Collaboration

Jan 18, 2024

Good afternoon and welcome to the Ceres Power Holdings PLC investor presentation. That was a recorded short update meeting. Today, investors will be in listen-only mode. Questions are encouraged, can be submitted anytime via the Q&A tab situated on the right-hand corner of your screen. Just click Q&A, type in your question and press send. Company may not be in a position to answer every question received during the meeting itself, but the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Phil Caldwell, CEO. Good afternoon, sir. Good afternoon. Good afternoon, everybody. I'm pleased to be joined today by Tony Cochrane, our Chief Commercial Officer, and also Eric Lakin, our CFO. It's a great pleasure to talk to you today about a new license partner for Ceres. As we signed our first combined SOEC for green hydrogen and SOFC license with Delta Electronics in Taiwan. Let's just go into a little bit more detail on that. This is a long-term collaboration, as most of our partnerships are. This is for cell and stack production. This is a manufacturing license. The agreement itself is worth an initial GBP 43 million in stage revenues. That includes the technology transfer and the manufacturing license. In addition to that, there may also be some hardware provision as well. The technology introduction and factory construction will actually start immediately. I was obviously with Delta the past few days, and actually they've already got the factory shell ready to go, which is quite interesting. It's over three stories because land is at a premium in Taiwan. We're probably going to start the technology transfer next week, really. It's quite rapid as well. Initial production is expected to start by the end of 2026. Taiwan is a powerhouse of manufacturing. When you go there, it's incredible to see. You've got all the semiconductor fabs there and Delta's capability in terms of manufacturing. We're really excited about this partnership. I'm going to say a few words about the financial implications before I hand over to Tony, who'll give you more insight into Delta themselves and the partnership. As I mentioned, the total value of transaction is GBP 43 million technology transfer. It's high margin license revenue for us, and engineering services over three years. Of the GBP 43 million, approximately half of that is expected to be recognized as revenue this year. What that will mean is already we'll have line of sight to contract approximately GBP 40 million this year. Around double the revenue that we did last year at this early stage in January. We're looking at a very strong start and probably a very strong 2024. As I mentioned, there's upside of additional revenue from stack supply over the three-year period. Then as always, royalty streams are baked into the agreement following the production launch and the commercial stage, from what's already contracted as the royalty fee. That's the financial implications of the deal. I'm going to hand over to Tony to say some more about the partnership. Thank you, Phil, and good afternoon. I do not know how familiar Delta is in terms of a household name, but Delta is a very reputable company in the business-to-business world, especially in the markets such as data centers and clean energy and efficiency of devices globally. They produce solutions for a number of markets, and of course, one of their core competencies is their ability to manufacture at scale in some of the low-cost regions of the world, such as Taiwan, Thailand, China. They have about 80,000 employees distributed worldwide. Obviously, there is a strong footprint in the Taiwan and regional area, but their facilities span the globe, Europe, U.S., all across Asia, and their sales channels are very strong into all those markets. They are a very diversified company, but if you look at their portfolio of products, it is very focused around solutions for smart buildings, energy infrastructure, grid balancing, efficient energy storage, efficient energy conversion, which aligns quite well with the type of business that they are investing in now. They also have a culture of very strong decarbonization, low carbon type technology investments, and that is part of the DNA of the company, which is very well aligned with some of the values that Ceres brings to the table as well. Specifically, though, why does Delta make such a strong partner for Ceres and for the deployment, commercialization, and scaling of our technology? Well, they have some of the same ingredients that we found in some of our other key partners. First of all, they have a global footprint, good channels to market in the types of markets where our technology is most suitable. They have a portfolio of products that complement our cells and stacks, meaning they do power conversion devices at very high efficiency and very low cost. In fact, if any of you are running this video on your laptops, there is a good chance that your laptop is being powered by a Delta power converter inside. Ladies and gentlemen, just want to check that we can hear Tony there. Feel like we have just lost him for a moment. Bear with me one second. If we've lost Tony, I can take over the slide. Please, if you would, Phil. Once he's come back in, we'll just confirm he's back through. Delta's aim is to be a leader in Taiwan's energy transition. Taiwan's energy mix actually needs to be cleaned up as well. They have quite a high constituent of coal in their energy mix. Also, when you see these big semiconductor fabs as well, there's a lot of power that has to be built just to service that part of their economy as well. Delta's going to integrate our technology into a variety of their products, and that's what Tony was just talking about. They're obviously big in the ICT sector. They supply people like Microsoft, they do chargers for Tesla, et cetera. This technology is very synergistic on the fuel cell side in terms of power applications. They're targeting customers worldwide, a myriad of sectors, and that's why it's an SOFC and an SOEC license, including decarbonization of chemicals, energy, transportation, steel, and more. They have very strong relationships with some of the big industrial groups in Taiwan as well. I was there, as I mentioned, just yesterday actually, and they're establishing a net zero science laboratory. That means they've already laid foundations, which I saw for actually electrolyzer testing, at Tainan. They've got a very sophisticated infrastructure set up there already, ready to go on this as well. Their energy solutions will support the estimated global demand of hydrogen, which we've talked about many times before, which is 223 million tons in 2030 and 630 million tons by 2050. I think this is another example where if you look at the demand for hydrogen and green hydrogen, it far outweighs the current capacity or even the current small handful of players in the industry. That really plays to Ceres' strength as a licensing model because you should expect more new entrants, such as we're enabling with Delta, to come in, particularly with the Ceres technology. I think we're uniquely positioned in the industry to enable new entrants to come into this sector. In terms of evolution of royalties, obviously it's just starting now, but it's going to be quite a quick build. Obviously we have two factories coming on stream this year with Bosch and Doosan nearing completion. Delta will be hopefully completed by the end of 2026. So that's consistent with our business model, in terms of the royalty progression. In summary, it's our first dual license partner, which is fantastic considering that we made the decision to invest in electrolysis just over about three years ago. So it's quite rapid progress that we've made, and this is a big endorsement of that strategy. They bring strong capability in one of the world's leading centers for high volume technology manufacturing. I think the Taiwanese are famous for that. They've got this global footprint, as Tony mentioned. They've got facilities and people in China, in Thailand, in Taiwan, in the U.S. It's a significant partnership for us in terms of its monetary value of GBP 42 million. We couldn't start 2024 any better, really. It puts us in a really strong position for the year ahead. We've got a growing and strong pipeline, for both SOEC and SOFC. So we're delighted to announce this partnership today. I think with that we can probably go to the Q&A. Fantastic, Phil. Thank you very much. Thank you to the team. Ladies and gentlemen, do please continue to submit your questions just using that Q&A tab situated on the right-hand corner of your screen. Just while the team take a few moments to review those questions submitted today, I'd like to remind you a recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. I'd like to hand you over to Elizabeth Skerritt, Director of Corporate Communications, to host the Q&A. Elizabeth, if I may just ask you to read out the question, where appropriate to do so, direct it to the team, and they'll pick up from you at the end. Yep, that's great. Thanks to the team. Hi, Tony. Are you back with us now? I believe so. Yeah. Brilliant. We can hear you. That's great. All right. Perhaps I could direct the first one to you. A good question's come through asking, will Delta focus more on SOFC or SOEC, and which will they start with initially? Could you explain that for us? Thanks. Yeah. The contract isn't prescriptive on focus. It's flexible and so will the factory be. It will be able to produce to supply either market. Our expectation, though, is the fuel cell opportunity will come first. But the SOEC electrolyzer opportunity is understood by them as a bigger market opportunity, but it may take a little bit longer to scale in that market because of some of the proof points and some of the more conservative industry attributes. My expectation is that the fuel cell market will be provisioned first, but there's no prescriptive contractual obligations to do it in that way. Great. Thanks, Tony. Eric, perhaps I could come to you. There's a question here in terms of how high will the royalties be percentage-wise or as an absolute per megawatt. Could you just explain that for us? Yeah, sure. The license arrangement we've signed with Delta is very similar and consistent with that, with Bosch and Doosan. The royalty rate, the guidance we've given previously is in the range, GBP 50 to GBP 100. You could now say that's GBP 50 to GBP 100, with inflation. It's in that range. We won't give details, obviously, for commercial confidentiality. It depends whether it can vary, whether it's fuel cell or electrolyzer, and some volume breaks as well. You virtually apply that multiple, so the sort of pounds per kilowatt by the future capacity, and that is set capacity that's sold on a commercial basis from 2027. Great. Thanks. And perhaps a follow-up to that, Eric Lakin, if I may. Of the half of the GBP 33 million that we spoke about being recognized in 2024, what proportion is licensing revenue and what is engineering revenue? Yeah. I won't give the exact breakdown, but the majority is licensing revenue. Of the GBP 43 million, you get of the license revenue, there's a significant element which is upfront, so technology transfer. There's an ongoing element, which is what we call development license, that's recognized over time, over the three-year development period, 2024 to 2026. The same with engineering services. I saw the question around the phasing. What we've said is of the GBP 43 million, around half we expect to be recognized this year, and the balance we expect to be recognized roughly evenly in 2025 and 2026. Again, the majority of that residual is development license fees, with a small element being engineering services. Great. Thank you. There's a couple of questions here which are around IP, and I can come back to Tony Cochrane. Firstly, someone says, "Congratulations, guys, on a great start to 2024." So thank you. The question around IP is kind of how certain we are that our IP is protected and partnering directly with a Taiwanese company, are we confident that we're protecting IP, and how do we do that? Could you pick that up for us, Tony Cochrane? Yeah, sure. Obviously, we provision IP very carefully and judiciously. We have very strong contractual provisions, but they don't in of themselves fully protect you. There are some supply chain protections on some of the materials and ingredients that go into the parts, which allow us some control of the IP and misuse thereof. Of course, we don't share how we design or why we design our products. We deliver a design, and all the insight and knowledge of the design itself is something that Ceres and Ceres alone retains. That is in of itself also quite a strong IP protection mechanism. The last tool is partner selection is important, and we tend to pick partners who have a lot to lose outside of their domestic region. In other words, because Delta has a very strong global footprint and business all over the world, obviously, if there's a misuse of our IP, we have recourse in a number of other regions other than perhaps the regions that you might be concerned about. So it's a multi-layer process for us, and we think about that long and hard as we choose our partners and how we deliver the technology. Fantastic. Thank you. There's lots of great questions coming through, so I'm going to try and do them justice. There's one here, Tony, perhaps for you, asking: Will Delta build electrolyzers on their own, or would they just produce for other companies? I guess what aspects- Yeah of the hydrogen value chain would they be looking to capture is another way to put it, perhaps. Yeah. So Delta, it's a very deep value chain. The electrolyzer module is a set of components that goes around the cells and stacks, and Delta's ambition is to produce the module itself. So more than just the stacks rather than just a component supplier. And the reason for that is they have a lot of complementary product lines. So they do power conversion devices, they do thermal management systems, they do controls, and their intention is to have a very high portion of the value as a result of those complementary product lines. So their target is to deliver electrolyzers and ancillary components to a site system integrator in the market. Great. Thank you very much. There are loads of questions coming through, so I think we should just address it head on. Perhaps I can come to you, Phil Caldwell, regarding the Weichai Bosch deal for China. Mark asks an interesting question. He says, "Considering the speed at which this deal has concluded, why is the Weichai Bosch deal taking so long to bring to fruition, and is that still on the table?" Perhaps you can just pick that up for us. I can comment on the speed. Look, two-way deals are a lot easier than three-way deals. Also, I think Delta's appetite is very strong to get going on this, strategically as well. So I think, yeah. The contracting of the three-way deal obviously was quite involved and took a long time. We are not going to give an update today on the Bosch Weichai relationships. Look, I have been in Taiwan, I have also been in China as well. One thing I can say is our relationship with both our key partners in Bosch and Weichai remains very strong. Obviously, we are looking at moving forward with our China strategy as well. This does not interfere with what we are going to do in China, I think long term. This is a standalone deal, and I think you have got to think about this in terms of, as I mentioned earlier, a very strong partner, both in terms of their product lines and also in terms of their manufacturing capability, and also with a very interesting home market, but with a global view as well. So think of this as a separate deal rather than how it interacts with the China strategy. Great. Thank you. Tony Cochrane, perhaps I could come to you, there is a good question here. Should we consider the Delta deal to be wholly around stacks production for fuel cell and electrolysis? Or will Delta also be making ready-to-use products, supplying stacks to others to make systems? How is that going to work? Yeah. They have an option to do both, to both integrate stacks into their own product lines, and also to supply stacks to third parties for perhaps a global demand for stacks into other system integrators. The way the factories reward you, they tend to reward scale, and so that optionality was quite deliberate because, the bigger the factory you build and the more capable a manufacturer you are, you can find multiple channels for that stack product. Delta understands that very well. They're motivated to not only scale their own business, but perhaps offer others an opportunity to procure stacks from them and add other product lines to this capital investment in the factory. So I believe both will happen. But the first step will most likely be a Delta focus step with their own product, their own electrolyzers, their own fuel cell systems. As they scale, they will likely make stacks available to others under the appropriate commercial terms. Fantastic. You may all have comments to make on this question, but perhaps I could come to Phil first. With the existing partners, Bosch, Doosan, and Delta, how much capacity do we expect that we can start to capture in royalty terms by 2030? Could we expand a little bit on that ambition, I guess? Yeah. Look, it depends whether you're talking in fuel cell terms or electrolyzer terms, but we're looking at multi-gigawatts by 2030. Most partners start off with building blocks and then hopefully scale from that point. If you're going to make an investment like this, the license fee is obviously significant to us, but it's actually only a small part of the total investment that goes into the building of a business, a whole new line of business. So most of our partners have that kind of ambition. I think if you think about some projections out there that we're going to need about 300 gigawatts of electrolyzers every year from now to 2050 to hit the targets that are out there. Even having multi-gigawatts under license by 2030 is pretty small market share. We believe, in electrolysis, which is new for us, we are one of only probably three or four credible SOEC players. We expect to have a market share of 30% would not be unreasonable, and that is the way we think about this. Fantastic. Thanks. There is quite a long question here, which I will try to do justice to. Kenneth says, "On a wider scale, Ceres has reacted today in the market like a biotech with a successful drug trial. But Ceres technology and use cases are not uncorrelated in commercial terms. The more licensees will plant Ceres' adds values and reduces the risks for all our partners. Would you agree? And how does this manifest itself for existing and for potential new licensees? Maybe I can comment on that. Look, 2023 was a very frustrating year for us, and I think that is because the wider technology sector was down because of interest rates. Then the hydrogen sector was also down because of some frustration around delays into Final Investment Decisions and these kind of things. We have often traded in line with a basket of stocks. People think of us like a hydrogen production company. We are not. We are a technology business, and I do not think that we are fully recognized or rewarded for that. I think we have seen fairly negative views on what we are doing recently, despite the fact that we won the MacRobert award last year, despite the fact that we have just stood up world-class electrolyzer technology. When we actually do actually deliver what we say we are going to deliver, I think you see this reaction a bit like a biotech is an interesting point, but I think it is just a reflection that the company is, in my opinion, undervalued right now. We are at a share price that we were at before we had the investment of Weichai and the investment of Bosch, and we have stood up two factories already, and we have got the collaboration with Shell, and now we have got the collaboration with Delta. We are going to have more partners, and I think Ceres is going to surprise people again and again. The reaction today is, for me, is very pleasing. I think, unfortunately, U.K. stocks were at a record low discount compared to U.S. stocks, and I think the market is not quite functioning as it should at the moment. I think as long as we continue to deliver, and interest rates start to come down, and we deliver on what we said, the share price should get back to a sensible level where it was. Great. Thanks, Phil. You picked up an interesting point there, mentioning our relationship with Shell. There is a question here saying, are we affected in any way by the sort of market announcements that Shell has put out around pulling out of hydrogen? Perhaps you could just touch on that briefly. We obviously have an ongoing relationship with Shell. I am not quite sure that Shell have said they are pulling out of hydrogen. I think, where we are focused very clearly, and I think this is why I am confident we have got the right strategy, is what we are focused on is industrial decarbonization. If we do nothing else, we have to replace gray hydrogen with green hydrogen. When you think about industrial decarbonization, synthetic fuels in the future, steel ammonia production. Even if you just green hydrogen as a feedstock, then that is going to be necessary for these industries to decarbonize. I think that is the area that Shell is interested in, and that is our primary focus. That is where this technology has a 25% OpEx and CapEx advantage compared to everything else. That is why you are going to see more and more interest and more and more deals in SOEC in the coming months and years. Great. There is perhaps a couple of quick ones for you, Eric, if I may come to you. Quick one. Was there ever a question or discussion of Delta either investing in Ceres stock or Ceres investing in any type of joint venture? No. This is a straightforward bilateral license deal. No joint venture or separate entity needed, nor investment in Ceres stock. No plans for that. I don't know if you can comment, a follow-up question. Is the 43 million actually USD, I'm assuming, or TWD? Yeah. No, it's pound sterling. Also, I can add that the pricing and fees are set in sterling, so there's also no currency risk for us on that either. Brilliant. There's just a few questions as well, if I could come back to you, Tony. Just really in terms of the outlook, another person congratulating us on today's deal, but also saying, are you able to share a forward view on the pipeline and what else might be in discussions for either SOFC or SOEC deals? Yeah. Look, I'll build on what Phil said, but I can't say a lot more than has been said already in that if you look at our forecasts and you look at our communications, this isn't the last deal of the year. We have ambitions to add to the licensee portfolio that we have. Even within year, there's obviously confidence that that will happen. What I can speak to, though, is that the industry has really woken up to solid oxide electrolyzers as an enabler of some of the financial decisions that were falling apart with other technologies. What I mean by that is, the industry got a little bit of a bad signal by a lot of these FIDs falling apart because of incremental risk or increased financing costs. What the technology like solid oxide electrolyzers do is they bring those investments back into play. I think the industry has woken up to that, recognizing that solid oxide technology, especially for industrial hydrogen, green hydrogen, is really the only viable tool going forward. Therefore, the interest by Delta is indicative of what I believe a market interest in solid oxide electrolyzer technology. We're, of course, one of the preeminent players in that sector, and there aren't many. As Phil said, our ambition is to have 25%-30% market share of those opportunities, and that creates huge demand for our technology. So we're in an opportunity-rich space right now. Fantastic. There have been an awful lot of questions come through. I think some of them are overlapping with many of the ones that we've answered already. So if I haven't answered your specific question, I'm sorry. We will publish answers to all the questions that have been submitted after today's webcast. Perhaps I could just close out by coming back to you, Phil. There's one question here that's just asking about whether the board is concerned about a hostile takeover bid given the reduced share price right now. How are you feeling about the position of the business and the outlook? That'd be great if you could close out on that. Thanks. We're not overly concerned because I think we've got two strong strategic shareholders, in Bosch and Weichai, which I think would make a hostile kind of action, very difficult. I think, as a board, we're concerned with valuation in general, I think, because I think that we don't feel that the company is appropriately valued at this point. But also, I've learned this over 10 years as CEO, you can't look at your share price every day. You've got to deliver the business. I think that today's announcement hopefully restores some of people's faith in Ceres in terms of the strategy that we have is very different from everybody else. The margins that we get from these kind of deals is industry leading, and what we are now able to do, again, is play in multiple markets, multiple geographies simultaneously, by leveraging partnerships. I think as long as we continue to deliver on that, we will be rewarded for that and the value of the company will grow. As executives, that's our job, is to grow the value of the company. Fantastic. Thank you very much indeed. Elizabeth, is that the final question I think you wanted to run through? Yes. Thanks very much. We'll get to all the other questions in writing. Thanks. That's great. Thanks for covering those off. As Elizabeth said, the team will run through all the questions submitted. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Phil Caldwell, can I just ask you just for a few closing final comments, and then I'll redirect investors to give you that feedback. Yeah, sure. Look, in conclusion, we're very excited with this partnership. We really like the Delta management team. We like their strategy and their capabilities, so they're a really good fit for us. We're delighted to have a strong start to 2024. 2024 will be a record-breaking year for revenues already because we'll double last year's revenue and we'll build from there. It's only week 3 of the year, and we're working very hard on the commercial pipeline. Now that we've added electrolysis on top of fuel cell, we're staring at a whole new suite of opportunities. I think our reputation is growing. We're not reliant necessarily on the FIDs and some of the things that are slowing down or frustrating the rest of the industry. I think you have to start to think about Ceres slightly differently from some of the pure play hydrogen stocks out there. I think that we're going to have a very good 2024. Fantastic, Phil. Thank you for joining this afternoon. Phil, thank you very much, and thank you to the team as well. Could I please ask investors not to close the session, as you will now be redirected to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to complete and is greatly valued by the company. On behalf of the team of Ceres Power Holdings PLC, we would like to thank you for attending today's presentation. That concludes today's session, and good afternoon to you all.