Green Hydrogen Systems A/S

CSE:GREENH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone, and welcome to the Green Hydrogen Systems Q2 2024 Interim Report. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Peter Friis, CEO, to begin. Peter, please go ahead.

[Peter Friis, executive]

Thank you very much. Good morning, and welcome to our webcast. Today, we will present the first half year results for 2024. Today's presenters are Soren Rydbirk, CCO; Ole Vesterbaek, CFO; and myself, Peter Friis, CEO. We will go through our business highlights, the financials, and the guidance. At the end, we will be open for the questions.

Now I'll start going through the business highlights. At the moment, our turnover is driven by our A-Series business. During the coming year, our business is expected to transition to X. We currently produce our A-Series units, and we see good progress in our capability in sourcing, assembly, and tests. We clearly benefit from all our product improvements that we have implemented. Together with the expanded test capacity, we have good conditions for delivering the planned deliveries for the second half of '24.

We constantly collect and analyze fleet data to improve performance of our product. Our improvements are being rolled out through our retrofit program, and based on that, we see step-by-step better performance in our installed fleet.

I'm really excited. The X-Series is the best product that we've ever had. '24 is the point of time where our X-Series meet reality and we start doing X-Series business. 2024 is also the year where we see the results of all the good work that has been done by our design team designing the X-Series. The X-Series prototype continues to improve performance through our extensive test programs. Our facilities in Kolding are now prepared for building the first X-Series units. Our customers acknowledge our efforts and our dedication to deliver a high-quality product.

The next step is to ensure competitiveness and profitability. And part of that exercise is a cost-out exercise. We have already initiated that work. As we transition our business into X, we also depend on X-Series order intake. [indiscernible], we have never had a better product. And based on that and based on our positive ongoing customer dialogues, we expect order intake on the X-Series during the second half.

Now I'll hand over to you, Soren.

[Soren Rydbirk, executive]

Thank you, Peter Friis. In 2024 first half, we secured new order intake of above 8 megawatts from the A-Series. At the same time, we delivered 6 electrolyzers around 5 megawatts to customer sites in Sweden, Germany, The Netherlands and the United Kingdom. We still have 15 megawatts scheduled for delivery in 2024 and '25, and that will bring our installed capacity above 26 megawatts across 9 countries in Europe, including Australia and Sweden. As our CEO, Peter Friis, said, the X-Series product is the best product ever that Green Hydrogen Systems has been able to bring to market. We see strong customer interest for the X-Series product.

Let me elaborate a bit on the sales process and the steps. In February, we reached technical proof of concept from the X-Series based on our prototype in Denmark. And based on further reliability test, as a second step, early July, we have been able to provide binding offers and performance share-based pricing structure to select customers. And as a third step, early July, we will step into binding offers for full commercial terms around the X-Series.

It's important to note that our customer dialogues around the X-Series goes several years back. We have customer dialogues all the way back from 2022 and '23 around the X-Series. It's also important to note that the customers in those dialogues are very far with their project maturation. They have sites in place, they have offtakes in place, and they're working to get the final project financing in place. With all this, we have high trust that we will achieve the first order intake from the X-Series in 2024.

In terms of the market outlook, the development in the market fundamentals continue to support a future green hydrogen based energy sector. We still see hard-to-abate sectors where we need green molecules coming from green electricity. We are starting to see the EU Hydrogen Bank coming in place and into play. And lately, here in July, we saw several final investment decisions coming through, many of those from energy majors such as Shell, BP and RWE. I think that is strong.

We, of course, also see that the market is facing challenges due to high project costs, complex value chains, and limited offtake, and we especially see that for multi-megawatt large scale projects. But if we are looking into our pipeline and customer dialogues, we also see a midsized segment of 50 to 100-megawatt projects, which are feeding our X-Series very well progressing. In this segment, we see players that are really, really strong to create offtake and control the offtake, and they are really, really strong at integrating projects all the way from renewable energy up to the use of hydrogen. This capability you see, especially in this segment of 50 to 100 megawatts, and we are very comfortable with that.

[Ole Vesterbaek, executive]

Thank you, Soren. In the following, I'll walk you through the key takeaways from our first half year financial results as well as updating you in regards to our full year estimate for 2024. We have, as just outlined by Peter Friis and Soren Rydbirk, realized a lot of progress in regards to our A-Series and our ability to test in Kolding as well as delivering A-Series to our customers. .

As a result of the business performance, we have concluded our first half year financial results by realizing a net revenue of DKK 32.6 million, which are more than doubled compared to the DKK 14 million in the first half of 2023. The revenue is heavily impacted by late delivery fines, which means that we can't link our revenue per megawatt directly to our sales prices.

Our EBITDA is improved by DKK 30 million compared to first half of 2023, due to significant lower retrofit costs than we experienced last year. Then we have overcome the highest share of our investments, which means that our investments in the first half amount to DKK 66 million, with DKK 90 million lower than last year. Finally, our cash and cash equivalent balance by end of June is DKK 360 million.

Looking into our balance sheet. It's DKK 2.2 billion compared to DKK 1.7 billion last year, which are a result of our rights issue capital raise process in 2023. Our stock is slightly higher due to the final season of a number of electrolyzer units in our warehouse.

Yes, then I would like to go through our full year expectations in regards to our guidance. So when it comes to our guidance, reflecting our full year expectations. Yes, our guidance is based upon our realized figures for the first half year as well as our latest full year forecasting, reflecting our ability to meet the full year expectations we have communicated 8th of February this year. And Green Hydrogen Systems maintains its ability to achieve the guidance previously communicated, which means that we are going to deliver revenue in the range from DKK 125 million to DKK 165 million, and EBITDA from minus DKK 220 million to minus DKK 260 million, and total CapEx investments between DKK 160 million to DKK 200 million.

I'll now hand over to Peter Friis for closing comments.

[Peter Friis, executive]

Thank you very much, Ole. We maintain our guidance for the full year. We continue to navigate in a challenging market, and our industry definitely needs political support. Our strategy is to continue to improve our products to make sure that we deliver the best possible solutions to our customers. We see clear improvements on our A-Series and our ability to deliver. I have a good feeling and have a good confidence in our X-Series product. The test results are good, and we have promising customer dialogues.

We are now open for questions, and I will hand back to the operator.

[Operator]

[Operator Instructions] And the first question comes from Dan Togo of Carnegie.

[Dan Jensen, analyst]

It's Dan Togo from Carnegie. A few questions from my side here, and I'll just take them one by one. Firstly, regarding the X-Series. You explained that you had some commercial dialogues, and you also explained that some of them might include some performance-based pricing structure. Could you elaborate a bit on this? How is this composed? And what does it do to the payment profile once we see the orders from this floating in? That's the first question.

[Soren Rydbirk, executive]

Yes, sure. I'll answer that. The performance-based contract is for select customers where we are deep into the customer dialogue and where we are getting close to a final project. It's a contract where we are, you can say, providing a discount on the total price upfront. And then we are delivering the equipment to site. We'll have an extended test period for these projects, and they will be the first of its kind for the X-Series. And during that test period, we'll have a performance test.

Based on that performance test, we'll add a variable, you can say, price structure, or variable fee on top of the base fee that will go all the way up to the full price. That essentially means that we are sharing, you can say, the risk for the first unit in terms of availability. And we, of course, do that because we expect to get a higher availability. We see that on our prototype. And thereby, we also dare to go in with [indiscernible] to help the first projects of the X-Series.

[Dan Jensen, analyst]

And the payment profile, so to say, the cash component, how is that impacted by this?

[Ole Vesterbaek, executive]

Yes. Let me elaborate. The cash profile is based upon our standard expected installments for a commercial unit, but calculated with a lower sales price, which means that the amounts are going to be smaller. But based upon the same payment structure as a full commercial product.

[Dan Jensen, analyst]

Okay. Understood. Then you also mentioned here that you are entering into a second base reliability testing for the X-Series. How many of these testing bases is left? And what is it that is critical to test right now? I just want to get a feeling of when you sort of say, out of the woods and this product is commercially viable?

[Peter Friis, executive]

Yes. It's Peter Friis answering the question. Thank you very much. First, it's very, very important for us to document that we have a bankable product. And this means actually that the specifications that we are promising our customers that we can deliver, we have validated those parameters. Now it's left to document our reliability and uptime of the product. And we are progressing extremely well in that program. And we are very close to launching the product for full commercial sales. So that will happen relatively soon.

After that, we will, of course, continue to do the testing, because it's very important to learn all we can about the prototype.

[Dan Jensen, analyst]

And I understand that, yes, this will also be beyond the first commercial orders, as you mentioned just before here. So understood. Then Ole, you mentioned you cannot compare what you deliver and the revenue before. I have, of course, done the math backwards here to see what the ASP is on what you deliver. Is there anything -- can you just elaborate a bit what is the technical part that takes down revenue at the moment? Are there any penalties, et cetera, so that we cannot compare what you deliver in terms of megawatt and the revenue component?

[Ole Vesterbaek, executive]

The units being delivered at the moment, some of the first units we have sold, which means that those where the [ LDs ] has been kept, and thereby, the sales price is significantly lower. So in the second half of the year, we are going to deliver some of the latest sales orders, which means that the sales price per megawatt is significantly higher. Yes.

[Dan Jensen, analyst]

And could you give a value of the order book as it stands right now? You have these 15 megawatt for delivery. What is the value on that?

[Ole Vesterbaek, executive]

In regards to order backlog, we have and we are only going to announce the megawatt, and not be able to both reveal the ASP as well as the megawatt. So the order backlog is currently 15 megawatts.

[Dan Jensen, analyst]

Okay. Understood. And then just to understand how exactly you get to this 15 megawatt, because you had 17 at end '23. You have 15 now at end first half, but you have received orders of 8. But you have only delivered 5. I would say the pure math should suggest that you have delivered 10, but you have only delivered 5. What is the difference here? Has anything exited the order book?

[Ole Vesterbaek, executive]

During the period of time, we have had 2 cancellations, which are the difference you have calculated.

[Operator]

[Operator Instructions] And the next question goes to Casper Blom of Danske Bank.

[Casper Blom, analyst]

Just a couple of follow-ups from me. You mentioned in the statement today that at sort of first launch, you expect to have the available capital you need into '25, depending, of course, on prepayments from X-Series. Could you help us a little bit understand how much prepayments or how many prepayments on the X-Series you need here in the second half in order to feel comfortable with your capital position into '25? That's the first one, please.

[Ole Vesterbaek, executive]

Let me elaborate. As a part of our rights issue capital raise mid of 2023, our simulation model and the estimates of the midterm targets were based upon a number of assumptions in regards to the business development. That, of course, are both associated with the revenue, our production costs, our order intake, and thereby, when the prepayments are going to be realized, we expect it, and it's material for our midterm financial and operational success to get the X-Series orders from a capital reserve and prepayments are important, as also outlined in the prospectus. So we need a number of A-Series orders. It's, of course, depending upon the size how many orders we'll need in the second half.

[Casper Blom, analyst]

To clarify, you said A-Series orders. So it is X-Series?

[Ole Vesterbaek, executive]

Yes, we have sufficient A-Series orders right now and only need to deliver our backlog to stay well within our guidance range for revenue.

[Casper Blom, analyst]

Then my second question actually goes back to the annual report, where you wrote that you would be revising your medium-term targets in 2024? Any update on when we should expect such a revision?

[Ole Vesterbaek, executive]

We are going to revise the midterm targets later in 2024 when we know more details in regards to our reliability, our dialogues with X-Series customers, and we have a clear picture to which extent the X-Series orders are going to support the future midterm plan.

[Casper Blom, analyst]

Then my last question just goes to the -- so there was a 500 or 550 megawatts of dialogues that you highlight in today's report. Could you elaborate a little bit? Are those projects that you have sort of exclusivity on and sort of that basically, if everything goes well, everything will turn into orders and then it becomes sort of a matter of whether or not these projects go through? And if also you could provide any kind of time line as to when we could expect this to turn into firm orders?

[Soren Rydbirk, executive]

Yes. Soren Rydbirk. I will take that. It's a pipeline of many, many, many projects, and we are talking here several gigawatts of a project pipeline where we have selected around 500 as priority 1 projects. These projects are projects of 1 to 2 units. We have many of those. And you also have projects of 22 to 50 and 100 megawatts in there. So it's a mix of that kind of projects.

As said, it's expected that we close the first order here in 2024. And it's also quite different sales processes. You can say, for some of 1 to 2 unit projects, it's projects where we are in final negotiations, seeking to help projects to materialize among 1 to 2 players left in the final race. So you have these kind of projects, but you also have large projects that have been in planning and project dialogue for, you can say, up to a couple of years, where we are looking at other sort of final tender processes, in the race of that, or we are looking at larger reservations of capacity for projects built out.

If you're talking about exclusivity, we have actually none of that. But I can also say that we have been awarded through FEED studies by EPC companies winning those, which puts us in a good position, of course. And now we're in final tender. And we have also supported some of those projects, ensuring funding over the last 18, 24 months.

[Casper Blom, analyst]

Thanks, Soren. Looking forward to see what happens in the last 4 months of the year.

[Operator]

We have no further questions. I'll hand back to Peter for any closing comments. We've just had a follow-up from Dan Togo of Carnegie.

[Dan Jensen, analyst]

I was just wondering here, what does the statement that you have, that these very large projects now are challenged, we've seen some cancellations, et cetera, to the market outlook that you have? I mean, in order for this technology to really go commercial and be competitive, we will need very large projects. So what does this do to the market outlook? Are we still going to see these very large projects, but at a later stage? And then will the curve be more flattish and then we'll have a huge hockey stick at the end, just a few years out and closer to 2030 or something like that. Could you give some color on how you see the market?

[Soren Rydbirk, executive]

I think if we're looking at some of the larger projects, we are seeing them slipping in time. So it takes longer time to mature and get the full value chain in place. It is integration between renewable energy, electrolyzer capacity and sometimes even sort of further processes to get to green fuels. And that's a quite complex value chain. And I think the industry, in general, are seeing that, that takes a longer time.

The bigger the project, the more complex it becomes. And I think several players are seeing that you probably need to take a stepwise approach, trying to phase some of these projects. And thereby, we see some chunks of those projects being in, let's say, 100-megawatt scale instead of 500 megawatts. So that's a slower progress, but still, I would say, quite a big uptake in the market.

[Dan Jensen, analyst]

And where are the challenges? Is it on the electrolyzer side? Or I guess the renewables, the wind, the solar, et cetera, they have been up and running for a long time. Where is it especially that the challenges are to get to these larger-scale projects?

[Soren Rydbirk, executive]

You cannot point to 1 element only. As mentioned, it is a complex value chain. If you're talking multi-megawatt projects, you need massive investments still in renewable energy to feed into that. So that is 1 thing that needs to get in place. The other thing is the offtake. And here, you have still higher project costs in many instances than what the market is willing to pay for. And that is also why we need regulation to support when it comes to scaling this.

Then in midsized range of projects, you have some developers and asset owners that are creating their own offtake. They are maybe decarbonizing their own operations, replacing fossil fuels by hydrogen. If they're sitting on the offtake themselves, it's easier to progress projects. But again, those projects are typically smaller than when you're talking about green fuel projects for methanol or ammonia.

[Operator]

Thank you. Back to you, Peter.

[Peter Friis, executive]

Yes. Thank you very much for participating today. I have no further remarks.

[Operator]

Thank you. This now completes today's call. Thank you all for joining. You may now disconnect your lines.