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

Good morning, and welcome to the Ceres Power Holdings plc Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CFO, Eric Lakin. Good morning to you.

Thank you. Thanks, and good morning, everyone, and thank you for joining. Apologies, Phil Caldwell, the CEO was intending to join but couldn't for technical reasons, so I'll pick up the presentation today. I'll go through the slides and cover any questions that you may have at the end, so do please submit them on the system online. This announcement this morning is further to the original announcement on the 22nd of July, where we announced a significant new license partner in the Asia Pacific region and which led us to increase our guidance for the year revenues of GBP 40 million to GBP 50 million, driven by the increase in the order backlog, supported by this new important license partner. Today's announcement confirms the identity and location of the partner. So this is -- I'm very pleased to say this is Denso. It's a very well-established large OEM. Many of you will already be familiar with Denso. But if you're not, they are a significant global automotive components manufacturer with expertise in manufacturing specialty ceramics components, which is perfectly well suited to the build of sales and stacks for SOEC technology. They have approximately $50 billion revenues worldwide, 160,000 people across many countries. And they're an ideal partner to support our ambitions for expansion at scale and pace. They have big ambitions to support the energy transition. The fact they're located in Japan is also significant. Japan, as many people know, has -- close to 90% of its energy needs are imported, and Denso are going to be a key part of helping that energy transition, to decarbonize their energy needs. This is our first SOEC-only license. And we earlier in the year in January, announced our first combined SOEC SOFC license partner with Delta in Taiwan, so that's both fuel cell and electrolysis. This is a pure electrolysis license and are very much focused on the rollout for high-efficiency electrolyzer technology. Similar to other large licensees in the past, including Bosch, Doosan, Delta, this is a nonexclusive global license and it will include revenue from initially license fees, technology transfer and development license over the course of the license period and also engineering services and hardware over multiple years. Talk more about the Japanese commitment. So Japan was one of the first countries to release a natural hydrogen strategy approximately 7 years ago. This has since expanded to focus on the hard-to-abate sectors, which is where our technology really comes to the fore. So that includes the decarbonization of steel production, synthetic fuels and ammonia, green ammonia, which can be produced through green hydrogen production. The significant funds planned, close to $100 billion over the next 15 years, both in public and private investment to support this initiative. And as a country, they're targeting electrolyzer capacity of 15 gigawatts by 2030. And again, approximately 90% of all Japan's energy needs is imported. Nearly all of that is on ships through the form of LNG. And over time, the way to -- and that LNG is only using thermal plants, which is very significant. In Japan, there's over 60 gigawatts of thermal power generation just with -- just domestically. And to decarbonize that, you can use green ammonia, for example, and there's a drop in fuel and provide that transition from the current application, which is mostly using natural gas and also coal to some extent for power generation. So this deal supports our long-term ambition to have partnerships with global OEMs, supporting the worldwide build-out of fuel cells and electrolyzers. We've now got partners across the globe in Germany, China, Taiwan, Japan and in Korea -- South Korea. This enables us through our licensing model to support our manufacturing partners to grow, build factories and rollouts, industrialize, commercialize at scale and reduce costs for fuel cells and electrolyzers, support the growing needs. And in particular, with the SOEC license with Denso, it supports the green hydrogen production market. The latest forecast from Bloomberg New Energy Finance estimates global production of green hydrogen will be close to 400 million metric tons by 2050, with an estimated market value of close to $1.4 trillion. There are different forecasts out there, different volumes over different time scales, but the opportunity is very significant. And this is consistent with our view that ultimately, if you want the lowest levelized cost of hydrogen in high-efficiency electrolysis, then that can be achieved through solid oxide electrolysis. And as part of the fact that Denso have selected Ceres for their future rollouts is a strong endorsement of our technology. Just to touch more on the global hydrogen market. So just building on the -- that forecast from BNEF of $1.4 trillion, around half of that is in the end-use applications of steel production, ammonia and SAF or synthetic kerosene. And that is where the solid oxide technology works well, because effectively, in industrial processes, we reuse and integrate waste heat from those processes. So that's very much in our sweet spot. And Denso, in particular, we expect they would be focused on ammonia production. The first feedstock of that will be green hydrogen from renewables. And a lot of that can be -- this is a global license that can be a supply of electrolyzers overseas in countries with relatively low cost of energy in renewables, which can then be -- subsequently be imported into Japan. And just to break that down by geography focused on the future green hydrogen markets. We've got significant scale across Asia, particularly including China and India, Southeast Asia and East Asia, including Japan, is an important element of that. And the rest of the world is also a big opportunity. We're currently accessing Europe, and North America represents an opportunity as well. But having, as you can see from this breakdown, Asia is a significant market for electrolyzer technology. And we also have China covered with our evolving partnership with Weichai as well. So what does this mean for our financials short term? So we've already given increased guidance of revenue for the year of GBP 50 million to GBP 60 million. This license deal, we're not putting an exact figure on it, but it's similar to previous license partnerships such as Doosan, Bosch and Delta, so it's a multiyear contract. It's a significant contribution to revenues, not just this year but in the coming years. That's enabled us to increase our guidance just from the existing order backlog, so we've got good visibility of that, and we'll give more guidance at the point of the interim results on the 27th of September this year. This also supports improved margin as well because the contribution from license fees, which is very high margin supports that. We've given guidance for the first half of 75% to 80% gross margin compared to 61%, which was the gross margin for the first half last year. And thinking longer term, this not only supports revenue streams from license fees, engineering services and hardware in the coming years. But once the factory is up and running and they're rolling out and commercializing electrolyzers with Ceres technology, that supports future royalties steels as well. So in summary, Denso is a fantastic partner for Ceres. It brings advanced high-volume manufacturing capability and technology across many different industries. It's our first partner exclusive for SOEC, which is a great validation of our development and our strategy to invest also in EC as well as fuel cell technology. This is our second partner announced this year in the Asia region. And it supports the thesis of growing consensus of hydrogen's role in decarbonizing the hard-to-abate sectors. So again, this provides significant revenue growth this year. It contributes to that compared to last year with 2 new license partners. But also longer term, it gives a potential increased manufacturing capacity across all of our partners, which leads to future revenue streams. So with that, I will pause and allow people to ask questions. Thank you.

[Operator Instructions] While the company takes a few moments to review those questions submitted today, I would 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 our investor dashboard. Eric, Patrick, as you can see, we have received a number of questions throughout today's presentation. And Patrick, if I may now hand back to you to chair the Q&A. Kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you at the end.

Thank you very much. The first set of questions we have, Eric, relates to the structure of the agreement with Denso. And they are along the lines of whether we have any specific targets or benchmarks set for volumes, for the deal, whether there are any specific milestones and other performance indicators that we'll be monitoring to ensure the success of the partnership.

Yes. Great question. I mean the answer is yes, we have -- without going into detail, but we have -- again, consistent with our joint plan to move at pace, we have targets on the way and milestones that several of which relate to stage gate milestones for our technology. So we're developing and continue enhancing our cell and stack technology, including for electrolysis capabilities. So we've got a road map for the rollout of that, which is consistent with our existing plans. So that's part of it. So over the -- between signing and the rollout of the factory, there are milestones on the way, some of which are sort of KPIs that form part of the commercial agreements. And we're confident around meeting those. And it means we've got joint incentives to deliver on that road map, and continue to mature our product in terms of performance, in particular, in cost and support the build of the manufacturer. There'll also be the prototype system production during that time as well, again, consistent with other license partners ahead of the full-scale rollouts at the start of production.

Great. Thanks, Eric. And just picking up your point about the factory, do we have any visibility as to -- about when Denso plans to build their first factory and whether they intend to manufacture outside of Japan at all?

So we won't give details on that. But typically, what we've seen in the past is from flash to bang, so contract signing to factory being built and commissioned and royalty starting is typically 3 to 4 years. So I'd say this contract is consistent with that. And where -- in terms of where the production will be, I would hesitate to answer that question. I think certainly, the initial prototype mill, I suspect would be in Japan. But they're at liberty to have production of SOEC technology anywhere they choose. And also the sale of these electrolysis modules can go throughout the world where it's best suited for production. So they've got flexibility around that, but the start point is expected to be locally in Japan.

Right. Thank you. And on a broader note, given Japan's investments in hydrogen, it's obviously an important market for Ceres. One of the gaps that has been identified by the asker of the question has been the U.S. So do we have any thoughts on that as a market for Ceres?

Yes. So we've been -- I mean the North -- yes, the U.S. is obviously a significant market for -- in total for fuel cells and electrolyzers. The IR initiative is potentially a very strong stimulant for investments, including production incentives for -- specifically for green hydrogen production. There were some delays to that really taking effect because of uncertainty about the details of that. And one of the important aspects that's become -- that became clear just last year was the need for additionality that points to the need for specific renewables, newly renewable supply for electrolyzer factories. So it's taken longer than we would have liked to really have an impact. So I'd say it's still got potential. It's a big market, but it's taking a bit longer to identify a partner in the U.S., particularly for licensing our technology, but it's still an area that we continue to work in and review. We've got boots on the ground in most countries, including the U.S. But it's interesting, the fact that we've had most recent success in Asia, again, it's following the money. It's where you've got regional national support initiatives, in particular, for decarbonization projects. And the -- Japan, in particular, is one of the leaders in this area.

Thank you. [Operator Instructions] Otherwise, there are no new questions that have come in. So in the absence of any additional input from the audience then, I'll turn it back over to you, Eric, for any concluding remarks you may have at this stage.

Okay. Great. Yes. Thanks, Patrick. Yes. And thanks, everyone, for attending. Again, it's a really, really pleasing announcement to reveal a very credible new SOEC partner in a new territory. And it supports a -- what will be a very strong year for Ceres. And we're looking forward to working with Denso in the years to come. A big thanks to everyone in the company involved in this project, and look forward to speaking to everyone when we announce our interim results at the end of September.

Perfect. Eric, Patrick, thank you very much indeed for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management team of Ceres Power Holdings plc, we'd like to thank you for attending today's presentation, and good morning to you all.