ITM Power Plc

Good afternoon and welcome to the ITM Power PLC final results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab situated in the right-hand corner of your screen. To click Q&A, scroll to the bottom, type your question and press send. A company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Dr Graham Cooley, CEO and Andy Allen CFO. Good afternoon.

Good afternoon. Thanks for the introduction. Thanks for everybody for joining the call. So this is the results presentation for the full year ending April the 30th, 2022. I'm Graham Cooley. I'm the CEO of ITM Power, and I'm also joined by Andy Allen, who's our Chief Financial Officer. So it's been a very important year for IT Empower. Actually, it was an important year last year, and it will certainly be an important year next year as well. I'm going to talk you through very briefly the macro picture in which we're working. I'm going to talk you through the product roadmap, the production roadmap, and then I'm going to hand over to Andy to talk about finances and guidance. And then we'll run through a quick summary at the end. So the macro picture then, developing a very significant macro picture in the energy markets. So what you see on the right-hand side is a graph of the spot market price for natural gas in the UK. It's a five-year chart. What you can see is prior to the Russian invasion of the Ukraine, a steady price for natural gas, somewhere around 30 to 40 pence a fern. And actually, we've entered an unprecedented period, a period of the geopoliticalization of fossil fuels, the weaponization, you might say, of fossil fuels and the gas price. is very, very significantly higher. In fact, this is unprecedented in history. The result of this is that industrial grey hydrogen is now very expensive. And actually, as a result of that, green hydrogen now has parity with industrial hydrogen. Not only does it have parity with industrial hydrogen, it has lower volatility. It gives you energy security and it's also net zero. I can show you some examples of prices. 200 pence per therm for natural gas. You turn that into industrial hydrogen, which is used in huge volume worldwide. Kilogram. And that doesn't include the carbon price. 500 pence per therm. you're looking at an industrial hydrogen price of $10 a kilogram. And between those two values, we have been sitting for some considerable time. The significance of this, of course, is that governments around the world are looking to energy security packages and to get themselves off of Russian gas. And the market is massive. The market alone for industrial hydrogen is 70 million tons per annum today. That's equivalent to 600 gigawatts of electrolysis. So the macro picture for green hydrogen is very, very significant. And people often ask me what happens when natural gas prices normalize. And what you see is a futures graph for natural gas from Bloomberg. We used to be around 30 to 40 pence a therm. Their view over the next period and out to 2027 is that natural gas will normalize to 140 per therm. So we will still have a gas price which is significantly higher than it used to be and will still have green hydrogen parity all over Europe, even after that normalisation. So our backlog. Our backlog is 755 megawatts. Only 10% of it, 77 megawatts, is under contract. 340 megawatts is in the final stages of negotiation and 338 megawatts is preferred supplier status. If you look at the graph and you add up under contract plus in negotiation for three periods, that's to the top of the grey bar, for three periods it hasn't changed. And if you look at it to the top of the yellow bar, which also includes preferred supply status for two periods. It hasn't changed. So what's going on? What is going on is that under this very important macro picture, we have the EU, the UK, and around the world implementation of policy. Policy that means that green hydrogen can find the market that we all predict it will find. But today, those policies aren't in place. And so FIDs, that's financial investment decisions, the final investment decisions. And actually, we had a very important piece of news from the EU that the first important project of common European interest had passed and gone and was delegated then to the nation state. So I'm expecting that those projects under negotiation will unwind pretty rapidly as this policy goes into place. But that's the reason. So we have some delays on those decisions which are out of our control. We also have delays which are within our control, and that is new product introduction, particularly at Loinna. And I'm going to talk you through where we are with that. And I think there's incredibly positive news about that. So a mixed picture of a very strong backlog tempered with the need for final investment decisions. But during all of this, we really have been cracking on. We started serial manufacture. of our new product, which we're deploying at Loina. We're working very closely with Linda Engineering. Refiners been running at full load. We have first hydrogen at Loina. And I can tell you that we've now manufactured all of the stacks for Loina. In the photograph you can see four of the modules which are deployed at Leunen. I'm going to show you more photographs of the plant as we go along. We've been investing in skills. Those skills are required for deployment and we've been very careful about our underlying costs. And very importantly, we've modified our manufacturing strategy and plan so that we can optimize our capital deployment. And again, I'm going to tell you more about that as we go along. So first of all, the product roadmap. So at Refine, we've deployed the first generation of our two megawatt module, MEP1. It's 20 bar, it's deployed at the Rhineland Refinery with what was at the time world's largest electrolyser and the largest one still at a refinery and we've demonstrated it 100% load and some great successes in terms of technical results and I'm going to show you the technical results in the coming slides. In terms of Leunavent, we moved up to a cube which has a module which has a higher efficiency and a higher pressure responding to targets. And we've now achieved just hydrogen. And that is the unit that we then integrate into the 10 megawatt module announced by Linda at their webinar on the 7th of July. And that's the platform that we build a much larger plant. So I'm going to show you some results. It's the first time we've shown results. So let me explain this chart first of all. This is performance of our electrolyser stacks. You can see first of all that as you go down the diagram, you reduce the amount of energy required to make a kilogram of hydrogen, kilowatt hours per kilogram. Okay, that means as you go down the diagram, you're increasing efficiency and also reducing opex. And as you go across the diagram, you're reducing capex because you're increasing current density. So at any one time, a snapshot What is the efficiency of your electrolyzer? It depends on the current density. So an efficiency diagram is a line. You can see for the stacks at Refine with Shell, the line is significantly lower than the FCHJU target for 2020. That was the target we were responding to. 2.2 amps per square centimeter. we needed to be below 55 kilowatt hours per kilo. In fact, we beat the target by some considerable margin and are much more efficient. Of course, as the industry develops, the targets move. And the FCHJU 2024 target is at a higher current density to produce a lower CAPEX. and also it is at a lower energy rating. So how have we responded to that? Well, with LOINAT. LOINAT, the cubes are increased efficiency and also increased pressure. You can see the green line is the line of efficiency against current density for the very first modules and stacks that we have made for Leuna. Now, if you look at the PEM average across the industry, we're also better efficiency than the PEM average. And you can also look at the red line, which is where we think we'll be with continuous improvement. Certainly that's borne out with all sorts of development work that we've done. Where you want to be, of course, is in the bottom left-hand side of the diagram. And if you extrapolate the line down, you'll notice that we are higher efficiency than alkaline electrolysis. And the reason for that, and I've been saying this for a long time to analysts, is that the only reason alkaline electrolysis came to be high efficiency is because they work at low current density. If you get to high efficiency at high current density, then you're better maximizing reduction in capex along with reduction in opex. So we have world-class technology in the field as evidenced by both Refine and the Leuner project. If you look at the picture, you can see on the right hand side, four of our modules on site at Leuna. If you look at the right hand side, you see Linda's balanced plant. What you can see in that picture is those 11 rectangular boxes are 11 power supplies. The plant has 12 power supplies. The reason there's only 11 in the picture is the other power supply has been an ITM power. We've been working with Lynda on site at ITM, with Lynda engineers at ITM and ITM engineers at Loina. And they've had a very successful first deployment and the collaboration between the engineers on the ground is extremely good. So very pleased to be able to show you those results. The production roadmap, again, a very important announcement for us. We have expanded the name plate capacity of Bessemer Park from one gigawatt name plate to one and a half gigawatts. This is all about us. sweating our asset in the UK, throwing our money on the ground with an existing asset. So in October 2021, we had a plan of one gigawatt per annum in the UK, building a new factory, Aviation Park, an additional one and a half gigawatts, taking us to two and a half gigawatts in the UK. and then building an international factory, taking us to 5 gigawatts per annum across the whole of our portfolio. We made the decision to invest in an existing asset and not to build Aviation Park. So what are the reasons? Well, first thing is we didn't want a construction project on our critical path and on our expansion path in a period of uncertainty and inflation. And actually, construction projects are going up in cost because of costs in the supply chain. And there are also many of them are delayed. We also are seeing more and more incentives and deals to build factories all over the world where those incentives, and I'm talking about very, significant contributions are not available in the UK. So we've made a strategic decision before we spend any capex on aviation part to expand our existing asset to then move one gigawatt of capacity into our five gigawatt aspiration and do three and a half gigawatts internationally, maybe in more than one country, seeking incentives, demand and government supports. And I think this is very important news for ITM because it conserves capital, and more highly gears the capital has been entrusted to us by investors. Our existing assets today, Bessemer Park, has now been reworked, and nameplate capacity is expanded to 1.5 gigawatts. I'm going to show you the build-up of manufacturing capacity at Bessemer Park. We've also been working hard to exploit Europa Drive, which is where we do our engineering development and where we will be developing the larger electrolyser platform and doing the prototyping. That's 18,000 square feet. We also announced Kurtstrasse in Germany, which is our EU rapid response centre, 17,000 square foot. We are at the moment in the advanced stages of looking at testing sites and we're looking for outdoor testing and validation with power supply somewhere between 15 and 25 megawatts. And with these four facilities, we will be developing using existing assets and buildings and taking off of our critical path, construction. In terms of remodeling Bessemer Park and getting to one and a half gigawatts per annum, our plan incremental deployment of capital, we can expand the capacity and we will expand the capacity according to the blue bars. We also have the additional optional capacity and can deploy further capital assets in the factory within eight months notice. And so what we're doing is deploying the capital responding to demand. And we're talking about a very well defined product now. It's very well tested at Leuna. We know exactly what we will be building and so deploying the capital with the manufacturing equipment is much lower risk for us. Test capacity. always needs to be in advance of manufacturing capacity. It's absolutely the same principle. We have test capacity that we are deploying in blue, and we have optional additional test capacity that we can bring online quickly, effectively deploying capital as demand builds. So I'm going to hand over now to Andy Allen, our Chief Financial Officer, to talk you through the finances and the guidance.

Thanks, Graham, and hello, everybody. So I'm going to talk about the finances, the themes of the year, sort of a snapshot of the financials, and try and pull out some of the features that are affecting those financials. So in terms of the themes of the year, the big ones for IT Empower were those of delivery and positioning. Graham's already shown you the two major projects that we were in the process of delivering during FY22. That's Shell Refine, we're getting through installation into the commissioning stage, and also overcoming delays with the Loina project. We telegraphed that earlier in the year, but there was still a supply chain, but then also unlocking manufacturing and testing bottlenecks as we went. In terms of looking forwards and positioning the company, We've been looking at key resource, both from the top of the company, but also ensuring we have staff for delivery, and I've got some slides on that. We've been building for the future and some of the future products, following through in terms of building to WIP, and then completing on contracts that are committed. And finally, we had the joint venture with Vittel for Motive Fuels. So in terms of the financial snapshot, on the right hand side you see a picture of our annual report that is going to be printed very soon and will be published towards the end of September. In terms of numbers, the sales revenue was £5.6 million against £4.3 million the year before. We flagged that fairly early. It's disappointing for us. We had hopes to recognise revenue to do with Loina as part of the FY22 numbers, and that project is now in delivery in the current financial year. In terms of adjusted EBITDA loss, we had a loss of £39.7 million, up from £21.7 The big impact of that is gross losses, and I'll show you a bit about what those gross losses are made of. But gross losses are at 23.5 million for the year, up against 6.5 for the year before. All this is done with the backdrop of a strong balance sheet, with a cash balance of 366 million pounds at period end, and we spent about 53 million pounds in a year, of which 25 contributed to work in progress at year end. So in terms of revenue, I've got a series of bridges here which will take us through the features of the P&L and the cash flow. On the left-hand side, the grey bar shows you the revenue from the year before, 4.3 million. On the right-hand side, you've got the revenue for the year we're reporting at 5.6 million. And in the middle, we have the features that affect that. So what we have is an increase of 1.7 million on containerized projects, A large feature of that is that we were delivering REFINE, recognising that revenue on percentage of completion in FY21. With REFINE broadly fully recognised before FY22, we would expect that the modular programme with LOINR would have realised revenue growing up, but we've delayed that revenue until this year. So that will appear in the most part financial year FY22-23. Finally, the big impact on the right-hand side, £900,000 of feasibility studies and fuel sales. Those feasibility and feed studies give us partners and also projects to develop into the future. So revenue for the full year, £5.6 million. In terms of gross loss, it's a very similar bridge. So on the left-hand side, we had losses last year of 6.5 million at a gross margin level, and this year it's at 23.5 million pounds. There are three main features that have contributed to that. Firstly, we provided for first-of-a-kind warranty. We provided 2.2 million pounds against that. Typically, we're providing a two-year warranty on our products, and that can be extended at extra cost. And you can see that only 1% of that was utilized in the year. So we're going to be collecting data as we go through the next few years as to what that right warranty provision is for the kind of plant. But we see that dropping to below 3% of sales price in the longer term. In terms of contract provisions, we've seen increased costs, particularly around the refined projects, increased testing, and some manufacturing activities to do in Loina, particularly around labor costs. We provided an extra 13.8 million pounds in the year, of which 7.4 was unwound by activity that was completed before year end. And the final part of that is a lot of those costs are to do with staff. Partly we've increased the absorption rate of our staff costs, but partly with increased headcounts, we've been able to apply more staff to getting these projects delivered and over the line. So gross margin of loss of 23.5 million. In terms of EBITDA, last year we had an EBITDA loss of 21.4 million and this year it's at 39.9. I've already spoken about the impact of the gross loss. We see some of that in flip side in overheads. So by recharging more of our staff to both cost of sales and to development costs as we develop new products, you saw a reduction in staff charged to overheads. That reduction was about £5.2 million before £1.1 million of consultancy was added for short-term solutions to projects. We've also incurred up to £4.5 million of research costs on the P&L and operation at Bessemer Park with a larger workforce, more activity going through the shop floor of £1.3 million. So EBITDA loss, 39.9 for the year. In terms of cash, we started the year with 176 million pounds and the activities in the year would have taken us to 123 million for the exception that we also raised 243 million in Q4 last year in a fund raise. So we ended the year with 366 million pounds. In terms of the activities in the year, we spoke about the losses, There were two features on the balance sheet. Firstly, building projects that are committed, contracted projects to WIP, costing us £25.8 million. Against that, we've received deferred income and also we've managed to get better payment terms with suppliers, improving our working capital position by £18.9 million. And finally, we've increased our provisions for contracts by £9.5 million net in the period. In terms of investing for the future, we spent £4.7 million on our joint ventures. At 1.9 of that was with ILE, matched by Lyndon, developing sales channel and the larger projects. The balance was to do with the investment in Motiv, not only the investment and the deal itself, but also set up with operational costs and also matched by Vittal, so that Motiv can very much develop its business plan. We've also invested nearly £4 million in fixed assets at Bessemer Park and a further £7 million on product development for future technology. So all told, we had a cash benefit of £53 million before the fundraiser of £243, giving us £366 million at year end. A little bit about people. So we've had three senior hires in the company. All of them very recent. So Tim Calver joined us about two weeks ago as commercial director. So Tim's history, his most recent role was at Ernst & Young as head of the hydrogen and water practice. Before that, he reported to the CEO of RWE. Before that, had a longer background in the power industry. So it's great to have Tim on board. Denise joins us as a non-exec director, Denise Cockram. She has experience both on AIM and on Foolness companies as a CFO. And finally, we will be welcoming Vicky Williams as COSEC in November. And Vicky has significant governance experience on the AIM market. It's not just at the top of the company that we are recruiting. We're also recruiting new early years employees as well as staff for delivery of our projects. These red jackets show that these people are going through their induction on the shop floor and starting their journey with IT Empower. We're delighted to welcome them and absolutely focused towards delivery of our projects. Final slide for me, some guidance for the current year and a little bit about FY24 as well. So in terms of product revenue, we're expecting that to be in a range of 23 to 28 million pounds. And that's reflecting 48 to 65 megawatts worth of revenue recognition. 48 is quite an easy number, actually. It's 24 megawatts of LOINA, 24 megawatts delivered at Yara. And on top of that, we will be installing and commissioning containerized solutions on sites throughout the second half of this year. In terms of an adjusted EBITDA loss for the FY23, we're expecting 45 to 50 million pounds of loss. And we see an increased focus on maximising our overheads and optimising those so that we can get the best out of our people. In terms of capital expenditure, we'll spend between £30 and £40 million in the year. Between £10 and £15 million of that will be equipment going into Bessemer Park and reworking Bessemer Park to get to that 1.5 gigawatt capacity. The balance will be towards product development, particularly next generation platforms of the product. What we'll see in FY24 is a reduction in the factory capex, but a continuation of those product development costs. In terms of working capital, we'll be building to stock between £14 and £60 million worth of product. This is going to be particularly containerised systems, for smaller applications. This is a strategy that we've articulated before about reducing lead times, and we see an opportunity to respond to a market that is demanding short lead times and representing an opportunity for IT and power. FY23, we'll see that working capital being deployed into inventory and WIP. FY24, we'll start to see that unwind as we recognize sales against those units. So that won't be a consistent theme going forwards. In terms of cash burn for FY23, we see a range of 110 to 135 million pound cash burn.