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

Hello, everyone, and welcome to Fusion Fuel Green's Fourth Quarter 2022 Investor Update. My name is Ben Schwarz , and I'm Head of Investor Relations at Fusion Fuel. I would like to first remind everyone that this call may contain forward-looking statements, including, but not limited to the company's expectations or predictions, financial 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. Thanks again for joining us today. I'll just quickly run through the agenda for the next hour. So we'll kick things off with an overview of our value proposition, and the management team will share fourth quarter highlights and financial results and technology update and then latest on our commercial strategy before wrapping up with a discussion of our milestones for 2023. We'll then open up the floor for a half hour of facilitated Q&A. [Operator Instructions] With that, let's proceed to the following slide. So we'll begin with an overview of how we at Fusion Fuel are creating value in the nascent green hydrogen market. Fusion Fuel, we are in the business of developing and delivering cost-effective clean hydrogen solutions to accelerate the global energy transition. At the heart of our value proposition is our proprietary miniaturized PEM electrolyzer, the HEVO. Our simplified and scalable technology democratizes access to green hydrogen and gives us a material advantage in the markets in which we play and does so in a number of ways by unlocking the advantages of mass production by positioning us to create bespoke, fit-for-purpose solutions and by enabling co-located and integrated deployment of our hydrogen generators. We'll talk further about some of the innovations that are within The HEVO itself, but what it comes down to is that we're able to deliver highly competitive levelized costs for small to mid-scale green hydrogen projects. This is a segment that's often overlooked, but aligned with where much of the commercial demand is today, particularly for the verticals that ascribe the highest value to green hydrogen. I also want to drive home the reality that despite progress, distribution infrastructure for hydrogen remains a key downstream bottleneck and that available solutions for moving hydrogen from sources of large-scale production to demand centers add both meaningful cost and complexity. We've estimated north of $2 per kilogram for the cost of last mile distribution and logistics. We believe that co-located and scalable production is and will remain an extremely attractive offer for the foreseeable future. So with that, I'll pass it over to Frederico Chaves, Co-Head of Fusion Fuel, for an update on the fourth quarter and subsequent events.

Great. Thanks very much, Ben. And thank you everyone for joining us today. So I just want to start with some highlights of the fourth quarter and also from the first quarter as of today. In the fourth quarter, we announced EUR 7 million of tech sales that have been contracted. We also announced our first projects in the U.S. and Italy. In addition, we were awarded a EUR 36 million grant from Portugal's C-5 Agenda . And we completed the EUR 9 million sale leaseback of our Benavente facilities real estate. In the first quarter, we are excited that we signed Portugal's first green hydrogen offtake contract with Dourogás. We also signed a EUR 10 million grant for our C-14 project in Portugal. And from our joint venture partners in Spain, we have exciting news recently that we were selected for a EUR 2.5 million tax sale tender in Spain, and we were awarded a EUR 3.4 million grant for a project in Spain as well under their PERTE Program. Lastly, as part of our efforts to develop strategic partnerships, we signed and spend as well an MOU with a leading logistics equipment provider to create green hydrogen logistics equipment projects together. This is a really exciting and strategic move, and we hope to be able to disclose more details to you all about this partnership in the future -- in the near future. Now on to the financials. In the fourth quarter, we recorded an operating loss of EUR 13 million. This is an increase of EUR 5 million from the third quarter, driven by significant noncash items. Our cost of goods sold consists of 2 main items: Exolum related impairments of EUR 2.5 million relating to further costs incurred on this first third-party projects that we undertook. As disclosed in our September financials, we, together with Exolum , are working to pursue innovation awards to partially offset this contract loss. We are also taking an inventory provision of EUR 2.9 million. This has been the case for us as well as others in the industry. The speed of technology evolution means that we have items that the value needs discounting and in certain cases, reworked to be suited for our latest tech developments. Both of these are noncash expenses. During the fourth quarter, our operating expenses increased by EUR 2.3 million, driven by significant nonrecurring items listed in footnote 3 and that I will address shortly. Before I do so, I just want to highlight the operating cost for the full year. For 2022, we have provided guidance of operating costs of around EUR 14 million. But given the significant one-offs, the total operating cost for 2022 are around EUR 18 million. The EUR 4 million difference is mainly driven by the cost identified here in the Q4 figures. First thing, we reserved a certain production capacity with our production partner, which, given project delays, we did not use mainly to avoid spending more money on raw material purchases. But this has led to a EUR 1.5 million charge. The production agreement for 2023 has been altered to avoid this potential charge in the future. In Q4, we also started amortizing our HEVO Gen 1 development cost, and we will amortize this over its expected useful life of 3 years. In addition, we had EUR 700,000 of R&D costs related to our demonstration plants in Q4. And this totals around EUR 1 million for the full year for the same cost item. During Q4, we saw service and professional fees of EUR 700,000, again one-offs, mainly driven by the sale-leaseback transaction costs, some strategic partner engagements and also legal fees. These are significant one-off items, which we were not able to foresee when we first provided our 2022 guidance. At the end of the presentation, we'll provide the guidance for 2023. To note, and I think importantly and hopefully that will -- the slide will develop in coming quarters. In Q1 of this year, we have already started invoicing clients for technology sales. During the fourth quarter, we strengthened our cash resources through the following activities, principally our sale-leaseback efforts. We were able to secure net inflows of EUR 7.5 million, which we received net of the security deposit and some deferred considerations. So the EUR 7.5 million was the net on the EUR 9 million sale leaseback settlement. We also -- from VAT, we saw inflows of EUR 3.8 million, mostly on reimbursement claims that we made to the Portuguese authorities. We have submitted additional gains in the first quarter for a significant portion of the EUR 3.7 million receivable balance as of year-end. In addition, we received EUR 3 million as a prepayment of a portion of the C-5 grant awarded, the very fast turnaround time of this payment. So we were awarded the grant in December, and we actually received the reimbursement cash in December, reemphasizes Portugal's commitment to the hydrogen business and to operationalize it as quickly as possible. During the fourth quarter, we raised EUR 1.5 million through the ATM shelf and a further EUR 2.3 million -- sorry, $1.5 million through the ATM shelf and a further $2.3 million was raised prior to mid-February this year. We continue to see an increased efficiency in the grant process in Portugal. Recently the Portuguese Prime Minister signed on terms of acceptance of our EUR 10 million C-14 grant award. And our team is already working submitting the prepayment application for this project, similar to the C-5 process. In addition, we expect to be able to operationalize additional drawdowns under our C-5 grant award as 2023 progresses. Grants brings substantial value to our projects and the early stage of this -- and in the early stage of this emerging green hydrogen market, it makes many projects viable. We'll continue to secure grants where possible, and we'll continue to add to the nearly EUR 65 million grants already awarded to us. I'd like to now take a moment to truly drive home what makes our technology so special as we are unique in the market. Our technology centers around the HEVO, as you see a picture there on the slide. It is at the heart of both the HEVO-Solar and the HEVO-Chain. It has a unique membrane electrochemical cell design that allows for reduced power system costs. This is a major cost driver for any centralized electrolyzer. It also protects against systemwide degeneration and issues as our membrane operate independently and not in the traditional stack. It allows for a modular approach using this miniaturized electrolyzer, which reduces O&M costs and complexity as well as system downtime as modules will be replaced individually. We can use inexpensive structural materials and simplified engineering and assembly, which reduces cost further. All of this enables us to create an industry-leading cost of green hydrogen, which Ben showed previously, an advantage that is amplified further in small to mid-scale projects. To note, we have 2 core products. We have our HEVO-Solar, which is for those of you who have been following us for some time, hopefully very familiar with. This is an integrated solar to hydrogen generator. It integrates the CPV technology to our miniaturized PEM electrolyzer, the HEVO, and allows us to have a grid independent and modular solution that requires good solar radiation levels and available land. In addition, we also have our other HEVO-Chain, which is also modular and scalable and a highly, highly efficient PEM solution. The HEVO-Chain is a containerized PEM solution that uses our miniaturized PEM electrolyzer, the HEVO, working in a series. The interesting thing is it becomes location and power agnostic. It can be deployed to connect to any source of energy. So we have received questions that what does the European Union's -- what are the implications to European Union's consideration of nuclear power as renewable? The HEVO-Chain can work with any source of energy, including nuclear. So we actually have a product that fits for several types of requirements. I'll now pass it on to Zach for [indiscernible].

Thank you, Frederico. It's nice seeing everybody this morning. I want to start with a quote from the great Jack Welch. "Strategy is simply resource allocation and you strip away all the noise, that's what it comes down to. Strategy means making clear-cut choices about how to compete. You cannot be everything to everybody no matter what the size of your business is or how deep your pockets are." This is very timely, not only for Fusion, but the entire industry. It's such a massive addressable market, we need to boil down to the core what makes us competitive. Our key assets are the HEVO proprietary technology, our strategic land and grants we've secured and our people. Our business model is transitioning more to a solutions provider than just a technology company as that allows our technology to ramp up production, getting numerous facilities operational to build up track record while getting to scale through hydrogen production, focusing on development. First, the HEVO technology is particularly competitive at less than 10 megawatts projects. So we are focusing our efforts on small to midsized projects. We see most of the median market in the next couple of years as under 10 megawatt projects and have a strong pipeline of opportunities to execute this. As previously noted, the market is mobility, logistic centers, industrial and gas blending opportunities. Regarding our technology, we have collaborated with upstream technology partners such as Ballard on the Evora project. And recently, we signed a collaboration agreement with the global equipment provider to help us build out our mobility and logistic applications. Over the next few years, our plan is to ramp up production by investing in Benavente and expanding our addressable market with HEVO-Chain. This allows us to focus on all of Europe and North America as our core markets versus just markets with strong solar radiance. After an assessment of our cells, our production capacity cannot meet the demands of our project portfolio, and our tech sales are largely driven from our development efforts. For these reasons, our development portfolio is so strategic. Developing our own projects allows us to control our own destiny by having more control of our future tech sales pipeline. Our team has done an incredible job on establishing the equivalent of approximately 200 megawatts of hydrogen capacity in land that has been secured and EUR 50 million in grants have been secured. As we continue to work on business development opportunities, we're seeing a clear distinction between projects that are under 10 megawatts and larger-scale projects. As I noted, this allows us to develop the current market, which is still in a nascent stage, which are mainly smaller projects, while also having an eye to the future for larger projects and larger demand. With our technology production estimated to be 250 megawatts of capacity until the end of 2025, and our development pipeline being substantially larger, an estimated 1.5 gigawatts, we look to maximize shareholder value by also working with other technology providers to execute our portfolio of projects. This is a strategy we already kicked off and announced last year in our agreement with Toshiba to explore solid oxide solution for certain large-scale projects. This strategy solidifies Fusion Fuel as a holistic green hydrogen solutions provider. To do this, we have dedicated -- decided to create multiple development partnerships. First, we have Fusion Fuel Spain, which is doing an incredible job and build a pipeline of projects in Spain that has grown to 500 megawatts of high-quality opportunities that are in various stages of development. The team in Spain continues to do a fantastic job. Secondly, we are creating a development company to focus on building out development opportunities, focusing on the North American market, one of the most important hydrogen markets currently. Given our extensive development experience, this will be led by myself and Jason Baran. We'll continue to derisk our portfolio by working with world-class engineering, procurement and construction companies to minimize construction risk and sign long-term customer agreements to provide certainty of recurring revenues and EBITDA. These key elements combined with what we've already initiated with entitling our portfolio will make this attractive to third-party capital. We continue to work with investors at both the project and broader development portfolio level. Our North American pipeline currently stands at over 250 megawatts of capacity and the balance of our portfolio projects in Portugal and Europe is how we get to an aggregated total of 1.5 gigawatts. We'll have 200 megawatts of potential technology sales from the development activities, potentially over 30 megawatts of tech sales from third parties. As more and more of the development projects convert to operational projects utilizing HEVO technology, that will build up our track record and will make it easier to do a traditional tech sales model, and we also benefit from having potentially recurring revenues from the development projects that again will further derisk the overall business. Fusion Fuel strategy creates a diversified revenue model with traditional third-party technology sales and sales from our projects created by Fusion Fuel Spain and our other development company. We're currently focusing on -- we're currently forecasting over 230 megawatts of potential technology sales until the end of 2025 based on our current pipeline and our forecast. Our third-party technology sales are focused on Iberian Peninsula and Italy. We're seeing approximately 10 megawatts of potential sales this year. And as Fred highlighted earlier, we have recently been awarded another mobility project and winning another grant in Spain. We'll continue to explore additional technology sales and work on them in the current and our other core markets. We have also started commissioning of Exolum plant and signed contracts for Alcala Project and began invoicing to our client, KEME, in Portugal. All this brings our committed tech sales to a total of EUR 12.5 million for 2023. We are projecting additional opportunities to expand the technology sale in Alcala, also to complete the sale of our recently awarded project in Spain and a few other near-term opportunities to bring our target to over EUR 25 million in revenue this year. We expect exciting things from our partnership with Duferco and are forecasting further opportunities in 2024 and 2025 with them based on our recent efforts. Fusion Fuel Spain and our other development entity have a pipeline of, as I noted, of over 200 megawatts of tech sales for Fusion Fuel into 2025. This strategy also monetizes most of our brands and provides a steady [ diet ] of project pipeline for Fusion while we build up more traditional tech sales model in our core margins. As noted earlier, our strategy is to focus on creating value for our shareholders in project development and our technology. We see the benefits to Fusion Fuel being that we execute potentially up to the 200 megawatts of tech sales, as I've noted, during potential equity returns via recurring revenue and fees from creating value in the development process. We also benefit from building a footprint and track record in 5 core markets: Portugal, Spain, Italy, U.S.A. and Canada. Our development strategy will be to continue entitling our projects through securing strategic real estate, grants, where available, and licensing these projects. Secondly, we'll commercialize our pipeline by securing offtake agreements and signing EPC contracts to derisk the construction. We recently signed our first agreement with Dourogás, and we plan to continue building off this by signing additional offtake agreements as our projects move towards final investment decision. This approach will increase shareholder value by monetizing the grants, the land and selling our technology. We'll also potentially capture upside in development while controlling our own destiny through having our own project portfolio we've created that gives incredible backlog of tech sales. As part of creating this development entity, we'll opportunistically look to bring in third-party capital to supporting the funding of the projects, both in the development phase and the construction phase. The more we entitle and commercialize our portfolio projects, the more attractive the portfolio will be to third parties. Fusion will balance how far it takes the portfolio prior to bringing third-party capital to maximize shareholder value while also keeping an eye on our financial exposure. This will be managed by myself, Frederico and other senior managers of the current team and we'll be adding additional members to support in this effort. Frederico back to you.

Great. Thank you, Zach. So now I'd like to provide some overview and forward guidance on 2023 and outlook for 2024 and 2025 for figures. So I want to note that for 2023, we're providing guidance that we're seeking to achieve EUR 25 million of revenues. This is based on 5 projects, of which EUR 13 million of those have already been contracted. As mentioned before, we've already invoiced clients for technology sales at this point in time with invoice a little over EUR 1 million. For some of these projects, we're also selling the balance of plants and the equipment, so increases the revenue per megawatts that we're able to secure. I want to make that clear just that people don't simply divide the megawatts by the revenues to try and calculate the cost per megawatts of our system. We'd like to note that for 2024, we're aiming for EUR 80 million in revenues, and for 2025, over EUR 140 million in revenue. These are largely driven by projects that we are developing ourselves. This is part of the development effort of ourselves and the development partnerships that we have. So those projects are clearly identified. As Zach noted, the overall pipeline is 1.5 gigawatts, and we're talking about 220 megawatts for both 2024 and 2025 of pure tech sales. As noted, we have not reflected any additional income, but we expect to realize from our development activities such as fees or possible equity returns or shares. The reason for that is that at this stage, it's too early. The value of such fees or equity returns that we might have will be dependent on how much more the project is when an investor or partner comes in. So at the moment, it's too early to be able to accurately forecast what those revenues or income would be. I want to note that we're aiming to be cash flow self-sufficient and be able to deliver a positive net income in 2024. If successful, we will be one of the first companies in this industry to do so. Also want to highlight we always have some core milestones for 2023. Naturally, I have not included the booking of first revenues, but that is obviously implied with the previous targets that I noted earlier. So from our production, we want to keep expanding our production capacity and build out the -- our phenomenal facility in Benavente. We want to finalize the development of HEVO-Chain. As we've announced, we want to be putting it out in the market commercially in the first half of 2024. From our commercial side, we want to make sure that we have, obviously, all revenue for 2023 contracted. As noted, we are well advanced on that stage with already EUR 13 million there and the remainder coming from very specific projects that are very advanced at this stage and as well to convert our 2024 pipeline into confirmed orders. We've clearly done a good job of securing the ground for a company-owned plant. So already, at this stage, I'd say we've outperformed any expectations on the amount of grants that we could hope to secure for all projects. We'll keep developing projects that are in our pipeline and, of course, secure the required license and permits for our portfolio. Safety, as always, is a core pillar for us, and this is -- we want to make sure that we keep safety at the forefront of our mind. That's why we make sure that we keep it here in our key priorities for 2023 as always. One note, as the industry market takes shape and is taking shape, we've noticed that our advantage in our technology solution for a particular market needs become clearer and clearer. In addition, the advantage of our project development pipeline sets us apart from our competition. We hope that with our ability to be delivering revenues and delivering on the projects we have in 2023, that the market and the industry recognizes the clear value that Fusion Fuel has, and we're able to change the course that our -- obviously, our market cap and our share has taken over the recent history. With that, I'll pause, and I'll open up to Q&A.

Thanks, Frederico, and thanks to everyone who has submitted questions. Thus far we have got a few so we'll begin with some questions from [ Chris Chung, Webber Research ]. He asks about the Dourogás offtake agreement, which was announced a couple of weeks back, specifically around the duration of that agreement, the volumes considered in price and also how will the hydrogen be transported from Evora where it's being produced to where it will be injected?

Would you like me take that, Frederico? Thanks Ben. I'll work in the inverse. So we plan to take it from Evora and connect it via pipeline. We're working with the local pipeline operator [ FLOWIN ] on connecting to the grid. The agreement is a market-based price contract. It's based on forward-looking natural gas pricing and carbon offsets. And the volume is based on us nominating volume from the project. So right now, we have sufficient volume out of the Evora project, and that was what the plan was, but we could have opportunity to expand with future projects through having this be a good solution for selling our merchant capacity.

Thanks, Zach. Second question was around the C-5 funding, which, as a reminder, was EUR 36 million to the Fusion Fuels Consortium, of which Fusion Fuel will receive EUR 22.5 million for its H2 HEVO Sines project. Will the company receive all of that EUR 22.5 million when FID is reached? Or will it be distributed as certain milestones are achieved?

So it's attributed when certain milestones are achieved and actually as equipment is delivered. There is a certain amount that is available and we've actually received related to expenses that we expect to have for development costs of the project. That is the case for C-5 and also for C-14.

This one is for Zach. Any updates on the Bakersfield project in California with Electus? What is needed to reach FID and when is your expectation of when that's achieved?

Thanks, Ben. So we are concluding our concept study with Black & Veatch. We plan to do that next month, and then we'll make a decision with our partners at Electus to move to the next phase of work, which is pre-feasibility and feasibility, which is permitting. On the subsequent calls and the first quarter call, we'll provide more guidance on timing because I don't have the report just yet. But our anticipation is a late 2024, early 2025 final investment decisions around that project due to the permitting time line in California.

And now to the questions from Erwan Kerouredan at Royal Bank of Canada. He asked about the revenue recognition time line for Exolum. Frederico, if you can touch on that?

So we can start recognizing revenues for Exolum once the acceptance of the project starts. That will be dependent on how the commissioning process goes. As noted, during March, we will start the commissioning process.

And there is a separate question around what are the expected revenues related to that project, if we can share?

So of the first EUR 13 million [indiscernible] that is already contracted, just shy of EUR 2 million is related to Exolum.

Second question from Erwan is, with respect to impairment charges, is there any expectation of additional impairment in the first quarter of '23 and beyond?

Not at this stage. In fact, if we had, we would have already had to recognize it in Q4 even if we only learnt about it subsequently. So at this stage, we believe we had to take in the impairments.

Great. Last question here. What's your view on latest policy developments in the EU in response to the Inflation Reduction Act here in the U.S.? Do you expect additional funding potential in the near term or incremental commercial opportunities as a result of the latest developments, whether that's the EU Green Industrial Plan or the Delegated Acts? I know we touched on that somewhat in our shareholder letter, but if you have any thoughts on that?

So I can start and then, Zach, please add. But actually, I want to first on a high level note, say that the IRA has been phenomenal for the industry. I mean it's not regarding Europe, but obviously, it has pushed Europe and other markets to act. We are now seeing Europe. We're also seeing Australia start developing similar activities and start beefing up their support for the hydrogen industry. And so we find this exciting, the movement in Europe. Naturally there has been obviously some pressure from the nuclear side to include nuclear energy under the renewable cap. Again, for us, this is indifferent for us from a HEVO-Chain perspective as that is power source agnostic. We're thrilled to see the developments. We believe this will continue. We've already been hearing from Spain that they are actually increasing the grants available. In fact, they are already reopening some of the PERTE programs to consider funding some of the projects that were not awarded. So we do expect that trend in Europe to continue. Hopefully, similar to the U.S., there will also be more support on the demand side and not only on the CapEx front. In Portugal that is expected to take shape with a hydrogen auction later this year, where, similar to the energy market, there will be sort of, let's call it, feed-in tariffs for green hydrogen blended into the natural gas grid. But we do expect to see more of that also emerging in Europe. Zach, you want to add any color there?