Fusion Fuel Green PLC Q3 FY2021 Earnings Call

Hello everyone, and welcome to Fusion Fuel Green’s Third Quarter Investor Update. My name is Ben Schwarz, and I’m Head of Investor Relations at Fusion Fuel. I would first like to remind everyone that this call may contain forward-looking statements, including, but not limited to the Company’s expectations or predictions of financial and business performance, which are based on numerous assumptions about sales, margins, competitive factors, industry performance, and other factors, which cannot be predicted. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, and they are not guarantees of performance. I encourage you to read the disclaimer slide in the investor presentation for a discussion of the risks that may affect our business or may cause our assumptions to be proven incorrect. The Company is under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. So, thank you all for joining us today. I’ll just briefly run through our agenda for the next hour. We’ll kick off the call with some remarks from Fusion’s Chairman, Jeffrey Schwarz. Then, our management team will share third quarter highlights and financial results along with a business update, and finally, a recap of our progress against key 2021 milestones. We’ll then open the floor up for 20-25 minutes of Q&A. As in our previous quarterly calls, all questions must be submitted in the chat box in the webcast platform. For those of you who have dialed in and have questions for management, please direct your questions to the Investor Relations inbox at [email protected]. So, with that, I’ll pass it over to our Chairman for some opening remarks.

Hello. I’m Jeffrey Schwarz, Chairman of Fusion Fuel Green, and it’s my pleasure to welcome you into this Q3 investor update. Before I turn it over to the management team, I’d like to offer some high level thoughts. Most importantly, I would say, I could not be more excited about the opportunity that Fusion provides to help change the world and in so doing to also generate extraordinary returns for its shareholders. I hope at the end of today’s call, you’ll feel the same way. Now, unfortunately for our share price, Fusion does not make electric flying taxis. The good news is that Fusion does have proprietary and proven technology for producing green hydrogen. And that’s a market with a strong wind at our backs. The private sector has finally realized the importance of decarbonizing economic activity. And so, the level of inquiry and interest that Fusion is experiencing across geographies from potential customers for either our technology or for our green hydrogen has never been greater. Simultaneously, the public sector has arrived at the same realization about the importance of combating climate change. And so, governments around the world are making billions of dollars, euros, and pounds available in grants and subsidies to jumpstart a global hydrogen economy. In other words, Fusion is well-positioned in a market that should experience a steep growth trajectory for many years to come. Now, unfortunately for our share price, Fusion is not looking to make electric pickups and SUVs like a $150 billion market cap company we all know of. On the other hand, Fusion does not face a handful of behemoth competitors who’ll be fighting tooth and nail to retain market share, and who benefit from significant legacy infrastructure. While a number of Fusion’s competitors are somewhat larger, the market for electrolyzers is nascent, and from my perspective, entirely up for grabs. Fusion and our combined CPV microelectrolyzer technology gives us a differentiable edge versus our competitors. How? You might ask. Well, unlike blue hydrogen, our integrated solution is not dependent upon natural gas as an input. Unlike traditional centralized electrolyzers, our integrated solution is not dependent upon electricity from the grid as an input. And even if electricity comes from renewable sources, its price may be influenced by the market setting price of gas-fired generation. And the price of carbon under present and future emissions trading regimes adds another layer of uncertainty for the cost of hydrogen as exposed to natural gas at any point in the value chain. Given the volatility of the price of natural gas and of the price of electricity from the grid, and of the price of carbon offsets, the Fusion solution can provide a consumer of hydrogen with certainty of cost, a feature many of the potential customers we’re speaking with find compelling. What’s the differentiable solution that addresses what will soon grow to be a huge market and with an enterprise value net of cash of little more than $100 million? I’ll just leave it up to each of you to draw your own conclusion as to whether you find Fusion shares to be an exciting risk-reward opportunity. With that, I’d like to turn it over to Frederico Figueira de Chaves, Fusion’s Chief Financial Officer to walk you through our third quarter update. Frederico?

Thank you, Jeffrey. Good afternoon, everyone, and thank you for being with us today. I’ll go over the financials and keep it brief. We’re eager to share the latest updates from our business development team. For those who are new, I’ll quickly recap what Fusion Fuel is all about. We have developed an integrated solar-to-hydrogen solution using a proprietary miniaturized PEM-based electrolyzer paired with a concentrated photovoltaic solar panel. This design allows us to connect our electrolyzers directly to the panel, resulting in a modular and scalable system capable of producing competitive green hydrogen. Our off-grid system protects us from the recent volatility in the energy market. This year, the global hydrogen industry has faced significant disruptions. Until recently, companies had to pay a premium to decarbonize hydrogen production. However, with the surge in natural gas prices—especially in Europe—production costs for both grey and blue hydrogen have more than doubled, not including rising carbon charges expected to increase. In today's market, green hydrogen is no longer a premium offering. The green hydrogen market has also been impacted by energy price fluctuations. For instance, PEM-based systems using grid energy have seen hydrogen production costs increase to about €7 per kilo when power prices hit €140 per megawatt hour earlier this month. Recently, prices in Iberia have exceeded €200 per megawatt hour, pushing the cost of energy alone for a grid-connected electrolyzer plant over €10 per kilo. The clear direction for this industry is the need for off-grid solutions like our HEVO-SOLAR units to ensure stable and competitive green hydrogen production. I will briefly summarize our third-quarter financial highlights and recent developments, focusing on key points not addressed later by João. In Q3, we made significant strides in client relationships, including signing our first tech sale contract for a HEVO-SOLAR plant and hydrogen fueling station with Exolum in Madrid, Spain. We also secured three grant approvals for different projects using Fusion Fuel technology and initiated the licensing process for eight green hydrogen projects in Portugal and Spain, which is remarkable, as no other company appears to have this many in the licensing phase right now. From a technology standpoint, we’ve been producing green hydrogen in Evora for several weeks and are waiting to officially release it until the plant is fully commissioned. Independent verification of our hydrogen production has shown excellent results, surpassing our planned efficiency levels. Regarding team building, we’ve strengthened our team with recent senior hires, including André as Chief Production Officer and Mario Garma as Head of EMEA. We plan to continue this trend into 2022 to prepare for anticipated growth. In our quarterly financial results, there was no client activity as all current installations are fully owned by Fusion Fuel. We will only recognize revenue once the projects become operational. We will avoid booking revenue or cost entries on raw materials that are in consignment between Fusion Fuel and our production partner, which was done previously. Our operating expenses are significantly influenced by non-cash items, mainly share-based payments. Cash-based operating expenses increased due to team growth and rising professional service costs such as legal and engineering work. Our pre-tax profit benefitted from a fair value adjustment of the warrants amounting to €7.5 million, which is a non-cash item. Our cash balance at the end of the quarter stood just over €42 million, with cash used for raw material investments, supply chain security, plant development, and payroll costs. We issued restricted stock units to 26 employees as part of a new equity incentive plan to align them with shareholder interests. We expect to use these units as both a reward and a recruitment tool. Earlier this year, we set three key milestones for 2021: the Evora plant going live, signing MOUs and hydrogen purchase agreements, and establishing our automated production facility. Last quarter, we focused on production updates; this quarter we will emphasize business development as construction continues. We have completed the construction of Phase 1 of the Evora plant and requested commissioning, which is nearly agreed upon. Phase 2 civil construction is finished, and the trackers are installed. We will roll out our miniaturized electrolyzers as supplies allow in the coming weeks. I will now pass it over to João for updates on projects, funding, and licensing.

Thank you, Frederico. I appreciate everyone attending our quarterly results presentation. Recently, we have been actively working on our strategic plan to develop green hydrogen projects, which we view as a priority. This includes negotiating memorandums of understanding and hydrogen production agreements with prominent companies in the oil and gas sector. As a result, we finalized our first agreements for hydrogen production and technology sales in Portugal and Spain. In Portugal, we are pleased to announce that our HEVO-Sul project in Sines received funding approval from POSEUR, the country's operational program for resource sustainability. This project will install 178 HEVO-SOLAR units to produce 418 tons of green hydrogen annually, which will be mixed into the natural gas pipeline and also used to create green ammonia. The overall investment for this initiative is approximately €8 million, with €4.3 million coming from POSEUR during construction. We have secured 30 hectares of land, with 10 hectares designated for the project's installation, which is currently in the approval process with local and national environmental authorities. We anticipate starting construction by the end of the first half of next year and commissioning the project by the end of next year. Fusion Fuel is also engaged in additional projects that have been approved by POSEUR, where we will serve as the technology provider, expecting around €5 million in technology sales. Once completed, the three projects will include 304 HEVO-SOLARs with a total capacity of 7.5 megawatts. In Spain, we signed a contract with Exolum, a leading fuel logistics and storage provider, to develop a solar to hydrogen plant that will supply green hydrogen in the Madrid region. This marks our first sale of HEVO-SOLAR units to a third party, which will also provide green hydrogen to one of Spain's initial hydrogen refueling stations. The Exolum project in Madrid will install 21 HEVO-SOLARs to generate over 40 tons of green hydrogen annually—20 tons produced during the day through direct solar conversion and another 20 tons at night using electricity. The produced green hydrogen will serve a hydrogen refueling station intended to supply fuel cell electric buses. This initiative is pivotal for Fusion Fuel as it signifies the start of several other projects we are developing to produce and supply green hydrogen to refueling stations. In Morocco, we are working on the HEVO ammonia project in the Agadir Souss-Massa region with our strategic partner, CCC, Consolidated Contractors Company. This project aims to produce 31,000 tons of green hydrogen, used to create 180,000 tons of green ammonia, which will be shipped from Agadir to two northern European ports for commercialization directly to industries looking to decarbonize, or processed again into green hydrogen to be mixed into natural gas pipelines in Northern Europe. Vitol, a leading global energy company, will manage the offtake of the green ammonia. We have secured 6 hectares for the project and recently obtained initial approvals from local authorities. We plan to begin construction of Phase 1, which includes 200 HEVO-SOLARs, in the first half of next year, with the aim to complete all phases by year-end. Fusion Fuel has laid out a comprehensive strategy to pursue as many green hydrogen projects as possible, aiming to submit them for global funding aimed at industrial decarbonization. These funding programs are primarily available in Europe, Australia, and the USA. We are pleased to have confirmation that our green hydrogen project in Sines is among the three selected by the Portuguese Government as an Important Project of Common European Interest from an initial pool of 76 projects. This is a significant accomplishment for our company's strategy in developing green hydrogen projects eligible for European funding. In the coming years, these funding programs will be critical in achieving a competitive levelized cost of hydrogen compared to the current prices of brown and grey hydrogen. In Portugal, we submitted proposals for the POSEUR program involving a total cost of €40 million, with approval for three projects that will yield around €10 million in technology sales. Recently, the Portuguese government introduced the PRR, the European Fund for Recovery and Resilience, which has more than €2.4 billion allocated for decarbonization efforts. We submitted six projects in the first call, collectively representing around €176 million in technology sales. We are also preparing to submit three projects by the end of this year to the Component 14 call for hydrogen and renewable gas production, totaling around €45 million in technology sales. Additionally, we are working on a green hydrogen project in Sines for submission to the Innovation Fund call by March 3 of next year. In Spain, we are involved in seven projects to be submitted to the MOVES II funding program for sustainable mobility by November 25 of this year. This program has €100 million designated for mobility decarbonization grants. The Spanish government has also launched its own European Fund for Recovery, Transformation, and Resilience with over €5.1 billion available for decarbonization initiatives. We are developing various projects to be submitted for renewable hydrogen, sustainable mobility, and trans-European transport funding. These projects will produce green hydrogen for industrial off-takers, either directly or mixed into natural gas pipelines and hydrogen refueling stations. We are also preparing a green hydrogen project in southern Spain for submission to the Innovation Fund call in March 2021. With a substantial project pipeline in place, Fusion Fuel has secured a considerable amount of land in Portugal, Spain, and Morocco. In Portugal, we have over 1,100 hectares across several areas including Sines, Evora, and Portalegre, with six projects currently undergoing licensing. In Spain, we control more than 1,300 hectares in regions like Toledo, Córdoba, and Madrid, with two projects also in the licensing process. In Morocco, we have secured 650 hectares in Agadir for our ammonia project. Fusion Fuel began its European operations through Fusion Portugal, focusing on business development in Portugal, Spain, France, Italy, and Greece. We included Morocco in our strategy due to its importance for green hydrogen project development and our longstanding commercial relationships. We have also established Fusion Fuel Australia, entering into a joint venture with Ampol for business development in Australia. Furthermore, we launched Fusion Fuel USA to foster project development and support our activities in South America, particularly in Chile, where there are significant green hydrogen and green ammonia projects underway. Additionally, we are exploring two new markets in the GCC countries—specifically the United Arab Emirates, Oman, and Saudi Arabia—where projects are underway to produce green hydrogen, and in India, where the government has initiated an ambitious national hydrogen mission aimed at decarbonizing oil refineries and fertilizer production, indicating a substantial demand for green hydrogen.

Great. Thank you very much, João. So, as you can tell, all-in-all, it’s been a very exciting few months, a very busy few months, with significant progress on all sides. As I mentioned before, Evora Phase 1 is completed and at the commissioning stage. We now expect the discussions with clients and partners to continue to accelerate. In particular, with the recent disruptions in the natural gas and energy markets and the renewed commitment to decarbonization around the world, we’ve seen more and more people approach us and reach us to look into potential projects. It’s been extremely exciting, and a very busy time to be, I’d say, in the business development team at Fusion Fuel. But before we go into Q&A, just to note, the market for green hydrogen is truly getting launched now. We’re in a prime position to have a significant impact in its creation. And we see this as an extremely exciting time to be at Fusion Fuel. We’ll look forward very much to updating you on our progress with each quarter. It’s been a fantastic ride and I believe 2022 will only be even more exciting. So with that, I will open up for Q&A. João and myself are on, Jeffrey is on as well. And Ben will moderate the Q&A.

Thanks, Frederico. So, we do have a handful of questions that came in and a few more via email, encourage anyone to submit their questions, if they have any more, but I’ll start from the top. There was a question that came in around expected production capacity for HEVO-SOLARs next year in 2022.

So, this will very much depend on the exact timing of the go-live of the Benavente plant, something that we still continue to discuss with the providers of the machinery that’s going in there. We gave guidance last time to look to produce between 2,000 to 2,500 units. At a push, we would expect to still be possible to achieve that. Realistically, we would likely come in somewhere below that, mainly also partially due to the timing that it takes to get our projects licensed. So, the idea here isn’t to produce and produce and produce and have it all sitting in warehouses. We hopefully will time these projects as they get licensed. So, we still continue with our target of between 2,000 to 2,500 guidance until we notice otherwise.

Next question was around Phase 2 of Evora, the timeline for completion.

So, we’re hoping that towards the end of the year, potentially the first couple of weeks of January, we will be in exactly the same position as Phase 1 now asking for its commissioning. This also depends on just the arrivals of the membranes. So, as soon as HEVOs are in, we will ask for the plant’s commissioning. The main purpose of the both Evora plants is proof of concepts of the technology on an industrial scale. We’re already able to get what we need out of the Evora with Phase 1 at its current stage.

Great. Question that came in via email, in light of the addition of the new Head of Australian operations, if you could provide an update on Ampol, that project, and when you’ll be able to ship the units to Australia?

So, the project with Ampol is under permitting. We have already all technology ready. We expect to ship technology early December. Of course, in these projects of green hydrogen, permitting process is something that we don’t exactly control the timings. But nevertheless, we will ship the technology and we will prepare everything to start construction as soon as we have the green light from the local authorities.

Piggybacking on that, with the new additions, is the executive team build out now complete, or are there additional hires that you’re looking to make?

I would say that firstly, we are looking to add a senior leadership to Fusion USA. The U.S. is an important potential market for us, especially with the recent passage of the infrastructure bill that will provide funding opportunities for green hydrogen. But bottom-line, the U.S. is going to be a large market, and we need to have a leadership team in place. And that’s something that we’re very focused on. More generally, people are the key to us being able to both market ourselves globally, to be able to interface with customers and installation to be advancing our technology. So, while the addition of a senior leadership team in the U.S. probably rounds out the needs at senior management, we are still actively adding to our talent in the R&D area, in the area of progressing the R&D developments into industrialization and development. And of course, our Head of Production is building out our team that will be overseeing production at the Benavente facility. So, you should expect to see us continuing to add folks both at the senior management level here in the USA, and then mid-level throughout the organization.

Great. Thank you. A question around off-takers for the hydrogen that’s being produced at Evora, or that will be produced at Evora.

Evora has three off-takers. In Phase 1, we will produce green hydrogen, which will be stored and then converted into electricity using a fuel cell. The off-taker for this phase is the electrical national grid. In Phase 2, we have two off-takers. The first is Galp Distribution, a natural gas company, which will blend the green hydrogen into the natural gas pipelines of Evora city. The second off-taker will be from the Phase 2 project, where we will supply green hydrogen in bottles to hydrogen refueling stations that are currently under development and will be installed in the upcoming year.

Great. Thank you, João. Question here around the importance of aluminum to the cost of the HEVO-SOLAR. And also, what would an increase in the price of aluminum from current levels impact the levelized cost of hydrogen from a HEVO-SOLAR?

I’ll address that, Ben. That specific component has about a 5% effect on the levelized cost of hydrogen. The fluctuations in that raw material are not particularly significant on their own. However, it is important to mention that we have observed an increase in market prices for raw materials across various components, including aluminum and steel as well as membranes. We maintain our guidance of aiming for green hydrogen levelized costs below €2 in 2023. Even considering the current market prices, this excludes compression, purification, and exiting the system at 5 bars for anyone keeping track. This also factors in the grants. As João noted earlier, our team has done an excellent job in securing nearly all relevant grants available. Consequently, we continue to provide our clients and our own projects with hydrogen levelized costs under €2 as early as 2023.

I want to emphasize that we understand we might be facing inflation for an extended period. While inflation could be temporary, it might not be. Consequently, part of the discussions João is having with potential clients involves exploring ways to share the risks associated with the fluctuating costs of essential materials like aluminum and steel. We are very aware of the current cost environment and are open to finding solutions that address our clients' needs while also protecting Fusion from potential future surges in the prices of these global commodities.

Thank you. I have a follow-up question regarding securing production components for deliveries, considering the widespread supply chain disruptions.

Sure. So, that goes directly to our use of cash in the last two quarters in particular where we’ve made significant down payments to be securing the production line with several of our supply partners in order to do the best we can to make sure that we minimize any sort of disruptions that we have there.

And here once again, I’d like to jump in to say kind of kudos to the team. We have been casting a wider net for suppliers for key inputs. We continue to be adding to the list of qualified suppliers, the process of qualifying suppliers is not something that happens overnight because quality is obviously paramount to us. But in this environment of constrained supply chains, it’s important that we have multiple qualified vendors for all of our key components. And that’s something that the team has been working on and will continue to be working on as we head into 2022.

Great. Thanks. Question around the current levelized cost of hydrogen with the HEVO technology at current market prices for raw materials?

We are currently in negotiations with clients regarding technology services and hydrogen purchase agreements. Based on the current figures for green hydrogen and other green hydrogen sources, we believe we offer a highly competitive solution for hydrogen in the current market environment. Specifically, in areas with high solar radiation, we are aiming for and observing levelized costs below €2, not including compression and purification, with operation at 5 bars.

This is a question for João, in discussions with potential customers, do you we have a sense that more extensive performance data is important to certain customers to validate the technology in their eyes?

Yes, of course. We see that there’s a need of what clients are asking for track record. We have a track record from the plant of Evora, since it was started production a few months ago, and now more recently under full operation. In fact, what we are doing right now in these negotiations with this client is that we are assuming part of their risk of the technology by having a full EPC contract based on performance, meaning that the clients will have to make the payment of the full EPC plant whenever it has achieved the performance and the availability that has been contracted. And this way, this avoids a lot of months of track record analysis and allows us to move forward in these negotiations. In addition to that, in some of the clients’ negotiations, what we’ve been doing is that we can offer either tech sales or we can offer them a contract to sell green hydrogen, also referred to as hydrogen purchase agreements. In some of the cases, we negotiate hydrogen purchase agreements with the possibility of fielding a transfer. So, the client has the option to buy back the project after some months or at least the months defined as needed to evaluate the performance of the technology.

Question that came in via email, are you looking at the eventual re-purposing of natural gas pipelines to transport hydrogen, or do you expect hydrogen to be primarily a distributed energy solution?

There are two main options for selling green hydrogen. One option is to produce the hydrogen and supply it directly to the industry, which requires our plants to be located near these industries. The other option involves producing hydrogen, blending it with natural gas, and injecting it into pipelines. We believe blending is the key market for commercializing green hydrogen. This approach allows us to inject all our production into the pipeline, enabling customers in other countries, such as those in Europe, to purchase origin certificates for this hydrogen and utilize them in their decarbonization plans. We strongly believe that blending hydrogen with natural gas will shape the future of green hydrogen commercialization.

I will add that we are engaged in various types of projects, collaborating with partners who are repurposing pipelines and exploring distributed energy solutions. However, we want to clarify that we will not be handling the repurposing ourselves. Our involvement is limited to the production of green hydrogen.

Can you discuss any recent progress on the HEVO Ammonia Morocco project over the third quarter?

Sorry?

Updates on HEVO Ammonia Morocco, specifically in the third quarter.

We strongly believe that the HEVO Ammonia Morocco project will be developed in six phases. Phase 1 will focus solely on green hydrogen production and will involve a small plant with 200 to 400 HEVO-SOLAR units. This amount of hydrogen is too small to justify investing in the Haber-Bosch system for producing green ammonia, so this phase will only produce green hydrogen for an industry in the Agadir region of Souss-Massa. The subsequent phases, 2 through 5, will take longer to develop. We expect to begin construction of the plants in the third quarter of next year. However, the green hydrogen produced will supply a Haber-Bosch system, which will require at least 12 to 18 months for installation. Therefore, while we will start construction on Phase 2 of HEVO ammonia, it won't be operational until late 2023.

And the most recent developments, of course, would be extensive interactions with the local region, moving towards licensing process and securing the land, as João mentioned earlier in the presentation.

Great. Stick with you João, can you touch on the current state of any projects in some other geographies, for example, Abu Dhabi or Chile?

Yes, in Abu Dhabi, we are engaging with major developers on significant projects being announced in the region. We are in touch with key players involved in these developments. Similarly, in Chile, we are connected with two projects currently underway. In both Abu Dhabi and Chile, our role will be limited to technology sales. The scale of these projects indicates that we will need to establish local assembly lines to assemble and prepare our HEVO solar technology near the plants. This necessitates a comprehensive strategy, but all these major projects are set to commence construction between 2023 and 2025, meaning they will not begin immediately.

Thanks, João. It seems we have reached the end of the questions submitted. Therefore, in the absence of any further inquiries, this concludes our third quarter webcast. If you have any additional questions, please reach out to us directly at [email protected] or visit our website at www.fusion-fuel.eu. Thank you for your participation and engagement. We look forward to our next quarterly update. Thank you.