Ceres Power Holdings PLC

LSE:CWR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentleman, and welcome to the Ceres Power Holdings plc interim results investor presentation. [Operator Instructions]. Before we begin, we'd like to submit the following poll. And I'm sure the company would be most grateful for your participation.

And I'd now like to hand over to CEO, Phil Caldwell. Good morning.

[Philip Caldwell, executive]

Good morning, everybody, and thank you for joining. I'm joined by Eric Lakin, CFO. And this morning, we're going to talk you through what I believe is a very strong set of interim results for Ceres Power.

So we've been having a fantastic year this year. We've signed 2 new stack license partners, major manufacturers and one system license partner this year to date. That's resulted in a record first half year revenue increasing by 144% to GBP 28.5 million and gross profit increasing also by more than 200% to GBP 22.9 million. That's backed by a record order intake of just under GBP 47 million in the first half. And we've been busy since then as well. So order intake, as we stand at the end of August is actually over GBP 100 million.

We now have 4 global stack manufacturing license partners progressing towards scale production. And it's not just that we have 4, but it's the quality of these people that we're working with the addition of Delta and Denso this year on top of Bosch and Doosan.

As a licensing business, it's essential, we maintain technology leadership, and I'm very pleased that our development on SOEC has gone very well. We have the 1 megawatt demonstrator currently being commissioned with Shell as we speak. And we've entered into a joint development with them on scaling that to 10-megawatt pressure electrolyzing modules and then enabling scale up to 100 megawatts to gigawatt scale plants.

So this year has been all about commercial acceleration. We started the year in January in Taiwan with Delta Electronics. This is a manufacturing collaboration for both SOFC and SOEC. So that's very important. It's the first one we did for SOEC, but also has the SOFC side of the license as well. We followed that up with the second manufacturing license for, purely for SOEC with Denso Corporation in Japan.

And then -- since then, we've also signed a system-level license, so a smaller level license, but equally important with Thermax Limited in India. This provides us entry into the dynamic high-growth Indian market. So 3 new major partners taking us into 3 new geographies.

On top of that, we continue to support both Bosch and Doosan as they continue to implement their initial volume manufacturing, and there's great progress there as well. And we have strong business momentum going into this year with additional license agreements leading to what we believe will be record order intake, revenue and gross profit, not just at the half year, but at the full year also.

I mentioned the technology leadership. It's been a relatively short period since we entered into the SOEC market. And I think this year is the first year where we're starting to see the benefit of the investments we've been making over the past few years coming through now in commercial agreements.

So as I mentioned, I was in India just a few weeks ago for the inauguration of the 1-megawatt electrolyzer at Shell center in Bangalore, India. and we're very busy getting on with the next level of the design of pressurized SOEC modules, which I think is quite unique in the industry.

This architecture scales readily to 100-megawatt plus building blocks that can take us into gigawatt scale, and we've done some work there with AtkinsRealis that we shared, I think, earlier this year as well. And also we're sustaining our leadership position in fuel cell technology. There's very few players in the SOFC market, and we have that leading position. And we've been working obviously with Bosch and Doosan and Weichai on that technology, and we've added Delta to the SOFC portfolio this year. So very strong progress on technology and on the commercial acceleration. And that's really underpinned the results that we're going to take you through this morning.

So with that, I'll hand over to Eric, our CFO, to talk you through the finances.

[Eric Lakin, executive]

Thanks very much, Phil, and good morning. I'm very pleased to announce a first half financial results, which are consistent with the high end of the trading update guidance we gave in July this year. And also as Phil said these are record set of financial results in Ceres' history. We have revenue of GBP 28.5 million, relative to the guidance we gave at GBP 27 million to GBP 29 million, and that represents a 144% increase from the first half last year. With the high growth and the strong revenue mix with a high contribution from license fees, that resulted in an 80% gross margin at the high end of trading update guidance and that represents a significant increase from the margin in the prior year period.

As a consequence, gross profit of GBP 22.9 million is over 3x higher than the first half of last year. As a result of high revenue and margin and whilst maintaining the cost base at comparable levels to last year, there's a significant reduction in the EBITDA loss from GBP 23.5 million last year to GBP 9 million loss in the first half of this year.

We finished the half with a cash balance, including short-term investments of GBP 126.1 million compared to GBP 140 million in the end of December last year. That represents a cash outflow of approximately GBP 14 million, so a significant reduction in the outflow in the same period last year of GBP 21.1 million.

And as Phil mentioned, as a consequence of the Delta contract plus some other orders, the total order intake for the half was GBP 46.9 million compared to GBP 15.4 million order intake in the first half of last year.

And on the back of the Denso contract that won at the beginning of the second half, we are today reaffirming the upgraded guidance of revenue for the full year to the range of GBP 50 to GBP 60 million.

So I just wanted to talk through the development of revenue and gross profit for the last 4, 6-month periods. And as can be seen, there's a significant uptick in the first half of this year, and that was largely driven by the recognition of revenue from the technology transfer for the Delta contract as well as revenue contributions from other existing partners.

As a reminder, our revenue segments are comprised 3 elements, at the moment, we have engineering services, which is effectively consultancy for our partners to support them to start of production in their stack manufacturing licenses, but also providing support for system development there is supply, which is provision of prototype stacks and components from our manufacturing excellence center in the U.K. to our partners. And then we also have license fee revenue, which is very high margin, and that can be recognized upfront in the form of technology transfer, but also elements over time through development license through the period of the manufacturing collaboration license arrangements we have.

As shown here, the significant growth in the half was due to the license fee revenue recognition from the Delta contract.

The fourth element of revenue in the future will come from royalties and that will be effectively 100% margin, and that's derived when our partners sell stacks or systems to third parties on commercial terms and we get a royalty from that. And we expect the first royalties to occur by the end of next year as Doosan stack factory comes online and they have commercial sales from their existing pipeline.

Despite the very strong growth, we were also ensuring we're managing our cost base. And that's a good example of the operational leverage of the business and also the asset-light model. And as can be seen from this chart, which shows the last 6-month period, the evolution of our costs and by cost, we include everything, including operating costs, capitalized development and CapEx. We have invested a significant amount in our SOEC and SOFC technology in recent years.

And during that time, we've met a number of important milestones through in R&D and also in our new product introduction for both sides of the business. And that's enabled us to a position where there's a natural reduction in spend on some of those projects, some of which are nonrecurring in nature, such as test and infrastructure build, the investment into our prototype factory and also the first-of-a-kind 1-megawatt demonstrator that Phil talked about, which is in the commissioning phase.

So as a result, we're in the position, as we indicated earlier in the year that our cost base will stabilize this year compared to growth in prior years. But in addition, we're in a position to optimize our cost base and we're announcing today, we are effectively implementing a restructuring in the business in this quarter, which will result in an approximately 15% reduction in headcount and also our overall cost base which will reduce our run rate of costs through into next year. And again, demonstrating the ability of the business to grow the top line whilst also managing its cost base.

As a result of that, we finished the half on a confident note, and we are well funded for future growth. With that, I'll hand over back to Phil -- I'm sorry, one more slide. So as a result of the revenue growth and margin improvement and also managing the cost base, we show the cash outflow of the business is reducing and the GBP 14 million outflow in the first half of this year compares favorably to the GBP 21 million in the first half of last year.

I should note in the second half of this year, we expect the cash outflow to be more than the first half. There's a number of variables within that. It also includes the one-off restructuring costs in the half. But I should emphasize the overall cash outflow this year is expected to be less than the total cash outflow last year.

So with that, I'll hand back to Phil. Thank you.

[Philip Caldwell, executive]

Thank you, Eric. So I just wanted to take the time to update you on the business strategy. Fundamentally, it's built upon 3 main pillars: the commercial acceleration that we've started to talk about this morning, technology leadership and how we execute both at scale and pace.

On the commercial acceleration, we've been putting a lot of work in over the last few years on the SOEC side. And we have a very compelling case, when you look at the business case for hydrogen, for green steel, green ammonia due to the high efficiency this technology brings, particularly in the areas for industrial decarbonization.

On top of that, we're also seeing new licensees coming in, both on SOFC and SOEC applications, and we're seeing demand on both sides of the business. On technology leadership, as I mentioned, we've got the demonstration with Shell and also the optimum architecture as we scale up towards 100 megawatts or gigawatts offering with this technology.

And the execution at scale and pace is about how we operate. The business model of this company is different. We're not a pure-play manufacturer. We're a licensing business. And therefore, what we essentially do is we leverage other partners' capabilities and balance sheets. And we have a compelling offering, not just do we have the world's best technology in solid-oxide but we can provide a factory blueprint. We can give people the means to how they can actually localize production and also localized supply chains. And that's quite unique in the industry. This is not purely a local play for us. This is a global play. And I think we're probably the only company of our nature in this sector that is actually addressing the global market.

So let's go into a bit more detail on some of these partnerships. So the first one was Delta, and this is a dual license for both power and hydrogen. So it was our first licensee partner to take on the SOEC license in addition to SOFC. You may be less familiar with Delta in Taiwan, but Taiwan, as you probably know, has a heritage in high-volume, high-quality manufacturing, Delta employs over 80,000 people. It operates at 200 facilities worldwide, has manufacturing, obviously, in Taiwan, but also in China, Thailand, India and has a strong ambitions to diversify into decarbonization solutions for energy infrastructure, grid balancing energy storage. It's already a big supplier into the data center in power electronics markets. So it's natural partner for Ceres. This agreement included revenues of GBP 43 million through the technology transfer and licensing and they're going quickly. So they are targeting initial production by the end of 2026.

The second major manufacturing license partner we added this year is Denso in Japan. This is a nonexclusive global license for cell and stack production, again, the same kind of structure as Delta, including license fees, engineering services and hardware over multiple years and it's of a similar quantum of value to our other licensed partners.

Denso is a Fortune 500 company, again, employing over 160,000 people, and it's world famous original equipment manufacturer with expertise in system control, thermal management, automotive supply chain. So again, a very high-quality partner to add to the service portfolio.

Talk about getting into different markets. Japan has all been big in hydrogen, but recently, it's now mobilizing JPY 15 trillion, equivalent to $98 billion over the next 15 years of public private investment. Japan obviously has some limitations in terms of its net importer of most of its energy. It's renewable constrained, and therefore, hydrogen and things like green hydrogen, green ammonia are essential to part of its energy policy.

So having a partnership in this key market for us in Japan is key with Denso. But again, Denso is a global player with operations worldwide. So we expect this partnership will address not just the Japanese market, but beyond. And it's our first pure SOEC license as well. So I think that's a testament to the quality of the technology that we've developed on the SOEC side.

More recently, we announced the partnership with Thermax in India. This is a system-level partnership and system licenses are -- while they're lower value than our manufacturing licenses. They're important in how we build out the ecosystem. When you think about the hydrogen value chain, we need partners all across that value chain that create the pull for this manufacturing technology that we have with our major partners.

Thermax already has a very well-established market presence in India. And India is, again, is one of the key markets for us as it moves from being a net importer of energy with ambitions to export green ammonia, green steel to the rest of the world. And Thermax is already a big provider of equipment into the process industry. It has a lot of experience with thermal integration, it does things like chillers for cooling, which is interested on the SOFC side, it has capability on EPC in terms of plants. So we think this is a great partnership for Ceres as well to address the Indian market.

And just taking a moment to explain the differences here. So we have 2 types of licensees. We have manufacturing partners and we have system partners. So on the manufacturing side, we now have 4 partners with the manufacturing license, Bosch, Delta, Doosan and Denso. And there, we provide the cell and stack IP for manufacturing and cells are integrated into the stacks, which are then ultimately integrated into systems. And we get royalties per kilowatt sold of stacks. That feeds into our system level partners. And now we provide different IP so we provide system-level IP for production of modules, electrolyzer designs, et cetera, and for fuel cell systems as well. So that enables us to go into these industrial processes through these partnerships we talked about. Again, same structure with royalties and upfront license fees and the royalties per kilowatt sold.

As you know, we've been more advanced on the SOFC side, it's a more mature side of our business. And now what we're seeing is our partners developing power modules for various different applications. Doosan scale it to 600-kilowatt modules, Bosch, the 20-kilowatt scaling to 100 kilowatts. And we're working with Weichai on scaling to 75-kilowatt modules that can go into megawatt scale, add to that, the recent addition of Delta.

What's interesting, I think, on the power side is we're starting to see, particularly in Asia and other parts of the world, more and more interest in distributed power generation and a trend that's coming about with increased power demand through AI, starting to put pressure on constrained grids. They need to generate your own power is meaning that this is becoming, again, quite an interesting market for our SOFC business on top of what we're now developing on the SOEC side.

And then as we get into the electrolysis side, which is the more recent development, I've already talked about the megawatt scale demonstrated, that will come online by the end of the year. And we've already signed the follow-on contract how we scale that into these larger systems. We did a lot of work earlier this year with AtkinsRealis, which has taken us through how this technology can be modularized. There's certain aspects of our technology, which are compelling because of our lower temperature, we're able to centralize a lot more balance of plant. It means that overall plant costs can be lower the materials that you use can be lower and it lends itself to, like I said, centralization of some of the key auxiliary equipment that you would need as you scale. We're also going into pressurize because we see that as giving a big advantage in the balance of plant on the compression stage for hydrogen as well.

And the model that we have is very similar to ARM in terms of we're building out an ecosystem, particularly to go after the green hydrogen market. So we operate with end users like Shell, who can see the compelling business case for this technology, and they want to pull this technology through. To do that, we need to work with EPCs and system integrators but we also now have a growing portfolio of manufacturing suppliers that could supply that industry as well.

So if you're looking at SOEC and you look at the service technology, you could have quite a diversified supply chain established with world-class manufacturers coming from Asia or Europe and hopefully in the future beyond that. So we think this business model scales probably better than anybody else's. It's asset-light, it's highly leveraged. And the quality of the partners that we have, I think, is second to none.

And that's emphasized, if you look at the global map now from British technology which we're very proud of. We've now got factories concurrently being built into Germany, South Korea, Japan and Taiwan. And these are the manufacturing powerhouses around the world. On top of that, we obviously have the relationship with Weichai on the systems side to address the growing Chinese market and also now starting to look at how do we access interest in markets like India.

I think also there's lots of estimates around the demand for green hydrogen. Some of those have been coming down in recent years. I think what is clear though is when you look at the market for green hydrogen, about 50% of this market is going to be for industrial decarbonization. So hydrogen has talked about as being compelling for lots of things, but for some things, it's essential.

So if you want to decarbonize steel, if you want to decarbonize ammonia, if you wanted to decarbonize future fuels, you will need green hydrogen as a feedstock. And that's where most of our partners are focused. And the good news is with SOEC technology, that's where we have this clear advantage on efficiency, about 25% or more clear advantage on cost and the thermal integration lends itself very well to most of those industrial processes.

I think from an investment point of view, if you're only playing in the European market, you're only addressing 6% of this global opportunity. The service business model is a cross-border model. So we do business globally. And if you look at where the decarbonization is going to happen, it's going to happen in China, it's going to happen in India, it's going to happen in Southeast Asia, it's going to happen in Europe and the U.S. and the rest of the world. With this business model from the U.K., we license technology globally. And I think we're unique in the industry and being able to say that.

So the outlook for the remainder of the year is extremely positive. three new licenses to date, two manufacturing licenses, very high-quality and system licenses as well. Bosch, Doosan, Delta and Denso now progressing towards scale production. So again, they all have incredible capability in manufacturing and scale up. We continue to grow the relationship with Weichai in China, particularly for the stationary power market, and we're seeing that trend I talked about have increased electrification now starting to put pressure on power grids and starting to create, I think, a more robust market for the SOFC technology.

We have demonstrated program on track for green hydrogen, both with Shell in India and also with Bosch and Linde in Germany. We're reconfirming today the guidance, which we upgraded in the middle of the year. So we've already upgraded once, and we're on track to achieve that with GBP 50 million to GBP 60 million of revenue, supported by the existing contracts that we already have and the order intake this year, which is over GBP 100 million coming into the business. And don't forget, because of the asset-light model, that's GBP 100 million of order intake of very high-quality margins. So there's nobody else in the industry to get anywhere near the margins that we do.

So we have a very strong financial position driven by this increased order intake. We are now optimizing the cost base. And I think that's because we want this business to emerge in the strongest position we can after a couple of years. I think of difficult trading situation in the hydrogen industry as this industry starts to grow, and we're starting to see that, I think service is well positioned from a very strong business model and cost base to exploit that.

So with that, I will take any questions.

[Operator]

Phil, Eric, thank you very much indeed. [Operator Instructions]. Patrick, if I may, just hand back to you just lead the Q&A.

[Patrick Yau, executive]

Thank you. Thank you, Mark. We now open the floor to questions. If you'd like to ask a question, please raise your hand and wait for the microphone to arrive. Thank you.

[Kenneth Rumph, analyst]

Thanks, all. Ken Rumph from AIB Goodbody. A couple of questions. One for Eric, on the cost. So last year, the costs were about GBP 90-odd million. As you say, you're on track for that, including capitalized and CapEx. You're on track for a bit less this year, the cost-saving program in the final quarter, is that going to be kind of finished and therefore, we can expect GBP 12 million, GBP 13 million off next year? Or is it going to take a bit of time to come through?

And for Phil, and Doosan said that they're going to be mass production next year. Do we know where Bosch are at? They simply not said. They sort of rethought their approach and sort of scaled at what they want to do in terms of size, but do we have any kind of timetable for that and congratulations, by the way, on 3 new licenses and great set of results.

[Eric Lakin, executive]

Great. Thanks, Ken. Yes, so your question around the cost base, the reorganization cost will all be absorbed and completed by the end of this year, so in Q4. And therefore, the run rate of cost will -- the benefit of that will feed into next year.

I won't give a precise number. There's a number of moving parts, and obviously, we continue to invest in the business with third parties, and particularly one of the major programs ongoing is the stack array module activity with Linde and Bosch. But to give you an idea of order of magnitude, we expect overall cost to be GBP 10 million also less than this year.

[Philip Caldwell, executive]

And the second question, Ken, was around the plans of Bosch and Doosan. So as you're correct, Doosan have officially said they're going to launch product, and we expect first sales next year 2025. Bosch are making progress, but they haven't officially said what their plans are as yet. And I think that there is development there in terms of what the scale of the products look like in the future. But that, again, a consequence of this business model is we can't actually speak on behalf of our licensee partners, which I'm sure you appreciate.

[Sean McLoughlin, analyst]

Sean McLoughlin, HSBC. A couple of questions. Firstly, on the cost-cutting, just to understand what is giving here. Is this just some of the R&D projects that have come to a natural end. Are you, let's say, cutting around the edges on admin and procurement. Is the R&D effectively continuing? How should we think about that cost-cutting drive?

[Philip Caldwell, executive]

I think the R&D effort is obviously continuing. And I think we have one of the largest R&D teams in the industry on solid-oxide. I think that we've -- over the last couple of years, we've invested heavily in new stack platform, conversion of some of our infrastructure for testing towards electrolysis, some of the first system development. So a lot of engineering manpower has gone into that. Some of that is going to come down and prorata across the business. some of the support functions will also come down as we come down on the headcount as well.

So it's going to be across the board but it's going to be driven by the completion of some of the major nonrecurring adherent projects that we've now gone through. And when we actually -- last phase capital in '21, it was explicitly for this move into SOEC. We're more or less on track in terms of what we actually said we were going to deploy, and that's now coming to a natural roll-off.

What we're now focused on is what's the steady state kind of cost base for this business. And again, to stress the licensing model, you shouldn't expect this business to grow linearly cost and top line. So we should be able to service a couple of new license partners a year with the cost base that we have and maintain the world-class R&D.

[Sean McLoughlin, analyst]

Second question is around the -- well, the partnerships and the U.S. specifically, there's a clear pivot towards Asia, which obviously is an area where I think we'll see a lot of hydrogen-driven growth. Just thinking about solid-oxide fuel cells and the natural gas opportunity that we're seeing in the U.S. around data centers. Are your partners, how are your partners targeting in the U.S? Are you still looking at U.S.-specific partnerships beyond what you have already just around the U.S.

[Philip Caldwell, executive]

Yes. Look, we follow the market. So we follow the market demand of our partners. And I think this is a trend that's just emerging on the fuel cell side. We're definitely seeing it coming through in Asia. And I think what's maybe slightly different in Asia, you're seeing a transition from coal to natural gas before you get to renewables and hydrogen. So even that trend is there. And in some geographies like Taiwan and China, that's more pronounced. But obviously, the U.S. and other markets are a key target for us as well on this as well. So the business model that we have lends itself to partnerships in all geographies really. But we've -- like I said, I think this is an emerging theme that's not going to go away now. So it's something that we're going to obviously look at quite hard as a business.

[Nicholas Walker, analyst]

Nick Walker from Peel Hunt. A couple of questions, please, Phil. First one is on partnerships. I think it's been mentioned in the past a few times that sort of plenty more opportunities in the hopper. I wonder if you could just sort of comment on sort of how you see them sort of coming through to fruition. Does the sort of the role that you're now on in terms of commercial partnership deals signed this year, does that help with other partners in terms of speed of getting on, if you like.

And just on that, you mentioned I think it was about a year ago, sort of in terms of a global infrastructure for Ceres with respect to sort of stack and system partnerships. I think you said something in the order of 5 to 6 stack partnerships potentially globally is a reasonable number, supporting perhaps 20 to 30 long-term system partners. Is that still a sort of configuration that you see, medium to longer term? And in terms of the hopper, if you like, is the buildout sort of progressing towards that, if you like.

[Philip Caldwell, executive]

I'm not going to comment on the hopper because it's very difficult to forecast. If you think about the kind of deals that we do, these are major corporate development type deals. And we've always guided if we -- a way to think about this is if we do one major manufacturing license partner a year, the cash burn of this business is pretty low, and we're building that market share, and we want to be -- have that we want to have the biggest market share in solid-oxide.

If in any year, we got 2 partners, this business is more or less cash breakeven. And I think people need to get their heads around this is a very asset-light model that we have. So that's the way we look at it. Now it's very hard to predict when we get these major deals, a bit like London buses , you might not have one for a while and then you might get 3 at once. So I'm not going to be drawn on that because it creates a bit of an issue for the business.

But in terms of the opportunity, we expect more end users than manufacturing license partners. But actually what we're seeing now is depending on incentives and national policy, you can start to see localization of manufacturing. And we're nowhere near, nowhere near the capacities that the market could sustain. So I think we're going to look at this both on the EC and the FC side going into the future. But for this year, we've already contracted sufficient to give us the confidence on the upgrade to the guidance we have but we obviously continue to chase partnerships and chase license deals all the time. That's what we do.

[Nicholas Walker, analyst]

Okay. Second question, on the EC side, you've referenced obviously key markets that you're targeting or partners targeting steel, ammonia, e-fuels, et cetera, et cetera. With respect to sort of timing of the maturation of the technology and getting the end user customers, and it's also your partners' end-user customers in terms of those steel manufacturers, the ammonia producers, the e-fuels producers. Obviously, you've got your test happening commissioned or commissioning now in India with Shell, which I presume will produce some meaningful results and obviously Shell, that's really solid sort of partner in the refining market and other markets.

Question is, I suppose, with respect to the other technologies that are out there in the market, you've got mature alkaline, you've got PEM, obviously, doing its thing. You've got sort of doing bits and pieces at smaller scale. And they've got 1 or 2 other solid outside players. What's the sort of speed which you can foresee these trials, the sort of 1 megawatt turning into 10-megawatt turning into sort of slight thing and then getting into steel plants of maybe 20 to 50-megawatt scale then going into the hundreds. So how do you see the maturation and in terms of the sort of deployment in real world, hard to...

[Philip Caldwell, executive]

I think that's -- it's a great question. I think the -- what we're doing is we're doing things in parallel. So really, the megawatt scale demonstrator is really a test base that we do lots of things with a partner like Shell, and we can also share that data with other partners like Bosch and Linde and others. Some of the images you saw in the slide deck are the pressurized modules, which we're intending to have on test by the end of next year. And again, that will give us a whole of the level of technology, and that's moving quite quickly. So while we're building and testing the first of a kind, we've already do partnerships through the voice of the customer like Shell through the work with Atkins, we're working on the next generation of this technology.

Now, when you say about maturity is key. I think a few years ago, everybody was saying, well, the hydrogen market is going to grow so fast. And if you're not in the market already, you're going to miss it, and it's all going to be alkaline and PEM. We've seen a major slowdown in the rollout of that. Maybe that's not bad for solid-oxide technology. What we're also seeing is when end users look at the business case, the business cases for solid-oxide with the thermal integration is so compelling that they want to pull this technology through.

Now the people who are licensing at the moment, you could say are early adopters is -- it hasn't been deployed at scale, but they're still very credible organizations like Denso, like Delta. I think once we actually get to those proof points on maturity, then you'll get some fast followers. And that's where I think the hopper point that you asked about earlier, that can start to -- probably accelerate a bit on the electrolysis side. But I think we have work to do on the technology side to demonstrate the maturity.

Now that maturity, don't forget, is built upon the 20 years or so that we've invested in the FC technology because this is broadly speaking, the same cell and stack technology. So we have a really strong starting point. And I think that's enabled us to go, I think, relatively rapidly into this market from a standing start of just 3 years ago.

So I think the time line, if you look at Delta, Denso, et cetera, you're probably talking about '27, '28 onwards, where you start to see solid-oxide, I think being in that scale. But already, we're talking about, well, how do you demonstrate this at 10-megawatt blocks because once you have the 10-megawatt blocks, then it's very easy to go 10, 100 gigawatts. So it's modular, it's very modular, like I said.

[James Carmichael, analyst]

James Carmichael from Berenberg. Just a couple from me. So just on the Delta agreement, I guess you're sort of 9 months into that now. Can you provide any color on how it's progressing just in terms of tech transfer. Are there any sort of additional challenges of having both the SOEC and SOFC involved in that? And obviously, I think you mentioned they're still on track for sales in '26.

Coming back to Bosch as well, well, I know you can't sort of speak for them specifically, but progress on the SOEC side is a little bit slower than maybe we hoped, but they're obviously still very engaged on the SOEC side. So just wondering if you're seeing a bit of a shift in emphasis in Bosch maybe towards electrolysis over the fuel cell market.

And then lastly, maybe just quickly for Eric. I guess given the Denso deal that came in July, I think, what's sort of gross margin outlook for the...

[Philip Caldwell, executive]

Okay. So taking those in order. On the delta side, the technology transfer has gone extremely well. We had a very large -- and it gives you an insight into how we do this. We had a very large delegation from our Taiwanese partner living in Horsham for about 3 months, which is quite an interesting dynamic. And interestingly for us as well, we had some of the world-class manufacturing people that they have, who operate plants in Taiwan, China and everywhere else and looking at levels of automation, et cetera, that go far beyond what our limits is at Ceres. So I think it's gone very well. It's on track.

In terms of the FC versus EC side, that's their domain in terms of their system development. But so at the manufacturing cell and stack level, it's the same factories will service both. So I don't think there's any additionality issues there.

On Bosch, the question on Bosch, I'm not seeing any diversity of thinking on or moving from FC to EC. I think what we've seen on the fuel cell side in the past few years with the Ukraine situation has been -- there has been a bit of a cooling in Europe towards natural gas-based power products, et cetera. However, I think, as I said, the trend globally is somewhat different. So I still think the FC side is the main priority for Bosch right now. And if you go on their website and you see the deployment, the testing that they're doing, it's on the FC side to date. The EC side is a new initiative, which again, we will test with Bosch in conjunction with Linde and that will follow. But FC is the main priority.

[Eric Lakin, executive]

And your third question about outlook for gross margin for the year? So on back of the Denso. So the Denso arrangement, similar to Delta, will involve tech transfer this half. So that significantly supports both the revenue underpins the full year guidance, but also provides high gross margin. It's worth noting, though, also in the second half, there will be a high component of stack shipments to support existing partners. You'll see the balance sheet at the end of June this year. There's an increase in inventory to support that. So the mix will be different, even though there's still a high component of technology transfer, license fee income, so the second half gross margin, while still highly less than the first half. So for the full year, you're looking in the range of 75% to 80%. So they're still very high, but not as high as the first half.

[Skye Landon, analyst]

Skye Landon of Redburn Atlantic. You've got 4 manufacturing partners across EC and FC now, which means that there's 4 companies out there developing equipment based on your technology, which is great. But going forward, does that change your conversations that you have in with potential new customers around how they think about entering the market? Are they worried by the fact that their new products would be competing with existing technology that's already out there in the market? And does this mean that you need to be more selective with partners going forward?

And then secondly, just more of a clarification on the GBP 50 million to GBP 60 million revenue guidance. Is this a total revenue guidance for the year, including any new partnerships? Or is this more of an underlying guidance from existing partnerships in it?

[Philip Caldwell, executive]

Do you want to talk to the guidance?

[Eric Lakin, executive]

Yes, sure. No. So yes, thanks for the question. So the revenue guidance is based on the existing contract base, including Denso. So any material new contracts would be upside to that. At that point in time, that's the right range supported by contracts.

[Philip Caldwell, executive]

On your question about manufacturing partners. Again, you have 2 sides to this. One is, I think people are coming to Ceres because of the company that we keep, so the quality of our partners means that if you're serious about solid-oxide and you wonder how to do due diligence on this, does it scale? Can it be mass produced, can it be done at cost? Is there a supply chain, then you kind of look at our -- look beyond service to our partners and go, okay, if it's good enough for Bosch, is it good for Denso, they know what they're doing, it's good enough for Delta. So that effect is starting to happen and early adopters, fast followers. I think that is there.

Now then you get a little bit of, well, do they want to compete necessarily with some of those high-quality partners? We have been somewhat selective -- self-selective because let's be honest, if you're going to enter this market, you need a very strong balance sheet. So the self-selection tends to be Fortune 500 type global mass manufacturers. A lot of those guys are not necessarily intimidated by some of the competition. But I think what you start to see is this regional effect as well, which is, for example, Denso operating in Japan is covering potentially a slightly different market than, say, Bosch would in Europe and again, have different licenses at this time.

Delta in Taiwan obviously have a an outlook that goes far beyond Taiwan into Southeast Asia and globally. So I think there's room for more of these Fortune 500 type mass manufacturers globally. Can they coexist with some of our existing ones? Yes, I think they can, but they need to be of a similar caliber I think, is the key.

[Unknown Executive]

Any more questions from the room? Perhaps, Patrick I may hand it to you just to take any online questions that come through.

[Patrick Yau, executive]

Thank you, Mark. We have time for 1 or 2 questions, I think. Just picking up on that point, Phil, can you confirm what level of exclusivities manufacturers may have, if any? Is there anything on a country by country or regional basis?

[Philip Caldwell, executive]

We don't have any exclusivities with manufacturing partners on cell and stack. So we intend to operate on a nonexclusive basis because once you start to grant exclusivities, we limit the scope of the business, and it starts to get very difficult in how you actually write these license agreements because you have -- you start to have to carve out. So our standard is a nonexclusive basis.

[Patrick Yau, executive]

Great. A couple of financial ones for you, Eric. Yes. Firstly, in a typical license deal, when do you expect to receive cash compared to the timing of revenue recognition? Is there difference there? And secondly, do you have any thoughts about when the business might become EBITDA positive?

[Eric Lakin, executive]

Yes. On the first one, of course, the accounting standard for revenue recognition, IFRS 15, dictates that we recognize revenue as we perform on our obligations, it doesn't necessarily tie with the cash receipts. But so it varies by contract. And you can see the movements and the difference on the balance sheet with our contract assets and liabilities. So that's the effectively accrued and deferred revenue. But it broadly follows, so for example, a typical license is a significant element of upfront technology transfer. And we'll have invoicing milestones and payments that are broadly consistent with that. the timing of vary and there's payment terms, but it's broadly consistent, similar with development license and engineering services the cash flows and billing milestones broadly follow the revenue recognition with some timing differences.

Hardware is more straightforward, we invoice on shipments. So there'll be some catch up on any given period end on between cash and revenue. In fact, some contracts, we're getting cash ahead of revenue, it's deferred income and some it's the -- we're getting the revenue ahead of the cash accrued revenue, it depends, but it is broadly consistent with rev rec.

And the second question on EBITDA positive, I'm not going to give any medium-term guidance. But as Phil said, with the current revised optimized cost base, in a year, we get 2 material stack license partners, we should expect to be broadly profit breakeven.

[Patrick Yau, executive]

A couple for you, Phil, on government policy. So how's the new labor government given any financial incentives towards electrolyzer production in the U.K. And what sort of incentives would be helpful for Ceres? And how is the company engaging with government to try and make this happen?

[Philip Caldwell, executive]

I think to answer the first part, not yet. I think it's too early to say. What would help, I think, is government support, not just in terms of looking at the U.K. in terms of offtake for hydrogen in the U.K. but actually look at the business opportunity that companies like Ceres represent. If you look at this industry and you think it's a trillion industry, all our license partners see clearly a big business opportunity. They don't see a cost, they see an opportunity.

And I think in the U.K., we need to start thinking that way, which is what's the next industry for growth in the U.K. And if clean energy, clean tech is going to be part of that. We've got some world-class companies here in the U.K., which the government should get behind, I think. So any help that they can give towards R&D manufacturing scale of these businesses would be very well appreciated.

We're seeing this happening elsewhere, we've seen it with IPCEI funding in Europe, IRA funding in the U.S. I talked about Japan, talk about India. We indirectly benefit from other countries government policies because of our licensing model. So when we license technology to our partners, they are often also benefiting from local government support. But that's because of our business model. Without that, I think the U.K. is in danger of being disadvantaged because proactively, other countries see this as being strategically important for them. So I think the U.K. needs to also follow suit and make these companies' strategic areas of investment for the U.K. going forward.

[Patrick Yau, executive]

Final questions are really around electrolysis. So can we offer any insight as to why Denso only chose to take out an SOEC license. Do they have an activities in SOFC? Then finally, have any of our partners book firm orders for electrolyzers?

[Philip Caldwell, executive]

I think it all depends on the business case and opportunity that our partners are looking at. So with Denso, they're clearly focused on, as I mentioned, that green hydrogen opportunity in Japan. I can't -- again, I can't talk for those people. But if you start to look on that public material, you start to see the arrangements that they've got in place with off-takers and some of the business that they're starting to target. So they're all publicly traded companies. You can see that for yourselves. So I think -- what was the second part of the question?

[Patrick Yau, executive]

Have any of our partners booked firm orders for electrolyzers?

[Philip Caldwell, executive]

I think at this stage, that's too early to say. I think when they do it's up to them where they disclose that.

[Operator]

That's great. Thank you very much indeed, Patrick. Eric, Phil, thank you very much indeed. I'm sure you can redirect those online to give your feedback but perhaps before doing so, just ask you for a couple of closing comments.

[Philip Caldwell, executive]

Yes, certainly. Look, I think today, we presented a very strong set of results. We're very proud of these results. I think it's a testament to the hard work that the organization, the wider business has put in over the last few years. And I think we're starting to see an emergence -- a very strong emergence from the last few years for Ceres. And I think the industry opportunity is very significant going forward. So I think we're looking forward to the full year and beyond. And our job here is to position Ceres from a position of strength to really grow. And I think that's what we're talking about here.

I'd also like to thank Eric because we are going through a transition of the CFO. So this will be Eric's last interim results, and we also have y Stuart Paynter in the room today introducing our new CFO. Very excited to have Stuart onboard, and there will be a very smooth transition and hand over there as well. So thank you to Eric as well.

[Operator]

That's great. Thank you, Phil, Eric, Patrick for updating investors. We'll now redirect those online to provide their feedback. Good morning.