Itm Power (LSE:ITM) — Trading Update for the year ended 30 April 2022

0:01 Good afternoon, ladies and gentlemen, and welcome to the ITM POWER PLC Trading Update for the Year Ended 04/30/2022 Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode, and we expect this meeting will last thirty minutes. 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 please simply type in your questions at any time and press send. The company may not be in a position to answer every question received during today's meeting. However, the company review all questions submitted today, and we'll publish responses where it

0:32 is appropriate to do so. Before we begin, we would like to submit the following poll. And if you give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand over to doctor Graham Cooley, CEO. Good afternoon. Afternoon, and thank you very much for the introduction, and thanks for everybody on the call for joining. This is a trading update since the last time we reported numbers back in January. I'm gonna begin, and then you're gonna hear from Andy Allen, who's our chief financial officer. So just a bit of positioning, first of all. I'm sure most of you on the call know this already, but ITM POWER is an electrolyzer manufacturer.

1:18 We're a pen electrolyzer manufacturer. We're located and operate out of Bessemer Park in Sheffield, which is the world's largest operational electrolyzer factory. And we have a, well defined road map to get to five gigawatts per annum by the end of twenty twenty four. And we spent, now, a number of years building our skills and experience in the company delivering on electrolyzer projects. So highlights then and progress in the period. So work in progress is currently 75 megawatts. That is those electrolyzer projects which are already signed and are already going through the factories. It's up 74% year on year.

2:15 The backlog stands at a record of 755 megawatts, which is up a 160%. This increase in the backlog has been very well telegraphed. We made an announcement about the creation of Motive, a joint venture with Vitol, which includes 240 megawatts of preferred supplier status. That announcement constitutes all of the increase in the backlog since January. We've established, ITM POWER service in Germany with a new facility. I'm gonna tell you more about that. And that was established with, our first support from the German government, €2,000,000 support from the German government, an important new endorsement for us, from a government in Europe.

3:18 We also, received 9,300,000 from the UK government to support our testing and validation of the five megawatt module called the GEP. And we've made significant progress on the development of the two megawatt modules called MEP moving from MEP 1.0 to MEP 2.0 and also the GEP stack platform. And I'm gonna tell you a bit more about that as we go along. So the backlog then stands at 755 megawatts. So the backlog is the total of work in progress that signed contracts.

4:08 Those contracts in the final stages of negotiation, of which there are 342 megawatts, and preferred supplier status with two major blue chip companies, one SNAM and the other one, Vital via our joint joint venture with Vital, called Motive. And and you'll see that in the period, it is the preferred supplier status that has increased. Actually, if you go back to the period before, it was the, in the final stages of negotiation that had increased, and the preferred supplier status has remained the same. And and you'll see those two categories of backlog leapfrog each other as we go up in backlog quantity.

5:02 But what you are seeing is steady growth in work in progress. So the process for us is to move from preferred supply status through to negotiation from negotiation into work in progress, And that's what we're doing, commercially and with our sales team.

5:25 In terms of the macro picture then, there have been some very significant announcements in in the, macro market and particularly with regards to policy. So you you will note a very important reaction in the EU and The UK to the Ukrainian crisis. The EU had a target for green hydrogen at a an explicit electrolyzer target of 80 gigawatts of electrolyzers by 2030. That's in the next eight years. That, 80 gigawatts has now increased to 200 gigawatts, and that's in the next eight years.

6:11 That calls for 20,000,000 metric tons of green hydrogen per year to replace industrial hydrogen, which uses natural gas as its feedstock. And, clearly, the reason for that is to, reduce, Europe's dependence on Russian gas. A parallel announcement came from, the UK government. UK government had a target of five gigawatts of clean hydrogen, which included blue and green hydrogen. They've doubled that to 10 gigawatts with an explicit electrolyzer target of five gigawatts by 2030.

6:58 So that's in eight years. And in The UK strategy, it all also calls for a significant UK content, which positions ITM POWER well, in the market. What why is this all of this happened? Well, it's happened because, of the incredible increase in the price of natural gas and also, the increase in the commodities volatility. So over the last year, we have seen green hydrogen achieve parity with gray industrial hydrogen. That is hydrogen made using natural gas.

7:49 And the world uses it at 70,000,000 tons, of gray industrial hydrogen. So it's a massive market, and we have achieved parity, but also can demonstrate incredibly low volatility. Because if you connect an electrolyzer via a power purchase agreement to renewable power, you get zero volatility.

8:15 You also get fuel security because you're connecting to a capital asset located in country. So it gets you around the geopolitics of importing natural gas, And it's also net zero, so you avoid, carbon pricing, which is running right now. The ETS at the moment is running at between 60 and €100 per metric ton c o two, which adds between 0.5 a dollar and a dollar per kilogram to the price of hydrogen. So a move by the EU to achieve an additional, 16,000,000 metric tons of green hydrogen, making a total of 20,000,000 metric tons of green hydrogen. Just to size that for you, that's the amount of industrial hydrogen that's used in the entire production of methanol worldwide, which is the feedstock for all of chemistry.

9:19 So it's a massive amount of equipment, 200 gigawatts. Repower EU then not only calls for significant amount of green hydrogen, but also a massive amount of new renewables. Actually, a 150 gigawatts of new renewables by 2030 coupled with the the gigawatts target of 200 gigawatts for the installed capacity of electrolyzers. So this is all about the deployment of green hydrogen and renewable power together, both industries being mutually supportive of each other.

10:07 So, in terms of, our products and our technology development, we've, we've moved actually to a new MEP unit. So what you see on this diagram is MEP one, which is the two megawatt module that we supplied to refine, which is now operation. And the operating pressure of those units is 20 bar. Actually, we're now delivering loyner, and loyner is using a two megawatt module, which is increased in pressure. It's operating at 30 bar. It also has increased efficiency, increased current density, and an increased overall output.

10:59 And that new pressure will be transferred. The technology will be transferred to the GEP, which is a five megawatt module. So we are scaling, also improving manufacturing processes and manufacturing manufacturability, and we will also be moving up in current density. Current density is the key metric for reducing cost of electrolyzer modules because for a given amount of hydrogen output, you reduce the area of all of the equipment, all of the components inside the electrolyzer. So we're deploying that for the first time at Loina.

11:46 Loina, we missed the revenue recognition, and we we telegraph that very, very well

11:56 in an announcement that we made a couple of months ago. And Andy's gonna tell you more about the revenue recognition associated with. We've just established ITM POWER service in Germany. So we got €2,000,000 from the German government to set up a a space holding control room and rapid response after sales support, organization for supporting, the rollout of electrolysis equipment in Europe. It's a facility that's 17,000 square foot, and it will support the refined projects. So that's refined one and refined two, also Leuna, but also wider than just Germany as supporting projects in France like POWER and, in Norway like Yara.

12:58 So important for us because, it supports our customers in Europe, and it also is the first time that we have been given support from the German government.

13:12 We've been positioning ourselves for delivering at scale by employing some fantastically skilled engineers and technologists. You can see the heat diagram, and you can see blue and shades of blue all the way through to gray are about delivery, production and testing, quality after sales support, product design, procurement, HSE, project delivery, all of those very tangible operationally orientated delivery functions. And you can see if you move from 2010 to 2022, how we've transformed the organization from an r and d organization to one delivering on product for customers.

14:07 We got to 400 members of staff now, ITM. The the growth, in staff numbers has slowed a little bit between 2021 and 2022, but we have built a fantastic team ready to deliver at scale.

14:30 Part of the part of the mix of skills and staff has been about transferring some of the staff from ITM POWER to the joint venture with Vitol. And as I'm sure you all know, we formed a fifty fifty joint venture called Motive. Actually, Motive has in it all of the build, own, and operate assets that were owned by ITM POWER. And and those skills then are being put to, great use in now developing that build, own, and operate organization. And we were delighted to get such a high quality, world leading partner with it all, who not only are very important, company in the area of energy trading, but also in the area of, fuels, including CNG rollout, in Europe.

15:34 Vital, of course, is not the only strategic partner working with ITM, and and we were delighted to add in terms of strategic partners and customers, not only if it's all but Yara in the period. And and as, the company develops over the

15:54 next, period, you'll see further strategic, partnerships emerging. And, actually, we built ITM POWER on having some long term very solid partnerships, going back to working with Shell and Linda over the last half decade.

16:16 So if I can hand over to Andy now, Andy's gonna talk you through the unaudited financial results. Thanks, Graham, and good afternoon, everybody. So as Graham said, I'll take you through the unaudited financial results for the year ended April 30. The full results will be out on the August 8 Monday, August 8, so do look out for that and for more detail accompanying that. But in terms of headlines, revenue for the year was £5,500,000 against 4,300,000 a year ago. And we're expected to have recognized the project revenue as part of these results, but actually that was deferred into FY '23.

17:01 And I've got a bit more on that in a moment. In terms of the EBITDA loss, an EBITDA loss of £36,500,000 versus 21.4 a year ago. Cash burn rose £52,000,000, very much in line with what we said we would be doing in q four twenty

17:18 one, which is starting to build a stock, build up inventory with to reduce lead times for customers. And finally, the cash at the at the end of the year was £364,000,000 versus 176 a year ago. And the doubts there being the fundraise we did in q four last year. So diving into what we've guided in terms of megawatts delivered. So on the left hand side, you see how we built up our guidance at the start of the year. On the right hand side, you see what actually happened. So we start with two building blocks. First, the 10 megawatts of refined one, which was due to be delivered in the year.

18:02 And we had recognized revenue on a percentage of completion basis. So there was not too much revenue left to recognize, but that was delivered in the year. Then there's 24 megawatts around, we expected to recognize. Now for our standard cubes, our standard products, revenue is to be recognized at factory acceptance testing. Due to the slight delay in the project, we've worked with Linda and the end customer to try and maintain as much of the original schedule for the project as possible. So the revenue recognition has changed. We're now sending cubes out, and we're sending stacks to follow to form a complete product product once on-site. So that revenue we recognized in h one twenty twenty three.

18:52 So that gave us our minimum expectation. And finally, we had products that we were built to stock of 70 megawatts, which gave us our maximum guidance. And what we saw in the year was whilst we contracted much more than 17 megawatts worth of projects, that revenue will be recognized in FY '23 and not part of FY '22.

19:14 So our megawatts delivered in the year was around 11 megawatts. In terms of other year on year differences, we have, as pointed out, an increase in skills and the workforce. And you see we have 400 employees now. The total impact year on year was about £7,000,000. And there was another impact, which is project delivery and production ramp up of about £14,000,000. In terms of cash burn, product development, there was an impact of £7,000,000. Some of that was the skills we brought in actually, you know, building know how and generating IP for our products in the future.

20:02 The other big cash burn impact was ongoing work in progress and inventory builds as we set out in q four last year. The WIP relates to and other contracted projects, and we're also building subsystems for our standard cubes going forwards. Finally, we continue to invest in Bessemer Park. We spent nearly £5,000,000 on production equipment. Part of that is creating greater efficiency in the processes we have, but also there was a case of bringing some processes in house, which gives us more control, not only

20:33 around quality, but around timeliness and making sure that we can ramp up as we need to. I'll hand back to Graham for summary. Thanks, Andy. So look. Just a quick summary. I think it's been a period of very strong operational progress. We got to a record backlog, but that was very well telegraphed with the prior announcement of Vitol. We've established an important after sales support facility, in Germany, in the heart of Europe. And we have a very rapidly developing, macro picture. Was delighted, that we have successfully improved our product, that we're delivering it to that we've invested in inventory skills and further production equipment.

21:28 So that's the presentation. I'm very happy to take your questions. Thanks, Graham. Could we start perhaps with an update from you on the second Sheffield factory at Aviation Park? And and perhaps an update on the high deploy if if there's anything new to say. Yeah. So nothing new to say really on either of those. Our plan is still in place for expanding our production. I didn't include it in the presentation because I didn't wanna share the same slides over and over again. But no nothing to add there, really. Is ITM POWER now in a position where it needs a full time dedicated department for sales and marketing?

22:24 Well, we already have a full time and dedicated department for sales and marketing headed by Andy Ellis. And we also interact very strongly with ILE who also faces the customers. So that's already in place. K. Have you ever considered developing steam electrolyzers that can use waste steam to reduce the electrical cost of hydrogen production? Yeah. I mean, high temperature electrolysis does use steam. The problem is where do you get renewable steam from? You know, you can make green hydrogen using green electricity, combining the electrolyzer with renewable power.

23:14 Steam, requires you to raise it in a boiler, and that means it requires you to use a fuel. And if you use a fuel, the only fuel that you could use that would be net zero would be hydrogen. So you'd be burning hydrogen to make hydrogen, which doesn't make any sense. I mean, thermodynamically as well, unless you've got waste steam, and you can, pose the question, where do you get the waste steam that's renewable? But if you've if you've got waste steam, then it's very easy for you, to imply that you have a very, efficient electrolyzer. Actually, if you add in the thermodynamics of the steam, you'll find that raising steam is a very low efficiency process. It's a Carmel cycle and not an electrochemical one. So all in all, it just doesn't work.

24:11 Okay. More and more people are talking about green ammonia and green methanol. Can you explain what part an electrolyzer plays in the in the production of of of these chemicals? Sure. So well, ammonia, first of all, and very topical for for the market today because of the announcement from CF fertilizers this morning. But, look, you make fertilizer by first producing ammonia, and then you you use nitric acid to turn that into ammonium nitrate, which is a fertilizer. So you make ammonia by reacting nitrogen and hydrogen, and all of the world's hydrogen currently or nearly all of it is made using natural gas.

25:06 So you you steam reform natural gas and you make industrial hydrogen, then you react the industrial hydrogen with nitrogen, which is extracted from the air in an air separation plant, and you react them together in a Haber Bosch reactor, the Haber Bosch process. Actually, Linde Engineering build full ammonia plants, and so that positions ITM POWER incredibly well for removing the industrial hydrogen part and replacing it with green hydrogen, which is what we're doing in the Yara project. A consequence of the increase in gas prices, of course, is that the corresponding price of ammonia has gone up very significantly.

25:57 And you may have noticed this morning an announcement from, the the largest the only, actually, fertilizer manufacturer in The UK that they have closed down their INS plant, permanently closed it, and they're part loading the Billingham plant because of the cost of of industrial hydrogen. And and and and methanol is made using the syngas process. So you you take, you take natural gas and you reform it and you make carbon monoxide and hydrogen, and you react those two together. And and, actually, renewable, methanol can be made with green hydrogen and c o two extracted from the air, and that's a genuine e fuel.

26:50 Okay. You've been in this industry longer than Plug Power. How did you let them beat you to the first one gigawatt electrolyzer order? Yeah. And that good question. So that that project, basically, the iceberg project, first of all, it wasn't tendered. But it is a great endorsement for very large scale panel electrolysis equipment. It is also a great endorsement for refueling heavy vehicles such as trucks because that project is actually going to be connecting directly to renewable power and working with h two energy to fuel trucks, 15,000 trucks.

27:40 So there's some work to do. So I spoke port needs an additional two gigawatt grid connection, which the project will need before it can deploy the off shore wind, and then it needs to build up the fleet of trucks. But I it it's a good consortium, great endorsement for some of the things ITM is doing. There'll be more gigawatt projects, and we hope that they're all competitively tendered because that's the way it ought to be done. Thanks. Could you just say a quick word because there are a lot of questions on the topic as as to why you're not disclosing the tender opportunity pipeline, please?

28:31 Yeah. It's for very, very commercial reasons, which is that we can't give that kind of information out into the market anymore. Things have become incredibly real, and our cuss our customers and our partners don't want to see those numbers published, and and I think they're right. Do you feel that you've been disadvantaged by Brexit with respect to getting projects in the EU, and and what can you do to get around that? So look. The the we have a strong presence in Europe, but that's part of the move for the after sales support unit being established in Europe.

29:17 What what what's the disadvantage of not being in Europe? Well, the amount of policy that's been developed on green hydrogen in Europe is very significant. You've got Repow EU. You've got the you've got the two new delegated acts, which are part of the, new renewable energy directive, and and you've also got the important projects of common interest. But all of those things are important for ITM anyway. We have partnerships with Shell who are headquartered in The Netherlands. We've got we work with Linda who are in Germany, with Snap, who are in Italy, and, with Allstate in Denmark and and so many of our partners now are involved in all of those projects. So I feel we've positioned ourselves at ITM very well for Brexit anyway.

30:22 Okay. I think we've got time for one more question before we draw to a close. Have you seen an increase in inquiries since Russia's invasion of Ukraine? And if you have, when do you expect to start seeing that feed through into the backlog numbers? Yeah. So so, yeah, yes is the answer. And I think that just as important is the way that the that the Ukrainian crisis has driven policy and and is actually the delegated acts are basically put into place to waive the additionality and correlation requirements to define hydrogen as being green, and they are being waived until 2027 and grandfathered.

31:19 And what that means is that projects that are deployed early will get that relaxed definition of green hydrogen. This is driving forwards those those early projects. And and you'll see those put into law in the EU in August. So I I I think it's the policy and the energy security policies that have emerged since the Ukrainian crisis that are really driving things forward. But a simple answer to your question is yes. We have. That's great, doctor Cooley. Andy, thank you very much indeed for updating investors, and thank you to all those that submitted questions. And, of course, we'll make those available to the company post today's meeting as well.

32:05 Doctor Cooley, I know investor feedback is particularly important to you and to the company, and I'll shortly redirect investors to provide you with their thoughts and expectations. But I wondered if I may, before doing so, just ask you for a few closing comments. Yeah. Sure. Well, first of all, thanks to everybody for coming to this update. I I think we're we're in a period of concentrating on operations, delivering on the projects we've already got, and converting those under negotiation into to work in progress. I think we're at a very, very pivotal moment in green hydrogen, and I think you'll find that the policies that have been put in place will turn pretty rapidly into orders and into additional capacity requirements for the whole electrolyzer industry.

33:07 So, yeah, a a very exciting time. That's great, doctor Cooley. Andy, thank you very much indeed once again for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for for your opportunity to provide feedback in order the management team can really better understand your views and expectations. This may take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of ITM POWER PLC, we'd like to thank you for attending today's presentation. That now concludes today's session, and I wish you all a very pleasant afternoon.