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

Good afternoon, and welcome to the Ceres Power Holdings plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand over to Phil Caldwell, our CEO. Good afternoon, sir.

Good afternoon and good afternoon, everybody, and I'm pleased to be joined today by Tony Cochrane, our Chief Commercial Officer; and also Eric Lakin, our CFO. So it's great pleasure to talk to you today about a new license partner for Ceres as we signed our first combined SOEC for green hydrogen and SOFC license with Delta Electronics in Taiwan. So let's just go into a little bit more detail on that. So this is a long-term collaboration as most of our partnerships are and this is for cell and stack production. So this is a manufacturing license. The agreement itself is worth an initial GBP 43 million in staged revenues and that includes the technology transfer and the manufacturing license. In addition to that, there may also be some hardware provision as well. The technology introduction and factory construction will actually start immediately. Ours, obviously, with delta the past few days, and actually, they've already got the factory [ shell ] ready to go, which is quite interesting. It's over 3 storeys because land is at a premium in Taiwan. And we're probably going to start the technology transfer next week, really. And it's quite rapid as well. So initial production is expected to start by the end of 2026. And Taiwan is a powerhouse of manufacturing. When you go there, it's incredible to see. You've got all the semiconductor fabs and Delta's capability in terms of manufacturing. So we're really excited about this partnership. And I'm going to say a few words about the financial implications before I hand over to Tony, who will give you more insight into Delta themselves of the partnership. So as I mentioned, the total value of transaction is GBP 43 million, technology transfer. So it's high-margin license revenue for us and engineering services over 3 years. Of the GBP 43 million, approximately half of that is expected to be recognized as revenue this year. And what that will mean is already, we'll have a line of sight to contract approximately GBP 40 million this year. So around double the revenue that we did last year at this early stage in January. So we're looking at a very strong start and probably a very, very strong 2024. As I mentioned, there's upside of additional revenue from stock supply over the 3-year period and then, as always, royalty streams are baked into the agreement following the production launch and the commercial stage from what's already contracted as the royalty fee. So that's the financial implications of the deal. I'm going to hand over to Tony to say some more about the partnership.

Thank you, Phil, and good afternoon. I don't know how familiar Delta is in terms of a household name, but Delta is a very reputable company in the business-to-business world, especially in the markets such as data centers and clean energy and efficiency of devices globally. They produce solutions for a number of markets. And of course, one of their core competencies is their ability to manufacture at scale in some of the low-cost regions of the world such as Taiwan, Thailand, China. And they have about 80,000 employees distributed worldwide. Obviously, there's a strong footprint in the Taiwan and regional area but their facilities span the globe, Europe, U.S., all across Asia and their sales channels are very strong into all of those markets. They're a very diversified company. But if you look at their portfolio of products, it's very focused around solutions for smart buildings, energy infrastructure, grid balancing, efficient energy storage, efficient energy conversion, which aligns quite well with the type of business that they're investing in now. They also have a culture of very strong decarbonization, low-carbon type technology investments. And that is part of the DNA of the company, which is very well aligned with some of the values that Ceres brings to the table as well. Specifically, though, why does Delta make such a strong partner for Ceres and for the deployment commercialization and scaling of our technology? Well, they have some of the same ingredients that we found in some of our other key partners. So first of all, they have a global footprint, good channels to market in the types of markets where our technology is most suitable. They have a portfolio of products that complement ourselves and stacks, meaning they do power conversion devices. They have very high efficiency and very low cost. In fact, if any of you are running this video on your laptops, there's a good chance that your laptop is being powered by a Delta power converter inside. [Technical Difficulty]

Ladies and gentlemen, just -- I'm going to check that we can hear Tony there for -- we just lost it for a moment. Give me one second.

If we've lost Tony, I can take over the slide.

Please, if you would Phil and to come back which confirm he's back through.

Okay. So Delta's aim is to be a leader in Taiwan's energy transition. Taiwan's energy mix actually needs to be cleaned up as well. They have quite a high constituents of coal in their energy mix but also when you see these big semiconductor fabs as well, there's a lot of power that has to be built just to service that part of that economy as well. Delta is going to integrate our technology into a variety of their products and that's what Tony was just talking about. They're obviously big in the ICT sector. They supply people like Microsoft, they do charges for Tesla, et cetera. And this technology is very synergistic on the fuel cell side in terms of power applications. They're targeting customers worldwide. There are myriad of sectors. And that's why it's an SOFC and an SOEC license, including decarbonization of chemicals, energy, transportation, steel and more and they have very strong relationships with some of the big industrial groups in Taiwan as well. And I was -- as I mentioned, just yesterday actually, and they're establishing an Net-Zero Science Laboratory. That means they've already laid foundations, which I saw for actually electrolyzer testing at Tainan and they've got a very sophisticated infrastructure set up there already ready to go on this as well. And the energy solutions will support the estimated global demand of hydrogen, which we've talked about many times before, which is 223 million tonnes in 2030 and 630 million tonnes by 2050. And I think this is another example where if you look at the demand for hydrogen and green hydrogen, it far outweighs the current capacity or even the current small handful of players in the industry, and that really plays to [ seller ] strength as a licensing model because you should expect more new entrants such as we're enabling with Delta to come in, particularly with the service technology. And I think we're uniquely positioned in the industry to enable new entrants to come into this sector. In terms of evolution of royalties, obviously, it's just starting now but it's going to be quite a quick build. But obviously, we have 2 factories coming on stream this year with Bosch and Doosan nearing completion and Delta will be hopefully completed by the end '26. So that's consistent with our business model in terms of the royalty progression. So in summary, it's our first general license partner, which is fantastic considering that we made the decision to invest in electrolysis just over about 3 years ago. So it's quite rapid progress that we have made and this is a big endorsement of that strategy. They bring strong capability in one of the world's leading centers for high-volume technology manufacturing. I think the Taiwanese are famous for that. And they've got this global footprint. As Tony mentioned, they've got facilities and people in China, in Thailand, in Taiwan, in the U.S. It's a significant partnership for us in terms of its monetary value of GBP 43 million. And we couldn't start '24 any better, really. It puts us in a really strong position for the year ahead, and we've got a growing and strong pipeline for both SOEC and SOFC. So we're delighted to announce this partnership today. And I think with that, we can probably go to Q&A.

Fantastic, Phil. Thank you very much, and thank you to the team. [Operator Instructions] I'd like to remind you recording of the presentation along with the copy of the slides and the published Q&A can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. I'd now like to hand you over to Elizabeth Skerritt, Director of Corporate Communications to host the Q&A. Elizabeth, if I may just ask you to read out the question where appropriate to do so, direct it to the team, and I'll pick up from you at the end.

Yes. That's great. And thanks to the team. Hi, Tony. Are you back with us now?

I believe so.

Yes, brilliant. We can hear you. Perhaps I could direct the first one to you. Good questions come through asking, will Delta focus more on SOFC or SOEC and which will they start with initially? Could you explain that for us? Thanks.

Yes. The contract isn't prescriptive on focus. It's flexible, and so will the factory be. It will be able to produce to supply either markets. Our expectation, though, is the fuel cell opportunity will come first but the SOEC electrolyzer opportunity is understood by them as a bigger market opportunity but it may take a little bit longer to scale in that market because of some of the proof points and some of the more conservative industry attributes. So my expectation is that the fuel cell market will be provisioned first but there's no prescriptive contractual obligations to do it in that way.

Great. Thank, Tony. And Eric, perhaps I could come to you. There's a question here in terms of how high will the royalties be percentage-wise or as an absolute per megawatt? Could you just explain that for us?

Yes, sure. So the license arrangement we've signed with Delta is very similar and consistent with that with Bosch & Doosan. So the royalty rate, the guidance we've given previously is in the range $50 to $100. You could now say that GBP 50 to GBP 100 with inflation. It's in that range, we're going to give details, obviously, for commercial confidentiality and it depends whether -- it can vary whether it's fuel cell or electrolyzer and some volume breaks as well. And so you've actually apply that multiple to the sort of pounds per kilowatt by the future capacity, and that is capacity that's sold on a commercial basis from 2027.

Great. And perhaps a follow-up to that, Eric, if I may. Of the half of the GBP 43 million that we spoke about being recognized in 2024, what proportion is licensing revenue? And what this engineering revenue?

Yes. So I won't give the exact breakdown but the majority is licensing revenue. And of the GBP 43 million, that is -- you get of the license revenue, there's a significant element who's upfront of technology transfer. There's an ongoing element, which is what we call development license that's recognized over time over the 3-year development period '24 to '26, the same with engineering services. So I saw a question around the phasing. So what we've said is the of the GBP 43 million around half we expect to be recognized this year. And the balance we expect to be recognized roughly evenly in 2025 and 2026. And that is the -- and again, the majority of that residual is development license fees with a small element paying engineering services.

Great. Thank you. And there's a couple of questions here, which are around IP, and I can come back to you to Tony. But firstly, someone says, congratulations, guys, on a great start to 2024. And the question around IP is kind of how certain we are that our IP is protected and partnering directly with the Taiwanese company, are we confident that we're protecting IP and how do we do that? Could you pick that up for us, Tony?

Yes, sure. Obviously, we provision IP very carefully and judiciously. We have very strong contractual provisions but they don't in and of themselves fully protect you. There are some supply chain protections on some of the materials and ingredients that go into the parts, which allow us some control of the IP and misuse thereof. And of course, we don't share how we design or why we design our products. We deliver a design and all the insight and knowledge of the design itself is something that Ceres and Ceres alone retains. And that is in and of itself also quite a strong IP protection mechanism. And then the last tool is, partner selection is important, and we tend to pick partners who have a lot to lose outside of their domestic region. In other words, because Delta has a very strong global footprint and business all over the world. Obviously, if there's a misuse of our IP, we have recourse in a number of other regions other than perhaps the regions that you might be concerned about. So it's a multilayer process for us. And we think about that long and hard as we choose our partners and how we deliver the technology.

Fantastic. Thank you. There's lots of great questions coming through. So I'm going to try and do them justice. There's one here. Tony, perhaps for you asking, will Delta build electrolysis on their own? Or would they just produce for other companies? I guess, what aspects of the hydrogen chain would they be looking to capture as another way to put it, perhaps.

Yes. So Delta, it's a very deep value chain. The electrolyzer module is a component -- a set of components that goes around the cells and stacks. And Delta's ambition is to produce the module itself. So more than just the stacks rather than just a component supplier. And the reason for that is they have a lot of complementary product lines. So they do power conversion devices. They do thermal management systems. They do controls. And their intention is to have a very high portion of the value as a result of those complementary product lines. So they will be -- their target is to deliver electrolyzers and ancillary components to a site system integrator in the market.

And look, there's loads of questions coming through. So I think we should just address it head on. Perhaps I can come to you, Phil, regarding the Weichai, Bosch deal for China. Mark asked an interesting question, he says sort of considering the speed at which this deal has concluded, why is the Weichai Bosch deal taking so long to bring to fruition? And is that still on the table or perhaps you can just pick that up for us.

I can comment on the speed. Look, 2-way deals are a lot easier than the 3-way deals. And also, I think Delta's appetite is very strong to get going on this strategically as well. So I think, yes, the contracting of the 3-way deal, obviously, was quite involved and took a long time. We're not going to give an update today on the Bosch, Weichai relationships. I've also been in China as well. One thing I can say is our relationship with both our key partners in Bosch and Weichai remains fairly strong. And obviously, we're looking at moving forward with our China strategy as well. This does not interfere with what we're going to do in China, I think, long term. This is a stand-alone deal. And I think -- you've got to think about this in terms of, as I mentioned earlier, a very strong partner, both in terms of their product lines and also in terms of their manufacturing capability and also with a very interesting home market but with a global view as well. So think of this as a separate deal rather than how it interacts with the China strategy.