Green Hydrogen Systems A/S

CSE:GREENH

Earnings Call Transcript 2023-Q2

[Operator]

Hello, everyone, and welcome to the Green Hydrogen Systems Interim Financial Report for the first half of 2023. My name is Harry and I'll be your operator today. [Operator Instructions]. It is now my pleasure to hand you over to Green Hydrogen Systems' CEO, Sebastian Koks Andreassen to begin. Sebastian, please go ahead when your ready.

[Sebastian Andreassen, executive]

Thank you very much, Harry, operator, and good morning, everybody. Welcome to this call as said by the operator, this is Green Hydrogen Systems reporting the interim results for first half of 2023. I'm referring to the slide presentation that is running on the screen in the background here. And firstly, I need to remind you that whatever we are reporting today, both in written and in oral materials here, that does contain forward-looking statements, and please be aware of that. And also refer to the overview risk factors in our latest annual report from last year, which is available on our corporate website, greenhydrogen.dk.

In terms of today's participants as ever, that is, besides myself, Sebastian, the CEO of the company are also Ole Vesterbaek, my CFO, who will cover the financial ground a bit later in the presentation. And we're also joined by Jens Holm Binger, who is heading our Investor Relations.

The content we have planned to cover today includes a business update, including recent events and also that is on the A and the X-Series, our product offering to the market. And then as said, Ole will take you through the financials, both the results from the financial statement that we're reporting today and also reconfirming our financial guidance for the year as well as our medium-term targets. I will round off with some closing remarks. And following that, we are open for any questions that you may have.

Briefly overviewing significant events so far in the year and also recapping, in case we are joined today on this call by any new investors or shareholders to the company. Green Hydrogen Systems as an electrolysers original equipment manufacturer. We are delivering pressurized alkaline electrolysis equipment through market for green hydrogen in the future. And starting out the year in January, we took our first order to date of 7.2 megawatts, which is a significant part of our current order backlog that we are about to deliver. We continued during quarter 1 of the year. The A-Series and electrolysers deliveries and also at per plan delivered the first prototype of the future X-Series electrolyser to its test site environment in Denmark.

In May, of this year, we did report certain and needed modifications for the A-Series, and that led to a downward adjustment and more negative adjustment to our EBITDA 2023 guidance, which was communicated back then. And as Ole will let you know later, we maintain the view that we adjusted at the time. So on EBITDA, this number is in control and is performing according to plan. In July, we had the great pleasure for the company to close the capital raise, a combination of the rights issue on equity and shareholder loan from 2 of our larger shareholders and that delivered proceeds for the strategy execution that we now have in front of us, and I'll get back to that topic a bit later as well.

We're also entering the summer break phase issues on the supply situation on certain of our components that have been going on for a bit longer than expected and that not least is also the basis for us today, not reporting revenue in the second quarter of this year. However, we are seeing positive signs now on these issues being gradually resolved.

That being said, we are seeing also the order backlog and what we are expected to deliver as per plan and to revenue guidance for the remaining part of the year. That will be piling up for this quarter and the following quarter of this year.

So delivery of the backlog to REIT revenue of DKK 120 million to DKK 160 million for the majority part of it will happen over the next 2 quarters. By end of this year, we also expect to conclude on the current test program we are running on the future X-Series, and that's the prototype I referred to in Skive. And that is the basis for us to conclude that we are capable of and ready to taking commercial orders on the X-Series, and that event is as per the original plan expected to take place by fourth quarter of this year, allowing us for first delivery of X-Series towards the end of next year in 2024.

Digging a bit deeper on the following slide into the A-Series and an update on the delivery and production capabilities there. We have seen successful acceptance test, delivery and revenue recognition of equipment in quarter 1 that led to the DKK 14 million as previously reported. And since then, we have been delivering electrolysers to both site's acceptance tests and commissioning for commercial production of green hydrogen both at customer sites in Chile, South America, in Norway and in Denmark. And as a brand new data point, I can also report that following the close of second quarter, we have here in August in the recent days, also concluded a similar test of the equipment to a European customer, which will be revenue basis that will be reported later on as part of the trading statement for quarter 3.

That being said, we have struggled on quality and supply chain challenges and that has caused a pause in certain parts of the assembly line during quarter 2 of this year. And as I mentioned before, this has trapped also into the beginning of quarter 3. We are gradually seeing these things being resolved. However, it's a very, very critical and important component in our ability to deliver the equipment towards the end of this year that we will get the adequate and sufficient supply of these components to allow us the ramp-up of production.

We have done final assembly, both here in July and August with successful acceptance of the A-Series electrolysers that I've referred to before. And also then we have our focus on industrializing our production facilities to allow serial production on the A-Series during the next quarters.

And lastly, as previously reported, we expect that the majority of the 20-megawatt approximately order backlog that we had from the beginning of the year, that we will deliver that as basis for revenue towards the end of 2023 with the remaining part to be delivered as revenue recognized in 2024.

We're bringing today 1 example of more to come on how we are supporting customers empowering transition to 100% green logistics. And this specific example is the equipment, piece of equipment that we delivered to our South American customer. We delivered 2 HyProvide of our A-Series A60 electrolysers, totally 0.6 megawatts. And that is indeed for the first industrial green hydrogen plant at a large warehouse and distribution center in Chile. The project itself is expectedly and soon to be replicated in other locations and that will allow the customer in question to decarbonize, if you will, the majority of 200 forklift trucks to become hydrogen driven. The electrolysers that we have delivered out there, they are [indiscernible] satisfactory and producing at its specified production sheet at least up to 260 kilos of hydrogen every day and an outlet pressure of 35. So we're extremely pleased now to be seeing these customer project examples and how the equipment and also our customers support the green transition.

Looking a bit further ahead, the X-Series is a major component in the continued scaling of the business. Our future revenue starting from next year and onwards is expected to come from the X-Series, and we are right now and we have been doing that since quarter 2, we are undertaking a very important test program of the first of 2 prototypes at a test site in Skive, Northern Jutland in Denmark. And that is the first prototype of the X-Series totaling 6 megawatts per module. That is being tested and validated up there. And as you can see from the picture, the site at GreenLab in Skive where the equipment has now been installed and is now being tested.

We're doing these prototype test to derisk the technology to take the learnings that expectedly occur when you run a test program, you will find components that are not working according to expectation, other things are. And ultimately, to make sure that we have all these corrections understood and plans for that. When we later on by end 2023, may the commercial decision expected to start taking orders on the X-Series equipment, and that will allow us to start delivering the first electrolysers by 2024 or at the end of that year. Reminding you that the X-Series module is a 6-megawatt module consisting of the current technology and the current stack, 6 in total, each of 1 megawatt and that is significantly increasing the product offering from us from the A-Series to the X-Series which goes well in hand with the expected increase and also customer needs and demand and the project sizes that we are seeing in the green transition.

As I also mentioned at the beginning of this call, Ole, the CFO; and myself, the Board of Directors were very pleased that we were able to conclude in July on a capital raise process, we ended up raising close to DKK 700 million gross from 2 instruments. Thanks to many of you listening in on this call, our shareholders, through the rights issued, where we issued new shares, DKK 104 million in total, and that raised gross DKK 469 million, and at the same time, we landed also very thankful for that.

2 term loans provided by 2 of our large and important shareholders, A.P. Moller Holding and ATP totaling DKK 250 million. And altogether, that allows us to continue to execute on our strategy and to meet our financial targets for the future. It also allows us a sufficient fund to maintain a strong balance sheet, and Ole can get back to that in a moment and ultimately, continue investing around 4 important areas for our scale up.

Firstly, on the R&D side. Secondly, on product industrialization, our ability to serially produce the equipment, strengthen the balance sheet and also a continued expansion, especially our capabilities around commercial and service organization. So altogether, very pleased to have that concluded and that leaves the task ahead of us to now start ramping up the production and delivery to our customers.

With that said, I need to conclude on the business update section, and then I will hand over to Ole, our CFO, to take you through the financials that we are reporting today. Please Ole.

[Ole Vesterbaek, executive]

Thank you, Sebastian. In the following, I'll update you on the financial performance for the first half of 2023 as well as the guidance for full year and our midterm targets for 2026.

In the first half of 2023 revenue from customer contracts was DKK 14.7 million compared to last year, it's an increase of DKK 14.2 million for the first half where delivery of the 2 customer orders contribute to revenue increase as just mentioned by Sebastian.

Service revenue from the delivered electrolyser units year-to-date as well as from orders late last year will be recognized at a later stage when service is performed at sites. Due to challenges in the supply of contained component, not fulfilling the specified coating quality, we have had post acceptances for parts of the backlog during the second quarter of 2023. The challenges are currently being managed and factory acceptance test and revenue recognition of the A90 electrolysers will resume from Q3 2023.

Gross profit was minus DKK 87.2 million and EBITDA minus DKK 161.8 million. In the first half, of the year, the quality issues with certain components combined with price inflation and additional work required in the assembling and manufacturing process contributed to increased costs at DKK 30 million to DKK 40 million. The cost increase also led to an adjustment of EBITDA guidance for 2023, back in late May.

Green Hydrogen System has adopted a profit protection plan, providing our expected savings to [ stop ] recurring the increased costs, cost-cutting exercise in the profit protection plan include postponement of activities, hiring of noncritical positions, postponement of certain investments as well as reduction of expenses from sales and administration costs.

Net financials ended at minus at DKK 6.8 million compared to a plus of DKK 3 million in first half of 2022. The increase in financial expenses is due to the fact that we have used our repurchasing agreement of Repro partly to finance our growth and our investments in the first half of the year.

Net profit was minus DKK 200 million compared to minus DKK 148 million in the first half of last year.

End of June 2023, total assets were DKK 1.762 billion compared to DKK 1.361 billion end of first half last year. This was mainly driven by an increase in noncurrent assets when tangible assets and property plant and equipment has increased by DKK 90 million and DKK 65 million, respectively. The increase in tangible assets reflect the continued investments in R&D activities, technology improvement projects and the increase in property plant and equipment reflects the progress and finalization of the factory expansion as well as investments in production equipment and sales facilities.

Furthermore, inventory has increased by DKK 94 million, inventory consists of parts. So raw material subassemblies and material as well as electrolysers delivered to customer sites, but not revenue recognized there yet.

Equity decreased in line with our net profit compared to June '22 as a result of the negative development for the period. By the end of first half, of 2023 cash and cash equivalents were net DKK 207 million, including cash like financial assets less borrowings.

In the first half of 2023 Green Hydrogen Systems initiated a capital increase process, as just outlined by Sebastian, the capital increase provided gross proceeds from a share issue of DKK 469 million. In addition, we have drawn off a term loan of DKK 250 million, which combined totaled DKK 719 million gross. The equity and debt has been recognized in the balance sheet in July. So it's not included in the balance sheet and cash flow for the first half of 2023.

Turning into the guidance for full year and medium targets for 2026. In the first half of 2023, we have tested, we have delivered and we have revenue recognized A90 electrolysers units. We had a setback in assembly and sales prior to summer due to the quality issues determined on certain components. Since then, we have made positive progress, and we have confidence in the production and delivery for the full year, which means that we maintain our revenue, EBITDA and investments communicated earlier, which means that our revenue is expected to be within the guidance range of DKK 120 million to DKK 160 million adjusted for our backlog and, of course, supported by our production plan. So we are still confident in the current production and delivery plan for the rest of 2023. It's important to state that assembly test and delivery of the A-Series electrolysers can be impacted by additional supply chain challenges and quality challenges on certain components, which may postpone delivery of orders expected as part of the revenue assumptions for 2023.

EBITDA is expected, as previously announced late May in the range of minus DKK 240 million to DKK 280 million, and investments are expected in the range of DKK 270 million to DKK 300 million.

Early 2023, we have announced our new medium-term targets to include the financial development for 2026, where we target total revenue of more than DKK 1.2 billion and a positive EBITDA. The development towards 2026 is based on a number of assumptions to our product development, cost-out potential, investments, general market development and more realization of the majority of the assumptions and thereby all the realization of the target financial development was consenting on a capital raise during 2023.

With the completion of the share issue and debt financing in July, we are pleased to confirm the 2026 revenue and EBITDA targets.

And with that, I'll hand over to Sebastian for some final remarks.

[Sebastian Andreassen, executive]

Thank you very much, Ole. And from my side, it's simply recapping that it was a first quarter, where we reported DKK 40 million in revenue and also a second quarter following up that, with no further revenue in total, an interim of DKK 14 million in revenue and the expectation that this will start picking up now for this quarter 3 and quarter 4 following this.

Since quarter 1, we have delivered electrolysers who have -- that have been site-access tested and commissioned their customer sites, both in Chile, Norway and Denmark. And also alluded to on the first page of the presentation, also followed up by a similar lens in this month, August of '23. The A-Series prototype has been delivered by end quarter 1, according to plan. And currently testing of that is going on. And we expect that to allow us a commercial decision basis to launch sales by 2023 quarter 4. And lastly, as I think, sufficiently elaborated right now by both Ole and myself, but indeed, it was a very positive thing. We concluded on the capital raise process in July of this year, meaning that we now have sufficient funds to deliver on our 2026 targets.

And with that said, operator, please, back to you, and I'm open for any questions from participants on the call.

[Operator]

[Operator Instructions] And our first question of today is from the line of Anthony [indiscernible] International.

[Unknown Analyst]

My question refers to efficiency and on your current and future X products. What is the kilowatt hours per kg, please currently and on the future X-Series?

[Sebastian Andreassen, executive]

We are coming from a current level, which is slightly higher than originally expected, which is in high 50s in terms of kilowatts per kilowatt hours. Our contractual levels right now sits between 57 and 59. We expect that to go further down also on the X-Series. And I'm not in a position right now to mention specifically what we will see gradual improvement of that over time. But we will target over time with the X-Series also sub-55.

[Operator]

Our next question today is from the line of Casper Blom of Danske Bank.

[Casper Blom, analyst]

I have 2 questions. I'll just take them 1 by 1. On the -- looking at your full year revenue guidance and what has been delivered here in the first half of the year, it's a quite significant ramp-up that you're looking into here in the second half of 2023. And I was just hoping if you could give a little bit more flavor as to what you have done in order to make sure that the organization is actually ready for such a ramp-up. I mean, quick math, and it is at least DKK 100 million that you need to book here in the second half. So, what have you done to make sure that, that is actually also possible from a practical point of view?

[Sebastian Andreassen, executive]

Thanks, Casper. Your question is, of course, fully appreciated and the math looks the same from our side. We will need to deliver the majority of our order backlog to fulfill our revenue targets. What we have done on the organizational side is, well, a number of things, but on the manufacturing side, it is both a focus on, of course, making sure that we're bringing in the sufficient amount of people with the right capabilities and have them trained.

And secondly, our new key operating [ craftmanships ] has been working on redesigning our entire production flow line, which means that we, both from a capability point of view, but also on how we actually assemble the subparts of what will end up being a final electrolysers that has changed. And with those 2 -- what can you say, decisions or work done. We are now relying on receiving the subcomponents, especially around light heat exchangers and separators to fit them into our racks and electrolysers to allow these equipment to be delivered to customers.

[Casper Blom, analyst]

Okay. Is there anything that could go wrong in terms of the sourcing? You did, of course, touch upon the sales as if some of your key components are being delivered sort of a little bit ad hoc. Have you done anything additionally in order to make sure you also have the stuff you need to make sure the diesel electrolysers leave the factory floor on planned?

[Sebastian Andreassen, executive]

Well, Casper, I think the answer to that, it needs to be no. Not in the sense that we have not worked hard on doing the best we can to have the sub-suppliers lined up. However, the sites also continue delays we've seen during the summertime in our ability to deliver equipment, that is exactly because we have not yet received the sufficient amount of soft components, especially around the separators and light heat exchangers. And that means that to your question, can further things go wrong. We don't expect it to, but there is inherent risk that if we do not receive the components as required, we cannot deliver according to plan.

That said, we remain confident that we will get the equipment and the subcomponents and that we can start assembling relatively soon in a more serial mode, allowing us to deliver the megawatt and revenue output for the year. But it does come with an uncertainty, and we are being clear about that.

[Casper Blom, analyst]

And if one was to sort of then think into '24, '25 and '26, where hopefully you will be delivering even more -- much, much more than you are doing here in the second half. Is there a way to sort of make sure that those sub-suppliers also step up maybe using more sub-suppliers? Or -- how can you assure that?

[Sebastian Andreassen, executive]

Yes. I mean, absolutely. And as ever, I am and we are very transparent around our own journey here, our ability to estimate and assess our overall performance output, allowing us to deliver on the promises made. But also our ability to work actively also upstream from our business into the value chain and the supply chain around our things that also needs to improve.

That being said, we are, from a sourcing point of view, taking a number of different approaches. Firstly, as you're also alluding to here, we are trying as best as we can not to be relying on single suppliers. So we have a dual sourcing strategy or multiple sourcing strategy on many of these components. We also try to be unreligious, if you will, on our -- what we are doing ourselves in the sense that as much as we can lead to sub-suppliers, we will, and we become more and more distinct on what is core to us and what we want to control ourselves.

And lastly, we are also working on making these sub-suppliers delivering larger and larger sub-modules to our suppliers. So we are not relying on this very large currently amount of sub-suppliers to us, but we are getting more and more preassembled before we do the final assembling of the equipment. So a number of different procurement sourcing initiatives there.

[Casper Blom, analyst]

Okay. That was a long first question, out of 2. But the second 1 then goes to the X-Series. As we sort of wait for, hopefully, successful testing and first sales here later this year, are there any milestones that you would be announcing towards year-end that we should sort of keep an eye on?

[Sebastian Andreassen, executive]

We expect to announce following, of course, the proper internal treatment of that, but we expect to announce by quarter 4 that we have now landed a sufficient basis and robustness on the X-Series so that we can commence firm sales on that equipment. And that is an event that is taking place in quarter 4 of the year, not with a specific date yet. But that is the vending quarter 4 allowing us to take in the orders that will convert to sales by next year to fulfill our targets there. So that will be coming from the company in quarter 4.

Operator, please?

[Operator]

[Operator Instructions] And our next question today is from the line of Dan Togo, Carnegie.

[Dan Jensen, analyst]

Yes. Just to break down the issues here during Q2. I see there's twofold, right? You have quality issues on the A90 causing you at least DKK 35 million to DKK 40 million additionally. And then you have these supply chain issues causing delays. Are there any cost penalties, et cetera, attached to that?

And then following upon a bit what Casper was asking here, in the longer run, can you elaborate maybe a bit what these supply chain issues are and the impact here because if it's lack of capacity, I mean, that could potentially reflect on prices? And then you're seeing additional cost inflation when we go into '24, '25. What's the risk of such a scenario? So a bit of flavor on that, please.

[Sebastian Andreassen, executive]

Thanks, Dan, and good morning also to you. I will let Ole cover the first part on the cost and the penalty side and I will address your question on sub-suppliers costs and uncertainties after that. Please, Ole.

[Ole Vesterbaek, executive]

Yes. In respect to your question in regards to our ability to pass on some of the costs related to the quality issues on coding and other quality issues causing delays in the second quarter. We are constantly looking into improving our supplier base optimizing the quality. But in this specific instance, of course, also passing on cost and looking for the ability to claim penalties and cover some of our costs, which has increased due to these events.

[Dan Jensen, analyst]

Can you elaborate maybe -- sorry, just to understand here, you have sort of say, quantified the quality issues to these DKK 35 million to DKK 40 million. Will there potentially be anything on top of that relating to the supply chain issues in the form of penalties, et cetera, that impacts the second half?

[Ole Vesterbaek, executive]

We have accrued for LDs arriving from our contractual obligations to customers. So we don't expect to realize any additional penalties in respect to these quality issues.

[Sebastian Andreassen, executive]

Thank you, Ole. To the latter part of your question, Dan, on general sub-supplier situation. I do foresee that we are exposed to sub-suppliers ability to both deliver on time and at the right quality, I mentioned that because that is also -- that is already a point of experience for us, that we have seen that. That is indeed also a point that we have already seen on the separator and the light heat exchanger issues. As mentioned as part of the EBITDA adjustment we announced in May. We also made the active decision of switching from certain materials, nickel coating to stainless steel.

And what we are seeing now in terms of sub-suppliers struggling, delivering on the time is probably something that we and also other OEMs in the value chain, we'll see also going forward. I do think, however, that part of the obligation we have -- the task we have with an OEM is also to become better and better in managing the supply chain. And then also, as addressed to the prior question by your colleague from Danske then that also includes more active involvement of more than one sub-supplier on these things.

On the one hand, a lot of these components, most of them are relatively simple components. Stainless steel is known material, et cetera, et cetera. So it is relatively straightforward. On the other hand, these raw materials need to be manufactured to become vessels and subcomponents in our systems. And that means that sub-suppliers need to do further handling of the materials according to our design and quality and safety specifications. And that means that although it is relatively simple materials, there are some steps before these materials become sub-components in our systems, and that takes longer than expected.

[Dan Jensen, analyst]

These clients are they unique for green hydrogen? Or do they supply other OEMs with an electrolysers? So it's a more industry-wide problem? Or is it unique for green hydrogen? Do you have any knowledge of that?

[Sebastian Andreassen, executive]

Yes. Well, if not full knowledge, then I can confirm that some of these suppliers are unique to us. Others are definitely supplying the entire industry. And that means that it is also widely speaking, an industry phenomenon we're talking about. I also think a bit of defense comments for the entire industry here is that although stainless steel is stainless steel and has been for a long time, many of these components need to go into electrolysers that are being scaled for the first time. I think there is a bit of an industry learning there as well that some of the suppliers may have been on the market for many, many years, but they have not done subparts to electrolysers. And there is a first for everything and this is also quite new to the value chain.

[Dan Jensen, analyst]

And then maybe something relating to this as well. What are the -- can you just remind us what are the warranty provisions you intend to make going forward?

[Ole Vesterbaek, executive]

We have put aside the warranty accrues in line with our revenue, and currently, we are quite conservative in that respect. Over time, when we are getting more and more insight and knowledge in regards to the expected cost, it will drop gradually. But right now, we are accruing around 10% for our guarantee obligations. And in addition, specific provisions related to any quality issues which are determined with more specific [indiscernible].

[Sebastian Andreassen, executive]

Thank you, Dan, and also rounding off the nature of the questions addressed here by all of you, we can, from our side, management side, confirm that we are paying a lot of attention to our supply chain situation. It is clearly a prerequisite for us delivering on our promises and our targets that we get these subcomponents. Otherwise, we cannot do that in the timing that we have in our plan. So rest assured, that this is a higher tension topic for us.

Operator, please, back to you.

[Operator]

[Operator Instructions] And as we have no further questions entering the queue today. So it would be my pleasure to hand back to Mr. Andreassen for any closing remarks.

[Sebastian Andreassen, executive]

Thank you, Harry. Thank you, operator, and thank you, everybody, for paying attention. This is only for me to say thank you on behalf of the Green Hydrogen Systems team. We are working hard and look forward to reporting the next quarter results at the trading statement in November of this year. So thank you very much for now for paying attention to this call this morning. Thank you.

[Operator]

Thank you. This concludes the Green Hydrogen Systems interim report for first half of 2023. Thank you all for joining. You may now disconnect your lines.