Doosan Strategic Collaboration

Oct 19, 2020

Slides

Hello, and welcome to the Sirius Power Tucson Agreement. Should you wish to retrieve the presentation of the call, You may download it from the Investors section in the seller's website. My name is Val, and I will be your coordinator for today's event. Please note, This conference is being recorded. And for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions session. I will now hand you over to your host, Philip Caldwell, CEO, Cyrus Power to begin today's conference. Thank you. Good morning, everybody and thank you for joining this call today. I'm very excited to talk about the latest strategic agreement that we've signed this morning between Sarah's power and Doosan. And I'll be referring to the presentation material, as mentioned, which is on the Presentations section of the Investor Relations part of our website. So I'm just going to step through this to explain to you the details of this collaboration. So moving to Slide 2. The strategic rationale. This is an incredibly strategic deal for Sarah's because do sound fuel cell is the world's leader in stationary power fuel cells. And today, we've signed an agreement that gives them a non exclusive license to manufacture the Sarah's steel cell technology, in South Korea. What's exciting about this deal is, it's a second major manufacturing licensee, after Bosch, but it's actually going to 50 megawatts capacity by 2024. So quite a significant ramp up in scale for this technology. What's also very strategic for us, and I think I've indicated this to you before, is we strategically want to go with market for fuel cells, which I'll explain in a few moments at a utility scale, and this is exactly in line with our plan. So again, more scale leads to future license and royalty revenues. Dusan has already established its leading player in the South Korean market with over 3.77 megawatts installed to date. And has just announced the world's largest fifty megawatt hedging power plant. So it's definitely the world leader in this technology. Moving on to Slide 3, the total value of the deal to Sarah's is up to 1,000,000 with license fee from technology transfer, joint development revenues of 1,000,000 over the next 3 years. Plus an additional million contingent on meeting certain KPIs. As usual, the agreement also includes the license terms for royalty streams, which will follow the production launch and the commercial sale of the 5 kilowatts steel cell stacks into future products of Tucson. And this builds upon the initial 2 year collaboration and license agreement we signed just over a year ago with Doosan, which was to develop a 5 to 20 kilowatt power system. That was an initial 1,000,000 deal. This is an additional 1,000,000 new deal today. If you move to Slide 4, just to illustrate how these collaboration agreements come together, So we're more or less halfway through the first collaboration on the 5 to 20 kilowatt system level license for a combined heat and power unit. Today, we're adding 2 key agreements to this. 1 is to actually take our technology and scale it into higher power systems for utility scale applications and also the license to manufacture the steel cell technology in South Korea with an initial 50 megawatts of capacity. Once those deals come to product launch in 2024, we expect to receive royalties from systems sold from CHP units and also royalties from stacked manufactured. And our royalties are based on a per kilowatt basis. If you go to Slide 5, many of you that follow the company will have seen this slide before, but what we've indicated before is the revenue evolution of the company. And you've seen in recent years, we've had significant revenue growth based on both engineering services and also on license revenues coming through. This latest deal over 3 years takes us again into that near term growth phase, but also has a first commitment to full market launch in 2024, which then gives us line of sight to those future royalties. So it's very significant because it's adding more scale at higher power and also the commitment for scale of mass production of our technology. Moving on to Slide 6, just a few words about Dusan. I mentioned, Dusan is the world leader in stationary fuel cell power. It's recently spun out. It's fuel cell division and listed this on the Korean markets. So it has a current market cap of around 1,000,000,000 It has 70% market share of the South Korean market. And it's built this based on existing technology that it's acquired several years ago from United Technologies in the U. S. And that's based on a phosphoric acid technology, which you can see there, the pure cell, which is about 43% electrical efficiency. What it strategically is doing with this agreement is adding solid oxide to its portfolio to increase electrical efficiency to 60%. So quite a significant uplift in efficiency. And Dusan is very ambitious. It's planned to achieve revenue growth from 1,000,000 today to 1,000,000,000. Targeting KRW1.5 1,000,000,000,000 of revenue by 2023. And you can see in the pictures on the right, the pure cell system it has today and also the world's first 50 Megawatt power plant, but it's just inaugurated in South Korea. Let me talk a little bit about why the South Korean market is, so key for us. Probably, it's got the most progressive regulation incentives anywhere to encourage the deployment hydrogen and fuel cell technology and is targeting 16 gigawatts deployment by 2040. As I mentioned, the 370 5 megawatts of installed plants already in South Korea account for 35% of global installed fuel cell capacity. Unlike many regions and countries that we're seeing post COVID, it's committed to a new green deal, which is 1,000,000,000 of investment by 2025, and that's part of a national strategy to transform the Korean economy from being carbon dependent, supporting the strange jobs and tackle climate change. It's also progressive in its future vision for hydrogen and has an issue to convert 3 cities to become hydrogen powered. If we go on to Slide 8, also what's fueling this growth is some of the policies that they have in place. The renewable portfolio standard means that utilities must source at least 7% of total power production from new or renewable sources. And that figure rises by 1% each year from 2020, up 10% in 2023. Now fuel cell installations counts as double towards these targets. So hence, you're seeing this introduction of fuel cell power for utility scale. Also, they have a hydrogen economy road map with the new green deal, transitioning career to a harsh and reliant economy by 2040. And the hedging market in Korea is set to double to 1,000,000,000,001 or 1,000,000,000 by 2030. And that's through a combination of targets around fuel cell power plants, rather than 15 gigawatts, residential fuel cells, rising to 2 gigawatts and a plan for something like 79,000 fuel cell vehicles by 2022. So very progressive, very ambitious policy for adoption of fuel cells. Moving on to Slide 9, why it's exciting for Sarah's is it's carrying out the strategy that we've laid out for the business. So, there's 2 prongs to this. 1 is we are aiming to have a number of partners as world class global scale manufacturers of our technology. And the South Korean market being such a strategic region for us, it makes sense that we go with the market leader and that Dusan. So we're very pleased to announce that they will scale manufacturing of our technology in South Korea. Second thing is, if you look at the right hand side, our technology has several different applications. And today, with this step forwards, we're looking to support Doosan to introduce this into high power applications which will have, benefits for increased power for distributed power generation and also be able to apply to the utility scale generation market. So very significant capacity in production which again leads to very significant future royalties for service. So In summary, on Slide 10, this is a very strategic deal for service today worth up to 1,000,000 over the next 3 years. It's a key manufacturing partner in the world's largest market for fuel cells. As I've mentioned, do some plans to build the facility, which should go on stream the 50 megawatts by 2024 with support from sellers on the technology transfer. And servers and do so and will work together to develop power systems to target larger utility scale applications. And we'll see in revenue streams then anticipated to come on stream for us post manufacturing launch for 2024. So with that, I'll take questions. We do have a few questions in the queue. The first question comes from the line of Lacey Majorbee from Pamru Guggen. Please go ahead. Good morning, Phil. Can you hear me okay? Yes. I can. Go ahead, Lesya. Hi. Congratulations on the announcements all in Perth. Great news. I just think first one for me is, was this sort of a natural sort of partnership development following the initial sort of, CHP agreement you had with Doosan or I'm just trying to get my head around because, obviously, there's a bit in here with doosan Corp and doosan fuel cell. So I'm just trying to understand if that follows on from that initial agreement or it says that that was quite separate from that. If that makes sense, I guess, I'm just trying to understand how you're moving parts or working? No. I think it's a good question. Most of these strategic relationships take several years to develop. And we we started with, with Dusang, probably probably 3 years or so ago now, as a usual first step of technology evaluation. And then we went into joint development of the first product, which was the 5 kilowatt CHA we announced last year. However, if you think about solid oxide as a technology and you think about their portfolio, So Tucson already have pen technology for lower scale applications. And then they've got phosphoric acid for higher power. Solid oxide as a as a technology could can go into all of these markets, all of these stationary power markets. And I think what's happened is, right from the beginning, we always anticipated that if things went well, we would expand this relationship with Doosan. And I think that the CHP contract was was a first step, but we always felt that the big opportunity was to broaden into higher power and mass manufacturing in South Korea. And that's where we've got to today. And I think if you you think about the product portfolio, I think it can go into several other applications as well in the future, because if you have solid oxide, you have the highest efficiency of all of the technologies for power generation. And I think that's why it's strategically important to produce that. Yeah. Definitely. Okay. Thank you. That's really helpful. And then just secondly, we'll just be sort of on the phase in of of those 43,000,000. I don't know if you can give any color on that over those 3 years? They're kind of running in parallel. I mean, there's there's quite a an intense period now where we do technology transfer, and what does technology transfer entail? That's where basically, we will get together with Dusan, run sessions where we actually teach them how to make our technology help them support the supply chain and actually bringing up manufacturing. And that's so there's an intense wave of technology transfer and then there's a long support period. And then on the developments of higher power systems, that's something that Dusan will take the lead in and we will play a supporting role in. So, the revenue streams will will flow over the next few years, but we'll give more details on that, I think, in future forecasts. Understood. No. That's helpful. That's that's good. Thanks. That's still that's all for me. Thank you. Thank you. Thank you. The next question comes from the line of Adam Collins from Liberum. Please go ahead. Good morning, Phil. Can you hear me okay? Yes, Robin. Good morning. Good morning. 3 quick ones from me. What's all the largest, power systems you think that still so could be targeted at by doosan? Are they interested in hydrogen still sell? And what do you think the main non Korean markets they're interested in is Sorry, Adam. Can you repeat the last question? Yes. Where do you think the main interest from Doosan is Internationally? I see there's a blob in your geographic chart, which looks like North America Is that one of their international aspirations? And where outside of Korea beyond that do you think that there might be targeting these things? Sure. Okay. So in terms of the size of the units, I think probably this technology is very modular. And if you look at the modules that they deploy today, they're in the range of 200 to 400 kilowatt type modules. So, I anticipate something something similar, in terms of power. In the hundreds of kilowatts, that's obviously, to be determined between the two companies. In terms of Doosan's ambitions, obviously, the career market is a large market, but career is as a country has pretty ambitious targets to actually become the world's leading export to the fuel cells as well. Just as they have with battery technology. And in terms of Doosan's presence, obviously, they have doosan fuel cell America. So they already have a pretty strong footprint in the U. S. As well. So I think when we announced these deals, people shouldn't think of Dusan as a pure Korean player in the summer. They shouldn't think of Bosch as a pure European player. These are global companies with, I mean, this is a global a global market that's emerging. So I think for Dusan, it's obviously the world leader and the number one in South Korea. But obviously with the footprints in the U. S, I think, that's obviously a key market in the future. What was your second question, Adam? I'm interested in running this in Hunter. Well, I think the answer to that is they are interested in hydrogen and you've seen in the presentation that just built the world's largest 50 Megawatt power plant running on by product hydrogen from an industrial process. So Hargine, I think, is a key part of South Korea's roadmap in the future. And technologies like solid oxide, which are are fuel flexible and and can be one of these key transition technologies that can run on natural gas and run on hydrogen. And the transition of blends in between, I think, is a very important feature for them as well. But I do think Korea will be one of the first countries to move towards hydrogen and therefore future proofing of technologies is important. Thank you. The next question comes from the line of Anthony Klums from Berenberg. Please go ahead. Good morning, Phil. Most of my questions actually been answered. I suppose maybe just a very simple one to start with. Would you mind maybe just discussing a bit more detail of what we actually mean by utility scale applications? In terms of the size, obviously, looking at multiple 100 kilowatt, but, you know, what what is the fuel cell displacing here? What's the biggest barrier to adoption? Who's the likely customers? I'm just getting sort of color on that would be useful. And then just on the KPIs, I suppose, what are these, what are these based on? And maybe you can't give it explicitly, what sort of things we're looking out for? Sure. I think when we talk about utility scale, as I mentioned in the presentation, that requirement on utilities to source increasing amounts of newer renewable power up to 10% by 2023 has created a growth market for fuel cells in those kind of applications. And if you look at how they're being deployed today with the current technology, you've got 100 kilowatt modules being applied into megawatts and 10s of megawatts scale when you look at that 50 megawatt power plant. So I think it's it doesn't mean that you have to build megawatt scale fuel cells. You can build modular multi 100 kilowatt systems and then just add them together to make megawatts scale. So that's what we mean by utility scale. In terms of KPIs, I think there's a balance of several KPIs, which are all around sharing some of the, the targets that we have for the cost of the fuel cells produced, the quality and on those kind of pretty standard commercial metrics. So I can't divulge all of the details, but What it's around is, Sarah's, once we've transferred this technology, making sure that what we say the potential is for what that production facility can do and what the technology can do is delivered to do so. Thank you. The next question comes from the line of Mark Elliott from Investec. Please go ahead. Morning, Phil. Just I was curious to know your thoughts. You now have 2 stack level agreements Bosch and Doosan. And just thought you could share us some color on how you see that sort of level of agreement with those 2 partners, opening up additional system level partners, let's say in there, I know you said they're both global, but let's say got Doosan opening up the Asian market, Bosch, okay, Global, but let's say European and North American, opening up new market the system level through their sales channels and thoughts. And also whether you're is this about the right kind of number of partners with whom you'd want stack level agreements or would you be looking to add 1 or 2 more in the next sort of couple of years or so? I think if you look at the scale of the market opportunity and where those markets are, It's always been our strategy to have several manufacturing licensees at the stack level. So, you know, we would, we would look at additional manufacturing licenses in the future. In terms of the additional, commercial opportunities that this may may bring. I think what it does do is if you think about our model, we have system level licensees for example, like Muirva. And then now we have manufacturing licensees like Bosch and like Doosan. What it creates this ecosystem is on one hand, we're creating more and more pull for the technology from system level partners of licensees. But now we also are familiar that demand to, potential supply through the likes of Boshen do sound, to fulfill the Mandeville swerve as well. So I think what it does is it gives increasing confidence to people who maybe want to use this technology, but maybe don't have the capability or the ambition to take on manufacturing themselves, that there will be a global manufacturing supply of this technology in the future. So I've used the analogy before of the chip industry with Alarm, it's a similar approach with creating an ecosystem of demand for the technology. And then looking to have a number of trusted partners at the manufacturing level, but with a global presence that can fulfill that demand. I think obviously strategically in the future, there may be key regions of the world where it makes sense to localize manufacturing with the right partners. So it's all for us, it's all about having global scale for our manufacturing. Thank you. The next question comes from the line of Edud Maravanyika from Citi. Please go ahead. Good morning, Phil. Just had a quick All of that royalty number will be up front. And can you maybe discuss how sort of how it compares to maybe other some volatility that you've discussed before? Sorry. Can you just repeat that question, please? I I'll it's no good for a second. Yeah. Sure. It was just around the royalties. Just to confirm if you have already predetermined the number upfront, and whether it's flat royalty number or whether there's some kind of a scaling or, whatever you can sort of expand on that? Sure. So, yes, the royalties are already agreed in in this in these contracts similar to most of our agreements. And the levels of royalty, while we can't divulge the exact nature, they're pretty consistent with our other licensee partners. So the royalty rates are probably in line with what we've described before. And I question comes from the line of Sanjay from Panmoor Gordon. Please go ahead. Most of my questions have been answered. I was just trying to get my head around Dushan's strategy because I noticed that Bloom Energy did a deal to sell units into South Korean market via SK Group. And I was wondering whether are you still able to do deals with other South Korean companies after this deal? Well, it's a non exclusive deal. But I think, you know, our focus is obviously we do so. Is we think that do sound all the market leaders and, probably the most important partner for us in this in this region. But you're right. I think the SK collaboration with Bloom actually create some healthy competition now. And you've now got 2 major corporations in South Korea moving towards solid oxide. I think that's very good for solid oxide as a technology in general. A lot of analysts are very familiar with Pam and people talk a lot about Pam in the transportation sector. And sometimes I feel that the stationary power market is somewhat overlooked, but now what you're seeing is large scale deployments of solid oxide particularly through Doosan are now with SK and Bloom. So I think it's healthy competition in in this kind of region. There are other applications of course that our technology is applicable to. And like I said, this is a non exclusive agreements with Doosan. So it doesn't limit sellers from, obviously, creating more partnerships in the South Korean market in the future. But today, we're very, very happy with Doosan and as the with 70% market share in that particular market, we think there's no better partner. And I'm guessing that your strategy is different from Bloom because Bloom is making the units, you presumably will just apply the sort of the stacks of whatever to do sand. Yeah. It's a different strategy from Bloom because we're actually licensing, Tucson to manufacture the staff in South Korea. So that's quite important, I think, particularly for, the South Korean government, because I think they want to see as much localized manufacturer as possible. So our business model of licensing is very attractive to do so. Thank you. Thank you. The next question comes from the line of Ann Margaret Crow from Edison. Please go ahead. Hi, good morning. Congratulations, and thank you very much for taking my call. I've got a couple of questions. But they are kind of more regarding DuPont strategy. So I appreciate it if it's not something that you feel fully able to comment on. One of them, the first was whether do some would be phasing out their phosphoric acid technology in favor of solid oxide. And then the second was whether doosan are being actually putting technology in place to ensure availability of hydrogen derived from renewable sources. Going forward. So I really can't comment on Dusan's strategy for its Forsmark the business. I think, if you look at their own investor relations reports, I think they say a lot more about their year. I think, obviously, solid oxide offers them something in addition to what they have in the phosphoric acid. Technology. And as we've just discussed, there is now competition is also in South Korea with a solid oxide technology coming to market. So, I think it's a natural progression that a company like Doosan would move move forwards with technology towards solid oxide, but I can't speak to that particular strategy. In terms of, your second question around hydrogen, I think the question you're asking Alan is, are they interested in green hydrogen from renewables. I think the answer to that is, it's obviously yes. They are. But interestingly, the first hydrogen power plant that they've installed is actually using byproduct hydrogen from an industrial process. And that's also quite interesting because solid oxide is able to deal with a lot of impurities in fuels, particularly if they're coming from additional processes. So We're a lot more tolerant to, let's call it, non green hydrogen or hydrogen that's being cleaned up from a and industrial process than than other technologies are, say, Pam. So we're very confident in the application of solid oxide, whether it's from green hydrogen or from gray or blue hydrogen, it doesn't really matter. And I think that flexibility is all so important to our customers like Doosan. Thank you. The next question comes from the line of Adam Forsyth from Longbow Research. Please go ahead. Good morning, Phil. Just a couple of questions. Firstly, on technology transfer, where do you see any pinch points there I'm sure you've had a thorough review of the risks. I wonder what are the sort of things that might just slow up the process around tech transfer? Is there any technology you're not transferring? Are they getting everything or are you keeping anything back from a sort of IP perspective And then finally, just again, on the sort of use cases that concern will be deploying the applications. Are you expecting most of these to be essentially baseload applications or will you be able to sort of provide some elements of flexibility within the final product as it were? I think they're using them in a variety applications, including prime power. So these aren't backup systems. These are prime power systems. And I think if you look at their product portfolio, you've got these, these high power level, deployments at other utility scale. And then you've got things like the CHP modules that were don't forget we're developing that product line with Doosan as well. And that will address a different a different sector slightly, which would be like commercial buildings, office blocks, etcetera. And they're also present in the the microgeneration end of the market as well currently with PEM. So I think they see this technology as a platform technology that can be applied into many different applications. But obviously, the larger markets today are at the time power generation and the market. In terms of IP transfer, we don't really foresee any bottlenecks in that. We're getting pretty, pretty good at doing technology transfer having done this several times already. And obviously, there's some some slight limitations with the current situation with COVID, but we are very confident that we've already built the team up in anticipation of this deal over past few months. So we're ready to go with the resources to do it. And, if you look at the timeline from where we are today to 50 megawatts is quite an aggressive timeline, cloud vicious. So we want to hit hit the ground running, with do sound and everybody's ready to go on this. In terms of the nature of the license, it is a license that will give some the full technology that they need to be able to manufacture sales and stacks in South Korea. So we're not withholding anything at this point that they need in order to actually enable that manufacturing to happen. On the system level, it really depends on what IP is relevant to their system and utilizing our technology versus inflection property that they already have or capability they already have. I mean, I think that's what's good about Dusan as a partner is obviously there's a heritage there within do some fuel cell and do some fuel cell America as well, on doing large scale systems already. So they bring, they bring a lot of know how to the table, already. So this, you know, the IP transfer is depends on what our customers really need, but it's going to be a very collaborative approach. Great, great. Thanks. Very helpful. Thank you. Thank you. The next question comes from the line of Nick Walker from Arjun Partners. Please go ahead. Good morning, Phil. A couple of questions, please. First of all, with respect to obviously this license is for technology transfer manufacturing of cells and stacks to do sand. In every case, will do sand be integrating 1000 stacks into their own whole products and those products be deployed in the market or might do sand in certain circumstances partner with other integrators, other product makers with your sales and stacks, where other partners might then make the end user products? That's the first question. And the second question is with respect to Doosan's sort of sales channels and sales partners, do you have any sort of feel for whether they sell directly in every case to utility companies, commercial building companies, etcetera, etcetera. Or do they work through distributors and other service partners to deploy the end user products? Sure. If I answer your second question first, I honestly don't know what, how that is managed today and what the split is. I think there's probably quite a lot of information in in the public domain from from doosan fuel cells around their strategy since they listed earlier this year or last year. So I think you would have to refer to do some for more information on that. In terms of the potential for them to supply to 3rd parties. I think we've said this in the R and S. The first focus is to meet their internal demand for their own products. However, they do anticipate, supplying stacks to third parties as well in the future. So I think they definitely have the ambition to manufacture beyond their own product portfolio. Thank you. Thank you. The next question comes from the line of Othinal from Marshallway. Please go ahead. Hi. Good morning, everyone. I have 2 questions, I guess, related to Slides 708 in terms, particularly in terms of the environmental benefit of fuel cells. I guess I'm just trying to understand 2 things. One is, is in, Korea, the fact that they're in senderizing, fuel cells as part of Renewable, but is that including using methane I'm just wondering if there's any environmental benefit. And then secondly, I mean, if there isn't an environmental mental benefit of using a fuel cell, for me thing versus a gas turbine? Is it, do you think that the Koreans are trying to promote the fuel cell technology and that eventually will transition to hydrogen? Yes. So I think it applies today for fuel cells running with methane and, it's all about also the transition to the future. I think if you're running, fuel cell is the most efficient way to generate power from fuel, So if you are going to use a natural resource, like natural gas as your fuel, then you want it to be as efficient as possible because that has the benefit of being lowest carbon way of producing power from that fuel. And I think when you get up into the types of efficiencies you're talking about with solid oxide, you're talking about reductions in carbon compared with grid scale power of around 30 percent lower carbon, right? I think that's those numbers are well understood if you look at any of the studies that have been done around the deployments of fuel cells, in Europe based on natural gas. So that's the first thing. The second thing is, I think South Korea are more progressive than most in understanding the relationship between fuel cells and hydrogen. There's a lot of excitement and talk about hydrogen as a fuel and there's less focus on the deployment scales and the side and the demand side of hydrogen. And that very often people's awareness is limited to transportation. And I think by using highly efficient distributed power, that convert on the fuels that we have today like natural gas and convert on future fuels like hydrogen is the right strategy because we need to be able to transition and natural gases is seen as a key fuel for that transition, you can't suddenly get a wholesale switch overnight from the energy system we have to a high stream future. And you can look at Goosehead strategy. They're operating plants on natural gas today, and they're just put in this 50 megawatt facility running on hydrogen. So you can see the direction of travel, essentially, with the same technology. And that's a big, a big part of the strategy is getting established with the most efficient technology today that can transition towards that hydrogen future. So I think the Korean The Korean incentives are doing 2 things. 1 is they are decarbonizing their society from today and their future proofing it towards hydrogen. I think the second part of the Korean government's strategy is they recognize that fuel cells are going to be as important as battery technology is globally. And they want to be a world exporter of that technology. So if you think about where lithium ion was a few years ago, and now the production scale production is dominated by Korean Chinese and Japanese manufacturers. I think by early adoption of this technology and by encouraging this industry, they realize that they will become world leaders in the support of this technology in the future. Thank you. There are no further questions in the queue. I'll hand the call back to our speakers to conclude today's conference. Great. Well, thank you everybody for taking the time today. As usual, very good questions, which helped to bring the the detail of the deal to life. And just to summarize, we're incredibly excited about this new deal with Dusan. It's an incredibly valuable deal for us with 1,000,000 over the next 3 years. It does establish a manufacturing partner in the world's largest market for fuel cells for stationary power today. It's a commitment to move to 50 megawatts scale, which is a significant ramp up in capacity for the service technology. It takes us into these higher power applications and new markets for the service technology. And it underpins the future value of the company through royalty streams, from future production. So, we're really looking forward to working with Doosan. And we're very pleased to announce this milestone today. So, thank you everybody for your time. And we'll keep you updated with progress in the future. Thank you. Please stay on the line and wait for the instruction.