Fusion Fuel Green PLC (HTOO) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Fusion Fuel Green's fourth quarter investor update. My name is Ben Schwarz and I'm Head of Investor Relations at Fusion Fuel. I would like to first remind everyone this call may contain forward-looking statements including but not limited to the company's expectation or predictions of financial and business performance, which are based on numerous assumptions around sales, margins, competitive factors, industry performance and other factors which cannot be predicted. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, and they are not guarantees of performance. I encourage you to read the disclaimer slide in the investor presentation for a discussion of the risks that may affect our business or may cause our assumptions to prove incorrect. The Company is under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. So thank you all for joining us today. I'll briefly run through our agenda for the next hour. So we will begin the proceedings with some remarks from Fusion's Chairman, Jeffrey Schwarz. Then the management team will share some fourth quarter highlights, financial results and provide a business update. We will then open up the floor for a half hour of a facilitated Q&A. As in our previous quarterly calls, all questions must be submitted in the chat box in a webcast platform. For those of you who have dialed in and have question for management, please direct your questions to the Investor Relations mailbox at ir@fusion-fuel.eu. So with that, I will pass it over to our Chairman for some opening remarks.

Thanks, Ben. Good afternoon or good morning, as the case might be. I'm Jeffrey Schwarz, Chairman of Fusion Fuel Green. We're about to begin an investor presentation where we will walk you through a summary of our financial results for the company's first full year of operation and then update you on business developments as we pursue our plan to build Fusion Fuel into a global player in the developing green hydrogen business. In that regard, this may seem like business as usual. Make no mistake, it is anything but. Our thoughts are with the Ukrainian people. Russia's unprovoked invasion of Ukraine is an appalling violation of international law, resulting in a tragic loss of life and even if there were to be a best case outcome, will trigger a humanitarian crisis. As a medieval Iberian poet and philosopher wrote, "I'm at the edge of the West, but my heart is in the East." Before I turn it over to Frederico Figueira de Chaves, Fusion CFO, I'd like to offer a couple of observations on the company's first full year of operations. As I've said in past calls, my experience based on more than 40 years as an investor in public and private companies is that if you are serving the right market with the right people and the right product to technology, you have a recipe for great success. Well, 2021 confirmed for me that Fusion possesses those 3 attributes. While green hydrogen is still a nascent market, interest in it accelerated throughout the year as evidenced by the pace of incoming inquiries from potential purchasers of technology to produce green hydrogen or alternatively to purchase the green hydrogen itself. We were and continue to be successful at building out our team with talented and experienced individuals, in so doing strengthening our R&D, production and business development functions, while also establishing a presence in Australia and North America, both being among the most attractive potential markets for our HEVO-SOLAR technology. Test results at our first hydrogen farm and Evora, Portugal confirmed levels of production modestly in excess of what we had expected. Our R&D team continues to innovate with the goal to constantly be bringing down costs and increasing performance of the HEVO. And the volatility in energy markets, which resulted in spikes in both natural gas and electricity prices in Europe, demonstrated the unique value proposition of our off-grid solution for producing green hydrogen. While one could be forgiven for wondering, given all that why the disappointing share price performance, I'll simply quote Ben Graham, the father of value investing. "In the short run, the market is a voting machine. But in the long run, it is a weighing machine." Our goal of Fusion Fuel is to capitalize on our early mover advantage to build the heavyweight in the green hydrogen business. With that, take it away, Frederico.

Hi. Thank you very much, Jeffrey, and thank you all for joining us today. I look forward to updating you on our progress. As always, before we get into the meat of the presentation, I want to recap for any new joiners on what Fusion Fuel is all about. In a nutshell, we aim to deliver cost-effective, clean hydrogen solutions. We do this through our proprietary miniaturized electrolyzer combined with our concentrated photovoltaic panel. This allows us to offer a fully integrated off-grid hydrogen solution that delivers a market-leading cost of green hydrogen production. Before going into the details of the company update, I'd like to touch upon the hydrogen market overall. As Jeffrey mentioned, the tragic events in the Ukraine have a direct impact on both the energy and hydrogen market. The continued increase in the cost of natural gas has a direct impact on the cost of grey hydrogen, now reaching values of around EUR 4 per kilo without including the carbon charges. Due to the ongoing uncertainty in the market, this is a commodity that may continue to experience significant volatility and high prices. This is generating interest in green hydrogen from various industries that were previously reluctant on making the shift from grey to green. However, with energy prices also hovering at very high rates, any solution that requires energy from the electrical grid are not commercially viable. Fusion Fuel's off-grid integrated solution is perfectly suited for the current market conditions, and we have been seeing continued increased interest in our HEVO-SOLAR. On the hydro market overall, we've also been seeing increased interest in the mobility sector in hydrogen, which is very exciting for this market seems to be taking shape even faster than we initially expected. Joao and I will update you on some of the company financials, the main events that happened in Q4 as well as more of our recent developments that we've also been announcing. As we will dive into some of these items here later in the presentation, I'll briefly focus on the items that are not outlined later on. Firstly, we continue to add significant talent to our team. And most notably, at a very senior level, we added Terry Jester to our Board, bringing with her a wealth of experience in product development, production management and renewable energy. We also brought on 3 new executive committee members with David in Australia, and Zach and Jason in the U.S., all 3 bringing substantial knowledge and experience to our executive team, and they highlight our ambition for significant growth in those markets. Both the U.S. and Australian regions presented an enormous opportunity for our technology. Dave, Zach and Jason have the experience to not only open up these markets for us, but also to help us across several strategic projects we have in the company more broadly. We're very happy to have them on board, and they're already having an impact in the company. On the financials, we will provide more granular detail when we submit our audited financials as part of the 20-F in April. So we continue to now for the quarterly just do the sort of financial flash. In the fourth quarter, we recorded negative operating costs, i.e., a positive P&L impact of EUR 11.1 million. This was significantly driven by release of previously recorded share-based payments. This is a noncash expense and this gets a noncash release. The release is due to the forfeiture of the contingent capital consideration by 3 of the 4 parties involved in the 2020 business combination agreement. This was driven by a desire to remove a conflict of interest of the structure created between executives and shareholders. So this is overall beneficial for the company. This resulted in a reversal of EUR 19.6 million, which were netted with the Q4 share-based payment charges, leaves us with a net negative share-based payment charge of EUR 14.7 million as outlined on the slide. In terms of actual cash expenses in the fourth quarter, we saw an increase of EUR 1.7 million quarter-on-quarter. This increase was driven by large expenses during the year that were booked in Q4. These include around EUR 0.5 million related to various auditing, accounting and grant advisory services, higher recruiting costs related to several senior and specialist function hires, and the booking of several large yearly administration costs such as transportation, rent, travel and business expenses, which fell in the fourth quarter. Going forward, we will be amortizing that throughout the year. And so that one-off impact will not be seen in 2022. In addition, in Q4 we also welcomed 15 new hires in the quarter, including some senior managers, which also increased our personnel costs. For guidance for future quarters, we expect our operating cost quarterly run rate to vary and to devolve from around EUR 2.3 million to EUR 3 million per quarter as the year progresses and as we continue to grow the team. In Q4, we recorded a pretax profit of EUR 24 million. And as much as I'd like to take credit for that, this was also driven by another very large positive noncash impact, and it's mainly driven by accounting practices and standards. As mentioned in previous quarters, we need to recognize fair value movements on outstanding warrants. With the negative market developments at year-end, we needed to book a release of EUR 13 million in the fair market value of these instruments. In terms of cash, we closed the fourth quarter with around EUR 35 million in cash for other liquidity instruments. And the main drivers of the EUR 7 million cash drawdown in Q4 is comprised of the EUR 3.65 million operating costs I mentioned earlier and another roughly EUR 3.5 million in raw materials and CapEx investments. Now for our outstanding shares and warrants, remain unchanged from the third quarter. As outlined in the third quarter, we introduced an employee incentive plan to both incentivize and retain personnel and ensure their alignment with shareholders, but also as a form to attract talent. So this is reflected in the very last line here on this table. This is the restricted stock units. We believe these are critical instruments to help us deliver the growth potential to us. And these restricted stock instruments are well vested over several years, so they form a -- they're form of a, let's say, lockup for some of our key employees as well. Now going into the business update, now that's on the more dry and sort of technical part of the presentation. We're excited to show you what we're working on, on where Fusion Fuel is today and where we're already being a pioneer in the green hydrogen market. So I'll start by sharing our 5 key milestones for 2022. As you'll remember from last year, we had this slide each quarter outlining what the priorities for the year was. Our intention is to do the same in 2022. So our 5 key priorities are -- starts with production. This is the go-live of our Benavente facility. So Benavente facility is critical for our growth. It's critical to deliver not only the increased production capacity, but also the reduction in unit cost of the HEVO-SOLAR, and also on the securing the grants and financing for this facility. Then secondly is to continue to close both hydrogen purchase agreements and tech sales contracts to fill our 2022 and 2023 targets. And importantly for that is also to secure grants for projects and development. So there's enormous amount of grants and programs available for clean hydrogen and green hydrogen solutions, and we want to make sure that we are heavily participating in these. On third, tech. This is critical. We continue to evolve our HEVO and HEVO-SOLAR technology, but at the heart of our company is a large technology component. And we intend to keep innovating and keep staying at the forefront of the technology piece of the business. Throughout the year, we will be launching different generations of the HEVO-SOLAR. These will either improve on the performance or will improve in the cost of the product. So this will be continuously an ongoing process, not only in 2022 but also in 2023. We also want to introduce clean oxygen capturing capabilities to our solutions. So our solution does produce oxygen with no emissions. So we want to have the ability to capture it. And we want to continue to innovate and develop further products. So over time, we want to not only have the HEVO-SOLAR, we'd like to continue to work on new product development. Fourth, very important, is the project development. So this is our ability to deliver and execute on projects in flight. We'll touch upon a few of those in a moment. Also we kick off and start the construction of some of the subsequent projects that we've already announced and are already approved, and importantly to secure the licenses for Fusion Fuel's multiyear project portfolio. This is a challenging one because the licensing environment changes country by country, and it's a very new world. But this is a core priority for us to make sure that we're able to deploy our units into the ground. Lastly and most critically, we want to ensure that we have a robust safety culture across all areas of the company. We have hydrogen producing facilities. We also have a production plant. Safety is going to be a principal pillar of the culture and DNA of this company. I will start with Benavente. Very pleased to inform you that we have secured just under EUR 10 million in financing support for the development of the Benavente production plant, representing around 25% of the total investment expected in that part of the coming 2 to 3 years where we then plan to have a production capacity of around 500 megawatts per year. The installation, as I mentioned, is at the heart of our growth plans and the financial support that we obtained from Portugal's Trade and Investment Agency highlights Portugal's commitment to its announced hydrogen ambitions. We'll continue to provide updates on the Benavente facility and development of it in the coming quarters. Now a quick update on Evora. So Evora, one, as Jeffrey mentioned, continues to produce hydrogen and receive visitors to site. This was the critical and most important function of this demonstrator science. It also, as Jeffrey referred to, continues to perform between 5% to 10% better than was expected, depending all to the radiation which is absolutely fantastic. We continue to work through the licensing steps required for full commissioning and significant progress already made. We hope to finally to fully go live in the coming months. Evora is a true trailblazing project. It's the first solar to hydrogen projects in Iberia. It's the first project that uses hydrogen as energy storage to feed into the electrical grid. And so while everyone is talking about green hydrogen, we are the only ones currently delivering clean hydrogen from renewable energy source through to the electrolyzer through to the end storage. The challenge is that we are also forcing the development of new standards and licensing frameworks as part of being at the forefront of this market. Over time, we expect that framework to become more straightforward with subsequent projects. I'll now pass on to Joao to update on some of the upcoming projects we have.

Thank you, Frederico. We are very happy to announce that our HEVO-SUL project with an equivalent electrolysis capacity of 3.5 megawatts as contracted nonrecourse grant from Portugal funding program. The project is located in the south of Portugal, more precisely in the Sines area, and consists of installation of 178 HEVO-SOLAR units, which after commissioning will produce around 418 tonnes of green hydrogen per year, considering day and night production, a portion of which will be used to produce green ammonia and the remaining will be mixed into the natural gas grids and are bottled for industrial uses as well as mobility. The global capital investment will be around EUR 8 million, and the project will receive EUR 4.3 million from the Portugal funding during the construction period. Currently, the project is under licensing process with the local authorities and national environmental agency, and we are waiting for the final licenses to start construction. This project will have a strong worldwide visibility and will have an important role in demonstrating the economic use of our green hydrogen in several different options, such as green ammonia production, blending in natural gas with monetization of the certificates of origin and supply hydrogen refueling stations. We entered also into an agreement with KEME Energy to install their green hydrogen plant in the same region of Sines designed as Sines Green H2 Solar1, which also contracted nonrecourse grants from Portugal funding program. The project consists of the installation of 62 HEVO-SOLAR units, totaling a global capacity of 1.2 megawatts, which will produce 77 tonnes of green hydrogen per year, also considering day and night production. That will be bottled for industrial uses in the Sines community and also for mobility. The global required investment will be around EUR 2.54 million. The project is under licensee process with local authorities and national environmental agency, and KEME is waiting for the final licenses to start construction. This project is expected to be a net contributor for the aggressive decarbonization targets led by the Portuguese government for the industrial and heavy transportation sectors.

Thanks, Joao. And as we did in Q3, we want to provide an update on our activities regarding funding programs for projects in Portugal. So as mentioned several times just now, we are involved in 3 possible projects that were approved, but also during Q4 we're also involved in 3 submissions to the Component 5 program of Portugal's PRR. But we expect to hear the results in September of this year. More recently, we submitted -- we were involved in submission of 2 projects to the C14 component of the PRR program with a total of 10 megawatts of electrolyzer capacity for those projects. And we will continue to develop and submit projects for these programs as they open up. We are incredibly active in this space. And so far we've been quite successful in securing the grants for our projects.

As mentioned before, we signed a contract with Exolum, a leader in European fuel logistics and storage provider, to develop solar to hydrogen plant to supplying hydrogen near Madrid. It was the first third-party sale of HEVO-SOLAR technology, which will produce and supply green hydrogen to one of Spain's first 100% green hydrogen refueling station. The Exolum project in Madrid consists of installation of 21 HEVO-SOLAR units to produce more than 40 tonnes of green hydrogen per year being 20 tonnes produced during daytime by direct conversion of solar radiation into green hydrogen and the additional 20 tonnes during nighttime using electricity outsourced. The project is under licensing process, but already received authorization to start site preparation and clearing. We are already manufacturing the HEVO-SOLAR units and if everything goes according to the planning, we will start construction in May with the aim to fully commission the plant until the end of quarter 3 this year. This project is very important to demonstrate the enormous advantage of our HEVO-SOLAR technology and consolidate our strategy in Spain, which includes the development of more than 1 gigawatt of electrolysis capacity in the next 5 years. We entered into a very important collaboration agreement with AESA, a leading Spanish industrial engineering service company and a pioneer in the decarbonization of industrial energy that will focus on the substitution of more than 500,000 tonnes of grey hydrogen consumed annually by industry today in Spain and promote the transition to hydrogen fueled vehicles for logistics and haulage fleets as well as the decarbonization of power generation and industrial heating. Fusion Fuel and AESA are actively developing decarbonization projects with major industrial clients who are well positioned to benefit from the recently announced CapEx subsidy programs aimed at incentivizing the innovative use of green hydrogen technology across the industry value chain. By jointly going to market, Fusion Fuel and AESA together form the leading-edge provider of turnkey low-cost green hydrogen solutions for decarbonizing industrial processes, thermal energy, as well and heavy commercial vehicles. We also entered into a strategic framework with HIVE Energy, a British renewable energy developer who has throughout Spain, a portfolio of around 3 gigawatts projects for green hydrogen and green ammonia production currently under development to supply the growing demand market. Under this agreement, we will supply our HEVO-SOLAR technology to HIVE Energy, who will develop and build a green hydrogen production plant in an exclusive technology supply deal. The project has a target annual production capacity of some 7,500 tonnes of green hydrogen per year and is currently in its administrative processing phase. We trust this project will be a first step on the road to a very significant portfolio of joint green hydrogen generation plants with HIVE Energy in Spain.

So as for Portugal, we're already very active in engaging with various funds programs in Spain. And the Fusion Fuel Spain team has been unstoppable filing after these. In the MOVES programs, 5 projects totaling more than 15 megawatts have been submitted using Fusion Fuel's technology and other projects are already being worked on for when the next programs open up. Now coming to some of the new markets for Fusion Fuel. As we've mentioned before, we have our partnership with Ampol, Australia's transport fuel leader. We will look to -- we will create a pilot plant in Brisbane to supply a hydrogen refueling station. The project and site development and licensing has kicked off. We've had our Ampol counterparts come and visit us in Portugal recently, and we're all extremely excited between - partnership between the 2 companies. With the U.S., even though the team has only just started, they have hit the road running. The U.S. is obviously another key future market for us, and it's one that's starting to take shape quickly. We started to take our first steps into this market with a project at the University of California, Irvine for a solar to hydrogen facility. We submitted an LOI to one of the DOE's programs for this project, and we're already actively looking into potential submissions for larger DOE programs that are part of the Infrastructure Investment and Jobs Act. So this is exciting early days for Fusion Fuel in the U.S. It's been a while since we shared an overview of our pipeline. We hope this provides a good idea of where we stand now. We haven't included all markets we're in discussions with. So if you will recall from a year ago, we had things like in Chile and so on. Discussions there and other markets continue to be ongoing, but we've only included the projects that are -- have a bit more shape to them at this stage. So we currently have over 3,000 hectares reserved for our projects and the pipeline for prospective hydrogen purchase agreements or tech sales projects number 36 different projects, 10 of which are already in the licensing phase. We've included on the right, the respective megawatt electrolyzer capacity to be more easily compared to other players in the industry. We always think about it in tonnes of hydrogen. You will see every announcements in the industry comes with megawatts. So we've decided to clarify what our pipeline actually includes. And you will have noticed maybe that in the different project slide we've been, as much as possible, including the megawatt electrolyzer capacity for clarity as well. Although these 2.4 gigawatts of potential projects include noncommitted projects, we're extremely excited at the level of interesting engagement in our solution. As the Australian and U.S. operations take shape, we expect this to grow further. Now before we go into Q&A, I'd like to recap on the core milestones as this is a little bit stubborn of us. We show this slide twice every time. So as a reminder, production facility, one of our key priorities, moving the existing pipeline to close the contracts, continued tech evolution and new product development, project construction and licensing, and an overall safety culture across the firm. We truly are pioneering the green hydrogen market in Iberia, and we'll keep being at the forefront of this emerging megatrend industry. Jeffrey opened today's update with a quote from Benjamin Graham and highlighted how we aim to build a heavyweights in the green hydrogen business. In my closing, I'd like to reference a quote from a heavyweight champion that captures how we will make this happen. And it's Muhammad Ali, his fly like a butterfly and sting like a bee, we're small, we're nimble, we're agile, we're innovative and we're creative. We develop our own projects and we control their destiny, and we intend to fully disrupt this industry. So with that, I thank you, and we'll open up with Q&A.

Great. Thanks, Frederico. So we'll start with the questions we've received over e-mail. This is a question for Joao regarding the KEME project. Is there any expectation that the hydrogen produced from the 1.2 megawatt KEME project would be exported?

No. Today, the equipments to transport -- to export the hydrogen is very complex. So KEME in hydrogen will be used in the commodity -- in the community of Sines and at the same time part of it will be used for hydrogen refueling stations, but the concept is always for the community of the Sines city.

Thanks, Joao. And as we continue to look ahead towards a more robust hydrogen export market, do you have a perspective on what forms of hydrogen look most economically promising, whether that's liquefied or green ammonia or something else entirely?

Yes. In fact, today the numbers -- the studies that have been published they clearly notice that the cheapest way to transport hydrogen -- exported is by converting the hydrogen to ammonia and then cracking this ammonia to get, again, green hydrogen to be used. The cost of the liquid hydrogen is today very expensive. There's only today one boat from a Japanese company, Kawasaki, making transportation of liquefied hydrogen and the costs today are still very expensive. There's also one additional possibility. It's in early stage, let's say, which is a liquid organic area. But today, it's still doing its first steps. So we cannot assume it as a reality.

This is a question for anybody. So we received a question about the maturity of the HEVO-SOLAR product and whether there are any future improvements to the product that are expected. Can you talk about that?

So I'll take that one. As I mentioned in our priorities, there is certainly an evolution of the HEVO-SOLAR generations. So we consider the product mature in terms of what we can put into the ground. This is why we are going to be delivering it to Exolum in a few months. But that said, we do have a significant pipeline of generations to come of the product. We will look to increase the performance of the product. We'll look to decrease the cost of the unit. That doesn't mean that the units we have today are not mature. So these are just different generations that we will be deploying.

We'll pass it back to Joao. The next question is about the process of commissioning a plant. How long that process typically takes and what are the possible roadblocks?

For the commissioning of a plant, we have to separate the commissioning -- I think the permitting processes and really the commissioning, the technical commissioning of the plant. So commissioning so starting producing green hydrogen, it's a process that, of course, depending on the dimension of the plant, can take varies 2 weeks to 1 month to commission and start producing. I think the question is related to permitting. And the permitting or across the licensing process of a plant sometimes depending on the land that we are using, if it's agricultural land or if it's industrial, it can take from very fast and again, depending on the dimension of the project, it can be done in 6 to 9 months. But it can also for bigger plants, it can take 1 year to 1.5 years. We knowing that this process takes long time, we start permitting some of our projects 1 year ago. So today, we can say that we have some projects already in advanced stage of permitting, but they will most probably can take 6 to 9 months to become -- able to install the technology.

For the large projects that Fusion Fuel is looking to develop, how does that roll out work? Is the addition of new HEVO-SOLAR to an existing installation expected to run smoothly?

For bigger projects, we will install additional quantity of HEVO-SOLARs. So a small plant or a big plant, it has to do with the quantity of the number of HEVO-SOLARs that we will install. Of course, this plant will hold -- will need different equipment depending, of course, on the output of the green hydrogen produced. It will need different equipments for compression, for purification and for storage, of course, of the green hydrogen produced.

We'll past it to Frederico now. So in the context of the 2.4 gigawatts of project backlog or pipeline, can you attempt to quantify what those figures mean in terms of potential revenue or EBITDA margin?

So I'll try to be very cautious here in my answer. But effectively, I want to note that that pipeline includes hydrogen purchase agreements and tech sales. We will look to do the projects that achieve the sort of maximum return to shareholders. So this could be projects with high net present value for the ones we own or high gross margins. So it's hard to quantify exactly parts as a rule of thumb if there were to be sort of wholesale, the 100,000 HEVO-SOLARs, and you sell them at EUR 30,000, that's a EUR 3 billion pipeline on a very back of the envelope calculation. The EBITDA margin does change significantly, especially in the short term if you're doing HPAs or if you are doing tech sales or the proportion of those. So I'm going to elegantly side step that question, but that puts into perspective of the pipeline. That does not necessarily mean that we can do a pipeline, the size and actually execute on it, but this is just the size of the pipeline with all the caveats we potentially have on that one.

On the subject of the pipeline, obviously the go-live of the Benavente facility is critical to achieving it. How confident are you on the mid-2022 date for the factory to be up and running?

So to note, we initially said that we would have the -- last year, we gave guidance that the factory would be up and running during Q3. We actually expect the first activities to already take place in the next quarter, in Q2, with further rollouts in different lines in Q3 and then some of the longer lead lines potentially during Q4. So we do expect to have activity in Benavente in the coming months.

Great. And how are you thinking about production capacity at Benavente this year?

Sure. So the production capacity and the guidance we gave last year was to target around 2,000 and 2,500 HEVO-SOLARs. So that continues to be a potential target for us of production capacity. That said, I want to note one point there, which is we will produce what we need for the projects that we can deploy to. Producing for just the partners of keeping in stock has 2 issues. The first is that it does eat a significant amount of capital. And the second is that as we have evolutions of the HEVO-SOLAR technology, we don't want to be keeping stock of a previous generation of HEVO-SOLAR. So that is the production capacity to 2,000 to 2,500. That's what we hope to be able to deliver on this year. The production volume will depend on the licensing of projects and what we can deploy into the field.