ITM Power Plc (ITM) Earnings Call Transcript & Summary

Good morning, and welcome to the ITM Power plc Interim Results Analyst Meeting. Today's session will be around circa 30 minutes. And throughout this recorded presentation, you'll be in listen-only mode. [Operator Instructions]. The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where appropriate to do so. I'd also like to remind you that recording of the meeting will be available on demand circa 2 hours post the close of the meeting. You will also be notified when responses to the questions are published. These will all be available for your review on the Investor Meet Company platform. I'd now like to hand you over to Dr. Graham Cooley, CEO; and Andy Allen, CFO. Good morning, to you.

So good morning, everybody, and thank you very much for coming to this meeting. This will be a relatively short presentation. Looking forward to your questions at the end. Actually, it's a short presentation because it's only 6 weeks since we gave the trading update, which was in December. So these are the interim results for the 6 months to the end of October 2021. And we were delighted to issue these results this morning, particularly as it includes a new 24-megawatt electrolyzer sale, which we were very pleased to be able to announce. I'm going to start, and I'm going to hand over to Andy Allen, our Chief Financial Officer. So just very quickly, for completeness, as I'm sure you all know, ITM is a PEM electrolyzer manufacturer. We're scaling the manufacture of the electrolyzer modules and our partner, Linde Engineering is scaling the deployment. We have a road map to get to 5 gigawatts per annum by the end of 2024. We are looking at a new more highly automated factory in the U.K. and I'm going to tell you a little bit more about that as we go on with the presentation. And we raised GBP 250 million in a fundraise in October to be able to execute on that plan. And that's what we're doing. This period has been all about delivery and execution. So the numbers then, first of all, the year-on-year numbers based on megawatts. You can see that our work-in-progress year-on-year is up 300%. The contract backlog up 200%, the tender pipeline up 166%. So a strong and positive growth at all levels of our backlog and our tendering. Just to put that graphically then, 2 of our metrics have been largely unchanged, which is the overall backlog, which still stands at 499 megawatts and the tender pipeline, which hasn't moved very much basically because of the lack of activity over that 6 weeks in the run-up and the runout of the Christmas and New Year period, as you can imagine. What has moved in a very strong trend is the work-in-progress. And we were delighted to announce, as I said, a new 24-megawatt electrolyzer project in the ammonia industry, which continues that very strong growth in the work-in-progress. In terms of that electrolyzer, it's actually in the ammonia market. The ammonia market, as I'm sure you all understand, is the one of the largest markets for industrial hydrogen. So industrial hydrogen is broadly 70 million to 75 million tons per annum. That's all gray hydrogen made using natural gas and the entry market to green hydrogen in replacing that gray hydrogen. And around half of that is in the production of ammonia. And so we now have a very significant reference plant with a new partner who is as yet undisclosed in the ammonia industry as well as a very significant reference plant in the refining industry. So an important new project for us with an important industrial partner and a very significant reference plant for ITM and for Linde. In terms of driving technology and products forward, you'll note that the 24-megawatt size is a replica of Leuna. And this drives plant standardization. It avoids additional nonrecurring engineering costs. It drives standardization in the balance of plant. We don't need standardization at the level of the modules because, of course, they are standard 2-megawatt modules already, but it reduces costs in the balance of plant by using replication. And it also helps us bid more rapidly. We can bid 24-megawatt units now because they're standard and the terms would be standard. And of course, for Linde Engineering, it achieves the first major reference plant in ammonia, a green hydrogen reference plant in ammonia. So in terms of engineering and international compliance in the ammonia industry, again, an important move forward. I've shown you this diagram before, but the levelized cost of hydrogen relates to 3 things. Primarily, it relates to production costs, and that means the cost of the renewable power and also the performance of the electrolyzer. Then the full system price and, of course, this new project and replication drives down the full system price and gives us a firm price within the ammonia market. And we're also working very hard in the area of operational excellence. So looking at driving down the levelized cost of hydrogen for all of our customers is very, very important, but the macro market has changed pretty significantly over the last year. And a number of things that happened in the macro market, which has continued to strengthen the green hydrogen proposition. The first is price. And you would have seen the volatility and the increased price in the natural gas industry. And in many parts of the world now, green hydrogen has parity with blue hydrogen, certainly, but actually, gray hydrogen as well. So this is an incredibly important dynamic, particularly across Europe. Price volatility is minimal with green hydrogen, if you link an electrolyzer to a PPA. In fact, you get a solid, unchanging price for the duration of the power purchase agreement, which means that green hydrogen has very low price volatility. You're also making your own hydrogen from your own renewable power, so it improves fuel security and also national balance of payments because you're not importing energy gases. And of course, there's a lot of geopolitics at the moment, driving the current price increases. One other important area is carbon pricing and carbon prices, of course, have been going up. where it's somewhere between EUR 80 and EUR 100 per tonne CO2. So with green hydrogen, not only are we at parity with other forms of hydrogen derived from fossil fuels, we also have a lower price volatility, better energy security and also, of course, it's net zero. And so you're avoiding carbon pricing. Okay. So perhaps now I can hand over to Andy, our Chief Financial Officer, to talk you through some of the results. Andy?

Thanks, Graham. Good morning all. So I will take you to the interim results, some guidance for the full year and show you a little bit about the next U.K. factory. So in terms of interim results, this slide is very similar to our trading update in December, total revenue of GBP 4.2 million versus GBP 0.2 million for the same period the year before. We had an adjusted EBITDA loss of just under GBP 13 million, which is an increased loss compared to GBP 10.4 million the year before. And some of that losses is to do with the fact that we are ramping up. We've got Bessemer Park up and running, and we're ready to address demand as it comes through, and we've really got the capacity in place now. In terms of the balance sheet, the cash balance at the end of the period was just shy of GBP 167 million. That excludes the money raised from the fund raise, which hit our accounts in November. So today's cash balance is circa GBP 390 million. Cash burn for the first half of the year, about GBP 11.8 million, and I'll show you how that might change in the second half of the year as well. So in terms of the guidance, completed products production volume of between 30 and 50 megawatts. And I can say that we're steering towards the middle of that range. In terms of the core stack modules, which can go into a number of different products, we will still be building in excess of 55 megawatts. In terms of revenue, we've always said the revenue is heavily weighted to the second half of the year. And now it's looking at Q4 2022. So revenue recognition for our standard products is based on a point in time, and that point in time is when we've completed all of our obligations against a contract, which, if it's for a standard product at the factory gate, it includes factory testing. And the project that is close to year-end is the Leuna standard product, which is 24 megawatts, which we are due to conclude in late April. In terms of overheads and cash burn, you've seen what it looks like for the first half of the year. With the fundraise, we are actually accelerating some of our R&D spend and increasing our overhead slightly in the second half of the year. And the same for cash burn. There will be other 2 more dynamics for cash burn. The first one is that we are going to be building to stock. And secondly, that we will potentially be paying for the land for the second UK Gigafactory in this period. And that land is called Aviation Park. So what you see here is the first designs for that factory. It's 265,000 square feet. So it's twice the size of Bessemer Park. We have a 1.5 gigawatt capacity and we'll be opening in Q4 2023. So more details to follow, but we'll be continuing to update and we're expecting spades in the ground in the second half of this calendar year. Graham, over to you.

Sorry, let me take myself off mute. Great. Thanks very much, Andy, for that. So just a quick summary from me then. Delighted to be able to announce this morning a very important project for us, which is the 24-megawatt electrolyzer in the ammonia industry. We have a very strong balance sheet. We have a strong market and policy momentum in our industry. I think it's an incredible time to be an electrolyzer manufacturer with this world-leading position, both in terms of technology, in terms of manufacturing, partnerships and reference plants. So the outlook then for the year, I think you can expect spades in the ground for the first U.K. -- for the second U.K. gigafactory of 1.5 gigawatts in size. You'll see pipeline developments and developments in the sales. And you will also see some continued strategic recruitment as we continue to bring into ITM Power some great skills and experience across our British industry. So thank you very much for your time and looking forward to your questions.

[Operator Instructions] I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard and the investor company platform. And you'll be notified once they're ready for your review. I'd now like to hand you over to Simon Hudson to post questions to the ITM Power team where appropriate to do so. Simon, good morning.

Paul. First question is from Arthur at Morgan Stanley. What share of the 33 to 50-megawatt 2022 product objective is already secured, i.e., what percentage of that is confirmed?

Perhaps I can take that one, Graham. So under contract as of this morning, we've got 86 megawatts. So that's the first line in the table that appears at the top of our trading updates and results announcements. So you can see that we've got more than we are producing in this financial year. This financial year has already been about ramp-up, and we've started to fill the hopper for the next year as well.

Cool. Next one is from Adam at [indiscernible]. The balance sheet shows a doubling in inventory since April. Obviously, that's business as usual. But is there an element of deliberate inventory build to deal with supply chain issues?

I think the answer is in the question. Yes, it is. We're building stacks to inventory. And you can see that we were building more stacks than we're building finished products as we start to unlock that, but also be ready to address the demand coming. So it's not necessarily just about supply chain issues. Graham, do you have anything else to add?

No, that's perfect, Andy. Thanks.

Okay. A couple of -- actually 3 questions from Lacie at Panmure. Let's start with manufacturing capacity is being ramped up quickly. But in the statement, there was a suggestion that there could be a potential lag in testing capability. Is that fair to assume?

In the statement, it brought up, I think that we are acknowledging that to recognize revenue with large-scale projects, you need to complete testing as well [indiscernible] modules to recognize the revenue. So that's the point there. But look, testing is something that we've been developing for a very long time. We are ramping up the testing. We've got the world's largest [ A tech zone ] in our factory. We are procuring a new building with a much larger power supply, and all of that is driven to world-class testing. So yes, it's all part of our capacity increase in development plan. Andrew, if you got anything to add?

No, I think that's all, Graham.

Second one from Lacie, how much of your current tender pipeline is focused on ammonia?

Yes, interesting question. I'm not sure we particularly like to disclose that, Lacie. But, Lacie, we're the only electrolyzer manufacturer that puts out in the pipeline. And I can tell you that there's intense interest across the news, trying to unpick our numbers now. I mean I think in the past, we have provided a very significant amount of information. And we have to be very cautious now because everybody is watching ITM Power in the industry and trying to interpret what we're doing based on our numbers. So I wouldn't want to unpack that number anymore.

Okay. And finally, from Lacie, what are you hoping for or expecting from the U.K. government's response following the hydrogen consultation in terms of volume and price support for green hydrogen?

Yes. I think there will be a separate CFD for green hydrogen. There's certainly the GBP 240 million allocated for the next grant scheme, which is a capital [indiscernible] for incentivizing some large builds of electrolysis equipment in the U.K., but that's not the key thing. Actually, the key thing is supporting with an RTFO in transport and also a [ CFP ] for industrial hydrogen. But, Lacie, what we are seeing as well is all of industry acknowledging that the price of gray hydrogen going forward may be far higher than it was before.

Okay. Quick clarification point from Kulwinder, on the 24-megawatt ammonia-related project announced today, is that separate from the delivery target of 33 to 50 megawatts?

It is separate, yes.

Yes. So just to add, the 24-megawatt plant announced today is for delivery in Q4 calendar year '22 rather than financial year '22, which I think is perhaps where the confusion may have been.

Okay. Question from Will. Please could you tell us something about input costs. Clearly, increasing costs are being flagged by your peer group. Is this something we can expect later in '22 or '23?

Yes. You will know more about what our peer group is saying than we will, of course, because you interact with them. I think we're not changing our guidance on any of those things. I mean, we feel very, very confident in the supply market because of the amount of work that we've done in the supply market. In terms of reducing the materials we use, in terms of increasing the effectiveness of what we do. And as I've said before, we believe we derive very significant competitive advantage from our prior work in that area.

A question from Ed at Citi. What probability would you put on full revenue recognition for Leuna not happening in FY '22?

Yes. Okay. I mean, we haven't changed our guidance. We're confident about our guidance, and that's why we've given it.

Okay. A follow-up for Ed. What still needs to be done before the 100-megawatt electrolyzer unit at Wesseling planned by Shell is officially confirmed?

Yes. So as we said in the announcement, we're going through the pre-engineering and that pre-engineering is required by any refinery before full investment decision. So this is absolutely standard in a process like this. And a very -- we have a great relationship with Linde Engineering and with Shell. So yes, this is absolutely standard form in the petrochemicals industry. You do the pre-engineering first.

Question from Chris. Could you please give some color on why the value of the backlog and pipeline has reduced by 15% since December. The megawatts in the pipeline has only gone down by 2%.

Yes. So that's all about product mix and about cost reduction. And we're driving forward cost reduction to increase volume and product mix is all about moving from a mix that included smaller units to a mix that now includes more and more standard modules without the balance of plant you get with smaller units. So in a nutshell, it's about cost reduction, which we're driving forward very hard because that's the way you become a world leader and it's because of product mix because the market is buying larger and larger systems.

Question from Patrick. Can you give an update on the 5-megawatt stack development? And when do you realistically expect to see regular manufacturing of 5-megawatt stacks?

Yes. The 5-megawatt stack it's -- just for everyone's knowledge, I mean, I'll hand over to Andy for the more detailed in timeline. But in terms of for everyone listening, the 5-megawatt stake is sometimes referred to, and it is in the announcement as the Gigastack. We also referred to it internally as the GEP. And that 5-megawatt unit is one that we're already bidding into projects. And in fact, we will be driving forward the assembly of that new factory. But, Andy, do you want to run through?

No, I think that's right. So timings for regular semi-automated production will align with the next U.K. factory. So -- which is due to conclude in Q4 '23. We could, if pushed, do limited production runs in Bessemer Park, but actually it makes things a lot cleaner to have a mega stack production facility and a Gigastack production facility. That's the current plan.

Okay. Andy, I think another one for you from Alex. Can you provide some additional commentary on the decrease in the average selling price down 17% since December? And could you highlight the drivers in this change? Is it simply the change in product mix and reduction in costs? And given the downward trajectory in costs making you more competitive, are you still confident of maintaining margins?

So just to say, I think I just answered that question. But anyway, Andy, sorry, I didn't mean to interrupt you. .

No, that's fine. But I think the significant change in that short period is product mix. And as you've seen throughout 2021, we started to quote that Gigastack product that we've just been talking about, which, again, just the average price lower.

Okay. Question from James. Do you have any concerns around raw material costs, in particular, PGMs?

Well, as I said earlier, our view is that any volatility in the supply market actually is a competitive advantage for ITM Power. As you know, many of the same components are used by other PEM electrolyzer manufacturers and of course, alkaline electrolyzer manufacturers. We've done a very significant amount of work in that area. So I get the concerns. I think it's a competitive advantage, as I said.

Okay. A couple of questions on what you're seeing in the market, one from Annabel at Stifel and another one from Arthur at Morgan Stanley. Given the importance of storage in energy security, are you seeing any straws in the wind for hydrogen storage projects in the U.K. and globally? And on a similar tack from Arthur, have you had any clients coming to you for green hydrogen supply, which has been triggered as a result of the recent increases in gas prices impacting gray hydrogen economics?

Yes. That's about 4 questions there, and I think the answer, yes, can be used for all of them. Let me go to the storage one first of all, intense interest in Germany about salt cavern storage for hydrogen and also putting hydrogen into the gas grid and also the use of hydrogen in industry and replacing gray hydrogen. So all of those things, including a very strong interest in what you might refer to as a new market, which is the market for green hydrogen in steel and making sponge using green hydrogen and then melting in arc furnaces. So you're using both net zero molecules and net zero electrons. I think the salt cavern storage dynamic is strong in Germany because, of course, they have the geology to do that, but we have that geology in the U.K. as well. And if you look around the Runcorn area and slightly north of Runcorn, you'll know that the salt caverns they're owned by Storengy, which is part of the ENGIE Group. So yes, we are seeing a lot of interest in storage. In terms of customers and their renewed interest in green hydrogen because of the cost of natural gas. A very strong dynamic, yes. A dynamic that I tried to bring out in one of my slides. I mean as an example, CF Fertilisers in the U.K. that run the only 2 ammonia plants in the U.K. actually closed down one of their sites. And they ended up getting the U.K. government support for those sites because of the criticality of using them. So we've seen that dynamic now. It started -- our first announcement of that dynamic resulted in that front page article in The Times, [indiscernible].

I think we've only got time for one more question. We just cruised through the half an hour time limit. On backlog. Regarding -- this is a question from Kulwinder regarding the contract backlog that's under negotiation, what percentage of that is from larger projects either greater than 20 megawatts or greater than 40 megawatts.

Yes. I mean the detail of that one is probably from Andy. But look, if you go back to December, we had a significant increase in the backlog, and that was related -- that was a 200-megawatt increase in the backlog and that's large-scale projects. So -- and the dynamic in the market, and I think we unpacked this in the trading update announcement, and the announcement before that, the dynamic in the market is the larger scale projects. Certainly, the tender pipeline and then those projects coming through into the backlog, associated with 2-megawatt module ganged together in EPCs up to 80 megawatts in size and then those 80 megawatts. So a large percentage, I don't know, Andy, if you've got an exact number.

No, I think that comes in great. I mean just to stress that, obviously, this plays well to the strategy we've got, which is to build a standard modularized product to scale quickly.

Yes. I mean the -- what we can't do in the market right now is to give more and more details about our backlog and our [indiscernible]. Because if we do that, we are giving away very sensitive commercial information. So you're going to see, as we go forward that we're going to have to protect the commerciality of the company.

Okay. Thanks, Graham. And I think that's it for questions. Now I'm conscious that there are a number of questions we haven't got to, but we will get to them post this presentation. Paul, if you could....

And just to remind all the attendees of course, a recording will be available circa 2 hours post the end of the presentation this morning, along with the Q&A responses, of which you'll get notified as well. So I'd like to thank Simon, Dr. Cooley, Andy for updating our analysts today. On behalf of the management team of ITM Power Plc, I would like to thank you for attending today's presentation. Thank you, and good morning to you all.

All right. Thank you.

Thanks all.