ITM Power Plc (ITM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the ITM Power Plc Preliminary Results Investor Presentation. [Operator Instructions] Given the significant attendance on today's call, the company will not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today, and we'll publish those responses on the Investor Meet Company platform, where it's appropriate to do so. Before we begin, I would like to submit the following poll. If you could give that your kind attention, I'm sure the company will be most grateful. I'd now like to hand over to the CEO, Dennis Schulz. Good morning.

Good morning. Thank you, and welcome, everyone, to our market update.

Good morning.

Good morning.

We are pleased to share with you the vast progress we've been making over the last 6 months, towards early deployment and volume manufacturing. And as that actions suggests, we have been gaining traction. We will start with a quick market update. I will then hand over to Andy Allen to present our financial year results '23 and guidance for the year '24. Dr. Simon Bourne and I will then report on our 12-month plan implementation, before we come to the most exciting part, which is our new product release, and we will then close our presentation with the outlook. The market has broadly developed and is predicted in our January update. Climate decarbonization and energy independence imperatives have continued to fuel the projected hydrogen demand. We now observe synchronized attempts to build up a worldwide hydrogen economy is underway at quite ambitious feat. I think more ambitious and more speedy and we are not any other industry ever growing in the world. This is opening vast demand opportunities for companies like ITM, although we have to say that the electrolyzer market itself is still quite immature. There are only very few technologies credible for commercial deployment today, and many companies have not yet been tested in the market. ITM now has the industry experience and capabilities to identify and execute what we will consider the real projects in the market. We are confident that we can also conquer this market through robust and commercially-proven products, reference plants that give customers the confidence to invest into large-scale projects, and credibility to manufacture at the necessary scale, quality and very importantly, also on time, which will require not only professional processes and controls from us, but also semi-automation or automation, strong execution partners, like we have it with Linde and very close collaboration with leading suppliers as we have recently announced one of the other collaboration. We have been working very hard on these 3 areas with laser sharp focus over the last 6 months and have made tremendous progress, which we want to share with you today. Today, ITM is the only PEM electrolyser company in the world, and trusted to deliver several commercial 100-megawatt plants. When I say plants, I don't talk about just new announcements, but real physical plants being built. We are supplying into projects for industry leaders such as Linde, RWE, Shell, Yara, Infineon and others, who all have very ambitious plans for the future. Due to recent developments in energy prices, as we all know, and inflation, coupled with slow funding decisions by some governments, some customers have delayed their final investment decisions. As such, the big demand spike is yet to come, and ITM will be ready for that. I will now hand over to Andy for our full year results.

Thank you, Dennis. And so I'm going to talk about the year-end results, also spotlight on revenue recognition for ITM Power and the guidance and particularly the EBITDA guidance for FY '24. So my first slide shows a typical ITM Power execution contract. This contract will -- in terms of duration, will depend on exactly what the complexity and what product has been offered, but may typically last for 12 months. And we structure contracts so the cash inflows, which is the top bar happen incrementally with various milestones that are met throughout the execution. Revenue, however, is only recognized when we have fulfilled all of our obligations to that second line shows, we hit revenue much later than we get cash inflows. And the revenue will either happen at Factory Acceptance Test, FAT, or the Site Acceptance Test into the products that we are delivering right now, it is predominantly a Site Acceptance Test. That can mean that we have received up to 95% of the cash and 0 of the revenue in Energy products. So the revenue, therefore, tracks behind the progress that we have in the factory. It also means that while we are recognizing revenue, we have to put all of our obligations, and we've got operating plants out and with customers and extensive for our customers having completed all of our obligations. This is really important in understanding the financial for ITM, not just the year we've just seen, but also the guidance and we'll come back to that later in the presentation. So in terms of summary financials, you can see that the revenue was GBP 5.2 million, which GBP 4.1 million of that was product revenue, and that's against the guidance that we had in January of GBP 2 million. I think this is actually really good results. It shows that we did more than we had expected to do in that short space of time, whilst also going through a reorganization and a restructure at the same time. In terms of cash, we had GBP 283 million at year-end against a guidance of GBP 245 million to GBP 270 million. So this was again, ahead of expectations that we set in January. It was very much to do with a series of one-off exercises, but also increasing our capital discipline throughout the company. One of those was about improving how we organize our deliveries from suppliers, so that we face them to a closer to a just in time approach. And so that was also about cash collection from customers. So -- but really decent result there. In terms of EBITDA, the EBITDA was in line with the guidance that we set, both in January and June at a loss of GBP 94.2 million. We did a detailed review of the business in January and a look at the causes of that GBP 94 million loss. And some of these cases are on the slide. Historically, ITM had chased an aggressive expansion strategy based on technology leadership, and as such, there are processes within the business, particularly around engineering and manufacturing that were not mature. And we see some of that reflected in the EBITDA position. I'm pleased to say that we see a number of those gaps closing very quickly as part of the 12-month priorities plan. And that is in the summary, we're talking more about that in the second half of the presentation. I'm also pleased to say that there were no new surprises since we did that review in January. So a thorough job done, notwithstanding the results itself is not acceptable and something that we can't repeat. The GBP 94 million had a number of one-off impacts and notably around stock, that will be reworked or operated as part of those design reviews. But we will talk a bit more about how that shape changes for FY '24 in a couple of slides. In terms of cash, at the table on the left shows our opening balance of GBP 366 million. And right to the bottom our closing balance of GBP 283 million, a cash outflow for the year of GBP 83 million. But we start with our adjusted EBITDA of GBP 94 million of losses. And there are a number of noncash movements in the income statement to the tune of GBP 31 million. This is predominantly the movements in provisions, which was a result of that detailed review in January. So our warranty provisions went up for in-field plants by GBP 0.7 million. The warranty for contracted, but not yet delivered products, it's also included in those provisions and is included within the contract loss provision. So we had nearly GBP 10 million of warranty provision against contracts that we are executing right now. Now these numbers are a cautious approach, based on best estimates of future products that have not had significant time in the field. And it's based on mapping all the variation of the products and that performs at to where we would expect to be going forward. And you will see from Simon balance sheet slides, there are incremental improvements that are really looking to mitigate what the impact to this warranty cost is. We also had an increase in the contract loss provision, and the contract costs were essentially underestimated for deployment of the plant that we had. There have been a number of exercises to improve forecasting of contracts and also the governance around contract execution, not just in contract signature, but also throughout. So we can see ways to mitigate that, and I can confirm that no projects will be sold without a positive contribution to market for no -- margin from no one. 2023 was also a year in which we built both to stock and 2 projects. And we saw an increase -- net increase in inventories of GBP 27 million. If you think back to that revenue recognition slidde at the start, we have seen cash inflows as part of those contracts that we are executing against. And that's the working capital improvements below. So those 2 numbers need to be taken in context, whilst there's a buildup of WIP. There's also cash being received against the majority of that. We've also invested into factory automation and testing capacity to the tune of GBP 8.6 million, and into product development to the tune of GBP 6.6 million in the year. This brings me to the guidance for FY '24. On the left are the 3 pillars of the 12-month plan, the product portfolio and the refinements of the products that we offer, and there'll be more from Simon on that. The capital discipline and the debottlenecking. In the middle are the key activities that we are looking to execute in this financial year. Personnel performance, it's about delivering against the projects that we have contracted. But it's also about continuing to invest not only in maintaining a technology advantage that we have, but also enhancing our people capability and then building in terms of the investment on facilities, both in Sheffield and in channel. So our revenue for the full year will be in the range of GBP 10 million to GBP 18 million, which is a 2 to 3x increase based upon the current year. That is quite a wide range. And that, again, is back to the revenue recognition, where we have site acceptance as part of our obligations. We have a certain amount of deliveries, 2 sites and a number of dependencies when we are there as we are one of a number of subcontractors bringing the site into operation. I'll talk more about the EBITDA losses at the moment. But the big number here is about CapEx. CapEx, we're spending between GBP 35 million and GBP 45 million, about 70% of that is on the facilities in Sheffield, expanding to a new unit and also the upgrade in the power supply to unlock capacity and capability, not only for validation, but also for testing products as it goes out the door. The balance of that CapEx is again about product development, and you'll see some of that in the slides to follow. All of that leads us to cash at year-end of between GBP 175 million and GBP 200 million. And this will leave us with a strong balance sheet positioned for growth going forward. It looks like a similar cash outflow for the year FY '23, but the balance is far more weighted to the future, and making sure that we are set up to deliver against the demand to come. So back to the EBITDA losses. We see EBITDA losses of between GBP 45 million and GBP 55 million in the year. In terms of project losses, there will be no cost and no contribution against project losses. We are executing against projects where we have already made provisions for the losses that we will make on this. So I've always said that we will not sell another project that does not make a contribution. That's a very easy statement to make. Actually, we -- it's very easy to say we will add margin. And the very obvious question to follow is, does that mean that we can still sell products? And as we've been more active in the market in the last few months, actually, there is clear evidence that even pricing with the margin, ITM remains incredibly competitive and customers like what we have in terms of experience and product. We then have some costs around manufacturing scale-up, and this is essentially the cost of quality, which is not just part components, but also extra people required, et cetera, et cetera, which have been costs that are pre-automation. And as we fit out the new facilities in the next 12 to 24 months, we will see that reducing. We also have overheads, not recovered, not recharged. So our gross overhead is above that figure that you see there the GBP 30 million to GBP 35 million. And what we do is as we recharge overhead based on product developments, project execution and also on product field. So those overheads will be recharged to a greater extent, as we gain volume in the market and accelerate from this point on. We then have some specific costs around the 12-month plan in the range of GBP 5 million to GBP 7 million, which will be one-off costs for this year, which is about transforming ITM's capability and laying the foundations for the future. So for those who are looking to think about ITM, the manufacturing scale-up will reduce over the next 12 to 24 months. Some of our plant costs are a one-off for this year. And we see those overheads not sole being dependent on volume of products that we deploy out in the market. With that, I'll hand back to Dennis.

Thank you very much, Andy. Before we go into the details, a quick recap along our 12-month plan laid out in January. We are now 6 months in to solidifying our conditions and have made substantial progress in our 3 focus areas. First one being to concentrate on a standardized core product portfolio, which is an important basis for repeated and reliable volume manufacturing. Second, improving capital discipline by stringent cost reduction program and by introducing professional processes, which gear us up for the future. And last but not least, number three, debottlenecking and scaling, also fabrication and testing and, of course, very importantly for us investing into the incremental automation. Of course, we also need and will continue to deliver against our project commitments, thereby completing very important reference plants. On that, I always like to keep it real and potential here to get some realized project impressions. On the left, you see our stacks and is being packaged for shipments to Norway, where they were installed into the Cube CC on the bottom left. And then on the right, you get an impression of how our delivery getting to 100-megawatt project looks like. In this case for Linde and RWE. Whenever I look at this picture, this is when I start to feel the heartbeat of the serial manufacturing company and what I want to see in ITM in the future. What is very important and potentially the sign of progress. In the last 6 months, more products have left the ITM factory than in the previous 22 years combined. This is definitely a testament to our progress as a company. Now over to you, Simon, for an update on our product report.

Thank you, Dennis. I'm going to talk to you about our products, which, of course, are a significant component of our 12-month plan. I'd like to start off by reminding people of the very broad range of products that we were supporting across the business. This has now been substantially narrowed, and we are laser-focused on the products highlighted in green that those necessary to support project and execution. This rationalization has resulted in a significant positive impact on our efficiency for the teams and also myself personally. And it's allowed me to give much more attention to the core activities within the business. At this point, I'd like to introduce you to the [ Harvey Ball ], blue dots on the right-hand side of the screen. These are used throughout the presentation to represent the progress that we're making. As we're around halfway through our 12-month plan at this point, a half-filled ball represents a progress that is broadly on track. And a [ Harvey Ball ], more filled would represents progress in excess of our fund, and I can tell you now with that the [ Harvey Balls ] that are less than half-filled. So now I'd like to talk about the product portfolio and the broad rationale. It's a busy slide, I'll guide you through it quite quickly. On the left-hand side is the stack skid and that is our core product. That's 2 megawatts in size. It generates hydrogen of 30 bar pressure and is highly efficient. This is a bit where ITM adds the maximum value. This is where we want to build repetition and get [ stack skid ] manufacturing as we scale the business. Moving to the middle of the slide, we have 3 routes to execute projects in the field. At the top, we have our Plug & Play Container. This is a stand-alone unit, with the stacks included, but also all of the necessary systems to allow the plant to run in an autonomous fashion, and we have over 20 megawatts of projects in execution right now based on that product platform. Moving down the level we have the Cube. This is essentially a package stack skid that will be supplied to an integrator, where a number of these Cube's can be sewn together to enable midsized projects to be addressed. And we are executing over 50 megawatts of projects based on that platform. At the bottom, we have the Module. And this is an integrated building block. The picture is an example of a 10-megawatt module that an EPC would produce, and the principle is to replicate these modules to be able to serve large-scale projects efficiently. On the right-hand side of the slide, I'll quickly run through the outlook for each of these projects. The Plug & Play Container, we're already developing the second generation of that product, based on design to manufacture. And we're engaging with potential assembly partners to bolster our manufacturing capacity to address the demand that we see coming. The Cube products will eventually be phased out in favor of the larger modular system. But of course, all of the learnings we have from real project execution and operation when we play back into our product development. And finally, and many of you will have seen the announcement this morning, we have defined and developed our own larger 20-megawatt Module. More on that is going to be laid out later on in the presentation, along with some branding work that will make that whole product platform gel together. Okay. So I'm now going to focus on the stack, and we have the most advanced stack technology on the market. I recognize that's quite a bold statement, but I'm going to give you some reasons to underpin that claim. There are 3 important metrics that are important to PEM stacks. The first is current density. The higher the current density, the more hydrogen you can make with a stack. We have the highest current density on the market, and that means we can shrink the footprint and also reduce cost. The second is efficiency. We have leading efficiency at levelized current density. Efficiency represents the amount of energy consumed to generate the hydrogen. So clearly, reducing the energy consumption reduces operational costs for the end user. The third is precious metal loading. We have the lowest precious metal loading reported, and that, of course, directly which leads to a reduction in costs. I also want to give you some numbers to further support non-impairment and what I've just described. The table at the bottom shows both EU targets for 2030 on those 3 metrics, and also the performance from ITM stacks that we're producing and testing today. Firstly, current density, the target for the end of the decade is 2.5 ounce per square centimeter. We are operating at 3.3, which is clearly much higher. Efficiency of 2.5 ounce per square sentiment measured in kilowatt hours per kilogram, again the target is 50, and we are achieving that today. And finally, on precious metal loading, a target of 0.4 milligrams per well. We're already at that level, and we have been for some time, having already reduced our precious metal loading by over 80% over the last 10 years. Now, ITM has developed and retained a high level of confidence -- competence in the core technology area. And in order to maintain our leading position, we're collaborating with key suppliers. And we've announced some examples recently, including Gore and Mott. And in this way, we are gearing our own capability with our leading players that have the capacity to scale with us, as we grow the business. Now I hand back to Dennis.

Thank you, Simon. Let's move on to capital discipline and start with an update on the restructuring and rightsizing we announced in January. We have successfully completed the restructure of our organization and achieved a leaner and flatter hierarchy and the new structure reflecting on the nature of our business as a serial manufacturing company. We have strengthened technology and especially also engineering and product validation focus, which was one of the lead areas I found when I joined ITM in December last year. We have bundled our customer interface from sales to delivery into one organization, and very much closely integrated manufacturing and procurement, which is important, and we have increased oversight and governance of company processes. We had announced in January that we will reduce our headcount costs by 30%. We have achieved 33% and around GBP 10 million. Also in our January update, we showed you this slide listing improvement potentials to mitigate future inventory losses and project cost overruns, as ITM had experienced those in the first half of last financial year. Again, the [ Harvey Balls ] indicate our progress, 6 months into our 12-month plan. As you can see, there's real progress happening in our company. Appreciate we don't have time to cover every point in detail today, but let me reiterate all these things are solvable. Of course, they need probably to pick only one for today. Design was previously at the root of many of the challenges we faced. This is now fixed. We have professionalized our engineering in terms of capabilities. We have brought in new metal engineering. We have broadened our processes and improved them significantly. One of them was the introduction of the design freeze, which was one of the main reasons for inventory losses in the past for ITM, and we have enacted a very stringent management of change. We have also strengthened compliance and validation with veto and sign-off right to challenge the engineering status prior to formal release for procurement and fabrication and, of course, also prior to release for selling. The area we are still working on and that's the reason why the [ Harvey Ball ] is not yet full, is that we are still working on our 2 landscape process simulation tool landscape further improve there. As we see that on a single [ Harvey Ball ], which is less than half full, 2 of them, 3 quarters, which means that we are very well on track. Let me again show you some very tangible progress now, followed by on our stack production and the improvements we have made to them and the effect of systems. When I joined, we were faced with a rate of stacks not passing factory acceptance testing, short FAT, that was far too high. So what did we do to tackle that. First, we performed a very detailed design FMEA, Failure Mode and Effects Analysis and implemented the results into our product design. We have incrementally automated or semi-automated various production steps, such as the assembly now being aided by later scanning and advanced camera and sensor technology, which makes a big difference for us. You will see more on the topic automation later. And we have also introduced a very stringent Quality over Quantity policy, which means that whenever we found an issue during testing of one of our stacks, which we did not understand immediately, which was not a known failure cost. We stopped production, we analyzed, we took a part of the stack, we analyzed the failure mode. We did proper design changes or adjusted our manufacturing process, and then only we started manufacturing. This has led to a little bit of on-off in our fabrication, but you will see the effect this was had in a minute. Why is that important? Why do we need to focus on how we produce stacks? And why do we need to increase pass rates? Is the first that leads to lower retesting costs. And as you can imagine, testing stacks at full load, consumes a lot of energy. So it's one means to lower our cost. There's also debottlenecking of test facilities, if we don't have to retest that. Certainly also fewer interruption to serial manufacturing. On the one hand, because on-off and on the other hand, because we avoid stack reassembly. It also leads to higher predictability of production and project schedules. And certainly, we can also reduce material storage. And now let me review the substantial impact this has had on our stacked output and the work required. What you see here is the real factory data from March this year onwards. The black line represents the stacks produced, while the green, the stacks that passed factory acceptance testing. Red is accumulated number of stacks that required rework. You can easily recognize the effect of quality first and on-off approach, and the introduction of new machines had on the timeline. What a tremendous and tangible improvements, which we will further accelerate. This is what debottlenecking is all about. It's about finding bottlenecks or weaknesses, understanding them, fixing them and then scaling up volumes. While we are already on it, let's continue talking about debottlenecking, our operations for scaling, because there's more. First, facilities expansion. As announced, we are currently expanding our Sheffield Bessemer Park facilities, which is well underway. By that, we are, at the same time, making more space for product R&D and validation, including new science labs and more testing facilities for first-of-the-kind products, which is very important for new generations. It also allows us to improve our factory layout for stacks, from a layout and factory design, which has evolved over time to one that is highly optimized for serial product automation. Also, we will gear up for higher stack volumes by that, and we will take over the new facility in November 2023 for interior fit-out, and we will start production in the second half of next calendar year. I want to keep it real again. This is how it looked like 1 month ago. We are very well on track. Likewise, we are very well on track with our German entity, which we are about to open in the City of Linden, which is very central to Germany, North of Frankfurt and also very center to the European Union. Official opening will be in October '23 already, and our new facilities will host various business functions, which are critical enablers for ITM's accelerated growth going forward. Like, for example, our new global business development function or our new global data and IoT team. At the same time, ITM Power Germany will act as the main after-sales hub for Europe, given its location. We will have facilities to store and quickly deploy stacks skid from there. And we will also field engineers to service the plants we are currently building in Europe. And of course, we are also gearing up for an increase of local concentration in the European Union. Next is testing and power supply. In our January update, we had announced the phased approach to increase test bay capacity to satisfy project needs; which require more than a doubling in 12 months. We have now successfully increased our electricity supply already by 50% to 7.5 MVA, and we have already signed a contract and secured a further increase to 30 MVA for the second half of 2024. So also here, well ahead of plan. Next is automation, one of the key improvement fields for ITM. Also here, we have made very good progress. And as you have seen in our stack output graph, these improvements are already affecting cycle times and build quality and gearing it up for serious volume growth. We are only incrementally deploying new automation and machines into our fabrication after robust product and manufacturing stack validation. We experienced supplier-driven delays for 2 equipment's, but where -- these were very well managed by our ITM team. Overall, we are very, very good on track, and you will see some more of that in a minute. I would say enough words for now. Let's now come to more visible proof of the progress we have been making on automation and that comes to our new product releases, exceeding expectations, that's what we are here for. [Presentation]

Well, this is what I call progress, and this is definitely a game changer for the industry. Let me repeat some of the key statements around POSEIDON. POSEIDON is our new standardized 20-megawatt core electrolysis process model with a very optimized footprint. It is replicable for scaling up for large projects and suitable for both indoor and outdoor installation, which consists of skid-mounted units, which can be prefabricated and pretested and which are ready for low transport without additional permits. By that, we can achieve reduced deployment lead times and lower construction costs and also derisk customer projects. POSEIDON has been engineered to ITM, incorporating real-world lessons learned from commercial projects. Let me put it like that. If we didn't build all of these first reference plants and last projects we have been currently building, we couldn't have designed this model. The design of the module is ready for integration into the balance of plant, which is enabling flexible execution work splits for large scale projects. And let me emphasize again, this is not just a nice vendor graphic, POSEIDON is now commercially available, and we have started bidding into actual commercial projects we did already last week. Our products are designed to out-perform. From today, this is our new product branding. Our second skid platform, based on our leading PEM electrolyser stack technology will be called TRIDENT. Our 2-megawatt autonomous Plug & Play electrolyzer for small to mid-size projects will be called NEPTUNE, and we just talked about our new cutting edge 20-megawatt module called POSEIDON. Coming to the outlook. I've been at ITM for just over 0.5 year now, joining the company at the time of challenging operational and financial performance. Being the first company to win large-scale commercial project, ITM had also experienced growing pains first. But as our competitors are experiencing similar challenges today, we will also be the first to fix them. Today, ITM already looks fundamentally different from ITM 6 months ago. We are well on track to solidify our foundations and we'll continue to focus on project delivery, which is very important for our customers and us [indiscernible]. Of course, still getting our house in order, we are now 6 months into our 12-month plan as such. So this means the remaining 6 months for us to implement and improve what's needed to be improved. We are going to keep doing so, and we will scale with existing and new commercial contracts. Of course, we are actively bidding for have a large commercial projects. I think there's not one credible product out in the market, where ITM [indiscernible] involved today. Just recently, we announced contract for the procurement of long lead items for another 100-megawatt project in Germany. We are very confident that we will further cement our position as the leading PEM player for real projects in Europe. And last but not least, we will unlock new territories, which is next strategic importance set for us. With that, I would like to close, and thank you very much for your attention.

That's great. Dennis, Andy, and Simon, thank you very much indeed for updating investors. [Operator Instructions] I'd like to hand over to Justin, who will now moderate the Q&A. Over to you, Justin. Thank you.

Thank you, Mark. Good morning, all. We have a number of questions. We'll try and get through as many as we can in the time frame. We'll kick off with the first question. Can you add any color or information regarding Gigastack and Orsted and Phillips 66 -- this yesterday, not to enter the hydrogen allocation realm in the U.K.

Sure. Okay. We have made a decision to focus and very heavily on projects that are in execution right now. There is much potential in front of us, what the right this time for us was to make sure that we are putting our effort in the places that gave the biggest impact to projects that we're delivering and committed to today. So from an ITM perspective, we have opportunities for further development of our stack platform, which are not covered today, but our focus right now is on the projects that are right in front of us, and there are a lot of them. So that feels like the right balance for me.

Question number two. The high cost of electricity is making electrolytic hydrogen expensive, and this is holding up in the market. So does ITM having plans to produce steam electrolyzers that reduce the electricity costs?

No. Let's keep it short. No, we don't.

Next question, what is the current monthly production quantity and what importantly are the bottlenecks that are facing the company over the next 6 to 12 months?

So we don't disclose our production quantities. And as I have said last time, our capital market update in January. So we are scaling with our projects. We have been doing that, and we will keep doing that. So with those of demand and we also signed contracts with the scale of fabrication of course, we don't see any bottlenecks at this point in time.

Next question. Could you provide more color on the processes that need to happen to successfully include an SOP?

Sure. Maybe I take that. So site acceptance testing is normally happens when a complete plant is being built and commissioned. This means that the whole electrolyzer plant, and sometimes even broader unit sometimes [indiscernible] tubing station, sometimes a tank farm. And so a whole electrolyzer plant can look very different, and take very different form and shape, and site acceptance testing normally includes that the whole plant is more or less ready to power the electrolyzer system so that you can check on interlinked with other elements. So site acceptance testing is oftentimes heavily dependent on the EPC partner and the end customer being ready for site acceptance testing. This is not so much an ITM and that's why we have a dependency, which we need to work on. I can tell you in the future contracts, and our last project are not reflecting that as well. We have deemed acceptance clauses in, which basically stated after certain period of time, after clearing product ready for shipment and factory acceptance test. If site acceptances test is delayed for reasons not in scope of ITM, then we can deem acceptance, recognize revenue and start volumes in period.

Regarding POSEIDON, you mentioned that these would be pretested. Does that mean there will be no SAT? Please, could you explain that as well?

There something else. I mean we are also pretesting our stacks in our factory with respect to acceptance testing, but the electrolyzers still the whole system doing now testing on site for SAT and also focused on pretesting units, after they have been manufactured offsite, is a risk mitigation so that you don't ship a product to site, which hasn't been validated, that it's functioning and then you find it out on site and then to ship it back. Basically about risk mitigation and speeding up the rotation and the product process.

Next question. Could you update us on the EU plans to restrict the use of EFAs?

Okay. So personally, I think that, that is unlikely and not practical. The broad definition that EFAs covers a whole range of chemicals. And the materials that are used in PEM stacks are long lasting, do not reach out any chemicals or of concern in this description. We're working with industry bodies to provide evidence of this to EU to help provide argumentation to support use of the materials that do not have risk.

I'll bring it on to you, Andy. Could you maybe explain or elaborate on some of the mix of the revenue guidance range for FY '24?

Yes, Sure. So the guidance range of GBP 10 million to GBP 18 million in all of those contracts, there is a site acceptance. And within that, there is a mix of Cube products and modules and container products predominantly going into the EU.

Next question. Regarding automation initiatives, what more do you think needs to be done over the course of the next 12 to 18 months?

Yes. So I showed you the enrollment which we had, which was progressing quite well. By implementing the road map within the 12-month plan, I would say we probably have been automated or semi-automated our whole stack fabrication that probably around 80%. The last remaining piece, which will not be fully automated until then, is the edges in the last assemble of the stacks, which we are also looking forward to automate for the -- 18 months' time frame.

With the IRA in the U.S., this seems to be a long-term driver for growth for electrolyzer equipment manufacturers. How is ITM specifically addressing this opportunity?

So right now, the IRA does not require us to have a factory in the U.S. Of course, it could make sense at a certain point to locate our fabrication there. But right now, this is not a must. We have checked that also from a media viewpoint and from a funding viewpoint. Projects will not be disadvantaged if we deliver specs from the U.K. So we do have strong partners already, like Linde was a very big footprint in the U.S. And for ITM, when I was talking about unlocking new territories, obviously, I was also thinking about the U.S.

You provided 3 KPIs regarding ITM stack technology versus EU targets. Where do you see ITM by 2030 in this regard?

Well, I don't want to give any concrete forward-looking statements on that. I think what I would say is that I am confident and proud of the core technology competency that we developed in the organization. That, combined with the partnerships that we've developed means that we are in a leading position, I would say, to make continued improvements to the stack platform.

Given the imminent opening of the facility in Germany, will ITM have any plans to manufacture in Germany?

If we had plans like that, we would have disclosed it at this point. So I mean the -- what I said today in terms of our German entity is what we are currently implementing. If we decide to implement more from the European Union, we will mention it.

On the very interesting slide for FAT, is it possible to comment on the percentage of production that has failed in the data?

So this is the tax passing versus this tax rate. I guess some might talk some of this that are our starting rate, base in low volume and the fee rate was pretty high and certainly not sustainable for our serial manufacturing. So we were above 30%. We've seen that decline dramatically, as we have improved the processes. We've also got a very clear policy, that upon any fee there is a clear investigation to what's happened, and we start, and we refresh. So we're learning lessons incrementally in real time. The other point here is when that stack fails, that doesn't mean that's striving to be a significant amount of the components we reuse rebuild. So that loss is first-time passes, and that's very different to things just getting scrapped. Yes, so I'm not going to...

Regarding the site, could you talk about some of the advantages that customers would benefit from by adopting POSEIDON into their projects?

Yes. I mean I think we've laid out actually when we showed the video, when I explained on the slide about POSEIDON. So it's about -- it's about proper scale-up of modules, which you can then repeat for large-scale deployments. It's about the lowering cost by repetition, speeding up project time lines. It's about derisking in terms of being -- all the units being prefabricated and pretested prior to arrival on site. And as I said, it enables ITM to work closely and in a very fast way with implementation process.

Do you have any updates on the [indiscernible] project?

We don't comment on specific sales projects.

Regarding the 12-month priorities plan, what do you believe are the key deliverables over the course of the next 6 months? And what are the biggest challenges you think you'll face?

So we maybe each answer our area.

Okay. First one. Within the year, ITM implemented a new ERP system, and there is work to really get all the full benefits from that system. So we've got something that looks like the minimum viral product -- products in January, not all to see, and we've been incrementally improving that. As we improve that ERP system, we also improved the controls, we have our own spend going forward. So from a financing government's perspective, a lot of what my team looking at is how we have the systems to support the controls that we're introducing.

I think in engineering, the focus is around making sure that we have the best tools and modeling equipment to support the development activity that something we finished [indiscernible] in the presentation. And also ensuring that we've maintained rigor and stringent design cruises control over product introduction.

Yes, maybe adding to that, ITM is not transitioning from what I always call an R&D and technology in such companies to a professional delivery organization, which is trying to produce its game. And this is of course, comes with the total change, obviously. So it's not only about implementing new processes and controls and systems, it's also about our day-to-day behaviors and how to lead these processes. And I think the kind of change element of that to change many going around that is quite time intensive right now for us. But this will be our main focus for the next 6 months to make sure that we actually walk the talk, so we are introducing processes, everybody sticking to them with discipline and high focus and they're not getting distracted. But I can tell you the system is already changing quite significantly.

Andy, you mentioned in might be on slides, overheads not being absorbed. Could you elaborate on more exactly what this means?

Yes, absolutely. So at the moment, we are charging -- we have all of our stock cost for instance within our overhead line. And then as we do activity, we recharge those or into various areas. So I think you covered it, but essentially, we have all of our cost system and overheads and then we are charging it both into product developments and to project execution. So then even in cost of sales or into the balance sheet. And that overhead number that we were putting in the guidance was our net overhead.

It's very normal for growth in business, if I may add to that -- it's very normal if the growing businesses to have -- let's say, overhang and overheads and the volumes across the certain minimum thresholds for which, and as a positive margin contribution from producing and selling more products.

Which new territories are you referring to at the end of the presentation?

As I said -- I mean, we are very strong right now in Europe. I think the most important markets to get a tool in the door is U.S. for us. Of course, there could also be other attractive markets, but I would say the U.S. is ranking quite highly right now.

Regarding POSEIDON, could you give us some idea of when ITM would be ready to produce and install the new module?

Yes, as I said, POSEIDON is now commercially being built into actual projects. So how would it work from here at large? I mean we are talking about large-scale projects. Large-scale project would require that the customer is normally completing a peak for us of the front-end engineering design, which is giving the whole investment of the plants. A engineering design process, which you can then base the cost estimate and schedule and -- on and then you can also acquire suppliers for lead times. And for POSEIDON, depending on the works that with the implementation partners, we will, for example, most likely buy the power supply units through the [indiscernible] into our books, some vessels, piping could potentially be done by an EPC partner. So we would have to define the detailed works that for that and on a project-by-project basis. But as I said, it's now commercially mature to a point where we are building the module into new projects, as of today.

With regard to the contract loss provisions that you took in FY '23, are these expected to be recognized on SAT of projects they relate to?

So the contract loss for any given project, if this loss-making is recognized at the point we recognize the [indiscernible] loss making. And the -- and that comprises of 2 parts, that comprises of cost to execute the delivery and then the warranty. And what you'll see is all our contract loss which will sweep out upon SAT. And larger commission will then move, it's the large commission line on the balance sheet. So yes, as we execute projects, we'll see our contract division going there.

Could you please elaborate, or any supply chain risks related to manufacturing ramp up?

Yes. I mean in principle, is just what I said, right, if we scale by a factor of more than 100, which is basically what we are doing right now, okay? Something between 100 and 500 in terms of scale our factor. This means that every part of our supply chain needs to scale with us at exactly the same speed. This requires a significant investment, and this is taken by every part involved. And that is why you need to be very closely integrated and very closely collaborating with the key suppliers of critical components. And that is why the recent announcements we have been putting out in the market for collaboration with key critical suppliers are so important for us to actually build a platform for real growth, because as long as you don't work with and closely integrated with your supply chain. If you don't do that, then everything else is just in the announcement. But if you want to come to real growth, then you have to work with your suppliers, and this is what we are doing. So do I see any bottlenecks at this point? No, because we are working very closely with our suppliers. But of course, it depends on how far you are right later in the future. They could come the bottlenecks then we have exceeded. Right now, I think we are very well on track working with our suppliers.

That for now is the amount of time we have for questions today. So thank you for your time. Any questions that you have outstanding, please send them through all of those open as soon as we can. So thanks very much for your time.

That's great, Justin. Thank you very much indeed for moderating the Q&A. Dennis, now I'll shortly redirect to investors on the call to give you their thoughts and their expectations and ask some feedback. But before doing so, I wondered if I may just ask you for a few closing comments, and then I'll redirect investors.

Of course, thank you very much. Thank you for dialing in. I hope we were able to convey the progress we have been making over the last 6 months, which we found quite impressive, I have to say. And we are gearing up for serious scaling of our manufacturing operations and deploying products to customers, which is what we are here for. Thank you.

That's great. Thank you, Dennis, Simon and Andy for updating investors this morning. The company is asking for us not to close this session, so we're now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of ITM Power Plc, I would like to thank you for attending today's presentation, and wish you all a very pleasant morning.