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

Good morning, ladies and gentlemen, and welcome to the Ceres Power Holdings investor presentation relating to the joint venture in China. [Operator Instructions] Questions are encouraged. [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. These will be available via your Investor Meet Company dashboard. And just to note, this presentation is scheduled for around 30 minutes in total. Before we begin, we'd like to submit the following poll. And if you'll give that your kind attention, I'm sure the company will be most grateful. And I'd now like to hand over to Elizabeth Skerritt, Director of Corporate Communications. Good morning.

Good morning, everybody, and thanks for joining us. I'm really delighted to be joined by Phil Caldwell, our CEO; and Eric Lakin, our new CFO. I'm also very grateful to have Tony Cochrane's support. He's actually Chief Commercial Officer, and he's based in Vancouver. He's been instrumental alongside Phil in getting this deal over the line. So I'm going to hand over to the guys to run through the presentation, and then we'd be happy to take some Q&A. Phil?

Great. Thanks, Elizabeth, and thanks, everybody, for joining. We're very pleased to talk you through what's an incredibly exciting deal and a very significant milestone for the company today and one that's been highly anticipated. So if we go to the first slide, please. Those of you that know the company well know that we have a very strong relationship with Weichai and we've always had ambitions for the Chinese market. We view China, obviously, as key to going to net zero and one of the biggest markets for our technology that there is. Today, we're very pleased to announce that we've signed the Heads of Terms as a three-way agreement, which includes one of our other major strategic partners, Bosch. So the addition of Bosch is incredibly exciting because it strengthens this deal significantly. Bosch is probably well-known to you as the global industrialist and manufacturer but also has a very significant operating history and footprint in China with over 55,000 employees. It already has a very strong relationship with Weichai as well in supplying various different business streams into Weichai, so it's the logical partner to add into our collaboration for China. And the intention now is that we are actually going to have 2 entities, 2 joint ventures that service the China market. The first one will be a three-way system joint venture where we pool our capabilities between Bosch, Weichai and Ceres to develop solid oxide fuel cell systems for a number of applications, including motive, and also significantly adding stationary power applications to that. The second entity will be a two-way entity for manufacturing of stacks in-country in China. It's very consistent, this deal, with our business model in that our main role in this will be as the technology provider and providing the license to an extension of our relationship with Bosch to enable manufacturing in China. So I'm going to hand you over to Tony, our Chief Commercial Officer, to give you some more details around these different joint venture arrangements. Tony?

Thank you, Phil. I'll talk about the -- some of the ingredients of the two joint ventures that Phil just mentioned. The first one I'll talk about is the System Joint Venture, which is the joint venture that Ceres will have an equity position in, 10%. The majority shareholder will be Weichai, and Bosch will have the residual stake above and beyond what Ceres takes in its 10% holding. And the scope of this joint venture is to produce the systems that access the market applications for both stationary power and motive, commercial vehicle and bus motive power in China. Under the agreement, both Ceres and Bosch will be providing licenses to system designs. Some of them are represented here. Examples are -- is a Bosch 10-kilowatt system, which is under validation testing in many applications in Europe. The extension of that product line would also be well suited to the China stationary applications. And obviously, the work that we've already described between Ceres and Weichai on developing systems for buses and stationary applications would also form part of the product lines of the system entity. The combination of that expertise is expected to not only expand the product portfolio but also expand the market applications accessible to the JV under a license. And initially, the stacks that will be incorporated into those systems will come from the Bosch facility in Germany that's being developed right now. And subsequently, once the factory is established in China, it would be primarily serviced from that factory. So if I go on to the next slide to talk about the stack joint venture. So the stack joint venture will be a venture that is heavily majority owned by Bosch with a minority interest from Weichai. Ceres will not be an equity holder or a party to that joint venture, but that joint venture will be practicing a license from Ceres, which would be an extension of the Bosch license already being practiced in Germany. And what this deal enables is Bosch to build a factory in China using a lot of the learnings and the footprint that they've already been working on during our collaboration over the last 2 years. And the benefit of this, of course, is that you don't have to go on a second learning curve. We're benefiting from all of the investment that Bosch has already made in derisking the implementation of a manufacturing footprint, and they will already have an active factory in Germany as they establish their manufacturing footprint in China. And obviously, that not only limits the risk, but it also could enable an accelerated execution of that manufacturing footprint, which is what we all hope for. The royalties on the stack will be preserved as they are structured in the agreement with Bosch. Obviously, the payment streams for the access to China will be incremental, but the royalty streams per stack will be consistent with the active agreements that we've already described. And Eric is going to go through some of those financials now. And just a last slide on the market in China. We could spend this entire session talking about the market in China. We won't try and digest all of it other than to say that this collaboration has materialized because the Chinese market is seen by the three parties as the largest market in the world for this technology. China is embarking on a very ambitious energy transition in support of some of the things that they committed to do to the world in the recent COP meetings. The first step, as we perceive it, is going to be a migration from coal to a much greater use of natural gas. Obviously, that plays very well to Ceres' technology. But as we've already communicated, the transition is a long-term transition from coal to natural gas and ultimately to zero-carbon fuels. And the Ceres technology is seen as an enabler of that entire transition. So not only the first step to natural gas but also to future steps into zero-carbon fuels and, ultimately, hydrogen. And so this is a very ambitious long-term play by the three parties in the largest market in the world for clean energy technologies. And we're very excited that we have some of the strongest players in the industry collaborating with us.

Thanks, Tony, and great to meet everyone virtually. And I must say I'm very pleased to -- for my first investor meeting to be part of the presentation for this important strategic collaboration announcement. As Phil has and Tony have mentioned, this new joint venture arrangement is building on the current business model that Ceres already has in place with its strategic partners. So it's a model of initial license fees. So the license fees will be GBP 30 million in total, split equally between the stack and the system joint venture. So payments from those entities ultimately to the U.K. company. Expect the payments to be spread evenly over 3 years. The timing of the revenue recognition is to be determined, and it's subject to the detailed agreements. So we'll have to update on that later once those are known. And so that's a high, profitable income stream. And then the investment itself, we're expecting up to 10% investment in just the System JV. No investment in the stack JV. And we're expecting that investment to be of the order of GBP 20 million likely to be spread over the 3 to 4 years. And the total funding for that stack JV is to provide working capital losses and capital expenditure up to the point of breakeven of that System Joint Venture. And then beyond that, once the business is profitable down the line, we'd expect to receive additional funds in terms of dividends from that System JV. In terms of the royalties, and that's the real value from this arrangement, there will be royalties consistent with other arrangements that Ceres has. Our previous guidance has been $50 to $100 per kilowatt. And so over time, those royalties will increase as volume grows. And if -- and any interim between license fees and when royalties become significant, there are minimum payments planned for the contract to fill any gap during those 1 or 2 years before production becomes significant. And as a last point, it says here detailed agreements are now being prepared, and we expect to finalize definitive contracts in the coming months. You may be familiar with this slide. This just reinforces the business model that Ceres has talked about. And so we've got -- we're in that near-term growth phase where we receive license fees. It's worth adding there'll be -- expected to be additional engineering services as well providing to the joint venture as well in the meantime. And then over time, once the production volume starts and sales of the system and stacks commence, we'll receive royalties from those on an ongoing basis each year. With that, I'll hand back to Phil.

Great. Thanks, Eric. Thanks, Tony. So look, to summarize, we've been working on this deal for quite some time. We always said we wanted to do the right deal that takes us into China in the right way. And I actually believe now that with our very strong partners with Weichai and the addition of Bosch, we really do have the potential to make a pretty formidable partnership, one of the strongest, I believe, in the industry that can really go after the Chinese market. Near term, as we said, it's worth GBP 30 million to us over the next 3 years. But beyond that, the value in this deal is really in the royalties as we scale the business for the Chinese market, and the scale of opportunity in China is pretty evident for all to see and it will grow in the coming years. It's very significant to us as we build out capacity for our technology. This will be a second manufacturing facility for Bosch following the plan for the 200-megawatt facility that it has in place for Bamberg in Germany, which is planned for 2024. So we have relationships, obviously, with other partners as well, but what we're doing is we're aggregating global capacity in blocks of hundreds of megawatts towards gigawatts, ultimately, to service the global fuel cell market. It really does strengthen the future scale of the company and gives more visibility to investors on how we're building that out. And as Eric said, we'll be able to give more details once we actually sign the definitive agreements and then form these joint ventures. But it's an incredibly exciting deal for us. We're very pleased to get to this point. And that concludes the presentation, and we're happy to take any questions.

That's great. Phil, Tony, Eric, thank you very much indeed for your presentation and update to investors this morning. [Operator Instructions] But I just want the company to take a few moments to review those questions submitted already. I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor Meet Company dashboard, and we'll notify you by email when they're ready for your review. Elizabeth, I haven't given you particularly a long time to review the questions that have been coming, but you can see investors have submitted a number of questions. Perhaps if I may hand back to you to read out those questions and give a response where it's appropriate to do so, and I'll pick up from you at the end.

Brilliant. Thanks, Mark, and hi again, everyone. We've had a few questions come through, gents. If I could start maybe with a question for you, Tony. "Can we explain why Ceres has not taken an equity stake in that second stack JV?"

Sure. So taking an equity stake in a factory or a joint venture is not our typical line of business as a technology company and a licensing company. It was something that we did with Weichai in the framework of the agreement that we had agreed a couple of years back. And to be honest, the -- this new engagement doesn't require as much direct resourcing from Ceres to enable the stack joint venture to exist and to be successful because of all the things that Bosch now brings. And so for the two reasons: one, the need for Ceres to directly participate in enabling its success is diminished; and secondarily, as a licensing company, it puts us back more in a pure-play licensing mode rather than becoming owner -- a part owner in large factories that require a lot of capital and a lot of operational expertise. So that was why we made that decision.

Great. Thanks, Tony. And perhaps an extension to that. In terms of the licensing of both Bosch IP and Ceres IP into the system joint venture, what is coming from Bosch and what's coming from Ceres is the question.

Yes. So initially, what we're contemplating is Ceres will contribute the IP related to the bus range extender system, which we've been working on for several years now with Weichai, as well as a 30-kilowatt stationary variant of that design, which is also under development; and Bosch will contribute the system that they have publicly disclosed, which is a stationary commercial combined heat and power system in the 10-kilowatt-class range. And so what the idea is that we will strengthen the JV's market access by having a larger pool of product lines that both parties enable through these system IP licenses.

Great. Thanks, Tony. And Eric, can I come to you? There's a question around can Ceres' financial contribution to the stack JV be funded from current cash resources? Or will a fund raise be necessary?

Yes. Sure, Elizabeth. Yes, the short answer is yes, we've got the resources to fund the current business plan and the investment in the joint venture. No additional fundraising will be needed.

Great. Thanks. And a follow-up just to that, "Will you get 10% of the profit from the JV?" One of the investors asks.

Yes. Yes. Of the system JV, assuming we have a 10% holding of the equity, it will be treated as an associate. And so we've -- we'll see the 10% contribution on the bottom line of losses and eventually profits from that joint venture. And over time, once there's distributable reserves, we would get our share of the dividend payments as well.

Brilliant. And Phil, can I just come to you because I guess this goes beyond the China and these specific JVs? But one of the investors asks, "Are royalties paid on a kilowatt basis? And can you comment on the value of pounds per kilowatt that we achieve in terms of royalties on our stack and system IP?

Yes. So our model is that royalty is obviously on a per-kilowatt basis. And I think previously, we've given guidance of between $50 and $100 per kilowatt, and this is in that range. It's consistent with that. Obviously, in this deal, we get royalties both on the manufacturing of stacks, so stack production, and also from the system IP injection, which we're sharing with Bosch. But we also get system-level royalties as well. So we get the benefit from both sides of that. So it's entirely consistent with our established business model.

Yes, absolutely. And then as a sort of follow-up to that, sort of saying, when do you expect to see significant royalties from China? Will it be in 2025 or later, do you think?

The exact details will become clearer once we actually sign the definitive agreements, and we'll announce jointly, I believe at that point, with Bosch and Weichai. And the way that the deals are structured typically is we have upfront license fees, which we've disclosed here. And then when we start production, we tend to have minimum payments until production levels reach a certain point and then the royalties surpass that minimum level. So the shape of the deal looks very similar. What we are not in a position to disclose here today is the exact timing yet. That would be an appropriate for us to do so without our partners.

Yes, absolutely. And Tony, perhaps coming back to you. We've just had a couple of questions around, can we give any sense of the capacity opportunity near term or longer term from the JVs?

Yes. So we won't be able to specify exactly what capacity will be put in place at what time because that's a decision that will be made with our partners under the definitive agreements. But what we are intending to do and part of the strength of the deal is to benefit from the learnings of the first factory that Bosch is putting in place in Germany, as we described. So the first factory that Bosch has described in Germany under our license is a 200-megawatt building block of capacity. And obviously, that blueprint is very, very useful in establishing a very credible path to a footprint in China. The exact size of that factory will be described by Bosch in future announcements related to this deal.

Great. Thanks, Tony. And coming back to you, Phil, there's a couple of questions around, does this announcement have any implications for the shareholdings that Bosch and Weichai holds in Ceres?

No. It has no impact.

Great. And then perhaps -- well, sorry, guys, we've had quite a lot come through and there's only so much time to deal with them. Just there was one question here on if you could comment, Phil, probably it's the best place, to how things are going with the SOEC development and if there are any partnership discussions happening around that. It's obviously not relevant to the deal today, but a couple of questions on SOEC and what you're seeing.

Yes. Look, we've previously said we're pleased with progress on SOEC. We've had a high level of interest from potential partnerships on that, and I think those discussions are progressing very well. So we hope to be able to update in the not-too-distant future, hopefully, that we can have that team move forward with some first partnerships on SOEC. But I think we will do so when it's appropriate and when we have those at the right level of maturity.

I mean probably a good extension from that, there's a question here as well on, is your SOFC technology still evolving? And are you planning new research to keep ahead of the curve? I mean that's absolutely the business model, but could you comment just on the SOFC side as well?

Yes, there's a lot of activity going on, on the SOFC. If you remember, last year, we raised additional capital, and we split that capital almost -- we raised GBP 180 million. GBP 100 million was to go into a new area of SOEC. while GBP 80 million was going into the SOFC side of the business and the fundamentals behind that. And really, the R&D that's going on, on the SOFC side is future fuel compatibility. So Tony mentioned transitioning towards future fuels and higher power applications as well. So things like the marine sector and looking at fuels like methanol, ammonia as we look at utility-scale power, and power systems for some of these new applications are also going up in power as well. So there's a lot of activity going on, on the SOFC side of the business.

Great. And Tony, if I can just come back to you, and there's a couple of questions sort of coming in around the competitive positioning in China and what we expect to see in terms of the balance of product between stationary and mobility with this, do you think?

Yes. So I'll answer the first question, the competitiveness in China. Solid oxide fuel cells offer the opportunity to compete with central generation at a distributed level. In other words, we offer equivalent or higher efficiency than even some of the central generation plants. But we allow people to deploy that in use cases that are closer to the demand. And in China, I think people are aware that there is a growing demand for energy and that the grid stability and the provisioning of reliable power is a major issue that China will be addressing. And one of the ways they will be addressing that is obviously moving away from central coal generation to lower-carbon, natural-gas-fueled distributed generation, which makes our solution the most competitive way of using natural gas in many of the use cases. And obviously, our technology, as Phil just mentioned, will also be future proof to other transition fuels which have an even lower carbon footprint. There's incredible incentives and pressure for industry and commerce to reduce carbon footprint and to deploy these assets. And the market analysis we've done is very compelling, and I think it motivates some of the ambition that you're seeing here today. In terms of the mix between motive and stationary, we -- the answer is we're not sure yet. There's a strong market for each of them, and markets have different time horizons for their adoption. What we can say is that Weichai, our partner, is very motivated to access both markets in a very meaningful way, and they have good channels to both.

Great. Thanks, Tony. And perhaps I could just come to you, Eric, once again. I think you did touch on this, but someone asks, is it fair to assume that there are additional near-term revenue opportunities to Ceres from engineering services, et cetera, on top of that GBP 30 million license revenues that we detailed?

Yes is the short answer. So the GBP 30 million is -- represents just the license fees, which we split between the two joint ventures and receive directly to Ceres from those joint ventures, the -- with engineering services on top of that as we support the partners in developing the systems for the various applications that Tony and Phil had mentioned.

Great. And another one perhaps for you just so that we make it very clear. And to confirm, you receive all the royalties and none is shared with the JV from the China stack and systems. That's not quite correct?

Right. Yes. So just to clarify that point, so we receive all of the royalties from the stack JV, and it's consistent with the current model that we've got with Bosch and others. And we share the royalties with Bosch on the systems JV. As mentioned, both parties will be cut with Bosch -- both parties will be contributing system development, IP and know-how into that JV. But if you aggregate the 2 royalty streams, it's still within -- we expect it's still well within the range we previously guided of $50 to $100 per kilowatt.

Brilliant. Thanks. I'm conscious that we're at time. Thank you so much for all your questions. We will make sure that we answer all of those after today's call. And if I could hand back to Phil just to make any final comments.

Yes. Look, thank you, everybody, for your time today. We're very pleased with this milestone for the company. It's been eagerly anticipated. But I think from our point of view, this combination of Bosch, Weichai with Ceres as the technology provider is a formidable partnership, and we're really looking forward to getting the definitive agreements done and moving on to the Chinese market. So thank you for your time today, and we look forward to updating you again in the future.

That's great. Phil, Tony, Eric, Elizabeth, thank you very much for updating investors today. Can I please ask investors not to close this session now as we're going to automatically redirect you so you can provide your feedback in order that the management team can better understand your views and expectations? It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team at Ceres Power Holdings plc, we'd like to thank you for attending today's presentation and good morning to you all.