Ceres Power Holdings (LSE:CWR) — Interim Results

0:02 Good morning, ladies and gentlemen, and welcome to the CERES POWER HOLDINGS PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. And if you would give that your kind attention, I'm sure the company would be most grateful. I'd now

0:32 like to hand over to CEO, Phil Good morning. Good morning, everybody, and welcome to our interim results. I'm Phil Caldwell, chief executive, and I'm joined today by Eric Lakin, CFO. I'm gonna say a few words of introduction before we'll go through the financial performance of the past six months, and then we'll revisit the business strategy towards the end, and then we'll take q and a.

1:01 We have quite a lot of people joining online as well as in person today. So just as a reminder of context for who we are at CERES, we're a world leading technology business based on solid oxide technology. And we're we are a technology business, which basically means that we have unique IP over a 100 patent families. And because of that, we operate a high margin licensing business model. So we're quite different from most of our peers in the hydrogen and fuel cell space. And the way we go to market is we collaborate with world leading companies to deliver clean energy at scale and pace. And scale and pace is important when you think about the urgency of of climate change and some of the energy security issues that we now face today.

1:47 So that's our position, and our our strategy is all about execute executing against that that mandate. We are at an investment stage in the company's growth. We're scaling up globally as is the entire industry. And we've made some significant progress in the past six months, one of which is our partnership that we announced with Shell for a megawatt demonstration of our new solid oxide electrolysis offering for green hydrogen. And as many of you know, we are in the latter stages of finalizing a three way joint venture with our two major partners in Bosch and Weichai for China JV to address the very significant market opportunity and decarbonization challenge that the the China represents.

2:37 So how we're scaling. We are in a very solid financial position. We we raised significant capital about eighteen months ago with the express purpose of growing the business, and we are now deploying that capital across the business as Eric will will describe into r and d, into more infrastructure, into this new business area of SOEC, which is is all all about about maximizing the opportunity for future royalties because we are this technology licensing business. So revenue in the first half was just under 10,000,000 with gross margins around 55%. Again, because it's a licensing business, it's a high margin asset light business.

3:22 And cash on hand was over 220,000,000 at the half year. As I mentioned, investment in r and d is up about 46%, both increasing the offering for SOFC into things like high power, new fuel capability as we go into those hard to debate hard to abate sectors of society, like decarbonization of industry and shipping and with the new area of electrolysis. So we are starting to invest and deploy that capital.

3:56 And to support that, we've we've grown the business significantly. We are a high growth business. We now have over 500 employees, and we're growing also the the leadership of the team with Eric joining us this year and also new GC, COSEK, Deborah Grimerson joining what's already, I think, a very good executive and board team at CERES.

4:19 I wanted to make clear where we are on the pathway to signing and establishing the joint ventures in China because this is a very key milestone for the business, and it's quite a complex deal as you can imagine. Three party deals often are. And we are literally in the final stages of preparing those agreements now. We expect to sign those agreements in q four this year. But once we sign those three party agreements, we then have to get the relevant regulatory approvals. Now that's not in our control necessarily, and that can be, you know, up anything up to four months. So we have to get approvals in Europe and China for the joint ventures that we're establishing. We then will establish the joint ventures in early twenty twenty three.

5:09 And consistent with our business model, that's the point where we unlock significant license fees, around 30,000,000, which will now be in the first half of twenty twenty three. And then more importantly, we then scale. And from the scale, we get recurring future royalties, which are 100% margin. So that's the most important milestone for the company is how we establish significant global manufacturing capability. We have to get this deal right. It is a very strong partnership when you think about the caliber of the of the parties in terms of Weichai, one of the biggest engine manufacturers in China, and Bosch as a global industrial leader and CERES technology. But once we have this, this will be our third manufacturing facility after the plans with with Bosch in Germany and Doosan in South Korea.

6:10 And just to emphasize what that looks like for us, building out the capacity, we have now about 250 megawatts in the planning planning phase. So with Bosch, as our lead partner, with their plans to scale up to 200 megawatts in Bamberg in Germany in 2024, with Doosan, now building the factory, which will initially be 50 megawatts, but we expect to grow beyond that again on a 2024 timeline and with Weichai and Bosch in China, which will follow, obviously, once we complete the the transaction that we just discussed. And, obviously, as a business, we are looking to expand. So once we have those three, we we are looking to grow geographically as well into some some of the areas that have favorable policies and structure structure around hydrogen and decarbonization.

7:08 So I'd like to hand you over to Eric to talk in more detail about the financials. Thanks, Phil. Turning over the page to the summary financials for the first six months of this year. Total sales of 9,900,000. That represents 43% decline from prior year. As has been mentioned previously, our revenue is highly dependent on the timing of license fee revenue recognition. This time last year, there were significant elements of revenues revenues recognized from the Doosan license fees, so it's a relatively high comparator. Gross margin in the half was 55%. Again, that's industry leading levels to reflect our business model. It is lower than the 72% in the first six months of last year.

7:59 Again, the proportion of license fee income is a strong reflector on the overall blended gross margin for the business. As Phil mentioned, we're in a strong cash position £221,600,000 as of the half year. That represents a cash burn of about about £28,000,000 in the first six months. We continue to invest and grow our employee base, five twenty three employees, up from four eighty nine six months ago. We continue to invest in headcount in r and d, material scientists, systems engineers, and so on to support future business growth. So gross profit, 5,300,000 derived from those sales.

8:44 Adjusted EBITDA loss of GBP 20,500,000, and that reflects relatively low sales compared to the prior year period and increasing costs as we invest the the fundraised amount here to support future business growth. The order backlog, that figure represents all contracted orders across our partner base of £76,200,000. And that just reflects the the known contracted orders. It does not incorporate any future royalty revenue income.

9:21 And the other metric we think is relevant to show as a KPI is the planned partner capacity, which Phil also mentioned. So currently, two fifty megawatts. That's what's currently announced and planned between Bosch and Doosan. And we'll revise that figure as new partners come on stream or existing partners increase their capacity. So for example, once the new China joint venture is established, that will add another manufacturing block of capacity, which is ultimately what will lead to future royalty income. So we're showing the progression of revenue and gross profit over the past four six monthly intervals.

10:07 This figure shows the variability of sales and therefore, profit in those times, largely influenced by the timing of that license fee revenue recognition and also the impact of the proportion of license fee on overall gross profits. It's worth noting that to reinforce the point around the timing of the China JV license fee revenue. So we now expect almost all of the £30,000,000 to be recorded and recognized on the establishment of the joint ventures. And that's expected to be early in 2023 following the signing and following the antitrust regulatory clearances for those joint ventures.

10:56 The impact of that will mean a relatively low second half sales, similar level to the first half, but it does mean a very strong growth in 2023, in particular in the first half as the £30,000,000 will be recorded. We originally had anticipated around half of that 30,000,000 to be recognized in the second half of this year. So effectively had a shift of £50,000,000 from the second half of this year to the first half of of next year. All of that revenue would effectively come through to profits as there's no cost associated with license fees directly. Not all of that would be reflected in cash. We've mentioned before when we signed the heads of terms that we'd expect the the £30,000,000 to be paid across three tranches, most likely annually.

11:48 So at least 10,000,000 of that will be paid in cash for next year, not all £30,000,000. So we we would would expect a corresponding increase in working capital next year to reflect that recognition of full revenue.

12:05 This chart shows the revenue mix and how that changes over time. And you can see from the first half of this year, a lower proportion of license fees of the total compared to prior periods, which is also impacting the overall blended gross margin. But in going through for the full year, we expect a similar type of level overall depending on the mix in the second half. You could expect something of the order of 50% gross margin for the full year. And but going forward to next year, it'll be relatively high because of the recognition of the £30,000,000 of license fees in the joint ventures. And for those who are not familiar with our business model, this on the on the right hand side just recaps the different types of revenue that that CERES receives from its business model. So license fee revenue, we've talked about. So it's very high margin, often recognized upfront. Sometimes it's recognized over time depending on the nature of that particular agreement.

13:09 Supply represents prototype technology. So it's a hardware, sales stacks coming from our pilot reference facility in Red Hill and and sales to our partners to support their growth and industrialization of those products. Engineering services encompasses joint development collaboration with our partners, and that includes engineers and scientists working with with the partners. So effectively, it's a business model of overtime recognition with a markup on those services. So the way to look at this license fee revenue is very high margin and sometimes 100%. Supply and engineering services is is lower margin, still a good margin for the business, but not as high as license fees.

13:57 The one revenue stream that's not on here yet is royalties. So that's a longer term high margin revenue stream paid by partners on commercial sales from the start of their production. So once our partners sell our products to the market from 2024, we'll be paid royalties from those products. That will increasingly become significant revenue stream in the long run.

14:24 We've talked a bit about investments in the future and follow and particularly, that's been accelerated following the capital raise last year, and we're increasing our investments. What we call investment in the future, which comprises of CapEx, r and d spend, and the capitalized r and d, increased to close to £26,000,000 from 16,500,000 in the equivalent period last year. And we've increased in investments both in SOFC, so the power side of the business, as well as SOEC electrolysis, the hydrogen segment. We've also increased in capital investments that enhances capability and capacity of our pilot manufacturing site in in Red Hill as well as testing.

15:12 So that amount those sums go into things like material science capability, systems engineering, material scientists,

15:21 investment in our CERES POWER H2 facility, CP 2, the reference plants. Test capacity is really important. That's a key part of our our business, supporting our own testing, but also supporting and transferring capability to our partners. And as announced earlier this year, we've got a partnership with Haribamira. So we're doing some outsourced testing, both the production of test stands as well as test as a service. These are all important ingredients to support future growth of the business. And we continue to increase that level of investment in the second half of this year compared to the investment in the first half of this year, in line with our plans and the strategy set out during the fundraise.

16:09 The final chart in the finance section is a reminder for those not so familiar with our business. It reinforces the nature of our business model over time. So in the in the purple section, you can see the existing power or SOFC business currently comprising of license fees, engineering services, and and hardware sales. And over time, increasingly, we get contribution from royalty sales as our partners sell into the market. And then layered on top of that is the hydrogen business or SOEC. Same same model. So we'll start with typically technology evaluations and joint development agreements, so getting license fees, engineering services, and hardware sales. And over time, our partners for SOEC in turn will sell into electrolysis systems into the market, and we'll get royalties from that business as well.

17:06 So with that, I will hand back to Phil. Okay. Thanks, Eric. So just an update reminder on the business strategy. What's been happening globally?

17:24 You know, there's many macro issues that influence our business. One is obviously what's happening in Europe with energy security. And as a result of that, we're seeing more and more policy decisions, more and more support for moving away from traditional fossil based energy towards cleaner alternatives and energy independence. That's most evident probably in the EU where we're seeing the awards of of the order of 5,000,000,000 in these programs of common European interest. So we've seen about 5,000,000,000 awarded into hydrogen already, and I think today, they've announced another 5,000,000,000 tranche, which is really starting to benefit the scale up of hydrogen and fuel cell technologies in Europe. Now as a UK company, because of our business model, we indirectly benefit from this because through our partnership for the likes of Bosch, that is good news for the industry. And despite what's going on in the wider world, we are seeing this one way trend, I think, towards hitting net zero and the urgency to actually scale these these industries.

18:40 Moving along, The US, I think, finally, has put together the biggest clean energy bill in its history under the Biden administration, which is $270,000,000,000. And, again, there's about $9,000,000,000 earmarked for hydrogen

18:58 hubs in The US. Now that's quite recent. But, again, what we're starting to see is a pickup in interest and activity, hydrogen fuel cells in The US as well. So I think that's incredibly, positive for this global picture. Already, we, we've talked about China, and China's got a challenge to decarbonize. It's it's a heavy use of a coal as it as is India. And part of that transition will probably be moving from coal to gas and then from gas to hydrogen or a combination of that and renewables. Part of what we offer is a better use of natural gas. So lower carbon, higher efficiency power systems, that's part of what we're looking at with our our relationship with Weichai.

19:45 And, actually, China will, increase its its usage of of natural gas in the in the coming years from about 8% to about 15% of its energy mix. So we we're seeing different macroeconomic environments in different parts of the world. And, again, because of the portfolio of technologies that we have and our partnering business model that we have, we're able to play in many parts of this energy transition. South Korea is obviously a a key partnership, of ours with with Doosan. And, again, it's benefiting from about $30,000,000,000 of of of funding into that that that particular territory. And it also

20:30 has very strong policy decisions on fuel cells for distributed power and also moving into new areas like decarbonization of shipping. India is an interesting area for us because, again, similar to China, they're trying to transition from a coal based society into cleaner energy, and they have ambitions, to have 60 gigawatts of electrolyzer demand by 2030. That's because they want to be exporters of green steel and green ammonia, which, again, relates to our new move into electrolysis and industrial decarbonization. So when you think about CERES and our strategy, we're very proud to be a UK technology business, but we really think and act globally, and we do that through partnerships.

21:17 And despite some of the the recent volatility, I think, in the in the markets with inflationary concerns, interest rates, etcetera, if you look at the urgency for decarbonization and what's going on on the macro scale,

21:30 I think the the outlook for this business is incredibly bright because we are one of the key pieces that can play in this energy transition in many of these different sectors and in many of these geographies. And, you know, if you want to invest or be part of this energy transition in China, in Korea, in The US, in India, then it's through investment in CERES, really, that you can actually benefit from that.

21:59 How we work as a business? We are a platform technology. So we have the core steel cell technology, which we scale with partnerships into a variety of power systems for use in commercial buildings, data centers, utility scale, and transportation applications run-in one direction. Running the the opposite direction, we can actually use the same cells and stacks to generate green hydrogen at very high efficiencies and therefore low cost, particularly in industrial applications. And we as mentioned earlier, we have our first partnership with Shell. So if you look at the quality of partners that we keep and how we actually go to market, we anticipate growing the electrolysis side of the business with the same kind of quality of partner that we've been able to secure on the fuel cell side of the business.

22:59 Just a few words. Many of you already know about our our relationships, but Bosch is obviously looking to scale production by 2024. It's invested around €500,000,000 in the development of the SOFC technology for its own products, its own manufacturing based on CERES technology.

23:21 I mentioned earlier, there's big policy support now in the EU. Germany, is gonna have about €8,000,000,000 of funding available, because it needs to to transition and needs to deal with energy security. And, again, through strong partnerships, we're in a good position to to benefit from that trend.

23:43 It's worth talking a little bit about Doosan in South Korea as well. So Doosan is also on a pathway to building its factory in in South Korea by 2024. It's committing a £100,000,000 to build the solid oxide plant,

24:00 and that's now well underway. We've already developed 10 kilowatt systems with Doosan. We're now developing higher power systems around 60 kilowatt modules that go into 600 kilowatt modules for shipping. And Doosan have announced partnerships with Shell and Hyundai Heavy Industries around the decarbonization of shipping. But also those kind of 600 kilowatt type building blocks are also interesting for decentralized power and utility scale power as well. So there's a lot happening behind the scenes, if you like, in our partners as they scale. Just a few words on the SOEC development. The reason why we think this is an exciting technology and why we've invested in this is we believe that solid oxide technology for electrolysis offers about a 20% improvement in efficiency compared to lower temperature electrolyzers that are currently on offer.

25:03 And that's important because about two thirds of the cost of hydrogen green hydrogen today comes from the energy input. So that gives us a pathway to what we believe can be achieved at about a dollar 50 a kilo of green hydrogen.

25:20 There's a slide on on this here, which is a dollar 50 a kilo of hydrogen is something we used to think up until recently was absolutely essential to compete with fossil based hydrogen. That's until we've seen the the the the change in the energy system globally. I think it was Bloomberg a week or so ago estimated that the cost of gray hydrogen, so hydrogen from fossil based sources has hit just under $7 a kilo. So it used to be this big economic argument about can you make green hydrogen as cheaply as you can make gray or blue hydrogen? That's gone out the window now. Green hydrogen, I think, will be the majority of the future for the hydrogen production.

26:09 And for us, the big target area is industrial decarbonization. There's about 70,000,000 metric tons of hydrogen produced

26:17 globally today. So even if we did nothing else with hydrogen, but we just switched the hydrogen that we already have in industry, that's already a very significant market. Which brings me on to the collaboration with partnerships. So what you see here on the right is our first module on test. So,

26:41 basically, we build the same stacks we use for fuel cells into modules that go into container based solution. And we're looking to demonstrate this at a megawatt scale with Shell in Bangalore in India. So they will be our first demonstration partner of this technology. As I mentioned, if you can utilize waste heat, which a lot of industrial processes like green steel, green ammonia, petrochemicals have, then you can push the efficiency of electrolyzers up into the high eighties and even 90% kind of level. And that is obviously very attractive for industrial decarbonization.

27:18 Our plan is to start the pilot with with Shell next year, and it will run for three years. And, again, hydrogen will be used in industrial on-site applications.

27:34 And I mentioned in terms of the the overall strategy why it this is entirely synergistic with what we already do at CERES. Our philosophy is the same core cell and stack technology, the same manufacturing base that we've started to establish on the fuel cell side can also service the hydrogen side. So, you know, we will continue to expand the business for power and, you know, adding to Bosch, Weichai, Dusan, Miura on the power system side and also start to enter partnerships in a new ecosystem around decarbonization of of energy, industrial decarbonization, synthetic fuels, etcetera. And, obviously, Shell is the first we hope of many partners on the electrolysis side of the business.

28:26 So if we just finish with the outlook and the targets for the year ahead, I think it's pretty clear. We're very focused near term on the joint venture in China. We we want to get that done and established, and then that's a big platform for us in terms of how we scale the business. We are continuing to invest for growth in SOFC and SOEC, which is entirely consistent with what we said we would do in 2021. And we are actively supporting our partners as they scale production in Germany and in South Korea. SOEC progression is is is going well. And, obviously, with our first partnerships there, you'll start to see more more and more proof points of that technology coming through.

29:17 And we are working on expansion of the SOFC into new applications such as marine and higher power and also the future fuel capability of that technology. Post the finalization of the China joint venture, we also intend to move from the AIM market to the main the main list of London Stock Exchange as well. We think it's a natural progression for the company to do so. So I hope that gives you an oversight of where we are as a business, and I think we'll move to q and a. Thanks, Phil and Eric. For those of you who don't know me, I'm Elizabeth Garrett, and I head up IR for CERES. If you do have any questions or follow-up after the presentation, you can contact us on the details shown on screen. But for now, we'll take some questions from the room first if anyone has any.

30:15 Good morning. It's Thomas Rands from Investec. Three quick questions, if I may. The first one is just around the SOEC pipeline. Obviously, excellent to sign up Shell. You give us any flavor as to how discussions are going and what sort of time frames we could hope for? Any any more big deals before the end of the year? I I wouldn't be as precise as that. I think look. We said this from the from the get go. I think that when we when we started moving into electrolysis, I think people are as an industry, people are saying, well, why would you do that? Because it's all about our clients, all about PEM. I think not just CERES, but you've you've probably seen recently a trend to more and more solid oxide announcements from some of our our peer groups, some of our competitors.

31:11 So solid oxide scientifically offers you the highest efficiency route to green hydrogen. So that's just the pure science of it. The the thing that's always held it back is maturity and scale. However, as soon as you can offer that, there are, of course, a huge number of people who are very interested in that because the the easy criticism that you can throw at electrolysis is, well, it's not very efficient, is it? The round trip of efficiencies aren't that good, etcetera. So with solid oxide, you have something that actually pushes those efficiencies higher. And, yeah, since CERES has a good pedigree, particularly particularly on on solid oxide technology and our business model in terms of scale and some of the partnerships we keep, there's a high level of interest now as we've entered this market because I think we're a credible player in solid oxide.

32:03 Solid oxide is seen on most companies as a technology that will come. It's on their road maps. And I think we're very confident we'll have more announcements, additional partnerships to the to the first one we've announced, but I won't I won't tell you exactly why. Second question is kind of linked with the the testing of the ECM, the electrolyzer cell membrane. Are there what other kind of stage gates, do you expect to kind of see in the next six to twelve months as that fuller system kind of gets created, tested, developed that we could kind of quiz you on in the future as to when that product will be at a point of being kind of commercial, please?

32:51 Yeah. So the the ECM test level is is entire system level. And then my engineers will hate me for saying this, then you're just adding modules. But the the sophistication is really in that module. So that's the first key proof point for us because at that point, you're you're you're you're going power into to out at a efficiency level, at a system level. But it doesn't stop there. This is really, for us, a proof point, first of a kind. Already, we're starting to look at what else do we do with that module in terms of development. The system level, there's a lot of IP, etcetera. But I think in terms of milestones, obviously, results at the module level, and then the the plan is at the megawatt scale to begin with, and then we'll build it from there. But that's the near term technology road map for the SOEC.

33:49 Thank you. And then last question is on SOFC and Bosch. I believe we're rolling out several, I think up to a 100 mini plant across Germany through this year. Any updates on how many they've installed? Any initial feedback? Any kind of data you can share on on those initial installations, please? I don't I honestly don't have that to hand. I know that they've gone into a number of different applications. And, you know, that Bosch is building, if you like, the the order book, if you like, for for those for those use cases. They're varied. They're they're taking a modular approach, not dissimilar to Doosan, to be honest, as in that the standalone power system is is highly efficient, and then you can just add to them depending on on what application you're going for.

34:39 But I don't I don't have to hand the date details on that. Okay. Thank you very much. Yeah. Thank you. Good morning. It's Martin Wilke from Citi. Just a couple of questions on the SOE technology. You mean you mentioned about the much better efficiency. There are some sort of market views it because PEM and Alkaline will have higher volumes, and they'll benefit much more from lower unit cost over time. Is that a view you share, or can the can the SOE technology over time match them on cost? And just in terms of how you allocate your r and d, presumably, a lot of it is about efficiency and and output. But are you also incentivized by your customers to help them reduce manufacturing costs as well? Okay. So on the second point first, yes, we are. So a lot of our joint developments, etcetera, have KPIs in them around cost. And often the way way we construct royalties, we don't want to be penalized based on reducing costs. We wanna be incentivized on that. So we're always focused on that, obviously, and that comes in a number of different ways. It comes in upgrades to the technology, so increasing power density, meaning you get more more work per cell, whether that's hydrogen or electrons. And therefore, that ultimately reduces the the the the cost of the platform, if you like. And then obviously through scale, you get what you

36:09 described is happening, particularly in the alkali area. As you get more mature technologies, you can start to to benefit from learning rates and coming down. I would say, you know, as a newer technology, there's a lot more innovation, so you can make bigger steps in the in the early years with something like solid oxide. In terms of the absolute capital cost, as I mentioned earlier, you've got to look at the levelized cost of hydrogen. So I think alkali will be the lowest cost, to be honest. I'm not sure that PEM will get to that level. And the differentiation then becomes one of efficiency. Even if solid oxide doesn't achieve the same cost point necessarily on a capital basis of alkali, it could still be equivalent or better on the cost of hydrogen because you've got to consider the the the energy input. And and that's why the it's the combination of the two that you have to consider. But in terms of how we see cost, a lot of the work that we're doing, a lot of the scale that we're doing gives us pretty good visibility on our cost base for the future. So that number that we put out of around a dollar 50 a kilo, that's based on $20 a megawatt hour even if power prices were higher, $40 a megawatt hour, even $60 a megawatt hour, you'd still be at 2 to $3 a kilo of of green hydrogen, which would be very competitive, as I mentioned earlier. So, yeah, we're we're we're confident in our predictions

37:41 on what we can achieve as a levelized cost of hydrogen because of the experience that we're going to as we scale on the fuel cell side. Good morning. It's Maggie from Stifel. I recognize this is slightly an unfair question because the inflation reduction act benefits your customers and your second derivative beneficiary. But a lot of the detail within that act is not completely well understood, particularly the benefits on investment tax credits, which are five years in cashback. Can you help us in your understanding and with your industry contacts how even on a second derivative that will benefit?

38:28 I understand momentum, but where how do you see this adoption time frame given that we still have this uncertainty? So this is a a announcement, but it seems very far off. So is Europe still your first part of call, and can you help us better understand in more detail that benefit from the inflation reduction act if you knew it? I'm not sure I'm qualified to be really help you understand that. The way we see it is I think it's a big positive step because I think, know, if you look at our our geographic spread, we've unashamedly gone where the market is. We've we've gone to Asia. We've gone to Europe. The US has some some key players that are scaling now. And I think that this IRA bill is now giving them, I think, more confidence.

39:24 You know, from what we know, some of the conversations we're having, think it's actually incentivizing people to start to plan more capacity in The US. It it's probably harder to compete if you're not in The US on that basis as well. But your question is a great one in terms of the longevity of it, but I think it's it's certainly given a near term stimulus and positivity to it. But I'm I'm not I'm nowhere qualified on The US political scene to know how how enduring that will be. Maybe you could tell us. Help us help. And the second question is, do you have an update on your investments in your in the Redux flow batteries, or is this still in the evaluation stage? That's still the evaluation stage. You know, we we kind of it's it's pretty small scale for us, but we're, you know, it's an interesting technology, and it's one that we're we continue to evaluate.

40:19 Great. No more questions in the room. I'll go to some of the online questions, and there's naturally been a few on, the China JV. Phil, could you just recap, a little bit on which elements of the JV are taking, you know, this this slightly longer time to agree and sign. And then sorry. There's quite a few questions that have come through. If we could try and just summarize, obviously, the the sort of potential scale over time, where we can And any risks we see to doing business in China, it's obviously a common question. I don't know if you could pick up those those three. Thanks.

41:05 Look. I I'm not gonna go into a blow by blow detail of of these agreements, but but they're they're very significant investments, and they're very significant corporate deals. And but whenever you add an additional party, three way deals are always harder than two. So it's just the complexity of of it and the number of agreements that are actually included in this deal. You know, it's it's very significant amount of legal work that we just have to get through. The hard points in all of these are always IP, particularly because we've got elements of IP sharing in this. We're gonna combine IP with what we've done with Weichai with what Bosch has done at system level. So there's a combination a collaboration that the result of which will be very strong, but obviously, that's a that's a complex thing to to navigate.

42:05 And then just the corporate side of it in terms of the establishment of entities, you know, it's always that always takes as long as it takes. The the key thing that we've always said and we've always operated this way at CERES is you have to get the right deal because these are long term partnerships. These are not near term sales contracts. So it will be done when it's right, and that's why it's taken us longer than we originally anticipated. But I still think that the result will be the, you know, the best results for for all when it when it's done. Next part of the question. And the scale up. I mean, I think just talking to some of the potential. Look. The this this is always a tricky one because it's it's not for us to say unilaterally.

42:56 I think what's what what's clear is there's a there's a a building block size from which you would naturally start. So if you look at what's been done elsewhere or or plans, you know, it starts at that kind of level. But in terms of the opportunity in China, the size of the market, etcetera, the the plans for it are to grow significantly in terms of capacity. And we do think that, you know, China, if you look at predictions on decarbonization, etcetera, it will be probably the biggest market for this technology. And then the last question was about risk. Question about risks. We often get this, but is there anything that's new that's cropping up? No. There's nothing that has affected our relationships with with Weichai.

43:42 And, again, you know, as a licensing business where one of the advantages we see in the three way is we're we're very much the technology provider with Bosch and Weichai and Bosch already having very significant as well established businesses in China alongside Weichai. We think that minimizes the the operational risk, if you like, for CERES. So Great. And on the same topic, can I come to you, Eric? Just a question around, could you talk through the change in revenue recognition for the 30,000,000 license fee just so we can recap on that from several years to one and what that actually means in terms of cash flow or timing? Yeah. Sure. So just to re to recap, the bulk of the £30,000,000, not necessarily all of it, but the vast majority is expected to be recognized on establishment of the joint ventures, so following regulatory clearances.

44:39 So we expect that to be early twenty twenty twenty three, certainly, h one next year. The cash from the JV license fees will won't follow the revenue recognition. And the best guidance to give at the moment is assume £10,000,000 a year in each of three years with the first payment being on establishment of the joint ventures. It's worth noting as well in terms of the investments, the other side of it. We guided previously in the heads of terms. We're expecting a total investment from CERES to be about £20,000,000. That still holds true, and we expect half of that to be paid on establishments upfront and the rest will be in later later periods.

45:28 Great. Thanks. Question here just in terms of confidence around regulatory approvals on the JV. I think, from what we we hear from our our partners, it it's pretty I think strategically, it's it's important, I think, to have these technologies for addressing decarbonization in China. So we don't we're pretty confident we will secure the the approvals. Yeah. Okay. And Eric here, one from Zoe Clark at Goldman's. She asks, you know, given the higher contribution from the China JV license revenue in 2023, I think she's fair to assume that gross margins are likely to revert higher in 2023.

46:18 But she asks, what is the normalized sustainable level of gross margins longer term? And what is the target mix of royalties versus licensees? So on the first part, yes, it's a good assumption that next year's gross margins will be high and certainly above 70%. In terms of long term trends and mix, we're not giving guidance on that. And but it obviously it does you know, a good rule of thumb, obviously, license fees and royalties are effectively at or close to a 100%. Engineering services and hardware, you know, a lower amount in the range 20 to 40. I give a wide range because it varies by contract.

47:05 And so you can one can model their own assumptions on future contributions from those four revenue streams, But, obviously, the overall margin will depend on that mix. Thanks, Eric. If I can come back to you, Phil, just some questions around electrolysis. I think we provided an update on our partnership with Shell. Question around sort of timing, when in 2023 might we expect to see that kind of pilot start? And, you know, are we getting other traction from other partners on on SOEC? I think if you can just recap on that, that would be great. Yes. I don't think we've we've given the details of that yet with with Shell. So I think, you know, the that that's something we'll disclose, I think, with with our partner. Obviously, again, when you're deploying it on an industrial side, there's a lot of preparation that has to happen to make that happen. So I think that would be later in 2023.

48:07 But don't forget that we're getting on with the development of this technology in house. So, you know, there'll be more to say on the actual development of the technology ahead of that deployment. I think we've already discussed potential of the partners. We we see a lot of interest growing amount of interest for the SOEC side of the business, particularly amongst the industrial decarbonization kind of end users. And, our go to market plan on this will be through partnerships at the the stack level through manufacturing and then with system integrators and EPC type partners as well. So we will say more on that as and when we we we can, but there's not much more we can say at this point, really.

49:00 Great. And I guess on the on the same theme, Chris Leonard at Credit Suisse was just asking, are we seeing more partnership interest for electrolysis coming from the ammonia in the ammonia industry because, you know, the 60% of capacity in Europe is is is shut down at the moment because of the high energy costs. And I guess he the second part is that he asks, you know, can solid oxide adoption benefit from those energy prices staying high for for longer? Is is that also driving interest in our technology? I I think the underlying trend is is somewhat helpful to electrolysis, but we have but, obviously, there's also a headwind about being competitive for a permanent in general because of the energy consumption.

49:50 But, yeah, I think that there has been this school of thought in electrolysis that it's all about CapEx. And, you know, we're gonna live in a world of cheap energy, and therefore efficiency doesn't matter. Now that's just totally been blown away in the past six months, and it's, you know, it's not a great scenario for, you know, many parts of the economy. This is all about energy efficiency. This is all about how much your, you know, your energy bills are. And if we we've always taken the philosophy, the more efficient your your technology, the the more more economic benefit it is for the end user. So high energy costs in in in industry, particularly, are are painful. It's not just ammonia. It's it's steel. It's petrochemicals.

50:39 And that's not gonna shift anytime soon, unfortunately. So I think, again, that it's done whereas a lot of people are having headwinds, we're actually seeing an unusual benefit from from these high energy costs. And Anne Crow from Edison actually asks just with regard to that, 20% higher efficiency than other technologies on our electrolysis side. Where are we in regards to achieving that goal, proving that that that achieving that proof point? But that's part of what we're we're demonstrating now. So at at stack level, already, we're very, very confident on that. And at system level, that's what we're starting to demonstrate now. And I think we'll, you know, in the in the future, we'll publish that data.

51:35 But it's like like I mentioned, this is not a scientific breakthrough. If you look at any of the other partners out there sorry, any other peers out there, solid oxide achieves, you know, this level of around, you know, 45 to 40 kilowatt hours per kilo, whereas your your your low temperature electrolysis is is above fifty, fifty five kilowatt hours per kilo. That's just the the the nature of it. The the actual systems themselves are actually somewhat simpler than the fuel cell systems. You're not dealing with fuels and catalysis and that kind of thing. So short answer is we're very confident. Great. Thanks. And, Eric, this one, I think you'll enjoy.

52:21 Why is license fee revenue recognized upfront and not over the license period? Favorite topic. So please How long have we got? I'll give you the short version. Yeah, plea for for more details, please consult IFRS 15 accounting standard. The the two broadly two types of license fee. If it's a if it's a a right to a right to use license, so we're basically enabling our licensee partners to use our technology, our IP into their systems, that is seen as an upfront license fee, recognized upfront because we are under the standards providing our meeting our obligations on the signing of that license fee, enabling the partner to develop their products. That's a point in time and recognize upfront. So that's called a a right to a right to use. There are some cases where it's recognized over time, so right right to access.

53:26 So there's ongoing obligation to transfer our knowledge and IP and ongoing development and foreground science and engineering, which transferred during the period of the contract. So that's recognized over time. Some contracts, you know, once you've gone through them in great detail with our accountants and auditors, are split into two, so sometimes combination of two. So final bit of color on the China JV, for example. The reason we're saying it's most of the 30,000,000, not all of it necessarily, will will come down to whether or not we also have in parallel some joint development agreements with those JVs, which might mean there's an ongoing element of transferring IP over time. So some of that might be recognized over a longer duration of one to two years.

54:15 Great. That's probably enough on that. Not too much. Thanks for the question. Thanks for the detail, Doctor. Noe, Derek. Lacey from Pannewa asks, what sort of order should should we we be be thinking about for the total investment in the future for the next three years, particularly this year? Eric, one for you. So I think components to that. If you look at the total investment in the future amount, assume that will be a high level in h two than h one. So I won't give an exact number, but that's continuing to trend upwards. And and potentially a high level again next year. Just to add a bit more color to that, one element to that is is is capital expenditure.

55:04 It was around 5,000,000 in the first half of this year. It'll be close to double that in the second half depending on the exact timing of of procurement spend. And so it'll take you around fifteen this year. And it'll be that sort of level, 15 to 20 next year, on our current estimates. Great. And a couple of questions here around sort of the human resources side. Someone notes the increase in r and d, especially that run through on the p and l, and it's very human intensive. Just asking around recruitments and a sort of similar in a similar vein, just asking about growing our staff and what specialisms are we adding and and how easy is it to find people in in The UK.

55:54 It's it's definitely got tighter. You know? There is there's high demand for good people. We we have over 30 nationalities at CERES, so we don't just look in The UK. We we look for world class people no matter where they are. And we've got a real mix. We've got scientists, engineers, technicians, accountants. So, you know, we we've got a lot of talented people in CERES. The other thing that we've initiated this year, which is, you know, we don't often talk about is when we when you're growing fast, it it that that's that that's hard to do everything inorganically. So we are starting to grow our own people. Obviously, we develop people, but we have graduate intern programs now with leading universities.

56:48 We've actually started apprenticeship scheme because, again, we need highly skilled if any of you have been to our our manufacturing pilot plant at c p 2, etcetera, there's some fantastic jobs and skills that we provide under the apprenticeship scheme as well. So, you know, we're we're about to publish our first sustainability report, thanks to Elizabeth, in the coming weeks. And one of the big things for us is actually about developing people and providing good quality of of of education and development for for the for STEM and engineering based roles. So what we've you know, we're we're, you know, pretty sizable company now in The UK. We attract a lot of talent because of our purpose. You know? A lot of people want to come and work for companies that are are aligned with net zero. So we attract a lot of refugees out of the automotive industry, out of the oil and gas industry who are also personally transitioning. So that's good.

57:46 But, also, we have to grow our own talent because hiring externally in the market is always expensive versus growing your own. So that's a big push for us. And on the same point, Eric, just are we seeing any wage inflation, cost inflation? Yes. Yes. We are. I mean, we've got we've got inflation across many aspects of the business like other peers in our industry and across most industries, and we are managing it as best we can. But total spend this year projected to be broadly in line with what we expect at the beginning of the year through various puts and takes. But overall, we are seeing inflation in in materials, supply costs, and in and employees. So we are conscious of of that. That. We're managing that combination of aspects. In some cases, we we we're it's a direct intervention. We did apply a cost very, very early during the inflationary situation, an overall cost of living increase to to salaries across the board back in in May, June this year.

58:53 But also looking at other areas are not so direct, as Phil mentioned, when it comes to development, you know, reinforcing the mission, other sort of software areas in terms of opportunities for sort of networking and and areas of of interest for for the staff at all levels and also deploying where appropriate share based compensation schemes to reduce the cash burden on the business whilst maintaining the long term retention. That's great. Thanks, Eric. And just to close out, so we've had a few questions just on the AIM market. Someone asked, did I hear that the AIM market move is is linked to the China JV timing? Why not stay on the AIM market? What what do we see as the main benefits of moving moving to the premium listing?

59:44 So we want to close out the China JV first. And so that's always been our intention. So that will be a a precursor to any move up. Benefits for us. Look. I think the regulatory environment on the on the AIM market has it's pretty close now to main market anyway, but we operate with a very high level of governance. If you look at our board and the way we operate as a business, we we already operate at that main market level. I think the biggest advantage is probably if you look at our shareholder base, international investors, I think, recognize the main list in a slightly more favorable light than the the AIM market. So so that for us is it's we're at that stage of evolution as a company that it's not if, but when, and we just feel the time is right to do that.

1:00:43 So Great. Thanks. If we haven't got around to your questions, we will be submitting written answers to all the the ones submitted online, and you can always touch base with us, directly. Otherwise, I'll hand back to Phil if you have any closing comments. Yeah. Thanks, Elizabeth. And look. Thank you for your time today, both physically and and also online. You know, we we are, I think, in an incredibly strong position at CERES. We've got a very healthy balance sheet. We've got a strong order book. We've got very strong partnerships. We're getting on with executing the business. The macro environment near term can be challenging, but for us, actually, it's a big opportunity. We, you know, we are committed to this net zero mission, and the way we're doing that through global partnerships will continue to grow.

1:01:37 We're really proud to be a UK business. We're actually growing and investing, as we said, and I think that's a virtue that's sometimes overlooked in The UK. So we want to grow a world class technology business in The UK, and that's exactly what we're doing. So thank you for your support today. Sorry. Eric, Phil. Elizabeth, thank you for updating analysts and investors this morning. Can I please ask investors online not to close the session as you'll now be automatically redirected for the opportunity to provide your feedback in order that management team can better understand your views and expectations? This may take a few moments to complete, but if, you could take that time, I'm sure that'll be greatly appreciated by the company. On behalf of the management team at CERES POWER HOLDINGS PLC, we'd like to thank you for attending today's presentation. Good morning.