Good morning, ladies and gentlemen, and welcome to the Ceres Power Holdings plc interim results investor presentation.
Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Just simply type in your questions at any time and press send.
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I'd now like to hand over to CEO Phil Caldwell. Good morning.
Good morning, everybody, and welcome to our interim results.
I'm Phil Caldwell, Chief Executive, and I'm joined today by Eric Lakin, CFO. I'm going to say a few words of introduction before we'll go through the financial performance of the past six months, and then we'll revisit the business strategy towards the end, and then we'll take Q&A.
We have quite a lot of people joining online as well as in person today, so just as a reminder, a context for who we are at Ceres.
We're a world-leading technology business based on solid oxide technology, and we are a technology business which basically means that we have unique IP, over 100 patent families, and because of that, we operate a high margin licensing business model, so we're quite different from most of our peers in the hydrogen and fuel cell space. The way we go to market is we collaborate with world-leading companies to deliver clean energy at scale and pace.
Scale and pace is important when you think about the urgency of climate change and some of the energy security issues that we now face today. That's our position and our strategy is all about executing against that mandate. We are at an investment stage in the company's growth. We're scaling up globally, as is the entire industry.
We've made some significant progress in the past six months, one of which is our partnership that we announced with Shell for a megawatt demonstrator of our new solid oxide electrolysis offering for green hydrogen.
As many of we are in the latter stages of finalizing a three-way joint venture with our two major partners in Bosch and Weichai for a China JV to address the very significant market opportunity and decarbonization challenge that China represents. That's how we're scaling. We are in a very solid financial position.
We raised significant capital about 18 months ago with the express purpose of growing the business, and we are now deploying that capital across the business, as Eric will describe, into R&D, into more infrastructure, into this new business area of SOEC, which is all about maximizing the opportunity for future royalties because we are this technology licensing business.
Revenue in the first half was just under GBP 10 million with gross margins around 55%. Again, because it's a licensing business, it's a high margin, asset light business. Cash on hand was over GBP 220 million at the half year.
As I mentioned, investment in R&D is up about 46%, both increasing the offering for SOFC into things like high power, new fuel capability as we go into those hard to abate sectors of society, like decarbonization of industry and shipping, and with the new area of electrolysis. We are starting to invest and deploy that capital.
To support that, we've grown the business significantly. We are a high growth business. We now have over 500 employees, and we're growing also the leadership of the team with Eric joining us this year, and also new GC and CoSec, Deborah Grimason joining what's already, I think, a very good executive and board team at Ceres.
I wanted to make clear where we are on the pathway to signing the and establishing the joint ventures in China, because this is a very key milestone for the business, and it's quite a complex deal, as you can imagine. Three-party deals often are. We are literally in the final stages of preparing those agreements now. We expect to sign those agreements in Q4 this year.
Once we sign those three-party agreements, we then have to get the relevant regulatory approvals. Now, that's not in our control necessarily, and that can be anything up to four months. We have to get approvals in Europe and China for the joint ventures that we're establishing.
We will establish the joint ventures in early 2023, and consistent with our business model, that's the point where we unlock significant license fees, around GBP 30 million, which will now be in the first half of 2023. More importantly, we then scale.
From the scale, we get recurring future royalties, which are a 100% margin. That's the most important milestone for the company, is how we establish significant global manufacturing capability. We have to get this deal right. It is a very strong partnership when you think about the caliber of the parties in terms of Weichai, one of the biggest engine manufacturers in China, and Bosch, as a global industrial leader, and service technology.
Once we have this will be our third manufacturing facility after the plans with Bosch in Germany and Doosan in South Korea. Just to emphasize what that looks like for us, building out the capacity, we have now about 250 megawatts in the planning phase.
With Bosch as our lead partner, with their plans to scale up to 200 megawatts in Bamberg in Germany in 2024, with Doosan now building the factory, which will initially be 50 megawatts, but we expect to grow beyond that again on a 2024 timeline, and with Weichai and Bosch in China, which will follow obviously once we complete the transaction that we just discussed. Obviously as a business, we are looking to expand.
Once we have those three, we are looking to grow geographically as well into some of the areas that have favorable policies and structure around hydrogen and decarbonization.
I'd like to hand you over to Eric to talk in more detail about the financials.
Thanks, Phil. Turning over the page to the summary financials for the first six months of this year.
Total sales of GBP 9.9 million, that represents 43% decline from prior year. As has been mentioned previously, our revenue is highly dependent on the timing of licensing revenue recognition. This time last year, there was significant elements of revenues recognized from the Doosan license fees.
It's a relatively high comparator. Gross margin in the half was 55%. Again, that's industry leading levels to reflect our business model. It is lower than the 72% in the first six months of last year. Again, the proportion of license fee income is a strong reflector on the overall blended gross margin for the business.
It's still mentioned we're in a strong cash position at GBP 221.6 million as at the half year. That represents a cash burn of about GBP 28 million in the first six months. We continue to invest and grow our employee base, 523 employees, up from 489 six months ago.
We continue to invest in headcount, in R&D, material scientists, systems engineers, and so on, to support future business growth. Gross profits, GBP 5.3 million, derived from those sales. Adjusted EBITDA, loss of GBP 20.5 million, and that reflects relatively low sales compared to the prior year period and increasing costs as we invest the fundraised amount here to support future business growth.
The order backlog, that figure represents all contracted orders across our partner base of GBP 76.2 million, and that just reflects the known contracted orders. It does not incorporate any future royalty revenue income.
The other metric we think is relevant to show as a KPI is the planned partner capacity, which Phil also mentioned.
Currently 250 MW. That's what's currently announced and planned between Bosch and Doosan. We'll revise that figure as new partners come on stream or existing partners increase their capacity. For example, once the new China joint venture is established, that will add another manufacturing block of capacity, which is ultimately what will lead to future royalty income. We're showing the progression of revenue and gross profit over the past four six-monthly intervals.
This figure shows the variability of sales and therefore gross profit in those times, largely influenced by the timing of that license fee and revenue recognition, and also the impact of the proportion of license fee on overall gross profits.
It's worth noting that to reinforce the point around the timing of the China JV license fee revenue. We now expect almost all of the GBP 30 million to be recorded and recognized on the establishment of the joint ventures. That's expected to be early in 2023, following the signing and following the antitrust and regulatory clearances for those joint ventures.
The impact of that will mean a relatively low second half sales, similar level to the first half, but it does mean a very strong growth in 2023, particularly in the first half, as the GBP 30 million will be recorded.
We originally had anticipated around half of that GBP 30 million to be recognized in the second half of this year. Effectively had a shift of GBP 50 million from the second half of this year to the first half of next year. All of that revenue would effectively come through to profits, as there's no cost associated with license fees directly. Not all of that would be reflected in cash.
We've mentioned before when we signed the heads of terms that we'd expect the GBP 30 million to be paid across three tranches, most likely annually. At least GBP 10 million of that would be paid in cash for next year, not all GBP 30 million.
We would expect a corresponding increase in working capital next year to reflect that recognition of full revenue.
This chart shows the revenue mix and how that changes over time. You can see from the first half of this year, a lower proportion of license fees of the total compared to prior periods, which is also impacting the overall blended gross margin.
In going through for the full year, we expect a similar type of level, overall, depending on the mix in the second half, you could expect something of the order of 50% gross margin for the full year. Going forward to next year, it'll be relatively high because of the recognition of the GBP 30 million of license fees from the joint ventures.
For those who are not familiar with our business model, like this, on the right-hand side, just recaps the different types of revenue that Ceres receives from its business model. License fee revenue, we've talked about, it's very high margin, often recognized upfront. Sometimes it's recognized over time, depending on the nature of that particular agreement. Supply, it represents prototype technology.
It's our hardware sales stacks coming from our pilot reference facility in Redhill and sales to our partners to support their growth and industrialization of those products. Engineering services encompasses joint development and collaboration with our partners and that includes engineers and scientists working with the partners.
Effectively, it's a business model of over time recognition with a markup on those services. The way to look at this license fee revenue is very high margin and sometimes 100%. Supply and engineering services is lower margin, still a good margin for the business, but not as high as license fees. The one revenue stream that's not on here yet is royalties. That's a longer-term, high-margin revenue stream paid by partners on commercial sales from the start of their production.
Once our partners sell our products to the market from 2024, we'll be paid royalties from those products. That'll increasingly become significant revenue stream in the long run. We've talked a bit about investment in the future in particular, that's been accelerated following the capital raise last year, and we're increasing our investment. What we call investment in the future, which comprises of CapEx, R&D spend, and the capitalized R&D, increased to close to GBP 26 million from GBP 16.5 million in the equivalent period last year.
We're increasing the investment both in SOFC, so the power side of the business, as well as SOEC electrolysis, the hydrogen segment. We're also increasing capital investment. That enhances the capability and capacity of our pilot manufacturing site in Redhill, as well as testing.
That amount, those sums go into things like materials science capability, systems engineering, materials scientists, investment in our Ceres Power 2 facility, CP2, the reference plants. Test capacity is really important. That's a key part of our business, supporting our own testing, but also supporting and transferring capability to our partners.
As announced early this year, we've got a partnership with HORIBA MIRA, so we're doing some outsourced testing, both the production of test stands as well as test as a service. These are all important ingredients to support future growth of the business. We continue to increase that level of investment in the second half of this year compared to the investment in the first half of this year, in line with our plans and the strategy set out during the fundraise.
The final chart in the finance section is a reminder for those not so familiar with our business that reinforces the nature of our business model over time. In the purple section, you can see the existing power or SOFC business currently comprising of license fees, engineering services, and hardware sales.
Over time, increasingly, we get contribution from royalty sales as our partners sell into the market. Layered on top of that is the hydrogen business or SOEC, same model. We'll start with typically technology evaluations and doing development agreements, so getting license fees, engineering services, and hardware sales. Over time, our partners for SOEC in turn will sell into the electrolysis systems into the market, and we'll get royalties from that business as well.
With that, I will hand back to Phil.
Thanks, Eric.
Just an update or reminder on the business strategy. What's been happening globally there's many macro issues that influence our business. One is obviously what's happening in Europe with energy security. As a result of that, we're seeing more and more policy decisions, more and more support for moving away from traditional fossil-based energy towards cleaner alternatives and energy independence.
That's most evident probably in the EU, where we're seeing the awards of the order of EUR 5 billion in these projects of common European interest. We've seen about EUR 5 billion awarded into hydrogen already, and I think today they've announced another EUR 5 billion tranche, which is really starting to benefit the scale of hydrogen and fuel cell technologies in Europe.
Now, as a UK company. Because of our business model, we indirectly benefit from this because through our partnerships with the likes of Bosch, that is good news for the industry. Despite what's going on in the wider world, we are seeing this one-way trend, I think, towards hitting net zero and the urgency to actually scale these industries. Moving along, the US I think finally has put together the biggest clean energy bill in its history under the Biden administration, which is $370 billion.
Again, there's about $9 billion earmarked for hydrogen hubs in the US. Now, that's quite recent, but again, what we're starting to see is a pickup in interest and activity, hydrogen fuel cells in the US as well. I think that's incredibly positive for this global picture.
Already we talked about China, and China's got a challenge to decarbonize. It's a heavy user of coal, as is India, and part of that transition will probably be moving from coal to gas, and then from gas to hydrogen or a combination of that and renewables. Part of what we offer is a better use of natural gas, so lower carbon, higher efficiency power systems.
That's part of what we're looking at with our relationship with Weichai. Actually, China will increase its usage of natural gas in the coming years from about 8% to about 15% of its energy mix. We're seeing different macroeconomic environments in different parts of the world.
Again, because of the portfolio of technologies that we have and our partnering business model that we have, we're able to play in many parts of this energy transition. South Korea is obviously a key partnership of ours with Doosan, and again, is benefiting from about $30 billion of funding into that particular territory.
It also has very strong policy decisions on fuel cells for distributed power and also moving into new areas like decarbonization of shipping. India's an interesting area for us because, again, similar to China, they're trying to transition from a coal-based society into cleaner energy, and they have ambitions to have 60 GW of electrolyzer demand by 2030.
That's because they want to be exporters of green steel and green ammonia, which again relates to our new move into electrolysis and industrial decarbonization. When you think about Ceres and our strategy, we're very proud to be a UK technology business, but we really think and act globally, and we do that through partnerships.
Despite some of the recent volatility, I think, in the markets with inflationary concerns, interest rates, et cetera, if you look at the urgency for decarbonization and what's going on the macro scale, I think the outlook for this business is incredibly bright, because we are one of the key pieces that can play in this energy transition in many of these different sectors and in many of these geographies.
if you want to invest or be part of this energy transition in China, in Korea, in the U.S., in India, then it's through investments in Ceres really that you can actually benefit from that. How we work as a business.
We are a platform technology, so we have the core fuel cell technology, which we scale with partnerships into a variety of power systems for use in commercial buildings, data centers, utility-scale and transportation applications running one direction. Running the opposite direction, we can actually use the same cells and stacks to generate green hydrogen at very high efficiencies and therefore low cost, particularly in industrial applications. As mentioned earlier, we have our first partnership with Shell.
If you look at the quality of partners that we keep and how we actually go to market, we anticipate growing the electrolysis side of the business with the same kind of quality of partner that we've been able to secure on the fuel cell side of the business. Just a few words. Many of you already know about our relationships, but Bosch is obviously looking to scale production by 2024. It's invested around EUR 500 million in the development of the SOFC technology for its own products, its own manufacturing based on Ceres technology.
I mentioned earlier, there's big policy support now in the EU. Germany is going to have about EUR 8 billion of funding available because it needs to transition and needs to deal with energy security.
Again, through strong partnerships, we're in a good position to benefit from that trend. It's worth talking a little bit about Doosan and South Korea as well. Doosan is also on a pathway to building its factory in South Korea by 2024. It's committing GBP 100 million to build a solid oxide plant. That's now well underway. We've already developed 10 kW systems with Doosan.
We're now developing higher power systems, around 60 kW modules that go into 600 kW modules for shipping. Doosan have announced partnerships with Shell and Hyundai Heavy Industries around the decarbonization of shipping. Those kind of 600 kW type building blocks are also interesting for decentralized power and utility scale power as well.
There's a lot happening behind the scenes, if you like, in our partners as they scale. Just a few words on the SOEC development. The reason why we think this is an exciting technology and why we've invested in this is we believe that solid oxide technology for electrolysis offers about a 20% improvement in efficiency compared to lower temperature electrolyzers that are currently on offer.
That's important because about two-thirds of the cost of hydrogen, of green hydrogen today comes from the energy input. That gives us a pathway to what we believe can be achieved at about $1.50 a kilo of green hydrogen.
There's a slide on this here, which is $1.50 a kilo of hydrogen is something we used to think of, up until recently, was absolutely essential to compete with fossil-based hydrogen. That's until we've seen the change in the energy system globally. I think it was Bloomberg a week or so ago estimated that the cost of grey hydrogen, so hydrogen from fossil-based sources, has hit just under $7 a kilo.
There used to be this big economic argument about can you make green hydrogen as cheaply as you can make grey or blue hydrogen? That's gone out the window now. Green hydrogen, I think, will be the majority of the future for the hydrogen production. For us, the big target area is industrial decarbonization.
There's about 70 million metric tons of hydrogen produced globally today. Even if we did nothing else with hydrogen, but we just switched the hydrogen that we already have in industry, that's already a very significant market. Which brings me on to the collaboration with partnerships. What you see here on the right is our first module on test. Basically, we build the same stacks we use for fuel cells into modules that go into container-based solution, and we're looking to demonstrate this at a megawatt scale with Shell in Bangalore, in India.
They will be our first demonstration partner of this technology.
As I mentioned, if you can utilize waste heat, which a lot of industrial processes like green steel, green ammonia, petrochemicals have, then you can push the efficiency of electrolyzers up into the high 80s and even 90% kind of level. That is obviously very attractive for industrial decarbonization. Our plan is to start the pilot with Shell next year, and it will run for three
Years. Again, hydrogen will be used in industrial on-site applications. I mentioned in terms of the overall strategy, this is entirely synergistic with what we already do at Ceres. Our philosophy is the same core cell and stack technology, the same manufacturing base that we've started to establish on the fuel cell side can also service the hydrogen side.
We will continue to expand the business for power and adding to Bosch, Weichai, Doosan, Miura on the power system side, and also start to enter partnerships in a new ecosystem around decarbonization of energy, industrial decarbonization, synthetic fuels, et cetera. Obviously, Shell is the first we hope of many partners on the electrolysis side of the business. If we just finish with the outlook and the targets for the year ahead, I think it's pretty clear we're very focused near term on the joint venture in China.
We want to get that done and established, and then that's a big platform for us in terms of how we scale the business.
We are continuing to invest for growth in SOFC and SOEC, which is entirely consistent with what we said we would do in 2021. We are actively supporting our partners as they scale production in Germany and in South Korea. SOEC progression is going well and obviously with our first partnerships there, you'll start to see more and more proof points of that technology coming through. We are working on expansion of the SOFC into new applications such as marine and higher power, and also the future fuel capability of that technology.
Post the finalization of the China joint venture, we also intend to move from the AIM market to the main list of London Stock Exchange as well. We think it's a natural progression for the company to do so.
I hope that gives you an oversight of where we are as a business, and I think we'll move to Q&A.
Thanks, Phil and Eric.
For those of you who don't know me, I'm Elizabeth Skerry , and I head up IR for Ceres. If you do have any questions or follow-up after the presentation, you can contact us on the details shown on screen.
For now, we'll take some questions from the room first, if anyone has any.
Good morning. It's Thomas Rands from Investec.
Three quick questions, if I may. The first one is just around the SOEC pipeline. Obviously, excellent to sign up Shell. Can you give us any flavor as to how discussions are going, and what sort of time frames we could hope for any more big deals before the end of the year?
I wouldn't be as precise as that. I think. Look, we said this from the get-go. I think that when we started moving into electrolysis, I think people are saying, "Well, why would you do that? Because it's all about alkaline, it's all about PEM." I think, not just Ceres, but you've probably seen recently a trend to more and more solid oxide announcements from some of our peer groups, some of our competitors. Solid oxide scientifically offers you the highest efficiency route to green hydrogen. That's just the pure science of it. The thing that's always held it back is maturity and scale.
However, as soon as you can offer that, there are, of course, a huge number of people who are very interested in that because the easy criticism that you can throw at electrolysis is, well, it's not very efficient, is it? The amount of efficiencies aren't that good, et cetera. With solid oxide, you have something that actually pushes those efficiencies higher.
Yeah, since Ceres has a good pedigree, particularly on solid oxide technology and our business model in terms of scale and some of the partnerships we keep, there's a high level of interest now as we've entered this market, 'cause I think we're a credible player in solid oxide. Solid oxide is seen on most companies as a technology that will come. It's on their roadmaps.
I think we're very confident we'll have more announcements, additional partnerships to the first one we've announced, but I won't tell you exactly when.
Thank you. Second question kind of links with the testing of the ECM, the electrolyzer cell membrane. What other kind of stage gates do you expect to kind of see in the next 6-12 months as that fuller system kind of gets created, tested, developed, that we could kind of quiz you on in the future as to when that product will be at a point of being kind of commercial, please?
Yeah. The ECM test level is entire system level, and then my engineers will hate me for saying this, then you're just adding modules. The sophistication is really in that module. That's a first key proof point for us because at that point you're going power in to hydrogen out at a efficiency level, at a system level. It doesn't stop there. This is really, for us, a proof point, first of a kind. Already we're starting to look at what else do we do with that module in terms of development.
At the system level, there's a lot of IP, et cetera.
I think in terms of milestones, obviously results at the module level and then the plan is at the megawatt scale to begin with, and then we'll build it from there. That's the near-term technology roadmap for the SOEC.
Thank you. Last question is on SOFC. Bosch, I believe were rolling out several, I think up to 100 mini plant, across Germany through this year. Any update on how many they've installed? Any initial feedback? Any kind of data you can share on those initial installations, please?
I honestly don't have that to hand. I know that they've gone into a number of different applications and Bosch is building, if you like, the order book, if you like, for those use cases. They're taking a modular approach. Not dissimilar to Doosan, to be honest, as in the standalone power system is highly efficient, and then you can just add to them depending on what application you're going for. But I don't have to hand the details on that.
Great. Thank you very much.
Yeah.
Yeah, thank you. Good morning. It's Martin Wilkie from Citi.
Just a couple of questions on the SOEC technology. You mentioned about the much better efficiency. There are some sort of market views that because PEM and alkaline will have higher volumes and they'll benefit much more from lower unit cost over time. Is that a view you share or can the SOEC technology over time match them on cost? And just in terms of how you allocate your R&D, presumably a lot of it is about efficiency and output, but are you also incentivized by your customers to help them reduce manufacturing costs as well?
Okay. On the second point first, yes, we are.
A lot of our joint developments, et cetera, have KPIs in them around cost. Often the way we construct royalties, we don't want to be penalized based on reducing costs. We want to be incentivized on that. We're always focused on that, obviously. That comes in a number of different ways. It comes in upgrades to the technology, so increases in power density, meaning you get more work per cell, whether that's hydrogen or electrons, and therefore that ultimately reduces the cost of the platform, if you like.
Then obviously through scale, you get what you described is happening, particularly in the alkaline area. As you get more mature technologies, you can start to benefit from learning rates and coming down.
I would say as a newer technology, there's a lot more innovation, so you can make bigger steps in the early years with something like solid oxide. In terms of the absolute capital cost, as I mentioned earlier, you've got to look at the levelized cost of hydrogen. So I think alkali will be the lowest cost, to be honest. I'm not sure that PEM will get to that level. And the differentiation then becomes one of efficiency.
Even if solid oxide doesn't achieve the same cost point necessarily on a capital basis of alkali, it could still be equivalent or better on the cost of hydrogen because you've got to consider the energy input, and that's why it's the combination of the two that you have to consider.
In terms of how we see cost, a lot of the work that we're doing, a lot of the scale that we're doing gives us pretty good visibility on our cost base for the future. That number that we put out of around $1.50 a kilo, that's based on $20/MWh. Even if power prices were higher, $40/MWh, even $60/MWh, you'd still be at $2-$3 a kilo of green hydrogen, which would be very competitive, as I mentioned earlier.
We're confident in our predictions on what we can achieve as a levelized cost of hydrogen because of the experience that we're going through as we scale on the fuel cell side.
Good morning, it's Maggie Schooley from Stifel.
I recognize this is slightly an unfair question because the Inflation Reduction Act benefits your customers and you're a second derivative beneficiary, but a lot of the detail within that act is not completely well understood, particularly the benefits on investment tax credits, which are five years in cash back. Can you help us in your understanding and with your industry contacts, how even on a second derivative that will benefit? I understand momentum, but where how do you see this adoption timeframe, given that we still have this uncertainty?
This is a great announcement, but it seems very far off. Is Europe still your first port of call, and can you help us better understand in more detail that benefit from the Inflation Reduction Act, if you know it?
I'm not sure I'm qualified to help you understand that. The way we see it is, I think it's a big positive step because I think if you look at our geographic spread, we've unashamedly gone where the market is. We've gone to Asia, we've gone to Europe. The U.S. has some key players that are scaling now, and I think that this IRA bill is now giving them, I think, more confidence. From what we know, from the conversations we're having,
I think it's actually incentivizing people to start to plan more capacity in the U.S. It's probably harder to compete if you're not in the U.S. on that basis as well.
Your question is a great one in terms of the longevity of it, but I think it's certainly given a near-term stimulus of positivity to it. I'm not. I'm nowhere qualified on the U.S. political scene to know how enduring that will be. Maybe you could tell us.
Help us. The second question is, do you have an update on your investment in RFC Power, or is this still in the evaluation stage?
That's still at the evaluation stage. It's pretty small scale for us, but it's an interesting technology and it's one that we're continuing to evaluate.
Thank you.
Great. No more questions in the room. I'll go to some of the online questions, and there's naturally been a few on the China JV. Phil, could you just recap a little bit on which elements of the JV are taking this slightly longer time to agree and sign?
Sorry, there's quite a few questions that have come through. If we could try and just summarize obviously the sort of potential scale over time, where we can, and any risks we see to doing business in China. It's obviously a common question. I don't know if you could pick up those three.
Thanks.
Look, I'm not going to go into a blow-by-blow detail of these agreements, but they're very significant investments, and they're very significant corporate deals, and but whenever you add an additional party, three-way deals are always harder than two.
It's just the complexity of it and the number of agreements that are actually included in this deal. It's a very significant amount of legal work that we just have to get through. The hard points in all of these are always IP, particularly 'cause we've got elements of IP sharing in this. We're going to combine IP with what we've done with Weichai, with what Bosch has done at system level.
There's a combination, a collaboration that the result of which will be very strong, but obviously that's a complex thing to navigate. Just the corporate side of it in terms of the establishment of entities. It's always that takes as long as it takes. The key thing that we've always said, and we've always operated this way at Ceres, you have to get the right deal because these are long-term partnerships.
These are not near-term sales contracts. It will be done when it's right, and that's why it's taken us longer than we originally anticipated. I still think that the result will be the best results for all parties when it's done. Next part of the question.
The scale-up, I mean, I think just talking to some of the
Yeah
Potential.
Look, this is always a tricky one because it's not for us to say unilaterally. I think what's clear is there's a building block size from which you would naturally start. If you look at what's been done elsewhere or plans it starts at that kinda level. In terms of the opportunity in China, the size of the market, et cetera, the plans for it are to grow significantly in terms of capacity.
We do think that China, if you look at predictions on decarbonization, et cetera, it will be probably the biggest market for this technology. Then the last question was about risks.
The last question about risks. We often get this, but is there anything that's new that's cropping up?
No, there's nothing that has affected our relationships with Weichai. Again
Mm-hmm
as a licensing business, we're one of the advantages we see in the three-way is we're very much the technology provider with Bosch and Weichai. Bosch already having very significant well-established businesses in China alongside Weichai.
We think that minimizes the operational risk, if you like, for services.
Great. On the same topic, can I come to you, Eric? Just a question around could you talk through the change in revenue recognition for the GBP 30 million license fee, just so we can recap on that from several years to one, and what that actually means in terms of cash flow timing.
Yeah, sure. Just to recap, the bulk of the GBP 30 million, not necessarily all of it, but the vast majority is expected to be recognized on establishment of the joint ventures, following our regulatory clearances. We expect that to be early 2023, certainly H1 next year. The cash from the JV license fees, that won't follow the revenue recognition.
The best guidance to give at the moment is assume GBP 10 million a year in each of 3 years, with the first payment being on establishment of the joint ventures. It's worth noting as well in terms of the investment, the other side of it, we guided previously in the heads of terms, we're expecting a total investment from Ceres to be about GBP 20 million.
That still holds true, and we expect half of that to be paid on establishment up front and the rest will be in later periods.
Great. Thanks. Question here, just in terms of confidence around regulatory approvals on the JV.
I think, from what we hear from our partners, it's pretty high. I think strategically, it's important, I think, to have these technologies for addressing decarbonization in China. We're pretty confident we will secure the approvals.
Yeah. Okay. Eric here, one from Zoe Clarke at Goldman Sachs. She asks, given the higher contribution from the Chinese JV license revenue in 2023, I think it's fair to assume that gross margins are likely to revert higher in 2023. But she asks, what is the normalized sustainable level of gross margins longer term? And what is the target mix of royalties versus licensees?
On the first part, yes, it's a good assumption that next year's gross margins will be high, and certainly above 70%. In terms of long-term trends and mix, we're not giving guidance on that. But obviously a good rule of thumb, obviously, license fees and royalties are effectively at or close to 100%. Engineering services and hardware are a lower amount in the range 20%-40%. I give a wide range because it varies by contract, and one can model their own assumptions on future contributions from those four revenue streams. But obviously the overall margins will depend on that mix.
Thanks, Eric.
If I can come back to you, Phil, just some questions around electrolysis. I think we provided an update on our partnership with Shell. Question around sort of timing, when in 2023 might we expect to see that kind of pilot start? Are we getting other traction from other potential partners on SOEC? I think if you can just recap on that would be great.
Yes. I don't think we've given the details of that yet with Shell. I think that that's something we'll disclose, I think, with our partner. Obviously, again, when you're deploying it on an industrial site, there's a lot of preparation that has to happen to make that happen. I think that would be later in 2023. Don't forget that we're getting on with the development of this technology in-hous.
There'll be more to say on the actual development of the technology ahead of that deployment. I think we've already discussed potential other partners. We see a lot of interest, growing amount of interest for the SOEC side of the business, particularly among the industrial decarbonization kind of end users.
Again, our go-to-market plan on this will be through partnerships. At the stack level, through manufacturing and then with system integrators and EPC type partners as well. We will say more on that as and when we can, but there's not much more we can say at this point, really.
Great. I guess on the same theme, Chris Leonard at Credit Suisse was just asking, are we seeing more partnership interest for electrolysis coming from the ammonia industry, because of the 60% capacity in Europe is shut down at the moment because of the high energy costs. I guess the second part to that, he asks can solid oxide adoption benefit from those energy prices staying high for longer? Is that also driving interest in our technology?
I think the underlying trend is somewhat helpful to electrolysis, but obviously there's also a headwind about being competitive for ammonia in general because of the energy consumption. Yeah, I think there has been this school of thought in electrolysis that it's all about CapEx, and we're going to live in a world of cheap energy and therefore efficiency doesn't matter. Now, that's just totally been blown away in the past six months, and it's not a great scenario for many parts of the economy.
This is all about energy efficiency, this is all about how much your energy bills are. We've always taken the philosophy, the more efficient your technology, the more economic benefit it is for the end user.
High energy costs in industry particularly are painful. It's not just ammonia, it's steel, it's petrochemicals, and that's not going to shift anytime soon, unfortunately. I think, again, that it's done. Whereas a lot of people are having headwinds, we're actually seeing an unusual benefit from these high energy costs.
Great. Anne Crow from Edison actually asks just with regard to that 20% higher efficiency than other technologies on our electrolysis side, where are we in regards to achieving that goal, proving that achieving that proof point?
Well, that's part of what we're demonstrating now. At stack level, already we're very confident on that. At system level, that's what we're starting to demonstrate now, and I think we'll in the future, we'll publish that data. But it's like I mentioned, this is not a scientific breakthrough.
If you look at any of the other peers out there, solid oxide achieves this level of around 45-50 kWh/kg, whereas your low temperature electrolysis is above 55 kWh/kg. That's just the nature of it. The actual systems themselves are actually somewhat simpler than the fuel cell systems.
You're not dealing with fuels and catalysis and that kind of thing. Short answer is we're very confident.
Great. Thanks. Eric, this one I think you'll enjoy. Why is license fee revenue recognized upfront and not over the license period?
Favorite topic.
How long have we got?
I'll give you the short version. Yeah, for more details, please consult IFRS 15, accounting standard. There are broadly two types of license fee. If it's a right to use license, so we're basically enabling our licensee partners to use our technology, our IP into their systems, that is seen as an upfront license fee, recognized upfront because we are under the standard, meeting our obligations on the signing of that license fee, enabling the partner to develop their products. That's a point in time and recognized upfront. That's called a right to use.
There are some cases where it's recognized over time, so right to access.
There's ongoing obligation to transfer our knowledge and IP and ongoing development and foreground science and engineering, which transfer during the period of the contract. That's recognized over time. Some contracts, for once you've gone through them in great detail with our accountants and auditors, are split into two. Sometimes a combination of two.
Final bit of color on the China JV, for example, the reason we're saying it's most of the GBP 30 million, not all of it necessarily, will come down to whether or not we also have, in parallel some joint development agreements with those JVs, which might mean there's an ongoing element of transferring IP over time.
Some of that might be recognized over a longer duration of more than two years.
Great.
That's probably enough on that. Too much. Thanks for the question.
Thanks for the detailed answer.
No, Eric. Lacie Midgley from Panmure Gordon asks, what sort of order should we be thinking about for the total investment in the future for the next three years, particularly this year?
Eric, one for you.
I think different components there. If you look at the total investment in the future, assume that will be a higher level in H2 than H1. I won't give an exact number, but that's continuing to trend upwards. Potentially a high level again next year. Just add a bit more color to that.
One element to that is capital expenditure. It was around GBP 5 million in the first half of this year. It'll be close to double that in the second half, depending on the exact timing of procurement spend. It'll take it to around GBP 15 million this year. It'll be that sort of level, GBP 15 million-20 million next year on our current estimates.
Great. A couple of questions here around sort of the human resources side. Someone notes the increase in R&D, especially that run through on the P&L, and it's very human intensive. Just asking around recruitment and, in a similar vein, just asking about growing our staff and what specialisms are we adding and how easy is it to find people in the UK?
It's definitely got tighter. There's high demand for good people. We have over 30 nationalities at Ceres, so we don't just look in the UK, we look for world-class people no matter where they are. We've got a real mix.
We've got scientists, engineers, technicians, accountants. so we've got a lot of talented people in Ceres. The other thing that we've initiated this year, which is we don't often talk about, is when you're growing fast, that's hard to do everything inorganically, so we are starting to grow our own people. Obviously we develop people, but we have graduate intern programs now with leading universities. We've actually started apprenticeship scheme because, again, we need highly skilled.
If any of you have been to our manufacturing pilot plant at CP2, et cetera, there's some fantastic jobs and skills that we provide under the apprenticeship scheme as well. We're about to publish our first sustainability report, thanks to Elizabeth, in the coming weeks, and one of the big things for us is actually about developing people and providing good quality of education and development for the STEM and engineering-based roles. We're pretty sizable company now in the UK.
We attract a lot of talent because of our purpose. A lot of people want to come and work for companies that are aligned with net zero.
We attract a lot of refugees out of the automotive industry, out of the oil and gas industry, who are also personally transitioning, so that's good. Also we have to grow our own talent 'cause hiring externally in the market's always expensive versus growing your own, so that's a big push for us.
On the same point, Eric, just are we seeing any wage inflation, cost inflation?
Yes. we are. We've got inflation across many aspects of the business, like other peers in our industry and across most industries. We are managing it as best we can. Total spend this year projected to be broadly in line with what we expect at the beginning of the year through various puts and takes. Overall, we are seeing inflation in materials, supply costs, and employees. We are conscious of that. We're managing that combination of aspects. In some cases, it's some direct intervention.
We did apply a cost-of-living, very early during the inflationary situation, and overall cost of living increase to salaries across the board back in May, June this year.
Also looking at other areas and not so direct, as Phil mentioned in terms of development reinforcing the mission, other sort of softer areas in terms of opportunities for sort of networking and areas of interest for the staff at all levels. Deploying where appropriate, share-based compensation schemes to reduce the cash burden on the business while maintaining the long-term retention.
That's great. Thanks, Eric. Just to close out. We've had a few questions just on the AIM market, and someone asked, "Did I hear that the main market move is linked to the China JV timing? And why not stay on the AIM market? What do we see as the main benefits of moving to the premium listing?
We want to close out the China JV first. That's always been our intention. That will be a precursor to any move up. Benefits for us. Look, I think the regulatory environment on the AIM market is pretty close now to main market anyway, but we operate with a very high level of governance. If you look at our board and the way we operate as a business, we already operate at that main market level.
I think the biggest advantage is probably if you look at our shareholder base, international investors recognize the main listing in a slightly more favorable light than the AIM market. So that for us is it.
We're at that stage of evolution as a company that it's not if but when, and we just feel the time is right to do that.
Great. Thanks. If we haven't got around to your questions, we will be submitting written answers to all the ones submitted online, and you can always touch base with us directly. Otherwise, I'll hand back to Phil, if you have any closing comments.
Yeah. Thanks, Elizabeth. Look, thank you for your time today, both physically and also online. We are, I think, in an incredibly strong position at Ceres. We've got a very healthy balance sheet. We've got a strong order book. We've got very strong partnerships. We're getting on with executing the business. The macro environment near term can be challenging, but for us, actually, it's a big opportunity. We are committed to this net zero mission, and the way we're doing that through global partnerships will continue to grow.
We're really proud to be a UK business. We're actually growing and investing, as we said, and I think that's a virtue that's sometimes overlooked in the UK.
We want to grow a world-class technology business in the UK, and that's exactly what we're doing. Thank you for your support today.
That's great.
Eric, Phil, Elizabeth, thank you for updating analysts and investors this morning. Could I please ask investors online not to close this session, as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations.
This will only take a few moments to complete, but if you could take that time, I'm sure that'll be greatly appreciated by the company. On behalf of the management team of Ceres Power Holdings plc, we'd like to thank you for attending today's presentation. Good morning.