ITM Power Plc (ITM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the ITM Power Final Results Investor Presentation. [Operator Instructions]. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. These will be available via your Investor Meet Company dashboard and you'll be notified by e-mail when they're ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll. And if you'd be so kind as to give that to your attention, we would be most grateful. And I'd now like to hand over to Dr. Graham Cooley, CEO; and Andy Allen, CFO, from ITM Power. Good afternoon to you both.

Good afternoon. Thanks very much, and thanks to everybody in the audience for joining this call. So we're going to be presenting to you the final results for the year to year ending April 2021. So just a very short slide on positioning, first of all. As you probably all know, ITM Power is an electrolyzer manufacturer. We're manufacturer of PEM electrolysis equipment and we've been developing and deploying PEM electrolyzers now for the last 20 years. We are scaling electrolyzer manufacturing and deployment. And we moved into the world's largest electrolyzer factory at the beginning of this year, and we have a strong collaboration with Linde Engineering. So ITM Power is doing the scaling in terms of manufacturing and Linde Engineering in terms of deployment. Why are -- why is our electrolyzers so interesting right now? Actually, the world is moving towards net-zero and essential piece of equipment to achieve net-zero is the electrolyzer because electrolysis equipment is used to couple to renewable power and make green hydrogen, which is the only net-zero fuel, the only net-zero energy gas. So incredibly important for the energy transition. And what we've seen is a major acceleration in the market over the last year or 2. Certainly, over the last year, the acceleration has taken the whole industry by surprise. And you've seen industrial companies, governments and policymakers announcing electrolyzer targets all over the world. So perhaps if I can give you a bit more color on that. We had a very important report that was announced in May of this year was the IEA report and it identified that to get to net-zero by 2050, the world needs 3,500 gigawatts of electrolyzers. That's a very, very large number. That's about 3 centuries of the current production in the world's largest electrolyzer factory here in Sheffield, 3,500 gigawatts at GBP 0.5 million a megawatt is GBP 1.75 trillion, a very largely significant market, and that's over the next 29 years. The Aurora report also came out in May, and interestingly, identifies 200 gigawatts of electrolyzer projects that are already in development. In fact, 85% of them have been identified as being in Europe. And if you look at the national electrolyzer targets worldwide, these are targets for deploying electrolysis equipment over the next decade. So they are targets for deployment to 2030, and they total 144 gigawatts. And there are many more hydrogen strategies, national strategies being announced all the time. We also, in June, have the U.S. DOEs Earthshot, which is the 5 major projects that the U.S. is going to enter into to get them to net-zero by 2050. And the first announced Earthshot was Green Hydrogen. And actually, the Green Hydrogen Shot Summit was last week, was chaired by John Kerry and actually attended by Bill Gates. And you can see a great emphasis now on green hydrogen also in the U.S. So an increasing emphasis on the need for green hydrogen to achieve net-zero. Some achievements in ITM Power then: We reported this morning a record backlog of 310 megawatts. A record tender pipeline of 1,011 megawatts, which is just above 1 gigawatt. We have now moved into the Gigafactory in Sheffield, which is fully operational. We delivered the 10 megawatts at the Rhineland refinery and was really pleased to get the announcement from a shareholder, they're expanding by 100 megawatts and we'll be doing that with ITM and Linde. And we also completed the FEED study in Humberside for 100 megawatts. And what we're increasingly seeing now is interest in the class of electrolyzers around 100 megawatts in size. And I'm going to show you more about that dynamic when we look at the tender pipeline. So first of all, then the results. The results, we're looking at 3 levels: work in progress, contracts backlog and tender pipeline. And at each level, we're going to drill into more detail about unpacking those numbers. The work in progress is up 125%, contracts backlog up 45%, and the tender pipeline is up 94%. And you'll note now that all the numbers, including the tender pipeline, are reporting the ITM portion of the value only. So if we begin then with the backlog. So both of these graphs, you can see 5 half year results and then a final bar, which is related to the current position. So the penultimate bar is H2 2021. So the backlog is made up of under contract in the final stages of negotiation and preferred supplier. Contracted is 43 megawatts, in negotiation 169 and preferred supplier with Snam is 98 megawatts. So you can see that for the first time, contracted plus negotiation has now gone over 200 megawatts in size. And in fact, if you look at the blue line, on the right-hand chart, you can see the tender pipeline. So the tender pipeline is the number of quotations we've made against commercial tenders over the last 12 months. And it has increased radically since June. Back in June, it was 600 megawatts. It's now 1,000 megawatts. Actually, if you go back 2 years, the tender pipeline was around 200 megawatts in size, which is what we now see in the backlog. So the trend in both cases is following a rapid growth, the backlog lagging the tender pipeline by about 2 years. The other thing that we see in the tender pipeline is an increased weighting towards larger projects. And I'm going to explain that a bit more now in a couple of slides. So when we look at the projects, we're looking at the products that are deployed in projects at a given size. And we divide the tenders up into projects between 0 and 4 megawatts in size. And all of these are plug-and-play containerized unit, which is deployed by ITM. And you can see a picture of those products, the top right-hand side of the slide. From 4 to 20 megawatts is a crossover between plug-and-play containerized products and those that are integrated with an EPC contract by ITM Linde Electrolysis. And from 20 to 80 megawatts, those projects are deployed using the 2-megawatt module. And above 80 megawatts, we deploy using 5-megawatt modules. And at both those levels, those are integrated within EPC contract by Linde. So if you look at the tender pipeline then, you can see how many projects and the total number of megawatts in each of those classes of projects. So projects that are between 0 and 4 megawatts where the deployment is done by ITM, there are 87 megawatts in total across 42 projects. If we go to the next level, up to 20 megawatts in size, fewer projects, 13, but more megawatts, 154. And as you increase down, between 20 and 80 megawatts is 190 megawatts with only 5 projects. And at the very largest class, deploying our Gigastack 5-megawatt module is more than half of the tender pipeline with only 3 projects. So we have a very significant move and an increased weighting in the tender pipeline towards larger projects deploying the 5-megawatt stacks with a Linde Engineering EPC. In terms of where the projects are in the world, you can see the piechart divides up into EMEA, APAC and the Americas. And actually, the EMEA territory is leading, particularly Europe. And you can see a very significant amount of the projects in Europe. If you go to APAC then, particularly Australasia, you see a fast follower. And the projects that are building there are particularly very large-scale projects. And then the U.S., where we -- we were very pleased to announce a 4-megawatt electrolyzer at Niagara in the results. The America after the announcement of the Earthshot is just getting started with large-scale industrial electrolysis. And we see this as a very significant growth area. And actually, we have quite a significant positioning in the U.S. because of Linde and their deal a couple of years ago with Praxair. So we feel very encouraged not only but by our first major reference plant in the U.S., but also Linde's presence there. So that's locations. In terms of applications and end use, you can see that the most significant application is energy. This is power to gas energy storage working with renewable energy companies. In APAC, the most significant market is industrial. So this is looking at things like refineries, ammonia and methanol production. And the third and smallest category is in mobility. So look, what is exactly that customers are looking for? So when we have negotiations with customers about electrolysis equipment, all customers are looking for the same thing. They're looking for the lowest levelized cost of hydrogen or the lowest total cost of ownership of the equipment. And to achieve the lowest levelized cost of hydrogen, the most important thing is the production costs because when you look at the revenue model for green hydrogen, the most significant cost is the renewable power. So that relates directly to the performance of the electrolyzer. So that's key, and that's the most significant. Second is the full system price to the customer. So that's the capital outlay. And it has to be full system. And then the aftersales support. That's looking at not only the lifetime and the performance, but sharing performance data with the customer so that they can operate the electrolyzer in an optimal fashion. And at all 3 levels, we look at optimizing our electrolysis equipment and there are sources at all 3 levels of competitive advantage. And we work by investing in R&D and continuous improvement on the performance of the electrolyzers. We have a very aggressive cost reduction program for the lowest full system price. And we're working closely with Linde in that area. And also, we've been developing remote monitoring and excellence in aftersales support. So we feel that we have a competitive advantage at all 3 levels of reducing the levelized cost of green hydrogen. And then finally, my last slide about partnerships. At ITM, we've spent most of the life of ITM developing long-term productive partnerships. So we started deploying electrolysis equipment on Shell forecourt now back. Well, our first announced collaboration with Shell was back in 2015. We started deploying 100-kilowatt units back in 2017. Fast forward to this year, and we've announced 100 megawatts with Shell. That project is going to be deployed with Linde, and we've been on the whole journey with Shell also with Linde. So that's more than half a decade. Shell -- sorry, Linde and recently, Snam became strategic investors in ITM Power, and we've also developed a strong relationship with ScottishPower, who's part of the Iberdrola Group, and also with Ørsted working on the Humberside project and also the OYSTER project, also collaborating with Siemens Gamesa in that project. And then last but not least, with Sumitomo, and we were delighted to announce the first large-scale electrolyzer to be imported into Japan. It's the first non-Japanese electrolyzer to be imported into Japan. And it's working not only with Sumitomo, but also Tokyo Gas. So I think an important announcement for that territory. So going forward then, partnering particularly with renewable energy companies and the oil and gas industry is going to be a significant part of our strategy. So I'll hand over now to Andy, our Chief Financial Officer, who's going to take you through the financials.

Thanks, Graham, and good afternoon all. So I'm going to take you through the key drivers for the finances for the year ending April '21 and also take a look at the results snapshot, which you would have seen in this morning's announcement. Then, I'll also be talking about the performance, revenue, EBITDA and cash, and also some guidance for the current financial year. So in terms of key drivers, the obvious one that we've spoke about before is the move into Bessemer Park. Bessemer Park opened in January 2021 and was officially opened more recently by the Secretary of State. And during the financial year, we fit out the factory with semi-automated plants. We've got the blueprint and the machinery for further expansion and can scale to a gigawatt within 6 months, and we're able to respond to demand that we see coming. In terms of partnerships, this was the first full year where we had worked with ILE, which is the joint venture between ITM and Linde. And ILE is really the sales quoting house for large-scale product that ITM would sell. And ILE is now up to 15 staff whose mission is to fill the factory. So not only have we got the sales team within ITM, but we've also got ILE. And whilst that hasn't impacted the numbers yet, what we're starting to see is the impact on the tender pipeline. We also had the partnership with Snam and the investment of GBP 30 million, which formed part of a wider fundraise totaling GBP 172 million. We've also seen the REFHYNE commissioning where ITM Power had a significant chunk of EPCs as part of the project. That's going through the numbers. That was commissioned and inaugurated in July this year. And broadly, we're closing out that project now. And finally, in terms of partnerships, we had the Gigastack product program development with BEIS, where we're developing our next-generation products, and you'll see from Graham's slides that we're now quoting that in many tenders going forward. The other thing that's been a feature in the last financial year, global events, we all understand the pandemic and how that's impacted daily life. For ITM, it's been about how we get on site and finish site works. Our revenue recognition is dependent on us completing the final milestone in that contract and certainly for plug-and-play units, that includes on-site commissioning and installation. We've also had Brexit providing an element of disruption in terms of getting to site to conclude those works. And post year-end, we've got a developing disruption within the supply chain, particularly around microchips, which affect our plug-and-play systems. This has been quite widely reported. Actually, ITM's demand is very, very low and only impacts 1 subsystem. But that is still something that could be a risk in the current year. So a result snapshot then. We had total income of GBP 5.1 million, down 6% year-on-year. But what was up was the sales revenue. And sales revenue was GBP 4.3 million, up 30%. This is where we start to see grant income being the smaller part of the income mix going forward. ITM will still look to win grant income to develop its technology road map and have that subsidized and create innovation along the way. But equally, we're seeing more and more of a lean towards product revenue. Our adjusted EBITDA loss was GBP 21.4 million, and that's characterized by a few features. The big one, we spoke about REFHYNE projects being commissioned. That's one of a couple of legacy projects where we've incurred gross losses, mainly around the EPC bid of the scope, the on-site works, and was a key driver for the relationship that we've generated with Linde, where they would now take that work. And the other part about the loss was to basically set up to capture the 1 gigawatt of demand we see coming per annum for Bessemer Park. In terms of balance sheet, we had GBP 176 million of cash at year-end and a cash burn of GBP 32.7 million, of which about 1/3 of that was on capital equipment for Bessemer Park. So just on revenue then. The graph on the right-hand side tells us the picture about how this differs from the prior year. As the prior year was the gray bar on the left, GBP 3.3 million of income, and the year ended April '21 is on the right-hand side, GBP 4.3 million. You can see the first orange bar, the first dip is in product revenue, and that's because we haven't been able to complete all of the on-site works than we might have expected to. Then you have an uptick in consultancy. And just to be very clear on what that is, that is money we've received for developing the Gigastack product. And so it's all about technology road map rather than ITM becoming a consultancy company. Maintenance is starting to tick up. And we saw fuel sales also impacted by COVID to leave us with GBP 4.3 million of revenue. In terms of EBITDA, you see the prior year, GBP 18.1 million of loss and April '21, GBP 21.4 million of losses. The first orange bar, GBP 0.7 million was the difference between gross margins in 2 years as we closed out those legacy projects. The next 3 orange bars represent investment. So we firstly have payroll. I have got a slide coming up about resources in ITM, but we've brought in skilled manufacturing experience and project delivery experience for the company. We've then had GBP 0.6 million of losses in ILE, the joint venture, as it starts to grow. And what we're expecting is we're expecting a need to support ILE until the end of calendar year 2022, at which point it ought to be self-sustaining. And then finally, we spend more on R&D than we did in the year before as we developed the Gigastack product and the technology surrounding that. So really, the middle 3 bars are all about setting us up for the future. In terms of resources then, as of the end of August, we had 305 full-time equivalents. And you would have seen in RNS recently, which said we filled CoSec and Ops Director vacancies, and we're now seeking a Projects Director as well. So we're strengthening the management team. Within the other recruits that we've had at this side of year-end, we've had a heavy emphasis on delivery. So 27 people within production and quality, 41 within R&D, 10 in after sales and 9 within projects. We've also added 5 people to the sales team, but that doesn't include the impact of the ILE team and work we've done previously to bolster our business development exercise. And in terms of the balance sheet, we ended the year with a strong balance sheet with GBP 176 million of cash at year-end. And the bridge really for me splits into 2 parts. There's the operating activities, which is Bessemer Park. We've spent GBP 17.2 million on operating activities and $10.4 million on CapEx. And there's a working capital impact of GBP 3 million. GBP 2 million of that is building inventory and really starting to reduce lead times for customers. And then in terms of partnerships, we've invested in ILE. We've received money from the fundraise in the Snam partnership. We've started to spend money on Gigastack as well, which we recognized on the balance sheet. So in total, we spent about GBP 4 million on Gigastack in the year. And finally, to the current year guidance. So we've added an extra metric here, which is the core stack module production. This is the core bit of electrolysis in the middle of the products that we make, and that will be in excess of 55 megawatts this year with an ability to ramp. So that is the core system that goes into everything. Beyond that, we have different subsystems that then are attached to it to make up a completed products. We're expecting that production volume to be between 33 and 50 megawatts this year. The revenue recognition will depend on a few things that we've already touched on. Site access in particular, travel restrictions, but also some disruption to the supply chain affecting plug-and-play products. And as we said before, revenue will be heavily weighted to the second half of the year, and we look forward to updating more at a later date. I'll hand back to Graham for the final slide.

Thanks, Andy. So just a quick summary from me then. So the results were very well telegraphed and predicted in the June 10 Trading Update. I think the announcement this morning is important in terms of achieving a record backlog of 310 megawatts, but also particularly a record tender pipeline of 1,011 megawatts, which is up very significantly since the 10th of June. We are seeing very strong market and policy momentum. And I think actually in the run up to COP26, you will see further green hydrogen announcements, further hydrogen strategies announced by national governments as we move into COP26. So the momentum in the whole industry is very, very strong. So thank you very much for joining the webinar and we're happy to take questions.

Dr. Cooley, Andy, thank you very much indeed for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab situated on the right-hand corner of your screen. But just want the company take a few moments to review investor questions submitted already. I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your Investor Meet Company dashboard and you'll be notified by e-mail when it's ready for your review. I'd also like to remind you that your feedback is important to the company. And immediately after this presentation has ended, we'll redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. I'd now like to hand over, if I may, to Simon to host the Q&A. So if I may, Simon, I'll hand over to you. With the live questions, if I could ask you to read out the questions, that would be most grateful.

Thanks very much, Mark. Let me start with a few of the pre-submitted questions, all of which, by the way, have been asked from the live attendees on this webinar. Let me start with one for Graham: What's the likelihood of reduced use of iridium in the electrolysis units? And how are you dealing with PGM sourcing?

Yes. So a question that comes up very regularly, actually. So the place to start with this really is the length of time we've been working in this industry. So precious group metals and the use of precious group metals in electrolysis in PEM electrolyzers. They're also used, by the way, in other forms of electrolysis, including alkaline electrolysis. That's a source of great competitive advantage for us now. I mean we've been working on reducing the amount of materials that we use. We've been working on recycling, and we've been working on reuse. And I think we've made massive progress in that area. In fact, in our trading update, we did note that we've exceeded the 2030 EU target 2 years ago. So yes, a source of, I think, a strong competitive advantage for us. We didn't put out in this results presentation, the cost reduction curve because we've presented it constantly for about 2 years, but I can confirm that we are still tracking ahead of that cost reduction curve and that includes the current cost of all of the materials that go into the electrolysis equipment. So the other thing to probably say is that we've just appointed a Head of Production. And we're very, very focused on strategic procurement and we'll be doing more and more work in the supply chain. So this precious group metals and catalysts, as far as we're concerned, is a source of competitive advantage for ITM.

A couple of questions on when you might pull the trigger on a second Gigafactory, which you've said you'll do when Bessemer Park reaches 60% capacity? When is that expected to happen? And are you currently actively looking for a suitable site?

Yes. I think that the tender pipeline and the backlog numbers are moving very quickly. Tender pipeline, particularly and the amount of activity in the market has surprised, well, the whole of the industry actually. The exact date, it's difficult to say. But the answer to your second question is very definitely, yes, we are already looking for a second factory.

Okay. A question for Andy here, I think: Given the company's forward financial projections, when do you expect to move into gross profit or to become cash flow positive?

Yes. So obviously, there's a number of notes out there, and we can see the consensus for cash flow positive is somewhere between 2024 and 2025 financial years.

Okay. With the expected growth of the hydrogen market, why isn't ITM pulling out all the stops and getting the second factory up as soon as possible? Would it not be beneficial to have a stock of off-the-shelf electrolyzers ready for when orders come flooding in rather than making them to order?

I think we're starting to do that, and you see that in the core module that we're building. I mean, there's something that we need to work with the supply chain and the production line to ramp up. You can't go from 0 to 1 here, and we're starting to do that, and we're building in capacity as we go. So I think Bessemer Park gives us an opportunity to start to build to inventory, and there will be a point where we will see, as Graham said, we want to extend it to a second factory. The Bessemer Park can give us some of that flexibility.

Graham, I guess this one is for you. Given the recently announced U.K. hydrogen strategy, when do you expect that strategy to impact on your order book, if it hasn't already?

Yes. So I -- you would have seen the announcement of the hydrogen strategy in the U.K. What that identified 2 areas of incentive in terms of revenue, the revenue model for green hydrogen, one, in terms of CapEx. So the CapEx one is GBP 0.25 billion grant scheme for low-carbon hydrogen. And the 2 revenue ones, which I have to say, by far, the most important because that will incentivize the deployment and for investment to flow into the industry. And there's the RTFO in transport, which is in consultation at the moment, and it has been confirmed that there will be an RTFO to green hydrogen in transport, which is great news for ITM Motive. And also that there will be a CFD for green hydrogen and for blue hydrogen. And it's been confirmed that there will be that CFD and that has now gone into consultation. So we're looking at that being announced as a biddable scheme in 2022. And those projects, of course, will be large projects because they are CFDs for replacing industrial gray hydrogen with green hydrogen. So U.K., the 2 targets, one is a 5 gigawatt target, which is part of the [indiscernible] targets to 2030, but also 1 gigawatt target to 2024, and that's a very important one because you can't really deploy blue hydrogen in the 2024 time scale. Actually, most of the blue hydrogen projects are looking at 2028. So that implies that, that would inevitably be green hydrogen projects. And that's as much as I can say. I am a member of the Hydrogen Advisory Council. So there is a lot going on, but those statements I've just made are those ones that are already published.

Two-part question coming up. Graham, maybe you could start on this one and then Andy: What are the greatest challenges you have converting tender pipeline opportunities to backlog contracts? And given the sizable backlog, what's the biggest challenge you face when it comes to converting those to revenue?

Yes. So challenges in all cases are that large companies have to make final investment decisions on large pieces of equipment. I think the tender pipeline lags the backlog if you look at it, and this is more a piece of correlation rather than direct causation, but the backlog lags the tender pipeline by about 2 years. So if you look at the backlog now under contract plus the final status of negotiation in these results for the first time, it went over 200 megawatts. And if you look back 2 years ago, the tender pipeline was at 200 megawatts. So you fast forward to June at 600 megawatts and now this morning, the announcement of 1,000 megawatts. So what's the difficulty in that? Well, it's a sign off of large schemes, and we're working more and more closely now with partners in the energy industry. We have a set of targets that they need to meet. I mean let me give you 1 example that's driving the industry forward, which is that all refineries in Europe have to comply by the renewable energy directive. So they all have to make 14% of their product renewably by the end of this decade. So they -- to deploy, they've got 8 years, and that is a very large amount of electrolysis equipment. So worldwide, hundreds of gigawatts. So that's one of the drivers that are driving things forward.

Okay. Andy, any comments on converting backlog to revenue?

Yes. I think -- I hadn't forgot, Simon. The -- there are 2 features here, and it really depends on when the revenue recognition is. So one of the challenges of getting stuff through our factory, there's a revenue recognition [indiscernible] Gates. There's not so much challenges, but there are opportunities for us to reduce lead times as we build the stock or build subsystems. So that will accelerate the revenue recognition, but I wouldn't necessarily characterize any of that as challenges. The greater challenge or the bit where ITM has, particularly in the last year, had less control is the on-site works. And if revenue recognition depends on site acceptance testing, then there's been a lot out of our control in the last 18 months. And so as we start to see things becoming more normal, that will also drop away. But we are also still reliant on working well with partners and subcontractors to an extent when we're doing the on-site stuff. So I think the challenges, particularly around the factory are really opportunities to go faster. And there's still a little bit to unlock with the on-site work.

A couple of questions now, definitely for Andy, I think: Can you please explain why provisions on the balance sheet have risen to GBP 12.3 million? And whether we should expect a further increase in fiscal 2022?

Yes, I certainly can. So the bulk of that, about GBP 5 million of that is a provision on contract losses. And just to say exactly what that is. There's -- these are legacy projects that we've recognized a gross loss on in the FY '21 and they include the forecast of cost to completion plus a certain amount of contingency in there as well. Beyond that, there are provisions for leaseholds and dilapidations, what I would call on recourse of business as you have a large site, and that will grow in line with the length of the lease for Bessemer Park. And finally, there's a provision around share options costs, which is actually cash neutral to the company. So that's a bookkeeping piece rather anything else.

Given the outlook for the electrolyzer market worldwide and what might be needed to get to net-zero, wouldn't it be in the company's interest to consider licensing its technology to some of its strategic partners alongside the buildup of owned and managed capacity around the globe?

So licensing is an interesting dilemma really. If you license your technology where you have to do is control improvements. And if you don't control improvements, then you can lose control of your intellectual property. You also don't capture all the advantages of going through the process of manufacturing and working directly with customers. So it's not a preferred model as far as we're concerned. And I think that being a manufacturer and also particularly running an after sales support model, where you're also looking after electrolysis in the field, developing an installed base and working with customers, it is the way to do it. And I think some technology companies license their technology out too quickly. I think they experience erosion of their IP. And it's -- although it's a lower capital-intensive model, I think it's one that ultimately ends up with loss of control.

Okay. I think a question for both, but probably starting with you, Graham: What's your approach to pricing? Is there a gross profit figure that you have in mind? And is industry on the same page? Or are you looking ahead and offering customers value to gain market share?

Yes, it's a great question. Pricing strategy is very, very important. I mean you can have a competitive advantage in terms of technology and manufacturing. But it's easy to choke off orders with price. What you really want to do is actually enter the market as aggressively as you can. So cost reduction is very, very important in the early days. There comes a point then when cost reduction can lead to an increase in margin. And some of it, you can pass on to the customer to gain market share and to increase your installed base and some of it, you need to keep this margin. And we constantly review that as we go forward.

You mentioned reducing lead times. What's the rough average lead time on a project? Andy, perhaps you could talk us through the timetable.

Yes, Sure. So to factory acceptance testing, Graham's given you a picture of different types of products, a plug-and-play system historically would have been about 14 months a year ago. And we're now down somewhere between sort of 9 to 12 months in terms of lead time. So that's good. When you look at modular solutions, then that could be quicker still. The balance of plants is simpler, and we're doing something repetitious. So probably around about 6 to 9 months for those [cubes] with opportunities to improve that further.

I'm going to ask this question because there are 4 or 5 people who've asked them: What's your win rate for tenders?

Yes, very difficult to assess. We haven't got enough data to assess that. And you can't just look at the tender pipeline and divide by a number and say that's what it looks like. We just don't have enough data and things are moving very, very quickly. So hard to assess.

Okay. And again, a question that's come up more than once on the -- today: Who are your competitors? And how do you track what they're up to in the marketplace?

Yes. So there are other companies that make PEM electrolyzers there, and there are companies that make alkaline electrolysis and they're kind of the usual suspects. So in the area of PEM electrolysis, there's Siemens Energy. There's Cummins who bought Hydrogenics. There is Nel who bought Proton OnSite. And there is Plug Power who bought Giner. And alkaline electrolyzers and market leaders. There are a few other smaller players as well, those that are developing pressurized alkaline. And so there's a field -- there's a handful of competitors. I think that it's a big market. It's moving very quickly. There'll be new entrants, no doubt about that. It's a great market to be involved in. And all of our competitors will get projects because I think it's a large enough market with lots of industrial collaborations being developed. How do we track -- sorry, a key part of the question, how do we track our competitors? It's actually quite difficult to know what everybody is doing, apart from there are a lot of press releases. Those are more at the level of renewable energy companies collaborating with the molecules industry. So the chemicals industry and the oil and gas industry. The listed companies put out results but we not really -- we don't really dwell on what everybody else is doing. I mean for us, the most important thing is doing what we do as well as possible. So I wouldn't say we're that concerned really. We get a lot of intelligence from our partners. But the market is moving incredibly quickly. The pipelines are moving very, very quickly, and I'm sure all of those competitors will do well.

Question for Andy: Can you make any comment on expected gross margins within the current contract backlog and there's a supplementary about positive gross profit or positive EBITDA, but I think you've already covered that one. So any comments you can make on expected gross margins, Andy?

I think we can probably give some indications here. So the projects that are in the backlog and under contract have been bid with positive margins, and with a long-run expectation of getting somewhere between 20% and 30% margin. And Graham has already pointed out that we need to fill the factory as well as continue to be at the front and have an installed base. So that might not happen this year. So the other part of that is, obviously, we are closing out these legacy projects with EPC work in the current financial year. And those seem to be in line with the forecast that we had at year-end, which should not impact the gross margin this year. But that's still an exercise we need to go through.

So we are involved in quite an important value engineering exercise. We work very closely with Linde and internally in ITM on cost reduction. So when we tendered, actually, we're still pushing hard for cost reduction, which will, of course, affect margin.

A question on partnerships. Graham, could you provide a bit more detail on the partnership with Shell and give us a sense of how the relationship has evolved? And secondly, Shell is not alone in the oil and gas space. To what extent are other oil and gas players actively looking at green hydrogen and electrolysis?

Yes. So I mean, the working relationship with Shell is extremely good. You saw them inaugurate the 10-megawatt electrolyzer and announce a 100-megawatt project with the ITM and ILE. And so I think that's a very strong and positive endorsement for our ITM and also ITM's technology and its relationship with Linde. And they know what that relationship with Linde is like because we -- we've been deploying hydrogen refueling stations on Shell forecourts going back to -- I think the first 1 was opened in 2017. So that's half a decade ago. So we've been working closely with them, and it's a very, very positive relationship. I mean we did the full EPC on the Shell project. And the next project we do with them, Linde will be doing that, Linde Engineering will be doing that EPC. In terms of other oil and gas players. So we work with Phillips 66 in the Humberside, looking at the 100-megawatt deployment with Ørsted and Phillips 66 to decarbonize that Humberside refinery. We work at Leuna, the 24-megawatt electrolyzer at Leuna. We'll be putting green hydrogen directly into the gray hydrogen pipeline, which is used by the whole of that chemical staff, but that includes Total, so another oil and gas play. And of course, Linde have many installations where they provide gray hydrogen to the oil and gas industry and the chemicals industry. So they are really well plugged in to the whole of the industry. And the dynamic that's going on in the oil and gas industry is moving from fossil energy gases and fossil fuels to net-zero molecules. And actually, the dynamic in the renewable energy industry is towards Power-to-X or making green hydrogen for energy storage. So what the -- the big macro picture is you're seeing renewable energy companies partnering with oil and gas companies. And indeed, you're seeing oil and gas companies buying renewable energy assets. So this is a very, very strong industrial dynamic right now.

Okay. Andy, a question for you: Will all of the 33 to 50 megawatts completed product volume for the current year be recorded as ITM revenues? Or will some go through the Linde joint venture? And if that is the case, what's the split?

Yes. Okay. So the 33 that we have contracted, we know that we've got 24, which are modules that go through ILE. And then the balance is smaller plug-and-play systems, which will be going 100% to ITM. But when we've been reporting the numbers in the RNS and here, those are all values attributable to ITM. So we're trying to remove what's historically been some confusion about what's ITM and what's Linde. All the numbers we're reporting here are values to ITM. So that's the 33 that we have contracted. The other 10 we have contracted is the REFHYNE project, which is a bit of an outlier because that is recognized on stage of completion, but it's all ITM again, but there's a small amount of revenue left to recognize on that.

If I can add to that, as projects get larger, they have more and more additions to the balance of plant. And some projects that we're quoting now, the Linde part has got ammonia plant associated with it. It's got liquefaction plant. It's got additional compression and so on. And it doesn't make any sense to quote -- for us to put the numbers out, any other number, then the per pound value to ITM Power, which is what is in our announcement today. And you saw the slide in the table of the 3 different levels, the work in progress, the backlog and the tender pipeline and all of those stated pound values to ITM only.

Okay. Graham, I think this is probably for you again. A number of questions on the levelized cost of hydrogen. Let's start with: How much more expensive is green hydrogen today compared to gray hydrogen? And when do you think you might reach parity as an industry or as a company?

Yes. So look, the cost of green hydrogen is broadly the cost of the renewable power that you put through it. So to say how much is green hydrogen is a bit like saying how much is electricity. You wouldn't ask the question how much is electricity. And the reason you wouldn't is it depends where you are and what point in the network you are. So when do you get to parity with gray hydrogen? Well, broadly speaking, when you're around GBP 0.02 per kilowatt hour for power costs. At that point, you're comparable with gray hydrogen in the U.K. And getting to that cost requires you, first of all, to have direct coupling. So you don't pay distribution charges. And then also we're looking at being able to use electrolyzers to balance the grid and get grid service payments as well. So if you look at the McKinsey model, for instance, and you look at an electrolyzer of EUR 0.5 million or $0.5 million a megawatt with a load factor of around 40% and $0.02 per kilowatt hour, you're looking at hydrogen about $1.6 a kilogram. And at that point, you become competitive with gray hydrogen. And gray hydrogen has a market of 600 gigawatts per annum worldwide, 70 million tonnes. So there are many predictions. You can look at Platts, you can look at the Hydrogen Council. You can look at Bloomberg New Energy Finance. But from the mid-2020s to 2030, about $1.6 per kilogram; by 2030, going down to $0.9 per kilogram, making a net-zero energy gas competitive with gray hydrogen. And they are the McKinsey numbers and the Hydrogen Council numbers, not ITM Power numbers.

Okay. You mentioned on the way through that it would take you 6 months to scale up to 1 gigawatt at the Bessemer Park. Could you just explain what you meant by that, please?

Andy, do you want to talk about capacity?

Yes. So we've put down machines that are semi-automated. And we validated a whole lot of processes in the first half of this calendar year, which a new process to Bessemer Park, which wouldn't fit into our old production facility. That includes technologies for the core products, but also for managing the larger products as it goes around the factory. And really, what we're seeing here is we're not just jumping up the gigawatt capacity ahead of that demand coming. We have built in the flexibility within factory that we can add machines as we need to increase the capacity to that gigawatt target.

So we're working on development work. We're working on cost reduction, and we're working on understanding what the product mix will be. So we have a product mix indication now from the tender pipeline, and I presented it to you. And that, broadly speaking, looks like the sort of product mix that we will need to design into the processes for the factory going at a full 1 gigawatt. We're also doing value engineering and cost reduction to make sure that we pin down exactly what it is we're producing. And value engineering is going to play out over the next few months as is understanding our product mix. And we'll be able to gear up production in a more accurate fashion.

Okay. Another 1 -- another last question, I think, for the time being, maybe 2 more: Can you explain the -- how the relationship between ITM Power and ITM Motive will work going forward? And how are you going to be addressing the various mobility markets?

Yes. So ITM Motive's strategy is a return to base refueling of industrial vehicles, so -- commercial vehicles. So we're looking at buses and trucks and trains and a number of other municipal vehicles, like dust lorries and sweepers and so on. And there are a large number of OEMs now moving forward with either hydrogen conversions of those vehicles or actual fuel cell, new vehicles and new electric drivetrains. And that's our market for ITM Motive. We've been talking with our fleet operators, with local councils and also large -- and also the OEMs making the vehicles. The RTFO is a very significant coming announcement from the U.K. Government. The RTFO is the incentive for using green hydrogen as a fuel. It's in consultation right now. And it will -- as soon as that is announced, it will propel that industry forward. And we are aligning ourselves with some very significant players in the U.K. to develop that part of the business. And of course, we've opened the Birmingham Refueling Station. We work with National Express in Birmingham. And yes, I mean, more and more interest coming for the heavy vehicles, not so much the infrastructure refuelers.

Okay. I think we're on a final question before we call it time: Would you go even larger than the 5-megawatt stack that you're developing? And how key is that 5-megawatt stack and developing it quicker than 2 years on the accelerated timetable to your future prospects?

Yes. So look, 5 megawatts is a big module. If you look at the battery energy storage industry, for instance, the largest cells or modules that you see there are about 50 kilowatts. So you're talking about 100x the size of battery installations that use modules. There's a logistics consideration to do this size as well. You have to be able to -- if you manufacture a module, you need to be able to move it around. You need to be able to deliver it in transport it. And that means to get it on to standard transport and do the logistics that you wouldn't want to go too much larger. We did an exercise with Linde Engineering about how you do these deployments. And the strategy that we came up with was a 5-megawatt module, which is integrated into 20-megawatt packages with a standardized balance of plant so that you could also reduce the cost of the balance of plant by standardizing and modulizing the balance of plant as well. So the building block is a module with 5 megawatts with an integrated 20-megawatt package to take you through installations that go up to hundreds of megawatts in size. So how important is it? Yes, it's important. I mean the weighting in the tender pipeline is definitely towards the larger scale projects and integrating 5-megawatt units.

Dr. Cooley, Andy, thank you very much indeed for being so generous with your time. And thank you also to all the investors that have taken time to submit questions during today's presentation. Of course, we'll make all of these questions available to the company post this presentation in case there are any other additions or answers that can be given. Dr. Cooley, before I redirect investors to provide you feedback, I know that's particularly important to the company, I could ask you perhaps for a few closing comments, as I said before, I redirect investors to give you their thoughts.

Sure. Okay. So look, first of all, thanks very much for joining the call. It's much appreciated. I think ITM have had a pretty amazing year this year. We moved into the world's largest electrolyzer factory in the midst of a pandemic and Brexit. We've developed partnerships that have become very productive in terms of quoting equipment worldwide. Our pipeline has increased. Our backlog has increased. And we're in a position now where the factory is, I think, performing very, very well and the future looks very significant for green hydrogen all over the world. So you'll see some, I think, interesting announcements in the run-up to COP26, where nations all over the world begin to articulate more their hydrogen strategies, and we certainly look forward to making some great announcements over the next year. So thanks for coming.

Dr. Cooley, Andy, thank you very much indeed for updating investors this afternoon. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in all that the company can better understand your views and expectations. This will only take a few moments to complete, and I'm sure it'll be greatly valued by the company. On behalf of the management team of ITM Power, I'd like to thank you for attending today's presentation. That now concludes today's session. Good afternoon to you all.