ITM Power Plc

Good morning and welcome to the ITN Power 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 in the right-hand corner of your screen. Just click Q&A, scroll to the bottom, type your question and press send. Due to the number of attendees on today's meeting, the company may not be in a position to answer every question received. However, the company will review all questions submitted and will publish responses of our approach to do so on the InvestorMeet company platform. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Dennis Schultz, CEO and Andy Allen CFO. Good morning.

Good morning and good morning everyone in the call. Thank you for taking the time to participate. I would like to start by introducing myself. My name is Dennis Schultz, and I took over the role as the new CEO of IT Empower on 1st of December 2022, which was two months ago. It doesn't feel like that, I have to say, but just two months ago. I bring with me 14 years of experience in the technology and EPC industry and related to component manufacturing. I joined Linde in 2008 and had various positions in the company, among them as head of project execution services and as head of strategy and mergers acquisitions, both in the company's headquarters in Munich. Since 2017, I led the restructuring of one of the size of EPC entities in Dresden, Germany, first as a CFO and then later as a managing director, taking over from my predecessor in 2020. During that time, I restructured and reshaped the company towards a new product portfolio focused on predominantly green technologies in the area of CCUS, which is carbon capture utilization and storage, and hydrogen predominantly blue and green. In that capacity, after Linda's investment into IDM, I was... Now we got the slide up. Thanks. In that capacity, after Linda's investment into IDM, I was closely involved in the strategic relationship of the two companies. And we had a great start by securing important customers, reference projects, and developing a 10 megabit standard module, which will be deployed for the first time in the project announced today, the two times 100 megabit linear projects in Germany for RWE. But after a promising start on the sales side, And I have to mention that all the IBM projects which were running through Linde were in my profit and loss responsibility from sales to execution. We found that IBM's project performance was falling behind expectations. And after that, I was then closely involved in collaborative efforts to try to overcome the issues jointly and mitigate delays to customer projects. In my role as managing director at Lindner Engineering, I was also working with other electrolyzer OEMs, despite the most intimate relationship being with ITM. This certainly put me into a position where I gained significant insight on the strengths and weaknesses of the different electrolyzer OEMs in the market. Personally, I'm a strategist, passionate chess player. I have a track record in restructuring and in turnarounds. leading organizations and I'm well connected in the industry with customers and suppliers alike. I will now first hand over to Andy Allen, our CFO, to present you the interim numbers before I continue with the priorities going forward.

Thanks, Des, and good morning, everybody. Thank you for joining us on the call this morning. So I will go through the interim results. They've been published this morning. They show a performance that's unacceptable and needs some measures to address them, and that absolutely can be part of the 12-month priorities in Dennis's presentation. So I'll also take you through the revised guidance for FY23 and give you a steer towards what we might expect in FY24. So in terms of the performance, the revenue for the half year was £2 million against £4.2 million the year before. Gross losses were 45.6 million against 2.6 the year before. And adjusted EBITDA losses were 54.1 million against 12.9 the year before. The important thing here, and we'll go into some detail here, is the bulk of those losses are non-cash movements, provisions based against project cost overruns and inventory costs, but we'll go into some more detail very soon. In terms of cash, We have 318 million at period ends against 164 million the year before, a function of the capital market raise we did just over a year ago. In terms of cash flow, total cash outflow for the period was £48 million against £12 million the year before. There's £42 million associated with operating activities, and some of that is the build-up of inventory. And in terms of investing activity, there was an outflow of £6.4 million, which includes £7 million of expense for capital projects. So the summary is we raised money to pursue an aggressive expansion strategy. And in doing so, we underestimated the skills and competencies that we required as a company to really get that volume going quickly. So that's led us to where we are today and the numbers that we are seeing here. And we need to absolutely get from being an R&D company to a volume manufacturer of an industrial product. In the last two months, we've formed a deep drive into the contributing factors, and I'll share some of those on the next slides, and you'll see more in Dennis's plan to follow. The vast majority of these actions will hit and impact FY24 and not necessarily make the guidance for this year change. So in terms of a summary, the revenue was £2 million against £4.2 million a year ago. A year ago, though, we did have funded prototyping from Bayes, £2.8 million for prototyping next generation stacks. You do see that actually product revenue is marginally up year on year. In terms of the case study, the Loina project is the flagship that we need to talk about. We have experienced both delays and we've also seen a change in our delivery scope. What we're doing is we're splitting our deliveries. So the project consists of 12 two megawatt modules. In the first half of the year, we completed factory acceptance testing for two modules. But as we've had delays, we've worked with Linda and the customer to really get the best and optimized delivery schedule. That means that we will split the delivery of the cubes and the stacks for the remaining 10 modules. So as of today, all the cubes are on site, they are being installed, and they now await the stacks that we will produce and to send to site. So for us, revenue recognition is about finishing an obligation, and an obligation in Loina is the testing of a module, so a cube and a stack. The first two modules tested at FAT as a complete module means we can recognize revenue. For the last 10, they need to meet on site and we recognise revenue as they are deployed and tested on site. What does that mean for us? Actually, revenue is going to lag behind the work that we're completing for projects. And we're also going to see we're now dependent on the wider SAT of the plant. So it's not fully within the control of ITM. This may affect other cube projects, including YARA. And that's one for us to be aware of. So this is not revenue loss, but revenue deferred. In terms of gross margin, the gross loss was 45.6 million pounds against a loss of 6.8 the period before. There are three contributing factors here, project cost overruns, inventory losses and warranty provision uptake. And this slide covers both warranties and the project cost overruns. So against the full portfolio of 49 million pounds worth of revenue, we've seen overruns in the period of 29.9 million. The contributing factors to that, if you look at the graph first, you see actual costs incurred in the period of £10.4 million. We see expected costs that are part of delivering projects of £9.4 million. And then you see a risk-weighted provision for £8.5 million, which is about really being much more stringent and disciplined with our approach to risk. The very bottom bit down there is our provisions for warranty. It's split into two bars. 2.3 million is the warranty for, and again, warranty provision for products on site. The 1.3 million will sit within contract loss provisions up to the point that the kit is deployed. And then at that point, it'll become a warranty provision. So what's driving these numbers? The big thing here is redesign work. We built products at a point where there was an unfinished design. And subsequent design changes have required rework of various products. We've also included customization at customer requests. And as a company, we haven't fully understood the impact of those customization exercises. We're also seeing the split of scope, as talked about in the Loina project. That's actually going to increase cost for ITM, and we see that as something we need to do to maintain the customer's timelines as best as possible. But it's more on-site work, more subcontract work, and more packing. And finally, in terms of testing, we had expected to see improvements within our testing timing, which have not yet materialized, based on the fact we're not doing volume manufacture right now. So the costs are related both to longer test durations, but also the impact of the energy prices for the company. The other contributing factor to the gross margin loss were inventory losses, and that's made up of a total cost in the P&L of 15.7 million pounds. Cost incurred, which is RITOS and OSS Lessons of 1.6 million pounds is one number and the other component is 14.1 million pounds worth of provisions. This is against a generation of stacks, population of stacks that is ring fenced and it's a 100% provision against those stacks. What happened there is there was a legacy design which included the introduction of an extra component to make tolerances easier to manage within the manufacturing process. That ultimately led to us having a product that we did not want to ship. So that prompted the need for a new tool modification, which was the RNS that we put out in Q4 last year. So the tool modification has been done. Components are being manufactured. Stacks have started to be manufactured. It would be easy right now to say we are sprinting towards completing customer projects, but we're not doing that. We're taking it step by step and making sure we validate the stacks as we do, so we avoid doing this again. In terms of cash flow for the period, We had an adjusted EBITDA loss of £54.1 million. 32 of that were provisions, non-cash movements, leaving us with a cash outflow from the P&L of £22 million. We saw an uptick in inventory of £29 million. We've improved our working capital position with receivables and payables by £8 million. And then we spent money on CapEx, notably about £3.5 million on assets with investment funds and a similar amount on product development. So our total cash outflow for the period was £48 million. I've got a little box on the left-hand side, which just acknowledges that of the £28.9 million inventory uptake, £14.1 million was provided, and that's that generation of stacks that we've just spoken about. In terms of the guidance for FY23 ending in 30th of April, So the result is very much baked in from decisions that have been made in the first half of the year. And we're not going to see the benefit of the 12 month priorities plan until FY24. So the revenue guidance in line with that change of product delivery, project delivery, means that we expect revenue to be two million pounds for the full year. That's the same number as we announced today in the interest. In terms of the EBITDA loss guidance, we're expecting that to be in a range of £85 to £95 million. We're expecting to see some inventory provisions in the second half of the year, and that will be about FAT success and volume of products going through the shop floor. And we're also applying contingency here, which is within that range, about project cost overruns we don't know about. It also includes the costs associated with the RWE and particularly the warranty. And finally, it includes the overheads at a similar runway to the first half of the year, but also we're going to have one-offs for redundancies and the impairment of discontinued products. In terms of cash flow, our cash flow guidance hasn't changed for the full year. We guided before 245 to 270 million. Actually, we also expect that to be towards the lower end of the range, partly because inflows from customer contracts have been deferred in line with delivery profiles. And outflows are impacted by project overruns and an unwinded provision made to a partial extent in the first half of the year. Final slide from the outlook for FY24. So revenue is going to be underpinned by site acceptance testing and a dependency on that, but particularly our focus here is yard and loiner, getting them down as pilot plant, as flagship plant that we can really use to showcase what ITM can do. In terms of cash flow from operations, we'll start seeing the benefit of the 12 month priorities and headcount reductions and cost management. We'll also expect to see an unwind of some of the inventory buildup that we've had this year as we start to see products go out the door. In terms of investments for the future, we are expecting to invest in a power upgrade and fit out of a new unit. And there will also be incremental automation machinery as we bring that online in FY24. I'll hand back to Dennis for the priorities plan.

Thank you, Andy. Let me pick you up where I left you, which is my introduction. Before I committed myself to IBM, knowing about the issues the company is facing, as I alluded to, I asked myself three questions which were important for my questioning to join or not to join, I have to say. These three questions are, does IBM have a technology with the potential to outperform its competitors? Does IBM have a strong enough balance sheet, which means cash, to support the necessary strategic and operational changes I was anticipating to strengthen the company's foundation? And does the market give us the time window needed to solve the growing pains IBM is encountering? And in short answer, yes. I'm convinced that these critical preconditions are met, else I wouldn't be sitting here in front of you today. On the technology side, as I also said, I do know what competitors are doing from my previous role at Linde and I'm more than convinced that IBM has the right technology to compete in the field. I will shed some more light on answering the questions on the next slides. I know this is content heavy and it's probably difficult to read, but bear with me. I will try to guide you through step by step. So first high level business update. Discussions around climate change, decarbonization, and recently, especially around energy independence coming from the Ukraine-Russia situation are further fueling the projected hydrogen demand increase. And I can tell you they are real this time. Coming from the customer side of the industry, we would expect the demand to be sustainable this time. So we will see significant investments coming up. If we look at the landscape of hydrogen production today, you will see that 95% of that is still gray, which means it comes with a lot of CO2 emissions, not really well aligned with the decarbonization agenda. However, just the demand increase alone on top of the installed capacity is higher than what electrolyzer OEMs can supply today in terms of green hydrogen stacks. Even if you take all the announcements out in the market for new factories, gigafactories, which I have to say are largely shaky. But even if you just believe in all of them, electrolyzer OEMs will still not be able to meet the demand at this point in time, so we will see significant investments in that industry going forward. Even if electrolyzer OEMs were able to supply stacks in a sufficient amount, we would have another bottleneck, which is then the availability of green electricity. because the ramp up of renewable energy is lagging behind in most countries nowadays, but also there I think we are gaining speed. Especially for the already installed base of steam reformers producing hydrogen, we will see a trend towards blue hydrogen for the interim, which means that we capture and store CO2 and sequestrate it. And while this is an important interim step to also allow taking the next bottleneck, which is hydrogen infrastructure, I would expect new installations to tend towards green hydrogen. When I say hydrogen infrastructure as a bottleneck, I mean transport possibilities from pipeline to last mile handling, shipping. I think you all know these discussions. And also storage for energy buffering, especially when we talk about higher share of renewables in the energy grid we need to buffer. Current peak electricity prices and inflation, that's no secret, put electrolysis of pressure, which leads to some delayed investments. That is a temporary effect, which is giving us, ITM, now the breathing time required to overcome our issues. The big demand spike is yet to come. We will see significant ramp-up of projects in the next years, and we as ITM will be ready for that. While we are working on our foundations, I can tell you that almost all competitors in the market are facing similar issues. We were a little bit ahead of the pack in that we won the first important and larger project in the market and we encountered the issues first. I hope that we can also be the first ones to overcome the issues and emerge stronger out of that. When it comes to product demand protection, or the integrated today container business, so plug and play units and stack alone as we would supply for Lehman are rather even today. And while, and this is illustrated in the bottom right graph of the slide, while we would expect container sales to see moderate increase, the demand for stack will be substantially larger and we would expect an exponential growth given the larger scale of projects in the market, which you wouldn't buy containers for one gigawatt project, obviously. Therefore, ITM will focus more and more on stacks going forward, which doesn't mean that we don't do containers, but it will mean that for containers, we will try to narrow ITM scope to where we can add maximum value. and pursue partnering opportunities for the non-core scope of the balance of plant in the context. In order to develop IDM from an R&D company to a professional delivery organization with volume manufacturing capabilities, we also need to take the inherent overconfidence in the business previously and replace it with what I would call industry realism. We have developed a 12-month priorities plan to achieve exactly that and to solidify our foundations. I clustered our plan into three focus areas. First one is that we need to concentrate on a core product suite to finalize the engineering of our technology, which is in itself performing well. But we need to get to repeatable and reliable volume products. While the previously mentioned manufacturing issues are there, they mostly originate from engineering shortcomings. And when I say that, I mean design freezes and not robust validation of product generations prior to release for purchasing and production. So it's not the technology on the electrochemical side, it's the engineering around that which is not mature enough. Second point, we need to stop the financial bleeding of ITM. And you just alluded to the numbers. We will introduce a short-term program to reduce costs and which addresses the key cost drivers of the business. I will say a few more words to that in one of the next slides. On top of that, we will review, together with VTOL, future for motor fuels with the aim to support 28 million of already committed investment and rerouted back to our core business where we needed to scale up production and focus on our core business. We will also work on substantially increasing the quality of our forecasts in order to build back market confidence in ITM. And please proceed today as being a first step in that direction. I think the degree of transparency we provide today is a step change for us. The third point is the bottleneck and the bottlenecking. We will ramp up fabrication and testing and invest into incremental automation. And you just mentioned that I have a separate slide on that part. In parallel, we cannot overstate how important it is to deliver on our project commitments. We need to become a delivery organization. We are a commercial company and we want to grow into becoming profitable at a point on our journey. And we have to learn from mistakes from the past. The today announced two Lingen 100 megawatts projects is a very important milestone on that journey, which allows us to scale our business with real contracts and not just towards a perceived demand, but with a real demand. With these two projects, we have almost 270 megawatts of latest tech generation in actual project delivery today, which is significant for us. I will now give you more details on these three focus areas on which you see is the blue dots. On the left, this is a list of all the products which IDM is today working on in one or the other form in chronological order of development and existence. I have to say that this was a bit shocking to me after I joined. It's a lot to focus on, and we definitely need to narrow down focus in order to be better performing in our state-of-the-art technology and products, which is those which we marked in green. The services we are still providing to support older generation technologies are disruptive to our engineering and manufacturing processes. They distract the organization, and they have become overall too costly and time-consuming. So what do we do about that? We will discontinue product development and ongoing design improvement work for legacy products which are no longer considered state of the art. All the products on top of the green ones with the white background. We will stop marketing and selling of these products and of course our customers will and should be able to expect from us and we will live up to that to fulfill our remaining contractual commitments and warranty obligations We would not back down from that, but we will narrow after-sale services to the later product generations to avoid distracting the organization too much. The green highlighted 30-bar MEP stack is the one we will scale and deploy in the current and larger installations to come. You see there that cubes are light green colors. We still intend to sell cubes, but we would expect the market to develop in a direction where either a rather small decentralized installation tending towards plug-and-play containers, which is then a complete plug-and-play unit, as opposed to a cube, or then going to the big large-scale projects, which would then rely on the stack-and-skid supply together with a larger module, in that case, for example, the 10 megabit module developed with Linde. In that sense, the strategic relationship with Linde is very important for us to take at the last scale projects to come. To allow us to narrow focus on that, which is really important, we have consciously paused work on a completely new stack generation. For the time being, as what I just said, the current stack is state-of-the-art in the industry. There's no need to rush to the new project generation instead of scaling up what we have. Andy showed you the numbers which have been disappointing for the first half of the year and which continue to be disappointing for the second half of the year. In order to stop the financial bleeding of ITM, we need to take the main cost drivers, which are underlying. And I tried to come up with a symbolic picture here a little bit. While the ship of ITM, which is not really horizontal right now, the ship is uplifted by technology, which is great, huge market demands. Right now, we could sell more than we do. consciously try to not oversell in order not to overstress the organization at this point in time. There's not a problem that we couldn't sell, I can tell you. And a strong balance sheet in cash position. This is certainly an uplift, but we are at the same time also pulled down by project cost overruns and inventory losses, as Annie just explained, and also by overcapacity as a result of overoptimistic recruitment towards unrealistic expectations of fabrication members. So, we will have to cut off one or the other of these weights, if not all, in order to steady the ship and try to become faster and more capable companies. Addressing the overcapacity is an important first step. We will restructure and right-size our organization towards being leaner and better in hierarchy. and with a structure that's reflecting the true nature of the business. We will strengthen technology, and in particular, we will strengthen engineering and product validation focus, which were the reasons for most of the issues we are encountering today. We are bundling our customer interface from sales to delivery in one customer-facing organization, and we will closely integrate manufacturing and procurement, which is essential. We will also increase the oversight and governance function of the CFO organization, especially with focus on getting to better forecasts, as I alluded to earlier. Today we also announced that Dr. Rachel Smith will step down as a statutory director from the board. Let me thank her this time for the tremendous contributions she has brought to the company. Rachel will continue to work with IBM in another role, and I'm looking forward to continue working with her. Coming back to the organization, we will reduce around 25% of headcount, which leads to a reduction of personal costs of 9 million year on year, which relates to, or equates to 30%. We will over proportionately reduce non-scaling functions, which means that these are sustainable savings meaning that if the business is picking up again, these functions will not scale with the business going up. And implementation starting immediately is certainly subject to employee consultation starting in February. So, how do we solidify our foundation? On this slide you see On the left-hand side, mitigation for future inventory losses, which Andy alluded to. And then on the right-hand side, you see mitigation of future project cost overruns. And when I guide you through these points, you will see that most of these are business basics, especially in the EPC and manufacturing industry when you look at mature organizations. But these are the topics which we really need to address now in order to become a capable volume manufacturing company with the required engineering professionalism. And by guiding us through these, I think what also comes to the surface is that, you know, these are the issues which we need to tackle. It's not an inherent technological issue per se. So let's go through that. In design, we will need to professionalize how we do engineering. This means we need to bring in new capabilities the capabilities we have and the processes. Today, I can announce that we will have a new head of engineering joining us. Someone I know from my previous Linde career and someone who I am 100% convinced of that he can help me fix the issues we have. And as I said, he will start today, so things are underway. We will introduce design freezes, which is among the most important things we need to change in engineering, and very stringent management of change. We need to stop changing products while they are being produced. I don't need to explain to you that this leads to additional procurement efforts, delays, and costs. The compliance and validation function, and emphasis here is on validation, with V2 and sign-off right to challenge the status we have. um we need to properly validate products before releasing them for production and purchasing and sending them to customers and this is what we what we have changed immediately then we will we will have to introduce state-of-the-art calculation simulation tools also from a two landscape point of view there's room for improvement and certainly this will also lead to better engineering results On the sourcing side, we will improve supplier audits. That is another inherent issue which we encountered. I would say, full supplier quality on one or the other component, and by that, rework to be done. This will also include on-premise inspections at supplier premises, and witnessing testing, which will then also reflect the risk profile of individual suppliers. We will strengthen also our standard T's and C's with the volume and specification flexibility, And we need to strive towards back-to-back warranties with suppliers, which cover us, especially for container business, cover us for the complete duration of warranties we give also to our customers in order to avoid having to provide too high warranty numbers. On fabrication and warehousing, we will enhance parts traceability from incoming to shipping. And we will work to our newly implemented ERP system, which has been implemented. and which is currently being set up for the complete organization. In terms of avoiding project cost overruns going forward, if we look at the product portfolio and sales phase first, we will enhance this vision around selling standard products as opposed to customized solutions, and we mentioned that already. This is a typical theme which is leading to losses in such kind of organizations like ours. Certainly we do strive to setting a standard product because it's really hard to estimate accepting clients and contracts and then having to change for each and every client, every standard product you have. That's not a sustainable model. So this is one of our key priority areas. Also, we need to come to comprehensive costing and pricing. We need to be more realistic on schedule and risk estimation. When I look at the current project delays, certainly a lot of that has to do with what I just said on the design and immaturity of designs. But it also has to do about being optimistic on the capability to deliver and not seeing realistic roadblocks on the way. Contract terms, we need to strengthen that towards accepting lower liabilities. Customers will not be pleased to hear that, but that's where we are. And we need to scrutinize our performance guarantees and orange obligations in the contracts going forward. Project governance. So during the project execution phase, then we will introduce a very stringent phase scale process model, which we will strictly adhere to. which means if we have not achieved all the steps required to pass a gate, we will not pass the gate, but we will make sure that we have a very stringent way of managing projects, products, and customer delivery from here onwards. We have also strengths and accountability across the business, which is, I would say, an inherent cultural issue at this point in time. It reflects the R&D nature of the company. We need to come to a point where accountability reflects that of a mature delivery organization. And we will also reset one or the other role profile expectations roles, including those of project managers to be more accountable for the project performance. We will also substantially improve the quality of project costs and risk reporting. The basis for every forecast which the finance organization can put to the market will be realistic. realistic understanding of where projects stand and which risks are ahead of us and by introducing that we will take it as a very forecasting topic and we will also advance our common project management processes and very strict governance and improve also the way we manage contracts throughout projects in terms of how we address changes coming from customers throughout the contract execution period This brings me to number three of the focus areas, which is the bottlenecking. I have now picked the three most important bottlenecks I see for the time being. The first one being testing and power supply. We anticipate and plan for a phased approach to increase test break capacity to satisfy the project needs under contract, including the Lingen project, which is certainly a step change for us. We will see more than a doubling of our capacity within the next 12 months, so until December 2023. From April onwards, we will have available 50% increased electricity supply from 5 to 7.5 MVA and we will see a further increase, which we have already secured just at the beginning of the year now, to 30 MVA in 2024. On fabrication and automation, a topic which was oftentimes talked about at IBM, we are making this happen now. So we do have an automation roadmap developed and in actual implementation. We will not be able to read now what's on that roadmap because it's really small here. I think it's not important to go into each and every step, but what you see here as small bars, this relates to machines coming in, being validated, tested, and then released into production throughout the course of this year, this calendar year. Some improvements were achieved already and a lot of others will come. This is a realistic assessment of when we will be able to introduce switch change. We will, as I said, incrementally deploy into production. We will not rush that. We will make sure that before we change the process that we have validated and verified that we can do that. One example is a machine on a process automation we will expect for October this year relating to automated screen printing of catalysts onto the membranes. Just to give you one example, this relates to precious metals. We will reduce waste by automating that process step and we will reduce cycle time from 10 minutes to 6 seconds and by that increase production capacity by 300%. but especially also on the reduction of process rates when it comes to precious metals that will be a game changer for us. That's just one of a lot of examples of what we have in implementation. On the very right, last but not least, R&D and validation. We are currently in negotiation to expand our shop floor space with a new fabrication just next to Bessemer Park where we are today. We do want to build up a dedicated R&D and product validation site. You see the topic validation comes up again and again. This is really important to me. This will host science labs and first-of-a-kind product testing facilities and will also share the electricity I just mentioned across the plant. This has not been signed, but we are in current negotiations, certainly also assessing other options as an alternative if that negotiation doesn't come to a successful conclusion. We do expect a decision ceiling Q1 this year. My last slide, outlook. I talked a lot about the next 12 months, and because these are essentially the size of ITM, I know that you have questions for the longer-term strategic plans around What about more production volume? And let me answer that maybe in a way to be able to still focus on the next 12 months. So, ramping up stack output is not difficult for us, but it requires robust product validation. We need to make sure before we enroll into volume manufacturing that what we produce is right. um if idm has proven something in the last year it was that idm was able to produce really quickly a lot of stacks as any alluded to these stacks were then not fit for purpose we cannot run into the same situation again so product validation first and then volume we will be able to do volume when it comes to new factories and markets also a question which was often asked um building a new factory abroad or even different factories in parallel is also not difficult it's But this requires that we do need to have a blueprint at hand, and we will make sure that we will get the current Bessemer Park facility with the plant extension to be a blueprint, which we can then copy into different work regions, which is then much easier than trying to fix different factories and layouts in different places. Paths to profitability. As I said, we do want to become a profitable company. Certainly, we will not be able to do that within 12 months, but that is our ambition for the future. But this requires a mature competitive product design, which we will get to. It will require incremental automation, which will improve build quality and cycle time, rigorous cost management, which I alluded to, building up our after sales business, important for customers and us alike, and most importantly, volume. You can only become profitable with volume. You see it here on the slide, we will get there. I'm confident that we will get there. What does count now is those that we implement with discipline and focus our 12 months priorities to make IDM stronger, more reliable and more capable company. As I said on the first slide or one of the first slides, the large scale opportunities in the market are yet to come. What we see now is first projects being realized, but as I said, they will go up in scale quite significantly. And by putting these foundations in place, we will be ready on time for that marketing month. Thank you very much. This concludes the presentation piece and I'm happy to take your questions.

Fantastic. Dennis, Andy, thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q&A tab situated in the right-hand corner of the screen. But just while the team take a few moments to review those questions submitted already, I'd like to remind you the recording of the presentation, along with a copy of the slides in the published Q&A, can be accessed via your investor dashboard. I'd now like to hand you over to James Collins to pose your questions to the IT Empower team. James, can I please ask you just to read out the question where appropriate to do so and direct it to the relevant member of the team?

Thank you. Okay, thank you. Okay. I appreciate 2023 focuses UK manufacturing. But how many international sites do you envisage for ITM Power by 2025 and 2030, please? And based on current incentives, what would be your preference for either the USA, Germany, or Europe?

Should I take that one for you here? Okay. Yeah, thank you for the question. As I alluded to on my last slide, I think the first priority needs to be that we get our house in order right now, and that we create a suitable blueprint. Certainly, once we have done that, we do want to expand to different world regions. I have not yet had the time over two months to come up with a strategic plan on how to address which world region, but maybe answering to that initial question, I can tell you that the USA with the recent legislative changes is a quite interesting market for us and would be probably very high on the list.

Okay. I think you've answered this in part. Could you please explain why ITM need over 400 staff when very little manufacturing is taking place? The use of company investors' cash seems to be treated without any respect and a lack of financial control.

We don't, right? That is why I announced today the headcount reduction program. The current number of employees does not correlate to the short and midterm output within the next month. And we will right-size now, also considering our obligations towards customers. But I also have to say that certainly we hope to be able to scale upwards again, not only product volume, but also employees once we have solved the current issues of the organization and once we can really start scaling up manufacturing in a bigger scale.

Okay. Can you explain the difference between cubes and stacks? Yes.

So, I think we do not have a picture at hand, right? So, you have to envisage a cube as being a mini container, which is like a housing for the stack. So, why is a plug-and-play container is like a complete electrolysis plant in a container, and the stack is what you have normally seen, you know, these different plates on top of each other, which is then producing the hydrogen through the membranes. which is part of the container. The cube is somewhat in the middle. It's like a mini container version, much smaller than a container hosting parts of the balance of the plant. So, The stack is like the heart of the electrolyzer. And then from cube to container, you go more and more into the plug and play and more scope of the balance of plant direction.

I hope that answers the question. Okay. Thank you. Dennis, you mentioned automation is one of the key areas where you will focus across the next 12 months and beyond. Given your knowledge of ITM's peers, where do you think ITM currently stands and what sort of ground would you like to cover first? On automation? Yeah.

So I think all, I would say most of our competitors, and I'm talking PAM now, because this is what could be comparable, are looking into automating their stack fabrication. I would say some are more advanced than others. I think, to be honest, I think IDM is not that off at this point in time, but certainly we have our own ambitions and we don't want to be average or in the middle field. We want to be ahead of the pack. So when you ask me about priorities, I said that we do have a roadmap. which is addressing each and every area of the fabrication process right now. And we will introduce these changes as priorities around where do we need to improve in particular the quality of assembly. So I would say either adding manual assembly and by that improving the quality of that build quality or fully automating certain process steps. And as I also said, to reduce cycle times in particular bottlenecks when it comes to ramping up the production.

Okay. Should we assume that all revenue deferred from Loin and Yara now falls into full year 2024? And when do we get full year 2024 guidance?

So the, yes, the short answer is yes. You know, there's a dependency there which is about the full lindescope being SAT'd for us to recognise our revenue. But yes, of the Loina and Yarra plants, we are expected to be recognised in FY24. In terms of guidance, we will next be talking in this level of detail in the June trading update, and there will certainly be some guidance for FY24 there.

Okay. What can be the potential revenues associated with the two new RWE Linda orders announced today?

Yeah, I think we're moving away from individual project pricing. It's a commercially sensitive topic, and we're actually keen to make sure that we don't detract from what we're doing in terms of commercial relationships with customers. So whilst we won't say that, it was bid competitively and was won as part of a tenner.

Today you announced a 25% reduction in headcount. How are you thinking about retaining top talent or hiring new talent a growing company like ITM require, especially when we look at the new large contracts just signed?

So the 25% headcount reduction takes into account the award of the Lingam projects and these were under negotiation when we took that decision and certainly we considered that. When it comes to retaining talent, this is obviously important for us, and we will make sure not to lose too much talent as part of the process. That's nature, I would guess. Would I be worried to be able to scale up the company again in terms of headcount once we scale up production? No, I wouldn't. I think we are a very attractive company to our employees and also to applicants. We do see that also in the market, and I think we are in a very good position going forward.

Okay, can you give an update on the Arrow delivery please? Are we gonna get a project update generally?

A specific update for the Arrow project? Okay, so the Yara projects, we're doing a similar thing to the Loina projects, we're choosing a split delivery model so that we can get cubes out supporting customer timeframes and stacks will follow. So the bulk of those cubes are in production right now and will be shipping within this financial year, but the revenue will be dropping into next year.

Okay. There's a big demand spike yet to come. Is it a next year event? And what needs to happen for demand to unlock? Are you confident in a solid response from the EU versus the Inflation Reduction Act in the US?

So as I alluded to on my market side, there are some bottlenecks which ranging from creating the necessary infrastructure, having renewable energy production in place, and so on and so forth. I think all of these areas are currently being addressed in the different void regions. The USA is pushing quite strongly ahead right now, but I think the European Union is looking into ways to also speed up the process on the Central European continent. And I have to say that I'm pretty confident with what I see. I mean, the momentum is strong, it's huge. And I would not see these things to be critical roadblocks. I think it's all surmountable for the next, but we need to address them one by one, certainly.

Okay. So, planned reduction in testing hours did not materialize for current product. When can we expect it to materialize? You indicate costs are compounded by high energy prices. Can you quantify the magnitude of higher energy prices on cost overruns?

I'll say that. So there's a number of expectations here. At the point where we get to volume manufacturing, we are happy with the product. Do we need to test every stack 100%? No, we will start to see a validated product going out. So there's a route which is about how many tests we do, but there's also a route to shortening test times through various pre-testing processes. At the moment, because we are somewhat immature as we go through that process, testing and test bay activity includes some of the debugging that should also happen upstream. So we will see that improve as we get manufacturing processes in place and improved. So the costs are associated with running a two megawatt skilled assembly with three stacks in it for a period of time. And we run it at various levels, so the intention here is over time to reduce the levels that we run at, so we're only running at 100% for a small amount of time. So I won't put a figure to it right now, but maybe we can answer that as we respond to the Q&A. Okay.

Yeah, maybe adding to that, that is absolutely right. It's about trying to reduce the time of testing. but also trying to reduce the number of tests we need to perform by improving build quality and leading to lower failure rates, obviously, in tests.

Very good. I understand the focus on near-term and simplifying as opposed to diversifying and make it more complex. But do you exclude using alternative technologies such as alkaline in the longer term?

I'm too much a strategist to say that I would exclude any strategic option going forward. But I can tell you that we are confident in the PEM technology we have. And this is our focused product, which we will get right. And by getting our house in order and doing the homework, which we need to do, we will be a very important market player, if not the most important market player in the PEM sphere. What the future will bring, will bring the future of a show.

Can you provide an update on Refine 2 and GigaStack?

So I think on GigaStack I did provide an update on this part of the slide. I had on the products we have paused development of a new generation stack in order to be able to focus on our state-of-the-art 3MAP31 stack. And when we talk about Refine 2, Refine 2 would also be built with the same 10 megabit standard module space on the 3MEP 31 technology as the Ardui-Lingen project, which we announced. So these are two separate topics. This project is progressing. We have very constructive discussions with Dinde and Shell alike. And the project is progressing in the current conception phase.

Very good. So a question for you, Andy. Can you give more of a breakdown in the inventory increase of 29 million for the period? What is this for? Sorry, could you say that again, James? Can you give a more detailed breakdown of the inventory increase of 29 million in the period? What is this for?

So the project cost overruns is the 29 million. Inventory is 15 million. So the project cost overruns I mean, as we said in the presentation, some of it is to do with design not having been settled as we started to build. Some of it is to do with change of scope and exactly when we're going to be delivering to site. And then some of it's also about reworks associated with onsite work, subcontracts and packing. To put actual numbers to it, I think the slide probably did enough. We've got a risk-weighted £8.5 million, and the balance is split across all of those categories.

Very good. You stopped signing new contracts last autumn. Given that you've now signed the RWE contract, are you in a position to sign further contracts? And have you received any order cancellations in the meantime?

So maybe I start answering the second question first. So no, there were no cancellations and we do not anticipate to receive cancellations. And we are in very constructive collaboration with all our customers to mitigate the project delays and issues we face in the projects. And we are also thankful for that, as I wanted to say. When it comes to selling, that is indeed true. We decided reduce selling activities and not sign new orders in order to get the breathing time and breathing space required to tackle our issues. As we announced, we have now signed the world's largest family electrolysis in execution, which is two of them at the same time, with a phased delivery approach. I think from here onwards, We will very carefully select which projects we will load into our organization from various viewpoints. One is we need to make sure that we don't overstress the organization, in particular, also looking at what we have in front of us for refined tool. And we will also need to look at profitability of projects going forward. I think we are at a point where we have sold enough reference plans, right? where I think we are able to prove deliverability of our product and reliability going forward. And I think we need to strive towards a realistic pricing and costing scheme. And therefore, we very carefully select new projects to sign.

Okay. A question for you, Andy. Can you give more detail on the revenue recognition timing of the new 100 megawatt Lincoln projects? And when do you expect SAT to complete?

So those projects are going to be delivered throughout 2024 and 2025. So revenue, I'll not spit out exactly where it is, will be FY25 and FY26, with SAT potentially falling into FY27, depending on exact timing. So we'll update more as that project develops. Okay.

Is the 268 megawatts of latest generation stack mentioned to be an actual project delivery, same as the backlog number that you used to disclose previously? Could you please explain the difference?

Shall I do that? Yes, it's the backlog number. We've historically also included items in negotiation and preferred supplier status, and actually we think that led to confusion and also uncertainty in terms of focus, what we focused on, we focused on delivering what we've contracted. So it's absolutely right to talk about a contracted backlog, which is that 268 megawatts.

Maybe adding to that, I have to say coming from the customer side of the industry, it was always a little bit funny to see that so many companies in the electrolyzer sphere were putting out MOUs, LOIs, study projects or study phases of projects as big announcements. And I think what we need to narrow that down is to real contract signs and real orders. So when we speak about these two Lingam contracts, this is not real projects, right? This is not just an announcement. And I think the new ITM way of disclosing information will be very much, it's signed when it's signed, and it's real when it's real, and I think we need to step away a little bit from inflating the bubble, not only as a company, but as a whole industry, that there's more than there actually is. So let's be down-to-earth, realistic about what's going on in the market.

Okay. Given project costs have been so detrimental to the financial performance, Will you be more selective on the projects that you tender for? Are you going to target those that are already funded or where you can deliver product and recognize revenue?

In line with what I just said on the other question, so we will definitely select projects carefully. We are partnering with Linde for the sales through our joint venture, ITM Linde Electrolysis. So we do have a very strong sales and business development arm in place also to screen projects and to check financial viability of customers and also of funding programs. However, it is very rarely the case that funding can be secured on time. So normally you have to engage in a pre-phase of the project, call it feed or whatever it is, but it's still to a certain degree a gamble which project then gets the funding. I would rule it out completely that you engage in a project which is not receiving funding. But as a rule of thumb, I think Hinde as an organization, together with us, screening projects, I think we got pretty good at identifying which projects are real and which aren't.

Okay. Would ITM ever look at the licensing model? For spec technology?

Yes. No, we wouldn't.

Okay. So where are you on the level of trust that customers have right now for the product? Do you think order intake can materially increase across calendar year 23?

So when it comes to trust, I think what customers are looking for right now, and having been a customer myself, is customers want to see running plans right now. They want to see that us and also our competitors in the market actually deliver on the promises we put out, meaning creating reference plans which show good performance. I think it will be all about delivering reference plans. This will be the most important and determinator for trust and increasing trust. And hopefully by being able soon to deliver on the projects we have under contract, we can be in a position to actually outperform on the trust point because we do have a product then which is working, in which we can prove that it is working.

Okay. Andy, a question for you. It's a cash question. Do we have enough cash to get us to profitability?

So we... We showed a slide on the FY24 guidance where we start to see cash outflows decreasing, partly with the unwind of working capital, partly with the impact of the 12-month priorities plan. There will continue to be investment for debunking that new facility. But in short answer, yes, we have enough cash.

a question on revenue. How should we think about full year 23-24 revenue given the significant deferral of full year 22-23 revenue?

Yeah. Our focus absolutely is on the Loina and Yara projects as flagship pilot projects that showcase ITM. So if I was looking at revenue now, I would be pinning my revenue expectations on those two projects particularly. Okay.

Will ITM continue their partnership with Lynda?

As I said in the presentation, the Lynda partnership is of very strategic nature and really important for us to scale up our business. by living up to the promises we made with our project commitments, and also living up to the Lingen challenge ahead of us, of the living two times 100 megawatts, we will, I think, rebuild some of the confidence and issues, which we built back some of the confidence lost over the last two or three years. I mean, as I said, I was on the receiving end as well. However, I mean, the predictions and hacks, we are working very collaboratively and closely together. We always, throughout all the year, we have Linde employees here in our factory and our engineering teams to support us on the way. Me having joined IDM is certainly also a trust-building measure right now in the sense of I think my word does count as being reliable. So I think when I state something, people will also trust me, which is building back confidence to a large degree, I think, which will be important for a strategic relationship. So, I mean, long answer to your short question, right? But is the relationship intact? Yes. Is it under stress? Also, yes, because of the project we have. Do I think we can get it fixed and regain the confidence? Absolutely.

And we will strive for that. Okay. Can you give more details about the new hires of head of engineering, please? Details in the sense of? So the announcement of the new head of engineering, can you give us a little bit more background?

So the head of engineering who starts today is my previous head of product management at Wind Engineering. and a very capable person who I know that he would effectively fit into the profile we need in order to overcome the issues I mentioned on one of my slides with regards to professionalizing engineering. So it's a trusted professional who I know for many years and who perfectly fits into that role profile. And having said that, he was also engaged over the last three years heavily with all the projects of IDM. Also with development of the 10 megawatt standard module I mentioned. So it's not that he needs to find his way into the company for six months. He knows exactly where IBM stands and can start taking the issues on their own.

Okay. And on that, the two megawatt stack, how deliverable is that for large projects?

It is, I mean, we just signed a contract or two contracts for two times 100 megawatt, which is definitely a very large project. And we will deliver exactly this stack, the 0.7 megawatt stack in an assembly of three. That's why it's called 3MEP at 30 bar as part of these 10 megawatt standard modules to these Snapseed projects.

So that is absolutely deliverable. Okay. What sectors are you going to focus on? Will it be ammonia and oil refineries?

I wouldn't say that we focus on a particular sector. I mean, our sector is selling plants which produce green hydrogen. And certainly I would be happy to say that together with Linda to any customer interested. I wouldn't narrow that down to certain industries.

And so a question on Motiv. Is ITN moving away from Motiv Fuels to create a closer link with Linda in the future?

no so these are two separate topics right so as we announced vitual and and us on very collaborative and positive discussions about how we see the future of of motive we had a section on that in our rns um it's not that idm tries to exit something alone to to align better to them that is not the case at all has also nothing to do within it While reviewing the current situation of the business, VTOL and ITM came to the same conclusion that the original intent to build up a larger network of fueling stations in the UK has limited outlook. And we admit or we see that it would need significant investments if we were to expand to other world regions potentially, for example, Europe. And I think for doing so, IBM would not necessarily be the right partner, given that we need to get our house in order and focus our own cash on fixing the fundamentals of our core business. Vito and us, as I said, we are in good discussions. This is not a tough negotiation at this point in time, and we are investigating all the options which are at the table from setting the business as a whole to discontinue it in good faith. And we certainly look forward to maintaining this strong relationship with Vito also after that exercise.

Where do you see the business in five years? Where does ITM sit in comparison with other hydrogen tech companies? That is, is it in the Premier League of such companies, such that it could be the forefront of exposing this commercial opportunity?

You would perceive me to be very careful in giving commitments to future, especially when it comes to numbers. But certainly I wouldn't sit here today and I wouldn't have joined ITM if I didn't think that ITM can become one or the front-runner in the industry.

Okay. So a question here from Anthony. Has the screen printing technology been robustly verified?

So the technology itself is verified as a standalone technology, obviously. As I said, we expect to deploy it in October, which means that we will get it well ahead of time and that we will make sure that we verify and test the screen printing prior to actual deployment into the factory then and replacing the current machines we have in the current way of doing it. So no, we haven't received the machine, right? But once it's being received, we will certainly do proper validation, as we do for all incremental automation steps upcoming.

Okay.

The high cost of electricity appears to put electrolysis at a disadvantage compared with the cost of blue hydrogen. So do you see an opportunity to reduce the electricity cost by using the energy of waste steam?

This is a little bit mixing up two questions or statement or two. So I wouldn't necessarily say that high energy price is favoring blue hydrogen because you also need energy for capturing CO2 and sequestrating it under the earth, right? It's not as easy as that, as you say, not if you just green is electricity and blue doesn't, I think. What was the second part of the question? Could you read that again, please? It's about using waste steam. Ah, waste steam. So when it comes to hot steam, I mean, there's a certain electrolyzer technology which is aiming for utilizing hot off steam, which is the SOEC, solid oxide technology. This technology does perform well in particular when you have hot off-steam. PEM and Alkaline are considered cold electrolysis.

Okay. Can we have an update on the SNAM relationship?

So the relationship... Do you want to take it? we we it's a strategic nature for for idm and uh we i mean the question is very broad right so i mean it's an intact relationship we hope that we will receive one or the other order from from slum and we'll be happy to support their agenda on on green hydrogen so and if you want to add any i think that's fine okay

Do we have an update on the Glasgow Whiteley project, the 10 megawatts?

So we are working on it. I wouldn't be in a position to disclose details about where we stand in the discussion negotiation. Certainly that's a sensitive topic also for our customer. So I normally do not comment on sales projects in particular, but it's still an ongoing effort.

Okay. And are you continuing to work with universities around the U.K.? ? You want to take that?

We're doing some work with universities around the UK, but actually there's also an incredible in-house capability in terms of developing the technology that we have. So, yes, there is some work, but also there's a lot of work being done by ITM. Okay.

Sorry, another question for you, Andy. Can you give us the firm orders, please, excluding Loina, Yara and RWE?

I'm not sure I understand the question, James.

So it's a question from Chris. So can you give us the firm orders, please, excluding the Loin ER and RW orders? I think he has it calculated at 22 megawatts outside of those orders.

That sounds correct, yes. That's exactly right. Okay. Okay.

Sorry, one question here from Sky. What was the difference in the GEP30 stack skid produced versus the MEP?

The GEP, the giga stack, would have been a stack of 2.5 megawatts per stack. and the MEP is a 0.7 megawatt stack. We do bundle three of these stacks for a three MEP module, which is then two megawatts worth of capacity. And the giga stack would have been two giga stacks bundled to five megawatts. Okay. From a technology viewpoint, the stacks would have been similar. So when it comes to membranes and electrochemistry. similar technology and performance.

Okay. There are a number of private investors that were far from happy with the previous CEO's reasons for production delays and numerous excuses as to the drain on cash. Does the new CEO recognize that he has to be more transparent and actually give honest opinions on whether ITM will in fact be in a position to supply electrolyzers to existing customers in the near future? I would just say yes, Frank.

Just say yes. No, I mean... Let's be honest, right? I mean, I do see that as well. The reason why we have, I hope that you perceive that as a step change in transparency today. And this was also important for us. We will continue exactly in that way to provide you the transparency of the actual situation of the business and of how we see the market going forward, because there's nothing to hide like me. It's just be open where we stand and let's improve the business from here on. sketch a successful story about IBM, you will be able to do so. So yes, I do absolutely recognize the need for transparency for shareholders.

Okay. Will the new head of engineering be responsible for production and manufacturing? No.

This is a different topic, right? So from an organization viewpoint, we have an engineering organization. So this is technology, the actual engineering, which we call product management, and the validation piece around engineering. And then we have a separate manufacturing and procurement organization, which is a normal way of how you would organize such kind of business.

I think we're coming towards the end. Sorry, some more questions coming in. Just one for you, Andy, again. I think you covered it, but likely revenue recognition timings associated with the 200 megawatt orders. Dennis mentioned a phasing, but no timings.

Yes. So, as I said, deployments, calendar years, 2024, 2025. April 25, April 26. We'll have potential for some to go into 27, but we'll update more as the project develops.

Okay. And a question from Roger. Generally speaking, do you anticipate that your plans in the near term will be held back by the difficulty in recruiting?

No, I don't expect that. Right now it's about, as I said, life-saving. It's not so much about new recruitment efforts. Certainly we will have to bring in new capabilities in some critical areas of the company, but it's not that there are no people who want to join or no capable people who want to join every hundred companies nowadays. It's a very attractive business view to me.

Okay. And do you foresee problems, resistance to change in the culture of the business? And if so, how will you address them?

I mean, you can never rule it out completely, right? And certainly a certain percentage of the organization will have issues. But overall, I have to say what I have seen over the last two months was really promising. We have a hugely dedicated and motivated workforce. I think what we need as a company now is to steer into the right direction and especially setting priorities and narrowing focus. It's not that, you know, people at IDM and implicit IDM didn't want to deliver what was sold. It was just the sheer amount of topics to work on in parallel with limited priorities being set. And I think we will definitely change that and hopefully by that win over also the employees to embark on the journey together with us.

Okay. If I could offer on top of that, we're already seeing a change in the last few months, having been before and post Dennis's arrival.

Excellent. Okay. I think we're probably running out of time on that front. Thank you very much.

That's great, James. Thank you, and thank you indeed for the questions. Of course, help me review all the questions submitted today, and we'll publish those responses on the Investor Meet Company platform where appropriate to do so. Dennis, just before redirecting the investors to provide you with their feedback, which I know is particularly important to you and the team, may I just ask you just for a few closing comments, please?

Yeah, thank you. All was said, all what we wanted to say, we did say. So this leaves me with maybe reinforcing again that we perceive this today as to a certain degree a reset of the way we work with shareholders and we work with the market in terms of transparency and openness, also being realistic about what we do. And certainly we will keep you updated on the progress of delivering against our 12 months priorities plan. thank you very much for taking the time dialing in today and thank you for your very constructive questions we have a lot to do a lot in front of us but we will get it done and we will be ready on time for the big demand spike to be seen in the market

Thank you very much for your attention. That's fantastic. Dennis, Andy, thank you indeed for updating Investor Today. Please ask investors not to close the session. It should be automatically 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 management team of IT Empower PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you and good morning to you all.