Fusion Fuel Green PLC Q1 FY2024 Earnings Call

Hello everyone. Welcome to Fusion Fuel Green’s First Quarter 2024 Investor Update. My name is Ben Schwarz, and I lead Investor Relations. I would like to first remind everyone that some of the information provided during the conference call may contain statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. It’s possible that our actual results and financial condition may differ from the anticipated results and financial condition indicated in these forward-looking statements. For discussion of some of the risks and important factors that affect Fusion Fuel’s future results, please see the risk factors in the company’s latest annual report on Form 20-F filed with the SEC. Fusion Fuel assumes no obligation to update or revise any forward-looking information provided during the conference call and shall not be liable for any action taken in reliance upon such information. So, with that out of the way, thank you again for joining us today. I’ll briefly run through our agenda. As always, I’ll begin with an overview of Fusion Fuel, followed by some observations on the market and industry dynamics within the green hydrogen space. Gavin and Frederico will then review first quarter highlights, subsequent developments and commercial updates, including a deep dive into our pipeline, before wrapping up by checking in on our progress against our 2024 priorities. We’ll then open up the floor for facilitated Q&A. As in previous quarterly calls, questions can be entered in the chat box in the webcast platform at any point during the next hour. Alternatively, you can also submit your questions to the Investor Relations mailbox, which is [email protected]. So, without further ado, let’s begin again with a brief refresher on Fusion Fuel, our value proposition, and positioning in the green hydrogen sector. Fusion Fuel’s mission is unchanged: to unlock the energy transition through the design and development of innovative green hydrogen solutions. At the heart of everything we do is our proprietary HEVO micro-electrolyzer technology. It employs a simplified modular design and decentralized parallel architecture that unlocks multiple sources of advantage for us, including superior long-term performance, market-leading efficiency, and high-throughput industrialized production. Our micro-electrolyzer technology lends itself to a turnkey building block approach to project development that delivers unprecedented flexibility and enables us to play competitively in small- to mid-scale projects, a segment of the market where we continue to see considerable demand growth. We’ve developed a complementary end-to-end service proposition that positions us to deliver solutions for our clients no matter where they are in their hydrogen journey, enabling us to capture a meaningfully greater portion of project spend. We’ve built a robust pipeline of actionable near-term green hydrogen projects with diverse avenues for monetizing value creation along the development cycle highlighted by our flagship IPCEI Project in Sines, Portugal. Lastly, we are well positioned to take advantage of the significant growth ramp as the market develops with a large and diverse pipeline featuring projects across more than a dozen countries underpinned by our world-class electrolyzer production facility located in Portugal.

Thank you, Ben. Good afternoon or morning to all of you who have joined our first quarter investor update call. During the first quarter, we received notification of the European Commission’s acceptance of our HEVO-Portugal Project as an important project of common European interest for IPCEI. Frederico will provide an update on this project later in the presentation. We raised net proceeds of €5.9 million through our ATM facility during February, with the lion’s share of this being raised on February 16th, when we witnessed unprecedented trading volume following the above IPCEI award. We were awarded a separate grant from the European Commission as part of the H2tALENT consortium. The total value of this award was just above €1 million and we are currently finalizing our first drawdown. We received provisional grant approval for our 25-megawatt HEVO-Aveiro green hydrogen project. This grant represents an estimated €5 million in grant funding as part of the second funding call of the Portuguese Government’s C-14 grant program, which focuses on accelerating the energy transition by supporting the production of hydrogen and other renewable gases. The company is also involved in a second submission for a 10-megawatt green hydrogen project led by a Portuguese Industrial Company, which has also received funding approval. Our HEVO-Aveiro project will have our HEVO-Chain technology installed, along with the associated balance of plant equipment. This plant will produce an estimated 2,100 tons of green hydrogen per annum, which is expected to be used by the local ceramic industry. We convened an EGM to secure shareholder approval, allowing the company’s Board of Directors to allot securities above the 20% annual cap imposed under Irish law. After the end of the first quarter, we drew down on the first tranche of the Macquarie facility, which amounted to $1.15 million. We intend to work with Macquarie to finalize a second closing on the facility as soon as possible. We completed the installation of a 300-kilowatt HEVO-Chain system for a global cement leader. This morning, we announced that we signed a technology sale contract for a 100-kilowatt HEVO-Chain system for a hospital client in Iberia. The hospital intends to capture the green oxygen created as a byproduct of the electrolysis process for medical applications and to use the green hydrogen generated to produce emissions-free power for the facility. The project also includes an R&D work stream aimed at developing and testing new materials for our HEVO technology. We continue to widen our strategic commercial relationships, reflecting a strong perception of our technology and engineering capabilities. As we deliver small- to mid-scale projects, our strategy is laser-focused on creating follow-on opportunities that will add value to the company as we continue to increase the track record of our HEVO technology. We will now move on to the financial results for the first quarter. Please note that all values discussed are in euros unless stated otherwise. No revenue was recognized during the first quarter. At the end of the quarter, we had €0.7 million of inflows that did not meet the revenue recognition requirements and instead, these amounts will be recognized as revenue later in 2024. Given the nature of our contracts, the key driver of revenue recognition is delivery or client acceptance. I had noted previously that our 2024 revenues would be weighted towards the second half of the year. For our 300-kilowatt HEVO-Chain system installed, the milestone for revenue recognition is client acceptance. This will take place after the commissioning phase is completed. We continue to sell or scrap our legacy HEVO-Solar materials and received inflows of €0.24 million during the first quarter. These sales have continued into the second quarter, and we will continue to realize as much as possible from the components previously impaired. We did not book any impairments during the first quarter. You may remember from our fourth quarter presentation that we had some credits recorded against our operating cost base relating to grant inflows. These credits were not repeated during the first quarter, and this is why we are showing an increase in our SG&A. Once we excluded the credits from the fourth-quarter expenses, our cost base decreased by €1.5 million. This is the fifth consecutive quarter that we recorded a reduction in our operating cost base. Our cost base continues to be a source of focus, and we achieve further reductions in areas like labor, travel, legal, and general operating expenses. The pre-tax loss for the quarter amended to €5.1 million and included non-cash items relating to share-based compensation expense of €0.6 million, depreciation, and amortization of €0.7 million and a fair value loss associated with our warrants of €0.6 million as our derivative liability increased. The non-current assets and inventory balances are shown net of historical impairment charges. The increase to inventory is down to two items. One being the reduction of the provision for impairment as items of legacy inventory were sold or scrapped. And the second being purchases made to fulfill our current technology projects. Until we recognize the revenue associated with technology sales, the equipment and materials related to this revenue remain part of the inventory. In May, we received a deficiency notice from NASDAQ regarding our shareholders’ equity. Under the listing rules of the NASDAQ Global Market, companies are required to maintain a minimum of $10 million in shareholders’ equity. We have 45 days to submit a plan to NASDAQ to regain compliance. If that plan is accepted, NASDAQ can grant an extension of up to 180 days to execute the agreed plan. We are finalizing this plan and it will be submitted in advance of the 45 days permitted. The notice has no immediate effect on the listing of our ordinary shares, which continue to trade on the NASDAQ Global Market under the symbol HTOO. Our bank balance was just over €1.5 million on March 31st. Since then, we have received $1.15 million from Macquarie along with various other customer inflows. Following the drawdown of tranche one of the Macquarie facility, we notified the placement agents of the termination of the ATM sales agreement. As mentioned earlier, our EGM took place during the first quarter. Under Irish law, the company must have authority from its shareholders to issue any securities. The company’s shareholders previously authorized the company to issue securities of up to 20% of the issued ordinary shares of the company during any calendar year. We sought and received approval from the company’s shareholders to provide the company with authority to issue securities above and beyond this 20% cap. We continue to believe that uncertainty around our capital position is the greatest concern of the market and that resolving the capital constraint will remedy our long-standing valuation disconnect relative to our peers. We continue to explore multiple options to solidify our capital position. A priority of ours is to exit cash burn by the end of 2025, and to do this, we will need to reinforce our balance sheet. A strengthened balance sheet should assure our teams, investors, and shareholders that the company is sufficiently equipped to achieve its goals and targets. It also provides our customers with further assurances that the warranties that are being offered as part of our technology contracts can be fulfilled. The shareholder approval allows management to move quickly and decisively in the event of a prospective capital raise or strategic partnership. We have significant grant amounts expected for 2024 which will mostly be to reimburse us for spend relating to R&D, our production facility, and engineering services for our projects. Due to the strengthening of our balance sheet in February and as we are now receiving customer inflows regularly, we are satisfied that the operational inflows coupled with the drawdowns from the Macquarie facility provide us with a runway to execute the capital raise efforts in progress. As noted in our investor letter, we intend to secure strategic and structural financing that will enable us to execute our business plan and accelerate growth. Finally, I want to confirm that we are maintaining our guidance for 2024 which was communicated earlier this year. I will now pass you over to our CEO, Frederico, who will provide a commercial update.

Thank you, Gavin. Good afternoon, everyone, and thank you for joining us today. I’m thrilled to be able to share with you the latest images from our project with a cement major in Spain. This is not only the first commercial installation of the HEVO-Chain system but is also the first project where we are capturing the oxygen released in the process. This 300-kilowatt facility was a turnkey solution delivered by Fusion Fuel. We took the work on from the conceptual design through all the engineering work required and finally the supervision of the installation and commissioning. It’s a special project in the green hydrogen world as it is commercially viable already without financial support and grants, which is pretty unique in the hydrogen market today. One of the main concerns for such an installation is the availability of the hydrogen and ensuring the production does not stop and impact the operation of the kiln. This is where our HEVO-Chain system truly differentiates itself. The system is made up of 15 HEVO-Chain cubes, each operating independently. Therefore, any issue with any underlying HEVOs will not impact the continuity of the plant’s operation. We see a significant competitive advantage for our solution in the sector with both the performance of our system and the availability advantages. As outlined in our letter, we have already received multiple requests for follow-on proposals from the same client and others in this industry. This plant is finalizing its installation and starting the commissioning process now. The commercial advantages of our offering are substantial for the market we are focusing on. We are not the solution for every challenge in the green hydrogen space, but for the sub-10 megawatt plants, where availabilities are concerned, we have an excellent solution. We have a market-leading system efficiency for the electrolyzer system, thereby reducing the cost of green hydrogen produced. We can ensure strong availability of a hydrogen plant both through an industry-leading nominal load range, meaning that we can produce hydrogen even with the smallest power inputs to a system, as well as with the modular design of the system. This modularity allows us to manage partial system shutdowns when operational maintenance work is required, thereby minimizing the risk of production stoppages for clients. This applies to both the container and the cube solutions, and the independent operation also significantly reduces the contagion effects seen in traditional systems. Given the operational independence of each of our HEVOs, we’re able to significantly reduce the contagion effects that occur in traditional systems. Lastly, our plug-and-play models allow us to deliver to a client a system perfectly sized to their needs, while also allowing for a simple scale-up of a plant later if the hydrogen need increases. We have recently been working with partners where they have requested a phased increase in electrolyzer capacity over several years, and our system can manage those requirements extremely well. For the next two slides, I’d like to focus on our commercial pipeline and the offers that we have outstanding. As you may recall, we truly started marketing the HEVO-Chain solution in the third quarter of last year. The shift we made last year from the HEVO-Solar to the HEVO-Chain solution massively increased our addressable market and it makes it significantly easier for clients to understand our system. Also, towards the end of last year, we made a concerted effort to broaden our reach beyond our home markets of Portugal and Spain. Since then, I’m pleased to note that we have a very strong pipeline with over 200 megawatts of offers and tenders made to clients in 16 different markets. We’re very happy to see the traction we’re seeing in the market with our offering, and as expected, most of our offers are for under 10 megawatts. This is really the segment where our HEVO-Chain system differentiates itself. To expand further on our pipeline, we have broadened our market reach substantially, although most large projects continue to be in Portugal and Spain, given our local presence and strong renewable energy profile in these markets. In terms of number of offers outstanding, it’s a near 50-50 split between Iberia and the rest of the world. A trend we believe will continue to develop further with the rest of the world growing over time. The majority of the offers outstanding lie in the 5 megawatts or under category. This is deliberate and fits our commercial strategy, as this fits our solution particularly well. However, most of the early green hydrogen projects being made and actually undertaken are small projects, as the industry has not yet proven its ability to deliver consistently large systems and government actions are continuously delayed. Therefore, we believe that apart from a few projects, most of the actual installation efforts in the next couple of years will be in the small- to mid-sized project range. As highlighted previously, our engineering expertise and hydrogen market experience have been real assets in proposals and discussions with clients. Over 80% of our offers include services that involve electrolysis provision, engineering services, or balance of equipment purchasing. This means that we’re able to capture a bigger share of the hydrogen projects we’re involved in. The push for full plant solutions and the focus on small projects align with the spirit of seeking clients who need our product, whether it’s electrolyzer or hydrogen engineering expertise. Now changing gears slightly, I’d like to briefly update on our own project portfolio. To remind everyone, several years ago, our focus was to create our own hydrogen projects to develop our own pipeline, as our technology was very new. We currently have six development projects that are fully owned by Fusion Fuel, with the intention to either sell the projects to a third-party infrastructure player or partner with a capital player on these. The heart of this portfolio is the Sines project, which was designated an important project of common European interest, or IPCEI, and I’ll go into more details on that on the next slide. The remaining three projects listed here continue their development journey, both in negotiations with hydrogen off-takers, as well as with potential project investors. Most recently, the Aveiro project was awarded a grant during the first quarter as well. So now all projects in our portfolio with government funding awarded are in various stages of negotiations with investors and partners. We believe this portfolio will provide substantial added value to the pipeline we outlined before and bring significant value to our shareholders. After four years of submitting the request for IPCEI consideration, along with substantial work and replying to various queries over this time, we finally received confirmation that our project was designated an IPCEI project by the European Commission. This 630-megawatt project incorporates our Sines 1 and 2 projects, which already have grants from Portugal’s Government and aims to supply 62,000 tons of green hydrogen per year while avoiding 650,000 tons of CO2 per year, all with the goal of being installed by the end of the decade. With the IPCEI designation, we can get support from the Portuguese Government, the European Investment Bank, and apply to the European Innovation Fund to help cover the premium associated with green hydrogen production versus traditional grey hydrogen production costs. This provides this project with substantial value. However, the project is too large for Fusion Fuel to undertake alone. We’re actively in discussions and negotiations with partners regarding this project to secure meaningful value for the company and shareholders over the long term. Given its size and the due diligence work required during these negotiations, we still expect it to be several months before we can share the outcome of these discussions, with the earliest we would say being the end of summer. Recently, we were awarded a substantial Work Package worth €1 million for a project called H2tALENT, which spans six markets and includes a consortium of 28 parties supported by government grants. This project directly relates to our IPCEI and the injection into the Sines hydrogen backbone, as it pays for the FEL I and II studies for our Sines projects. It also includes further developing our demonstration plant and capabilities in Aveiro. We’re pleased to be part of this project and have the opportunity to build relationships for the future with the other 27 members of the consortium. Additionally, we’re proud to be part of the only green hydrogen valley in Europe’s clean hydrogen joint undertaking led from Portugal, cementing our leadership position in this market. Before we go into Q&A, we want to cover our 2024 priorities and value drivers. We are on our way to deliver five to six full HEVO-Chain systems to European clients this year, five of which are full project deliveries. The installation of the first system we mentioned previously is a critical step in that journey. We can install a project today in less than four weeks for the HEVO-Chain system, given its plug-and-play nature. Strengthening our balance sheet remains a vital task, and Gavin, Ben, and I are all closely involved in these discussions. Due to the sensitive nature of the work, we can only provide information once they’ve closed. Having the Macquarie line now operational is an important tool for the company. We are also looking to secure more strategic sources of capital so that we can fund ourselves through to cash flow breakeven, which will go a long way in addressing the valuation disconnect between Fusion Fuel and our competitors. As previously mentioned, we made significant strides in broadening our commercial reach, and during this year, we want to further solidify that by certifying our product for the North American and Australian markets. On the cost front, we continue to make progress. You heard from Gavin about our reductions in operating costs for five consecutive quarters. At the same time, we’ve increased the efficiency of the HEVO production line. With now over 12,000 single HEVOs produced, our production team has significantly optimized the production process and we expect to reach a reduction of 70% in product transformation costs by year-end. These reductions aren't in raw material costs but in the costs related to creating the product in-house, which is a phenomenal achievement. Lastly, we have established relationships with multi-project developers for portfolios of small projects, which we see as an important angle for development. Three of those clients we're currently working with have portfolios signifying around €90 million in potential business for Fusion Fuel, for services that include electrolyzer provision and engineering services.

Great. Thanks, Frederico. We’ve got some questions in via email as well as through the webcast platform. A reminder, anybody who has questions, please submit them. I’ll begin with some questions from a couple of our analysts or I’ll start with Erwan Kerouredan from RBC Capital Markets, who asks why we elected not to provide a formal update on our 2024 revenue guidance.

Thanks, Ben. Just in terms of the guidance that we previously communicated, we’re maintaining our guidance as it remains our best estimate. We haven’t had any substantive information since we last communicated, so it felt appropriate to keep it as it is. As Frederico mentioned, we’re working hard to monetize the Sines portfolio, but this will take time. We had included revenues from our Sines portfolio in that guidance, but until we have further clarity on the current process, it would be inappropriate for us to revise the guidance right now.

Thanks, Gavin. The next question concerns the certification process for HEVO-Chain in North America and Australia. What are the steps required to achieve that milestone?

So this is really about engaging with an external certification company, such as TUV. We are currently working with them to capture all the certifications and requirements needed for those markets, and then the HEVO-Chain goes out for testing to ensure compliance with all of those. We expect to execute this by year-end based on our discussions with external partners.

Sticking with HEVO-Chain, can you provide any customer feedback that the company has received regarding that solution?

As I mentioned, we are installing the first customer unit now at the cement factory. We’re currently finishing the installation and going into the commissioning process. The fact that we’ve been asked by the same clients to provide four other plant proposals for some of their other cement plants is a pretty good indication that they are satisfied with our service and our solution; however, the plant hasn’t yet gone live.

A final question from Erwan, can you provide any commentary on how much capital the company is looking to raise to secure or strengthen the balance sheet this year?

I don’t think we’ve provided, before we get ourselves into trouble, a specific number in the past. However, we’d note, as Gavin mentioned previously, we want to reach our cash flow break-even towards the end of 2025. On average, we anticipate around €1.2 million to €1.3 million per month. It's not flat month-by-month because we get inflows from grants and clients, but this provides an indication of what we expect.

I’ll just add to that, if that’s okay. As part of our previous guidance, we expect to have between €8 million to €10 million in CapEx throughout 2024. That kind of adds to the point Frederico mentioned in terms of working that out. But again, just want to reiterate that this spend will be dependent on the inflows, whether from client billings, financing activities that have been mentioned, and those grants that have been important to us recently.

Okay. Moving on to a couple of questions from Jeff Grampp at Alliance Global Partners. Frederico, you touched on, in the question around customer feedback, these follow-on opportunities from the cement customer. Do you have a timing expectation for when that customer may decide on the additional projects proposed?

We don’t. The four projects are in three different markets; two projects for one market and the other two for the two different markets. We are working through those projects now. The natural stage here is that after the go-live will be when any decision will be made. I don’t expect a decision before the go-live, which is in less than 10 days for the plants. However, as we’ve seen with hydrogen, final decisions can always be delayed.

Speaking of technology sales or that part of the business, we mentioned in the presentation 73% of projects in the pipeline are under 5 megawatts. Within that bucket, are you able to further parse that to an average project size?

Sure. The average project size is around 3 megawatts from those under 5 megawatts. However, I will note they range all the way from 0.1 megawatts to 5 megawatts. A substantial amount of the 1s megawatts in that bucket are at the 5-megawatt range, but the simple average is 3 megawatts.

Great. Moving now to the product development side of the business. Can you provide an update on the status of some of those prospective project sales? Are there any timing risks related to the expiration or sunset of grant funding?

Of the projects, the grants have a deadline of 2025 or 2026, with the exception of Sines 1, which has an expiration date of this year. That said, we have already asked for the extension of the timeline to fit with the overall Sines IPCEI because this is all being negotiated and discussed as one package. We do not expect this to be an issue at this time, but that would be the risk we currently see for Sines 1. The others are further down the line.

Thanks, Frederico. And lastly, at what stage would you characterize the conversations with the prospective partner for the IPCEI project and can you touch on any expectations that you may have on the timeline for due diligence?

They have put a substantial team, including two or three external parties involved in the due diligence. This process has been ongoing for a couple of months now, so I would say it is pretty advanced at the due diligence stage, but just starting the negotiation stage at this point.

Thanks, Frederico. Now, moving on to questions from the audience. There were a couple of questions on the NASDAQ non-compliance notice. Gavin, perhaps you can provide some commentary here with respect to the plan to comply with the $10 million equity requirement, noting that the 45-day period ends in two weeks?

Thanks, Ben. Our requirement is to submit a plan to NASDAQ within the 45 days. I think discussing the plan in detail here is just not appropriate. We are confident and comfortable with our plan and where equity is currently. Again, reflecting on March 31 numbers mentioned in this presentation, things have obviously changed with the Macquarie drawdown improving the equity situation. To be respectful to NASDAQ, we will present that plan to them, and once we have discussions with them, we will make the appropriate filings and press releases subsequently.

I would just note two things. The first is a question with respect to following the ATM, the proceeds from the ATM sales in February and then the first drawdown on the tranche of the Macquarie facility. How is it that the company does not have sufficient equity to meet that requirement? That non-compliance was based on our published audited financials at the end of 2023. The delisting notice does not take into account any additional equity generated or created during 2024. I’d also mention that we have the option to transfer to the NASDAQ capital markets, which has a lower equity requirement among other less stringent criteria.

Absolutely, this is even just as recently as today. We’ve been submitting an offer for the U.S. markets. We certainly think that the U.S. market is a critical market for the hydrogen industry and for Fusion Fuel in the future. There is a reason we want to make sure that our product is certified for the North American markets. Expansion into the U.S. market is something that is definitely on our agenda. We work with various partners in that region, as we’ve announced, such as Electus Energy and Elemental Energy among others. We do devote significant time where possible to developing our relationships for that market.

Thanks, Frederico. Sticking with the U.S. market, can you provide an update on the Bakersfield project, which was announced a couple of years ago as a partnership with Electus Energy to develop a project in Bakersfield, California?

Currently, it’s a 70-megawatt project in California. However, as we’ve seen everywhere, all of the large-scale projects have been getting significantly delayed. The clarity on the U.S. guidelines for the IRA not yet being out doesn’t encourage substantial financial commitments. We are partners on that project but are not in the lead, so as expected, given significant delays, our focus in the U.S. market is to work on projects of 10 megawatts and under for the next few years.

Thank you. Last question here from the audience is for Gavin and it concerns the runway for the current cash position.

As I mentioned earlier, we are satisfied with the current operational inflows, such as client payments, grant inflows, or VAT receipts, coupled with the drawdowns from the Macquarie facility. This provides us with a runway to execute the capital raise efforts we have discussed. Looking at recent events, operationalizing the Macquarie facility should provide greater flexibility in accessing funds as needed.

One more question here that I missed. With respect to production capacity at Benavente, can you touch on current and anticipated production capacity from that facility?

Certainly! Since we mentioned earlier, the production team has done a phenomenal job increasing the efficiency of producing HEVOs. One production line can now produce 40 megawatts of electrolyzers per year. With an investment of €1 million to €1.5 million, we can more than double our production capacity. We're positioned very well on the production side to grow efficiently. We can increase our capacity from 30 to 80, and even to 120 with relatively minimal expenditure.

Okay. Thank you, Frederico. One last question, again, touching on the NASDAQ issue. How many shares does Fusion Fuel currently have?

I believe we have 17.4 million shares outstanding concerning the $10 million equity issue. To clarify, we have the option to transfer to the capital markets, which has a lower equity requirement, and we only need to submit our plan to NASDAQ to regain compliance at the end of that 45-day period. Therefore, we don’t need to regain compliance immediately but must provide NASDAQ with a credible plan to do so. Hopefully, that answers the question. In the absence of any additional inquiries, I guess we will call it a little early for our first quarter webcast. Thank you to everyone who joined and asked questions. If there are further questions or if you’d like to schedule a call with either myself or members of management, please reach out to me and the IR team at [email protected]. We look forward to seeing you all again at our next update.