Fusion Fuel Green PLC Q1 FY2023 Earnings Call

Well, thank you all for joining us today. So, I'll quickly run through our agenda for the next hour. We will begin the call with some remarks from Fusion Fuel's Chairman, Jeffrey Schwarz, followed by an overview of Fusion Fuel at a glance; our management team will then present first quarter highlights, financial results, project and commercial updates and the latest on our HEVO-Chain technology, wrapping up with a discussion of our priorities and milestones for 2023; we'll then open up the floor for a half hour or so of facilitated Q&A. As always, like the previous quarterly calls, questions can be answered in the chat box in the webcast platform at any point. Alternatively, you could also submit your questions to me at the investor relations mailbox at [email protected]. So, without further ado, I'll pass it over to Jeffrey Schwarz, Chairman of Fusion Fuel for some opening remarks.

Thanks, Ben, and hello. As Ben said, I'm Jeffrey Schwarz, Chairman of Fusion Fuel Green PLC, and I'm happy to be able to add my welcome to today's investor update. These have been exciting times at Fusion. In recent months, we've begun the commissioning of our inaugural third-party project for Exolum in Madrid; firmly planted our flag in another country with a recent awarding of a grant for a mobility project in Italy, a project that will employ the newest addition to the Fusion product line, our HEVO-Chain; we've signed a contract with CSIC for the installation of the HEVO-Solar solution, we'll be using the newest generation, HEVO 2023, for this project, which we expect to complete by year-end; we signed a collaboration agreement with Toyota Material Handling España, providing for a holistic customer solution, combining Toyota's market-leading hydrogen fuel cell forklifts and our HEVO green hydrogen production technology. And just last week, if you had been in Benavente, Portugal, you would have seen the first of those new generation HEVOs coming off the production line. You'll hear details about all these and more in the hour ahead. I'm proud of these accomplishments. But the real reason I have joined the call today is to be able to introduce Frederico Figueira de Chaves. Those of you who have followed Fusion already know Frederico. But it is my pleasure and honor to introduce him today as Fusion's first Chief Executive Officer. The organizational changes announced this morning, and in particular, Frederico's elevation to CEO, is the culmination of a process initiated by the Board of Directors 15 months ago with a goal of putting in place the team and the organizational structure that we believed would best position the company to grow to achieve our shared vision of making Fusion a leading player in the fast-growing renewable hydrogen ecosystem. Since assuming the role of company Co-Head, Frederico has worked tirelessly to build the culture that values teamwork and accountability. He has earned the trust and respect of everyone in the organization, from the factory floor, at the executive committee, and in the Board room. That is why the Board unanimously chose to appoint him as Chief Executive Officer. With that, I turn the call back over to Ben, Gavin, and Frederico to take you through the first quarter update.

Great. Thanks very much. So, I'll kick things off with an overview of our value proposition and positioning in the green hydrogen sector. So, Fusion Fuel's mission is to make the energy transition more accessible through the development and delivery of cost effective, clean hydrogen solutions. Our patented miniaturized PEM electrolyzer, the HEVO, is at the heart of everything we do. Its simplified, modular architecture unlocks a number of advantages, including industrialized throughput production, a scalable building block approach that positions us to create customized fit-for-purpose hydrogen solutions, and cost-competitive distributed or decentralized production of hydrogen mitigating the need for a distribution infrastructure, which is a costly and critical bottleneck in the market today. We built a strong pipeline of actionable near-term projects in our core markets of Southern Europe and the United States with significant grant funding tied to many of those foundational projects strengthening the economics and derisking the investment case. Our unique and complementary business model positions us across the value chain. In addition to selling our proprietary electrolyzer solutions to third-party customers, we also originate and develop green hydrogen projects with diverse avenues for monetizing value creation. And finally, we are poised and positioned for significant growth ramp as the market matures with an extensive long-term project pipeline in a world-class production facility located in Portugal where we're targeting 500 megawatts of electrolysis capacity per annum by the end of 2025. So, with that, I'll now introduce Gavin Jones, newly appointed Interim CFO of Fusion Fuel. Gavin has been with the company since 2021 in the role of Chief Accounting Officer. Prior to that, he spent over a decade at KPMG in Ireland. So, it's my great pleasure to welcome Gavin into his new role and to invite him to share some highlights from the first quarter of 2023.

Thank you, Ben. Good afternoon, or good morning, to all of you who have joined our Q1 investor update call. I'm really pleased that my first act as Interim CFO is to present our financial highlights for the three-month period ended March 31. Some of the key highlights include: entering two hydrogen purchase agreements with Dourogás and Hydrogen Ventures; issuing invoices to three external clients; also, as Jeffrey mentioned, we commenced the commissioning phase at Exolum; we signed a technology sales agreement with CSIC; and awarded grant funding towards a mobility project in Italy; also, in the spirit of sustainability and corporate governance, today also marks the launch of our first ESG report, headlining targets and ambitions for ourselves in the ESG space. We want to move to the next slide, please. We reached an important milestone during this quarter as we recognized our first third-party revenues. This revenue resulted from a technology sale for the supply and installation of 62 HEVO-Solar units that we previously announced. Our cost base reduced when compared to Q4 2022 with notable reductions relating to onerous contract provisions, inventory scrappage costs, professional service and consulting fees. These reductions were somewhat offset by a €1.4 million charge relating to a production line that was scheduled to be installed at our Benavente production facility during 2023. As this production line will no longer be installed as planned, it did not meet the capitalization requirements and was expensed. In line with previous quarters, we continue to recognize non-cash expenses for the awards under our equity incentive plan and fair value gains for our warrants that are mark to market instruments. These items culminated in a net loss of €2.6 million. Can we move to the next slide, please? During the quarter, we continued to invest in our core assets. Notably, our Benavente production facility, internally generated hydrogen production plants, our HEVO technology development assets and our inventory. Any increases in these assets were offset by depreciation and amortization charges. As a consequence of recognizing our first revenues, we also recognized trade receivables. And the amount shown on this slide has been received subsequent to the quarter-end. As I previously noted, we've also issued further invoices to other clients during quarter two. Our VAT receivable balance increased by €0.6 million during the quarter. In quarter two-to-date, we received €3.2 million of the amounts outstanding at March 31. To continue the trends of firsts, we entered into our first debt facility during the quarter and drew down €2 million. This facility, which is with a Portuguese financial institution, is short-term in nature, and its purpose is to free up some of the significant receivables we have with the Portuguese government. This €2 million has already been repaid during the second quarter as VAT amounts were received. The deferred income balance increased by €3.1 million as we received further installments from our C-5 grant award and amendments from customers that did not yet meet the requirements for revenue recognition. Next slide, please. We sold ordinary shares through our ATM facility, which raised net proceeds of €2.4 million. Our share-based compensation reserve also increased as we granted RSUs to our employees and options to our non-executive directors. We have been really successful at both securing direct grant awards and supporting partners in their submissions that would use our technology. This is an activity that we intend to continue, and we are already working on numerous proposals both in Spain and Portugal for the next wave of grants. Now, I will pass you to Frederico, who will provide an update on the business.

Great. Thank you very much, Gavin, and thank you for taking on the role of CFO from me as well. And also thank you, Jeffrey, for the kind words at the beginning. So, I will cover both technology and commercial activities in my update, starting with an update on our projects and pipeline. So, we currently have just over 25 projects in our short- to mid-term pipeline. The majority coming from Spain, where we are currently in the commissioning process of our Exolum project, our first project to go live in Spain. We're already actively advancing our HEVO-Chain offering for delivery as early as this year already. Most notably, we've already received a grant award for a project in Italy using this technology, only a few months after launching it. The United States continues to be a market of significant strategic importance for us. Zach and Jason launched our activities in this market last year with the Bakersfield project, and have more recently brought two other opportunities in North America to the portfolio. We aim to continue to develop opportunities in this market with them in the future and to enter into technology partnerships with them. Our focus is to mature our pipeline into projects in execution and contracted, something we have finally been able to make some progress on given the licensing or regulatory hurdles. As Gavin noted, we posted our first revenues in Q1. In Q2, we've invoiced two other clients, and we're now picking up momentum on the more traditional activities from our business development front. So, we expect that to continue as these 25 to 27 or so projects mature. I also want to take this opportunity to introduce an exciting concept we've been working on together with our Fusion Fuel Spain partners. Fusion Fuel Spain, together with two leading European energy companies, along with Toyota Material Handling, have created a holistic solution for hydrogen mobility for logistics centers. The partnership provides best-in-class hydrogen vehicles, our highly competitive electrolyzer solution, renewable energy sourcing and fleet financing options. So it's a truly holistic solution for logistic centers. We can offer competitive green hydrogen and mobility-as-a-service options to logistic companies in the region. The Zaragoza hub is expected to be deployed in various stages, matching demand growth and hydrogen fleet deployment. In fact, the CSIC project, which we're now executing, serves as the first concrete step in the execution of this particular hub. We find this a truly highly interesting concept and partnership, and we aim to replicate it for other logistic areas across Iberia. So, although this is just a concept example, this is one of several logistic hubs we want to be targeting. We see logistics as a core market for the green hydrogen world and a market where you traditionally can have captive fleets and fast deployment. On the technology front, I want to note that we have actually launched production of Gen 4 HEVO, which I have here in front of me. This is a substantial progress in our HEVO evolution. It is eight times more powerful than the previous generation used in our Evora project. So, we have significant reduction in complexity, and therefore also unit costs, showcasing the speed of the innovation that's taking place at Fusion Fuel. The HEVO continues to benefit from cheaper power equipment in the overall balance of the system, lower operational and maintenance costs and simpler maintenance processes than other launch solutions, with reduced system losses, lower production costs, and it's designed for modular and scalable deployment. We're already integrating this generation into our ongoing projects, starting with the CSIC project, which will incorporate this latest generation of HEVO. The HEVO-Chain will also be built around this new HEVO. Speaking on HEVO-Chain, I want to introduce the overall concept of this product line. So, once again, the new HEVO lies at the heart of the HEVO-Chain offering. Our centralized electrolyzer offering has two product types: the previously announced containerized solution, which ranges from 1 to 2.5 megawatts depending on the size of the container, which will enter commercial production in 2024, and the non-containerized solution. Still operating with a HEVO at its core, together in a string and tailored system that can be deployed for any project size. We plan commercial production and deployment of this series already in 2023. I want to highlight some of our 2023 strategic priorities a little bit different from the general business milestone that we had going on. Now with the HEVO-Chain offering, the Northern European market becomes a potential addressable market for us. The electrolyzer market in Northern Europe has been moving quickly. Although Southern Europe benefits from very cheap and readily available renewable power, the Northern European market has been moving faster in terms of actually deploying electrolyzers. With our HEVO-Chain offering, we now will have a highly competitive solution where we can enter this market, and we plan to do so already this year. Also, we want to strengthen our balance sheet and our capital position. Our strong tech offering and robust pipeline enable us to target being cash flow self-sufficient at some point in the second half of 2024. We continue to explore all options to ensure we have a balance sheet that allows us to execute on our strategy. On point three, as previously mentioned, we'll continue to evolve the HEVO-Chain offering to be able to be deployed on the large-scale projects that we're engaged in, particularly the non-containerized version. As a young company in a fast-growing industry, it's critical to ensure we maintain a strong corporate culture around operating as a team, executing quickly, and ensuring robust processes. This is a core element of our governance purpose in our first ESG report that we published today. We've been successful by being nimble and quick, and now we need to safeguard these elements as we grow and mature as a company. Lastly, I'll note the focus that we're undergoing on ensuring we can pursue strategic partnerships. Across the industry, we see exciting opportunities, whether in development, funding, technology, or even production space. We'll continue to explore these to strategically add value to our proposition. Already, our Fusion Fuel Spain, our Toshiba on the membrane, and our Toyota handling partnerships are just some examples of our efforts to bring in and partner with strong propositions to enhance our offering. Lastly, I want to finish up on tackling our key milestones for 2023 and our progress against them. With a new more powerful HEVO, we are well underway to have an expanded production capacity at minimal additional cost. As mentioned before, this HEVO now in front of me is eight times more powerful than its predecessor. Yes, it doesn't take eight times the time to make it. So, we are able to produce a lot more electrolyzer capacity now with this offering, boosting our production capacity. The HEVO-Chain non-containerized unit will be ready for deployment in the coming weeks. We continue to execute on our contracts, recognizing revenues and issuing invoices to receive payments from clients, which has been a major milestone. We have two launch projects that we are currently in contract negotiation for deployments later in this year. We also continue to see a wave of interest and projects coming to our commercial team for even full deployment as early as this year. On the project development side, licenses and regulatory frameworks continue to be a significant bottleneck in some situations, but we do see some progress in Spain, particularly. Portugal has progressed slower than we had hoped, but we have started several of these projects several years ago. So, we are now hoping that they are reaching levels of maturity where we can start deploying some of those larger projects we've been discussing for a while now. We are on the cusp of hydrogen deployment on a very large scale in Europe. The urgency and appetite for projects has never been greater, and we're finally seeing governments not only making promises or announcing ambitions but actually taking action. Examples include both the Portuguese and the European hydrogen banks, with hydrogen auctions going live later this year; this is set to initiate a change and step up in the industry overall. I'm thrilled to have the opportunity to work with my Fusion colleagues to play a leading and powerful role in this hydrogen market. So, I thank you all for your time, and I'll pass back to Ben, so we can go through the Q&A.

Thank you, Frederico. Just as a reminder for those of you who have questions, you can submit them in the chat box in the webcast platform or direct them to the IR mailbox at [email protected]. So, let's open things up with the handful of questions that I received via email from Chris Tsung at Webber Research. His first question is around Bakersfield here in the U.S. and the JV with the Electus, commenting on the latest information that was provided in the 20-F filing. So, just an update there, and perhaps also commentary on how the JV is structured and the prospective roles of Fusion Fuel on Electus Energy.

Thanks, Ben. I'll take that one. So, we continue to work with Electus Energy. The details of the partnership we can't disclose at this time as it's still too early for that stage. But as noted, we did engage with Black & Veatch to start the feasibility study of the project, and now the development work on that continues. Given its location in California, it does require a lengthy licensing process, which has started, but we will expect to continue to make progress, although it will likely still take some time before we're able to give meaningful updates on that side. I want to note that that is a very large project. As we announced, it was about 75 megawatts in terms of electrolyzer size. We are excited to share that, as I mentioned before, Zach and Jason created two new opportunities in the U.S. for earlier deployments in a slightly smaller scale, which we could tackle faster. So, we hope to be able to announce further details of those projects soon. It's important for us to note that the U.S. market continues to be a priority for Fusion Fuel.

Thanks, Frederico. Second question was, how are we tracking against our full year 2023 guidance?

I'll take this one, Ben. During the Q4 investor update, Frederico presented our full guidance for 2023 and 2022, and we are currently tracking positively toward those projections, especially when it comes to revenue and costs. Even prior to Q4, Frederico had provided guidance of between €4 million and €4.5 million in operating costs per quarter. Excluding the one-off charge I mentioned during my slides, we were within that focus. With the cost reduction plans we put in place and cost efficiencies, we expect to see further reductions as we continue on in the year. So, to answer your question, Ben, yes, we are still within the parameters of the guidance we provided previously.

Thanks, Gavin. Sticking with you, can you walk us through how we plan to fund our CapEx requirements through this year and beyond?

No problem. As Frederico mentioned most recently, we're currently looking into and investigating various capital areas where we can strengthen our balance sheet, with multiple discussions ongoing with financial institutions based here in Europe and beyond. As I mentioned as well, at the outset, we've invoiced three external clients so far in 2023. We want to continue that momentum as we push into the latter stages of Q2 and into Q3. Again, as I mentioned, we entered into a hydrogen purchase agreement with Dourogás and Hydrogen Ventures as well. We would look to use any inflows from those contracts to continue our CapEx, but it will through capital raising means as those discussions reach conclusion.

Thanks, Gavin. Sorry. Go ahead, Frederico.

I also want to add regarding the CapEx needs associated with projects. Anyone who's been following us for a while knows that we do the development of several projects ourselves. However, the total investment value for those projects is significant, in the triple-digit millions. We've noted this before, but just to clarify again, we intend to have financial partners for those projects. Therefore, those projects in SPVs are to be owned by financial investors, who take on that CapEx responsibility. We create the opportunity and intend to deploy our technology into it, but funding those projects through to completion is not in our short-term capital plan.

And just one piece if I may as well that I forgot to mention was the grant inflows, which we've started recognizing or receiving over the last four or five months. Some of the awards we've received over the last 18 months have actually been provided and paid out. So, again, we hope that's a positive trend and will continue during 2023 and 2024.

Thanks, Gavin. Just sticking with that point around grants. So, a question here around, should we expect continued delays in grants being paid out? And do we expect this to lead to any liquidity challenges or project delays down the road?

So, I'll take that. What we've noted is that grant payments can be unpredictable. It's not necessarily about delays. We've seen them take nearly a year to pay out, and other times being as quick as one week. What we are looking to do is to partner with some commercial banks to take the uncertainty of that payment timing away from us so that we can proceed and operate in a more normalized manner. If that's not possible, it could delay projects and activities. We will note again that we are not looking to take on the investment risk of the projects ourselves to sell them on to the third party. Depending on the capital position of that third party, they will have to decide how they want to take that timing risk.

Great. This question here from Amit Dayal at H.C. Wainwright. There's a question around maintaining our outlook for 2023 and 2024. We already covered, I think, 2023 and said, yes, we're confident with that guidance. How about the preliminary 2024 outlook? Has that changed since our Q4 '22 call?

Yes, we maintain the same guidance. Some of these projects can be chunky, as noted, so the timing of when those start and the deployment can impact those targets. With the information we have available, those continues to be our ambitions and targets.

Great. Sticking with analysts here, question from Erwan Kerouredan at Royal Bank of Canada. In light of the leadership changes announced this morning, how should we be thinking about the Americas? Should we expect the appointment of a Head of Americas reporting to Frederico anytime soon?

This is still to be determined. As noted, the Americas continues to be a strategic priority for us. While we will still work with Zach and Jason on developing some projects in the United States and North America in the future, we are also exploring strategic partnerships to cover the American market. It's still early days and something we are working on, but the likely scenario is that there will be multiple solutions for such a large and principal market for us.

Thanks, Frederico. I'll pass over to Gavin for this next question. Do we expect the current rate of dilution both through sales of securities through the ATM and the award of options to continue at these levels for the foreseeable future? What would it take for this pace to increase or decrease?

Thanks, Ben. I think if not steady, definitely reduced. If we think about options and RSUs, these were predominantly issued to retain key employees and also attract new hires. As those who have followed us in the past, we've grown our headcount from very small amounts to 150, 160 people. We don't expect to be granting too many more options or equity awards in the near future. On the ATM, we have not sold any amounts under the ATM facility in Q2 to date. But, again, without repeating myself, we're looking at various ways of strengthening our capital position. If we're successful in one of those, that will reduce the dilution from any future ATM sales as well.

Thanks, Gavin. A question around why the development and evolution of the green hydrogen economy is taking so long? What do you see as the primary challenges and obstacles? And what changes are needed to build momentum in this competitive space?

So, thanks, Ben. The first point to note is how hydrogen has been used historically, mainly in commoditized chemical processes. These activities with low margins are very sensitive to cost increases. Green, blue, or clean hydrogen still operates as a premium to traditional grades, and it takes time to replace those grades used for traditional activities. What we've seen is the support from governments that has come to support the green premium in these early stages of the market, along with new uses for hydrogen, such as mobility, which can justify a higher cost of hydrogen. The regulatory and licensing environment, as well as demand, have all been slowly working together to frame a world where green hydrogen is economically viable for large-scale use. I think the world was waiting for something to move. The U.S. was the catalyst that got everyone else moving, and now we're beginning to see that dynamic in the market that we have not seen before.

Thanks, Frederico. I would also mention, if I can get up on my soapbox for just a moment, I think that there is a dislocation between what's being announced and what's drawing attention in the market, which are really large multibillion-dollar mega projects, and what's actually being developed in the field, which are predominantly projects in the small- to mid-scale space that have much more modest capital requirements. We are well-positioned given our unique competitive advantage by virtue of our technology in that small- and mid-scale space while the rest of the industry and, more importantly, the rest of the value chain, particularly on the infrastructure side, scales up to support more widespread adoption of green hydrogen. Question here around the HEVO-Chain, asking for clarification on the benefits and differences between the two solutions. Can you speak to benefits of each and where they would be most significant?

So, the HEVO-Chain, again, we'll start with the advantages of using our smaller modular solution. Any product using the HEVO will benefit from these advantages, namely, the modular design allows for relatively easy operating maintenance, as opposed to having to send a full stack back if there's an issue, or shutting down an entire plant for repairs. We can simply take out the offending module, and the rest of the plant can continue operating. Additionally, each membrane in each unit operates independently even though they are in a string, meaning that mismatched losses in the system are only at the individual HEVO level and not on the full system level, hence we experience much lower losses overall. These are some of the large-scale advantages of the HEVO itself. The HEVO-Chain takes advantage of these benefits, allowing for a cheaper power system since HEVOs require significantly less power to operate. Both HEVO-Chain units, the containerized and the non-containerized version, can be scaled. For example, we do not need to fill the container all in one go. They can be scaled and ramped up in phases as client needs change. We have projects where they have phase 1 and phase 2, one in a containerized solution which is half a megawatt, followed by a second half-megawatt as needed, particularly for mobility as the fleet is deployed. The HEVO-Chain containerized unit includes the full system, such as the water and power electronic systems. In contrast, the non-containerized version allows for tailoring the system to specific sizes, presenting the differing use cases and both are very competitive in their markets.

Yes. Thanks, Frederico. A comment here around technology sales, and what's that process? What does that sales cycle look like? And how are those contracts typically structured? Is payment done upfront? Is it post-delivery? Is it phased?

Yes. Let's call it each negotiation is its own world. However, the general approach we're taking usually includes a certain amount of upfront payment. This is to help us invest in the working capital to buy materials for production. Then, certain milestone payments could be scheduled during production, with a remainder withheld until the successful commissioning and acceptance of the unit. So, payment is phased, designed to ease the working capital requirements for production.

Thanks, Frederico. A question about the efficiency of HEVO 2023, particularly how many kilowatt hours are required to produce a kilogram of hydrogen? I'm going to say that it's unchanged relative to prior versions, but it's important to note the distinction between efficiency at the stack level versus the system level. Frederico, I'll let you add to that.

Yes, that's correct. The efficiency at the stack level remains the same, which is very attractive. The precise number is around 47-point-something at the stack level. At the full-system level, it's around 52 kilowatt hours per kilogram. These are highly competitive figures for an electrolyzer system. Again, we've maintained those numbers while enhancing our capabilities and making our technology more powerful. By more powerful, we mean more electrochemical cell real estate, allowing higher hydrogen production with the same unit.

Great. I think we've reached the end of the Q&A session with plenty of time to spare. Unless there are any further questions or unless Frederico or Gavin have some final thoughts to share? If not, then we can wrap it up here. A big thank you to everyone who's joined. If any questions come up or you felt your question was not answered sufficiently, please do reach out to me and the IR team at [email protected]. We look forward to seeing you again at our next update.

Great. Thank you.