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.