot more about their strategy. I think obviously, solid oxide offers them something in addition to what they have in the phosphoric acid technology. And as we've just discussed, there is competition also in South Korea with solid oxide technology coming to market. So I think it's a natural progression that a company like Doosan would move forward with technology towards solid oxide, but I can't speak to their particular strategy. In terms of your second question around hydrogen. I think the question you're asking on is, are they interested in green hydrogen from renewables? I think the answer to that is obviously yes, they are. But interestingly, the first hydrogen power plant that they've installed is actually using byproduct hydrogen from an industrial process. And that's also quite interesting because solid oxide is able to deal with a lot of impurities in fuels, particularly if they're coming from industrial processes. So we're a lot more tolerant to, let's call it, nongreen hydrogen or a hydrogen that's being cleaned up from an industrial process than other technologies are, say, PEM. So we're very confident in the applications of solid oxide, whether it's from green hydrogen or from gray or blue hydrogen. It doesn't really matter. And I think that flexibility is also important to our customers like Doosan.

The next question comes from the line of Adam Forsyth from Longspur Research.

Just a couple of questions. Firstly, on technology transfer. Where do you see any pinch points there? I'm sure you've had a sort of thorough review of the risks, so I wonder what are the sort of things that might just slow up the process around tech transfer. Is there any technology you're not transferring? Are they getting everything? Or are you keeping anything back from a sort of IP perspective? And then finally, just again on the sort of use cases that Doosan will be deploying the applications. Are you expecting most of these to be essentially baseload applications? Or will you be able to sort of provide some elements of flexibility within the final product as it were?

I think they're using them in a variety of applications, including prime power. So these aren't backup systems. These are prime power systems. And I think if you look at their product portfolio, you've got these higher-power level deployments at the utility scale. And then you've got things like the CHP modules that we're -- don't forget we're developing that product line with Doosan as well, and that will address a different sector slightly, which would be like commercial buildings, office blocks, et cetera. And they also have a presence in the micro generation end of the market as well currently with PEM. So I think they see this technology as a platform technology that can be applied into many different applications. But obviously, the larger markets today are at the prime power generation end of the market. In terms of IP transfer, we don't really foresee any bottlenecks in that. We're getting pretty good at doing technology transfer, having done this several times already. And obviously, there's some slight limitations with the current situation with COVID. But we're very confident we've already built the team up in anticipation of this deal over the past few months. So we're ready to go with the resources to do it. And if you look at the time line from where we are today to 50 megawatts is quite an aggressive time line, quite ambitious. So we want to hit the ground running with Doosan, and everybody is ready to go on this. In terms of the nature of the license, it is a license that will give Doosan the full technology that they need to be able to manufacture sales and stacks in South Korea. So we're not withholding anything at this point that they need in order to actually enable that manufacturing to happen. On the system level, it really depends on what IP is relevant to their system and utilizing our technology versus intellectual property that they already have or capability they already have. I mean I think that's what's good about Doosan as a partner is obviously there's a heritage there within Doosan Fuel Cell and Doosan Fuel Cell America as well on doing large-scale systems already. So they're bringing a lot of know-how to the table already. So this -- the IP transfer depends on what our customers really need, but it's going to be a very collaborative approach.

The next question comes from the line of Nick Walker from Arden Partners.

A couple of questions, please. First of all, with respect to obviously these licenses for technology transfer and manufacturing of cells and stacks to Doosan. In every case, will Doosan be integrating sales and stacks into their own whole products and those products be deployed in the market? Or might Doosan in certain circumstances partner with other integrators, other product makers with yourselves and stacks where other partners might then make the end user products? That's the first question. The second question is with respect to Doosan's sort of sales channels and sales partners, do you have any sort of feel for whether they sell directly in every case to utility companies, commercial building companies, et cetera, et cetera? Or do they work through distributors and other service partners to deploy the end-user products?

Sure. If I answer your second question first, I honestly don't know what -- how that is managed today and what the split is. I think there's probably quite a lot of information in the public domain from Doosan Fuel Cells around their strategy since they're listed earlier this year, so -- or last year. So I think you would have to refer to Doosan for more information on that. In terms of the potential for them to supply to third parties, I think we've said this in the [ O&S ], the first focus is to meet their internal demand for their own products. However, they do anticipate supplying stacks to third parties as well in the future. So I think they definitely have the ambition to manufacture beyond their own product portfolio.

The next question comes from the line of [ Ausitn Earl ] from Marshall Wace.

I had 2 questions, I guess, related to Slide 7 and 8 in terms -- particularly in terms of the environmental benefit of fuel cells. I guess I'm just trying to understand 2 things. One is in Korea, the fact that they're incentivizing fuel cells as part of renewable, is that including using methane? I'm just wondering if there's any environmental benefit? And then secondly, I mean, if there isn't an environmental benefit of using a fuel cell or for methane versus a gas turbine, is it -- do you think that the Koreans are trying to promote the fuel cell technology and that eventually will transition to hydrogen?

Yes. So I think it applies today for fuel cells running with methane. And it's all about also the transition to the future. I think if you're winning -- fuel cells is the most efficient way to generate power from fuel. So if you are going to use a natural resource like natural gas as your fuel, then you want it to be as efficient as possible because that has the benefit of being lowest carbon way of producing power from that fuel. And I think when you get up into the types of efficiencies you're talking about with solid oxide, you're talking about reductions in carbon compared with grid scale power of around 30% lower carbon. I think that's -- those numbers are well understood if you look at any of the studies that have been done around deployments of fuel cells in Europe based on natural gas. So that's the first thing. The second thing is I think South Korea are more progressive than most in understanding the relationship between fuel cells and hydrogen. There's a lot of excitement and talk about hydrogen as a fuel and there's less focus on the deployment scale and the side -- and the demand side of hydrogen. And very often, people's awareness is limited to transportation. And I think by using highly efficient distributed power that convert on the fuels that we have today like natural gas and convert on future fuels like hydrogen is the right strategy because we need to be able to transition, and natural gas is seen as a key fuel for that transition. You can't simply get a wholesale switch overnight from the energy system we have to a hydrogen future. And you can look at Doosan strategy, their operating plants on natural gas today, and they've just put in this 50-megawatt facility running on hydrogen. So you can see the direction of travel, essentially it's with the same technology. And that's a big -- a big part of the strategy is getting established with the most efficient technology today that can transition towards that hydrogen future. So I think the Korean incentives are doing 2 things. One is they are decarbonizing their society from today and they're future proofing it towards hydrogen. I think the second part of the Korean government's strategy is they recognize that fuel cells are going to be as important as battery technology is globally, and they want to be a world exporter of that technology. So if you think about where lithium ion was a few years ago and now the production -- mass scale production is dominated by Korean, Chinese and Japanese manufacturers, I think by early adoption of this technology and by encouraging this industry, they realized that they will become world leaders in the export of this technology in the future.

There are no further questions in the queue. I'll hand the call back to our speakers to conclude today's conference.

Great. Well, thank you, everybody, for taking the time today, as usual very good questions, which helped to bring the detail of the deal to life. And just to summarize, we're incredibly excited about this new deal with Doosan. It's an incredibly valuable deal for us with GBP 43 million over the next 3 years. It does establish a manufacturing partner in the world's largest market for fuel cells for stationary power today. It's a commitment to move to 50-megawatt scale, which is a significant ramp-up in capacity for the Ceres technology. It takes us into these higher power applications and new markets for the Ceres technology. And it underpins the future value of the company through royalty streams from future production. So we're really looking forward to working with Doosan. And we're very pleased to announce this milestone today. So thank you, everybody, for your time, and we'll keep you updated with progress in the future. Thank you.

Thank you for joining today's call. You may now disconnect.