Fusion Fuel Green PLC Q4 FY2022 Earnings Call

Hello, everyone. And welcome to Fusion Fuel Green's Fourth Quarter 2022 Investor Update. My name is Ben Schwarz and I’m Head of Investor Relations at Fusion Fuel. I would first like to remind everyone 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 around 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 prove 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 again for joining us today. I'll just quickly run through our agenda for the next hour. So we'll kick things off with an overview of our value proposition. Then the management team will share fourth quarter highlights, financial results, the technology update, and then the latest on our commercial strategy before wrapping up with a discussion of our milestones for 2023. We'll then open up the floor for a half hour of facilitated Q&A. As in our previous quarterly calls, questions can be entered in the chat box in the webcast platform at any point in the next hour. You can also submit your questions to the Investor Relations mailbox at [email protected]. So with that, let’s proceed to the following slide. So we’ll begin with an overview of how we at Fusion Fuel are creating value in the nascent green hydrogen market. At Fusion Fuel, we are in the business of developing and delivering cost-effective clean hydrogen solutions to accelerate the global energy transition. At the heart of our value proposition is our patented miniaturized PEM electrolyzer, the HEVO. Our simplified and scalable technology democratizes access to green hydrogen and gives us a material advantage in the markets in which we play. This is achieved in a number of ways, by unlocking the advantages of mass production, by positioning us to create bespoke, fit-for-purpose solutions, and by enabling co-located and integrated deployment of our hydrogen generators. We will talk further about some of the innovations that are within the HEVO itself, but what it comes down to is that we are able to deliver highly competitive levelized costs for small-to-midscale green hydrogen projects. This segment is often overlooked but aligns with where much of the commercial demand is today, particularly for the verticals that ascribe the highest value to green hydrogen. I also want to drive home the reality that despite progress, distribution infrastructure for hydrogen remains a key downstream bottleneck, and an available solution for moving hydrogen from sources of large-scale production to demand centers adds meaningful cost and complexity; we've estimated north of $2 per kilogram for the cost of last-mile distribution and logistics. So we believe that co-located, scalable production is and will remain an extremely attractive offer for the foreseeable future. With that, I'll pass it over to Frederico Chaves, Co-Head of Fusion Fuel, for an update on the fourth quarter and subsequent events.

Great. Thanks very much, Ben. And thank you everyone for joining us today. I just want to start with some highlights of the fourth quarter and also from the first quarter as of today. So first, in the fourth quarter, we announced €7 million of tech sales that have been contracted. We also announced our first project in the U.S. and Italy. In addition, we were awarded a €36 million grant from Portugal’s C-05 agenda, and we completed the €9 million sale-and-leaseback of our Benavente facility’s real estate. In the first quarter, we signed Portugal’s first green hydrogen offtake contract with Dourogás. We also signed our €10 million grant for our C-14 project in Portugal. Our joint venture partners in Spain have provided exciting news recently; we were selected for a €2.5 million tech sales tender in Spain, and we were awarded a €3.4 million grant for a project in Spain as well under the PERTE program. Lastly, as part of our efforts to develop strategic partnerships, we signed an MOU with a leading partner. This is truly a really exciting strategic move and we hope to be able to disclose more details to you all about this partnership in the near future. Now on to the financials. In the fourth quarter, we recorded an operating loss of €13 million. This is an increase of €5 million from the third quarter, driven by significant non-cash items. Our cost of goods sold consists of two main items: Exolum related impairments of €2.5 million relating to further cost incurred on this first third-party project that we undertook. As disclosed in our September financials, we, together with Exolum, are working to pursue innovation awards to partially offset this contract loss. We also took an inventory provision of €2.9 million. This has been the case for us as well as others in the industry. The speed of technology evolution means that we have items whose value needs discounting and in certain cases rework to be suited for the related tech developments. First, of these non-cash expenses. During the fourth quarter, our operating expenses increased by €2.3 million, driven by significant non-recurring items listed in Footnote 3 that I will address shortly. Before I do so, I just want to highlight the operating costs for the full year. For 2022, we provided guidance of operating costs of around €14 million. But given significant one-offs, the total operating cost for 2022 are around €18 million. The €4 million difference is mainly driven by the costs identified here in the Q4 figures. Firstly, we reserved certain production capacity with our production partner, which, given project delays, we did not use mainly to avoid spending more money on raw material purchases. But this has led to a €1.5 million charge. The production agreement for 2023 has been altered to avoid this potential charge in the future. In Q4, we also started advertising our HEVO Gen 1 development costs, and we'll amortize this over a suspected useful life of three years. In addition, we had €700,000 of R&D costs related to our demonstration plants in Q4. This totals around €1 million for the full year for the same cost item. During Q4, we saw service and professional fees of €700,000, again, one-off, driven mainly by the sale of leaseback transaction costs, some strategic partner engagements, and also legal fees. These are significant one-off items, which we were not able to proceed with when we first provided our 2022 guidance. At the end of the presentation, we'll provide the guidance for 2023. To note, the slide will develop in coming quarters. In Q1 of this year, we have already started invoicing clients for technology sales. During the fourth quarter, we strengthened our cash resources with following activities, principally our sales lease efforts; we were able to secure a net flow of €7.5 million, which we received net of the security deposit and some of the first considerations. So the €7.5 million was net on the €9 million sale-and-leaseback sale. We also, from VAT, saw inflows of €3.8 million, mostly on reimbursement claims that we've made to the Portuguese authorities. We have submitted additional claims in the first quarter for a significant portion of the €3.7 million receivable balance as of the year-end. In addition, we received €XX million as a prepayment of a portion of the C-5 grant awarded; the very fast turnaround time of this payment highlights Portugal's commitment to the hydrogen business and to operationalize it as quickly as possible. During the fourth quarter, we raised €1.5 million through the ATM shelf and a further $2.3 million was raised prior to mid-February this year. We continue to see increased efficiency in the grant process in Portugal. Recently, the Portuguese Prime Minister signed terms of acceptance for the €10 million C-14 grant award, and our team is already working on submitting the prepayment application for this project, similar to the C5 process. In addition, we expect to operationalize additional drawdowns under our C5 grant award as 2023 progresses. Grants bring substantial value to our projects, and in the early stage of this emerging green hydrogen market, they make many projects viable. We'll continue to secure grants where possible and we'll continue to add to the nearly €65 million grants already awarded to us. I would like to now take a moment to drive home what makes our technology so special, as we are unique in the market. Our technology centers around the HEVO, as you see pictured there on the slide; it is at the heart of both HEVO-Solar and the HEVO-Chain. It has a unique membrane and electrochemical cell design that allows for reduced power system costs, as our membranes operate independently and not in the traditional stack. This allows for a modular approach using this miniaturized electrolyzer, which reduces O&M costs and complexity as well as system downtime; these modules can be replaced individually. We can use inexpensive structural materials and simplified engineering and assembly, which reduces costs further. All of this enables us to create an industry-leading cost of green hydrogen, which an advantage that is amplified further in small- to mid-scale projects. To note, we have two core products. We have our HEVO-Solar, which is for those of you who have been following us for some time are hopefully very familiar with. This is an integrated solar hydrogen generator. It integrates CTV technology to our miniaturized PEM electrolyzer, the HEVO, and allows for a grid-independent and modular solution that requires good solar radiation levels and available land. In addition, we also have our HEVO-Chain, which is also modular and scalable and is a highly efficient end solution. The HEVO-Chain is a containerized PEM solution that uses our miniaturized PEM electrolyzer, the HEVO, working in series. The interesting thing is it becomes location and power agnostic. It can be deployed, connected to any source of energy. We have received questions regarding the European Union’s consideration of nuclear power as renewable, but HEVO-Chain can work with any source of energy, including nuclear. So we actually have a product that fits various types of requirements.

Thank you, Frederico. It's nice seeing everybody this morning. I want to start with a quote from the great Jack Welch: "Strategy is simply resource allocation. When you strip away all the noise, that's what it comes down to. Strategy means making clear-cut choices about how to compete. You cannot be everything to everybody, no matter what the size of your business or how deep your pockets are." This is very timely, not only for Fusion but for the entire industry. Such a massive addressable market requires us to boil down to the core of what makes us competitive. Our key assets are the HEVO proprietary technology, our strategic land, the grants we've secured, and our people. Our business model is transitioning more to a solutions provider than just a technology company, as that allows our technology to ramp up production, getting numerous facilities operational to build up a track record while getting to scale through hydrogen production focusing on development. First, the HEVO technology is particularly competitive at less than 10-megawatt projects, so we are focusing our efforts on small- to mid-size projects. We see most of the immediate market in the next couple of years as under 10-megawatt projects and there is a strong pipeline of opportunities available to execute this. As previously noted, the market is mobility, logistics centers, industrial, and gas blending opportunities. Regarding our technology, we have collaborated with upstream technology partners such as Ballard on the Évora Project, and recently we signed a collaboration agreement with a global equipment provider to help us build out our mobility and logistics applications. Over the next few years, our plan is to ramp up production by investing in Benavente and expanding our addressable market with HEVO-Chain. This allows us to focus on all of Europe and North America as our core markets versus just markets with strong solar irradiance. After an assessment of ourselves, we've determined that our production capacity cannot meet the demands of our project portfolio, and our tech sales are largely driven from our development efforts. For these reasons, our development portfolio is strategic. Developing our own projects allows us to control our destiny by having more control over our future tech sales pipeline. Our team has done an incredible job in establishing the equivalent of approximately 200 megawatts of hydrogen capacity in land that's been secured and €50 million in grants that have been secured. As we continue to work on business development opportunities, we're seeing a clear distinction between projects that are under 10 megawatts and larger-scale projects. As I noted, this allows us to develop the current market, which is still in a nascent stage, predominantly smaller projects but also having an eye to the future for larger projects and larger demand. With our technology, we project a production estimated to be 250 megawatts of capacity by the end of 2025, and our development pipeline being substantially larger at an estimated 1.5 gigawatts. We aim to maximize shareholder value by also collaborating with other technology providers to execute our portfolio projects. This is a strategy we already kicked off and announced last year in our agreement with Toshiba to explore solid oxide solutions for certain large-scale projects. This strategy solidifies Fusion Fuel as a holistic green hydrogen solutions provider. To do this, we have decided to create multiple development partnerships. First, we have Fusion Fuel Spain, which is doing an incredible job building a pipeline of projects in Spain that's grown to 500 megawatts of high-quality opportunities that are in various stages of development. The team in Spain continues to do a fantastic job. Secondly, we are establishing a development company to focus on building out development opportunities, focusing on the North American market, one of the most important hydrogen markets currently. Given our extensive development experience, this will be led by myself and Jason Baran. We'll continue to de-risk our portfolio by working with world-class engineering, procurement, and construction companies to minimize construction risk and sign long-term customer agreements to provide certainty of recurring revenues and EBITDA. These key elements combined with our strategy to entitle our portfolio will make it attractive to third-party capital. We continue to work with investors at 50 megawatts of capacity, and the balance of our portfolio projects in Portugal and Europe will contribute to an aggregated total of 1.5 gigawatts. We'll have 200 megawatts of potential technology sales from our development activities, as well as potentially over 30 megawatts of tech sales from third parties. As more and more of the development projects convert to operational projects utilizing HEVO technology, it will build up our track record and ease the transition to a traditional tech sales model. Additionally, we may benefit from potentially recurring revenues from the development projects, further de-risking our overall business. Fusion Fuel's strategy creates a diversified revenue model with traditional third-party technology sales and sales from our projects created by Fusion Fuel Spain and our other development company. We forecast over 230 megawatts of potential technology sales by the end of 2025 based on our current pipeline and our forecast. Our third-party technology sales are focused on the Iberian Peninsula and Italy. We're anticipating approximately 10 megawatts of potential sales this year, and as Fred highlighted earlier, we have recently been awarded another mobility project and gained another grant in Spain. We'll continue to explore additional technology sales and work on them in the current and other core markets. We have also started commissioning Exolum plans and signed contracts for the Alcalá project and began invoicing our client KEME in Portugal. All this brings our committed tech sales to a total of €12.5 million for 2023. We are projecting additional opportunities to expand technology sales in Alcalá, as well as to complete the sale of a recently awarded project in Spain, and a few other near-term opportunities to bring our target to over €25 million in revenue this year. We expect exciting developments from our partnership with Duferco, and we are forecasting further opportunities in 2024 and 2025 based on our recent efforts. Fusion Fuel Spain and our other development entity have a pipeline as noted of over 200 megawatts of tech sales for Fusion Fuel into 2025. This strategy also monetizes most of our grants and provides a steady stream of projects for Fusion while we build up a more traditional tech sales model in our core markets. As noted earlier, our strategy centers on creating value for our shareholders through project development and our technology. We see the benefits of Fusion Fuel executing potentially up to 200 megawatts of tech sales, as I've noted, while driving potential equity returns via recurring revenue and fees from creating value in the development process. Our footprint and track record are being established in five core markets: Portugal, Spain, Italy, the USA, and Canada. Our development strategy will be to continue titling our projects by securing strategic real estate and grants where available and licensing these projects. Secondly, we'll commercialize our pipeline by securing offtake agreements and signing EPC contracts to de-risk construction. We have recently signed our first agreement with Dourogás, and we plan to continue building off this by signing additional offtake agreements as our projects move towards the final investment decision. This approach will increase shareholder value by monetizing grants, land, and selling our technology. We will also potentially capture upside in development while controlling our destiny through our own project portfolio that provides a credible backlog of tech sales. As we create this development entity, we'll opportunistically look to bring in third-party capital to support funding the projects, both in the development phase and the construction phase. The more we entitle and commercialize our portfolio projects, the more attractive they will be to third-parties. Fusion will balance how far it takes the portfolio before bringing in third-party capital to maximize shareholder value while also keeping an eye on our financial exposure. This will be managed by myself, Frederico, and other senior managers of the current team, along with additional members to support this effort. Frederico, back to you.

Great. Thank you, Zach. So now I'm going to provide some overview and forward guidance on 2023 and outlook for 2024 and 2025 quarterly guidance. I want to note that for 2023, we're providing guidance that we will be seeking to achieve €25 million of revenues. This is based on five projects of which €13 million of those have already been contracted. As mentioned before, we've already invoiced clients for technology sales at this point in time with invoices totaling just over €1 million. For some of these projects, we're also selling the balance of equipment, which will increase the revenue for megawatt we're able to secure. I want to make that clear so people don't simply divide these megawatts by revenues to try and calculate the cost per megawatt of our system. We'd like to note that for 2024, we're aiming for €80 million in revenues and for 2025, over €140 million in revenues. These projections are largely driven by projects that we are developing ourselves. This is partly due to our own development efforts and the development partnerships that we have. Those projects are clearly identified in our overall pipeline of 1.5 gigawatts, and we’re talking about 220 megawatts for both 2024 and 2025 in pure tech sales. As noted, we have not reflected any additional income but expect to revise from our development activities, such as fees for possible equity returns or shares. The reason for this is that it’s too early to accurately forecast what those revenues or income might be. Only to note that we are aiming to be cash flow self-sufficient and able to deliver positive net income in 2024. If successful, we would be one of the first companies in this industry to do so. I also want to highlight, as we always do, our core milestones for 2023. Naturally, I have not included the booking of first revenues, but that is obviously implied with the previous targets I noted earlier. So from our production, we want to keep expanding our production capacity and build out the number of facilities in Benavente. We want to finalize the development of HEVO-Chain, which we have announced we want to be putting out in the market commercially in the first half of 2024. From our commercial side, we want to make sure we have all revenues for 2023 contracted. As noted, we are well advanced in that phase with already €13 million in place, and the remainder coming from very specific projects that are currently very advanced. We also aim to convert our 2024 pipeline into confirmed orders. We've clearly done a good job of securing the grants the company has advanced as of now. I'd say we've outperformed any expectations on the amount of grants that we could hope to secure for our projects. We'll keep developing projects that are in our pipeline, and of course that also requires licensing and developments for our portfolio. Safety is always a core focus for us, and we want to ensure that we keep safety at the forefront of our mind as we make this a key priority for 2023 as always. Note that as the industry market takes shape and is taking shape, we’ve noticed that there are advantages in our technology solutions for particular market needs that are becoming clearer. In addition, the advantages of our project development pipeline set us apart from our competition. We hope that with our ability to deliver revenues and fulfill our product commitments in 2023, the market and industry will recognize the clear value that Fusion Fuel has and we will be able to change the course of our market cap and our shares moving forward. So with that, I'll pause and open the floor to Q&A.

Frederico, and thanks to everyone who has submitted questions thus far. We have quite a few. So we'll begin with some questions from Chris Tsung of Webber Research. He asks about the Dourogás offtake agreement, which was announced a couple weeks back, specifically around the duration of that agreement, the volumes considered, and price, and also how will the hydrogen be transported from Evora, where it's being produced, to where it will be injected?

Would you like to take that, Frederico? I’ll work in reverse. So we plan to take it from Evora and connect it via pipeline. We are working with the local pipeline operator Flowin on connecting to the grid. The agreement is a market-based price contract. It's based on forward-looking natural gas pricing and carbon offsets. The volume is based on us nominating the amount from the project. Right now, we have sufficient volume out of the Evora project, and that was the plan, but we could have the opportunity to expand with future projects to provide a better solution for selling our merchant capacity.

Thanks, Zach. The second question was around the C5 funding, which as a reminder was €36 million to the Fusion Fuel Consortium of which Fusion Fuel would receive €22.5 million for its HEVO-SUL and SINES project. Will the company receive all of that €22.5 million when FID is reached, or will it be distributed as certain milestones are achieved?

So it’s distributed when certain milestones are achieved. Actually, as equipment is delivered, there are amounts that become available. We have actually received funds related to expenses that we expect to incur for development costs of the project. That is the case for C-5 and also for C-14.

Yes. Finally, this one for Zach. Any updates on the Bakersfield project in California with Electives? What is needed to reach FID and when is your expectation of when that’s achieved?

Thanks, Ben. We are concluding our concept study with Black & Veatch. We plan to do that next month, and then we’ll make a decision with our partners at Electives to move to the next phase of work, which is pre-feasibility and feasibility, which involve permitting. On subsequent calls, we will provide more guidance on timing. So I don’t have the report just yet, but our anticipation is a late 2024 start in California.

Moving now to some questions from Erwan Kerouredan at Royal Bank of Canada. He asked about the revenue recognition timeline for Exolum. Frederico, if you can touch on that?

So we can start recognizing revenues for Exolum once the acceptance of the project commences; this will depend on how the commissioning process goes. As noted, we will start the commissioning process in March.

And there’s a separate question around what those expected revenues are related to that project, if we can share.

So €13 million primarily already contracted; just by €2 million is related to Exolum.

Thanks. Second question from Erwan is regarding impairment charges. Is there any expectation of additional impairment in the first quarter of 2023 and beyond?

Not at this stage. In fact, we would have had to recognize it in Q4, even if it was learned about subsequently. At this stage, we believe we have taken the advance.

Great. Last question here. What’s your view on the latest policy developments in the EU in response to the Inflation Reduction Act here in the U.S.? Do you expect additional funding potential in the near term or incremental commercial opportunities as a result of the latest developments, whether that’s the EU green industrial plan or the delegated acts? I know we touched on that somewhat in our shareholder letter, but if you have any thoughts on that.

I can start and then Zach can add. From a high level, the IRA has been phenomenal for the industry. I know this does not directly impact Europe, but it has obviously pushed Europe and other markets forward. We are now seeing Europe, as well as Australia, starting to develop similar support for the hydrogen industry. We see this as an exciting movement in Europe. There has been some pressure to include nuclear energy under the renewable cap. Again, for us, this is indifferent from a HEVO-Chain perspective, as that is power source agnostic. We are thrilled to see the developments and believe they will continue. We’ve heard from Spain that they are actually increasing the grants available. They are reopening some currently lead programs to consider funding some of the projects that were not awarded. So we do expect that trend in Europe to continue. Hopefully, similar to the U.S., there will also be more support on the demand side and not only on the CapEx front. In Portugal, that is expected to take shape with a hydrogen auction later this year where, similar to the energy market, there will be a mechanism to provide a premium and tariffs for green hydrogen blended into the natural gas grid. We expect to see more of that also emerge in Europe. Zach, do you want to add any color to that?

In fact, two things. Additionally, another market we’re in, Canada, is also counterbalancing against what the Inflation Reduction Act has been doing by working to pass a 40% investment tax credit for hydrogen, which will help reduce CapEx. Lastly, California acts as a leader in the U.S. regarding environmental and renewable markets, and the low-carbon fuel standard credit has driven the mobility market in California for hydrogen refueling infrastructure. We see that being replicated or discussed for replication in other states throughout the United States, which will help expand mobility, a core market for Fusion Fuel.

Thanks. There’s a question here about the green hydrogen tender that Portugal recently announced and its implications for Fusion Fuel. You just spoke to that. The question was whether Fusion Fuel intends to apply for parts of this tender. You might have already answered that explicitly, even though you already did.

Absolutely. We expect to not only participate for our own projects but also likely participate together with partners.

We have seen significant interest in HEVO-Chain, with existing partners already familiar with HEVO-Solar as well as new ones. The fact that it opens up substantial additional markets for us helps, but the HEVO-Chain solution's modularity and scalability appears to have generated high interest. The recent announcement of a global equipment provider is a good fit with our HEVO-Chain product, and we believe there will be many opportunities that arise from that in the logistics and mobility market. We are excited about the product and the advantages it has. We are also observing opportunities in curtailed power and mineral offers that give us a unique position compared to peers, particularly in the mobility market, through tapping into curtail power opportunities in the European market, gas blending, and other applications.

Question here from Amit Dayal at H.C. Wainwright: How much do you expect from development economics on a per-megawatt basis? And can you talk about the costs that will be incurred upfront and potentially supported by the balance sheet?

It's a great question. Every project is unique. The plan going forward on future quarterly calls is that, as projects reach a final investment decision, we will highlight those in our presentation so we can discuss what this means for Fusion Fuel from a technology sales standpoint—how we finance it, whether we receive development fees, and whether it entails equity returns or ownership interest. The overall plan is to bring in third-party capital on the development to fund the projects once they reach final investment decision. It is not our plan to take on that capital exposure.

What we’ve been doing from the beginning is engaging with third-party clients, developing user pipelines, and pushing forward with our hydrogen projects as fast as we can. When we say it gets announced, we’ll have to see how we handle our production constraints and plan accordingly. At this stage, we don’t have any new updates.

I just want to clarify that we are not abandoning opportunities in Morocco, the Middle East, India, or Australia. We have finite resources and have created significant momentum in the five markets we've talked about earlier. We see the most near-term opportunities for technology sales or growth in these developed pipeline projects. We will continue to develop and move forward in Australia and North Africa, and we hope to have some news soon in those markets so we can incorporate them into broader pipeline discussions. We want to ensure that we're focused on near-term actionable opportunities that have land, identified customers, and securing grants to showcase a real path to our forecasted pipeline and revenues.

Regarding the levelized cost of hydrogen chart on Slide 5, is it for the HEVO-Solar, HEVO-Chain, or both? I'll clarify; while we are in the process of industrializing the balance of systems for the HEVO-Chain, which affects its cost profile, that chart reflects an estimated cost for HEVO-Solar. Naturally, the levelized cost of hydrogen from that product is highly dependent on where it is deployed. In Northern Europe, it would appear quite different than in Southern Europe or California. We are assuming a benchmark location in Southern Portugal, but if it's deployed somewhere with superior solar radiation, that number could be below the range we provided. On our capital effort, we’ll break that down into two pieces. On the project side, our idea is to have partnerships to fund development costs of that substantial development portfolio. That’s the straightforward part. On the corporate side, as mentioned before, we have several options we are pursuing and considering to ensure the company is effectively capitalized. The board and management are acutely keeping an eye on this, and we will aim to find a long-term capital solution that is strategic. At this stage, I'd rather not divulge more, but this certainly is an area of focus for management and the board.

Thanks, Frederico. Last one here; it's not really a question, more of a request: Is it possible for future presentations to provide insight into how much revenue will be recurring versus one-off? Yes, we will make a note of that for future reference. In the absence of additional questions, I’ll wrap it up here. Thanks to everyone who joined and contributed questions. If there are additional queries that arise, please feel free to reach out to me and the IR team at [email protected] and we look forward to seeing you all again in our next update.

Thank you.