Ceres Power Holdings PLC

LSE:CWR

Earnings Call Transcript 2022-Q4

[Operator]

Throughout this recorded presentation, investors online will be in listen-only mode. [Operator Instructions] Given today’s attendance on the call today, the company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it’s appropriate to do so. Before we begin, we’d like to submit the following poll and your participation will be warmly received.

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

[Phil Caldwell, Chief Executive Officer]

Good morning, everybody and thank you for joining myself. And I am with Eric Lakin, CFO and Elizabeth Skerritt, Director of Investor Relations. And I am very pleased to update you on our final results for 2022. Many of you know the company but just to remind you of our positioning, we are one of the world leaders in solid oxide technology for both power generation and for green hydrogen. We have a very unique technology, which is protected by well over 100 patent families and growing all the time. And because of that, we operate a high margin licensing business model, which is unique within this hydrogen sector. And because of that uniqueness, we are able to collaborate with some of the world’s leading companies to deliver clean energy technology at the scale and pace that’s required to actually address climate change.

The past year has been another year of progress. And I think it’s only when you stop and look back that you realize some of the key milestones that the company has achieved. And I am going to talk through these briefly before I hand over to Eric, who will go through the details and financials. And then we will come back and talk a little bit more about the business strategy and give you a chance to ask questions at the end.

So just taking a look at the progress we have made in the past year this business model requires us to licensed technology and enable our partners to scale manufacturing. This is all about scale. And I am pleased to say that we are making good progress with our existing licensee partners, Doosan’s factory in South Korea, we don’t talk about too much, but that’s now underway. And we expect to come on stream in 2024. Bosch, we talk about quite a lot, but there are, our lead partner and they have put in place their investment plan which will total up to €500 million and again, a scaling the technology in Germany. We are making progress with Weichai. They achieved certification for their stationary power system in China this year, again, something that’s not been talked about too much, but it’s quite a big step forwards and obviously something that we want to put into the China joint venture.

We have expanded the business quite significantly, quite dramatically into electrolysis. And it’s gone very well in terms of our first 100 kilowatt modules on test this year and it’s already demonstrating class leading efficiencies. And we will talk a little bit about that later in the strategic section of the presentation. And on the back of that we have started to build the ecosystem of partnerships for electrolysis, with the same quality of names that we have done on the power system side. So we have added Shell in the past year and very recently collaboration with Linde Engineering and Bosch. So, again, collaborations with world scale companies that can really move this technology forwards. And finally, we have been investing quite significantly into our infrastructure. And we have bought on stream a new test center, HORIBA MIRA in the Midlands and the UK. So we continue to invest for growth for the company.

We are able to do this scale, because we have a platform technology, which is fundamentally the steel cell. And that cell technology, we build into stocks, as you know, and many of you may have seen, our facilities here in the UK. And then we embed that into power system products and now into electrolysis technology. So, we have the names on the top here, Miura in Japan, Bosch in Germany, Doosan in South Korea, Weichai in China, and pleased to say now we are adding on the bottom of this slide, people like Shell, Bosch and Linde on the electrolysis side of things. So we expect to continue to grow out the ecosystem of partners. And that’s important because this is a licensing business. So, the more capacity that we have the more future royalties we achieve, and that enables us to maintain sector leading margins. And again, we are still maintaining very good margins at this level. But once we add royalties into the mix, then we expect margins can be even higher.

So, that’s very brief overview. And I think just to make it clear we expect the same asset-light licensing business model to apply both to the SOFC side and the SOEC side. So, that’s the very quick introduction. And now I am going to hand over to Eric to talk you through the financials in some more detail.

[Eric Lakin, Chief Financial Officer]

Great. Thanks very much, Phil. So just to give an overview of the financial KPIs for 2022, so total revenue of £22.1 million as sales, that was down from prior year and that’s largely due to an absence of new licensed partners being one with associated revenue recognized in the year. In the prior year, there was significant element, in particular, from Doosan as we did tech transfer with them. And we look forward to a return to growth as the timing of which is really driven by booking new sales, new licensed partners, whether that’s with existing partners with the China JV or new licensees.

Gross margin at 59% was down 3 percentage points compared to 62%, but in line with our guidance of approximately 60% plus. It was actually relatively high given the lowest revenue level. And that’s driven by improved operational performance, so lower yield – sorry, high yield, which results in lower scrap levels and also a reduction of the warranty provision as we get a better data that shows a lower return rates from partners. So that offsets the lower level of revenue and the mix change.

So that was – I should note as well as a footnote on here, we have changed one of the presentational points in our P&L, which is a move forward to make it more transparent in line with good practice. And that is we are stripping out our deck which R&D expenditure credits in ‘22 was £1.1 million. And we put that separately under other operating income as well as other grants income rather than a credit to cost of sales. And the reason for doing that now from this year it will become increasingly as in from 2023 – increasingly significant component. Ceres being over 500 heads were no longer eligible for the SME tax credit small and medium enterprises. So more of our R&D spend is eligible for RDEC which is increasing rate as well from April this year. It moves from 13% to 20% growth rate. So that could be of the order £2 million to £3 million this year. So therefore, it’s important for more transparency to pull that out and show that as a separate and other operating income and not under as a credit to cost of sales.

Our other headlines are unaffected. So revenue and adjusted EBITDA and of course, cash flow not impacted by that change in presentation. So re-presented 2021 gross margin of 62%, it was previously shown as 66%, when you include the RDEC credit. So that results in gross profit of £13.1 million compared to £19 million in prior year driven by the revenue and adjusted EBITDA of £43 million loss compared to £16.7 million in the prior year. And that’s driven by the planned expected growth in investment, particularly growth in the future, which we will come on to later, as part of our new projects to driving future growth and innovation.

Cash balance at the end of the year was close to £182 million compared to £250 million in the prior year. And again, that’s in line with our planned investments. And that is in high investment grade money market deposits and banks and well diversified. So to anticipate questions in terms of we had no exposure to SVB or Credit Suisse and in fact, neither of those institutions would have been eligible under our current investment criteria. As I mentioned before of increase in employees, it’s 570, an increase of just over 80 in the year and that’s in a range of different fields, particularly material scientists, engineering, and increasingly and also our commercial team expansion as we look to leverage our technology and convert that into orders in different regions around the world.

Order backlog and that is defined as total contracted revenue as the backlog, so all of our back orders yet to be converted to revenue. So, that’s includes license fees, engineering services and hardware. It does not include future royalty potentials. It’s not an indication of future revenue. So for us for Ceres and its business model is a less significant metric for future value than if we are a pure-play manufacturer organization. Nevertheless, it’s a metric we track in it. It’s an indicator of more short-term revenue potential. That was down from prior year of £78.7 million and that was effectively driven by the revenue recognized in the year was greater than the new license fee or new contracted revenue booked in the year. And finally, an important metric for us is our planned partner capacity. That remains at 250 megawatts and that represents 200 megawatts with Bosch and 50 megawatts with Doosan.

So moving on to this, this chart shows the last 4-year trends in terms of revenue, gross profit and gross margin. It shows a consistent gross margin level at close to 60%. This is the gross margin re-presented to reflect having RDEC as other operating income rather than in cost of sales. And it’s strongly influenced by the level of revenue and also revenue mix. But as I have mentioned before, the gross margin is held up relatively well given the lower level of license fee revenue in 2022 on account of other offsets, particularly around operational improvements in our pilot factory and also a greater level of KPI recognition from our partners as we move closer towards startup production. And effectively, KPIs are effectively 100% margin revenue stream.

What we have shown on this chart is shows the breakdown of different revenue categories and how that’s evolved over the years. So as a reminder and for those that are not so familiar with our model, so the – we have got effectively three revenue categories, we have got license fee revenue, which is effectively 100% revenue and that’s often recognized upfront to some extent over time. And that’s during the tech transfer and joint development with our existing partners and recognize as we fulfill those obligations. Supply is effectively prototype stacks and sales providing our partners to enable them to build systems and try them out with pilots with their – internally and with their potential end users. And also of engineering services, which is really labor time of our engineers with joint development collaboration for both systems and other initiatives. And as I mentioned with that, it’s actually increased in the years we have recognized a high level of KPIs particularly with Doosan and Bosch.

And the fourth category is royalties, which is effectively a payment we received from every sale of our – on our stacks and systems by our partners. So, we don’t have any royalties yet, but we are on track for recognizing royalties that started production, expect in the second half of next year as our partners go to that stage.

So it’s worth touching on investment, it’s increased significantly in 2022 in line with strategy and the plan set out in the fundraise back in 2021. So, we defined investment in the future as effectively all of R&D spend plus CapEx plus capitalized development and that increased to £58.4 million in the year compared to £34.9 million in 2021. The components of that, includes its personnel and R&D. We also got some significant projects. As Phil mentioned, we are investing in our pilot factory in Redhill, Surrey. We have also got significant elements of spend in SOEC, in particular, the prototype demonstrators, of which there are two that we have announced with our partners, Shell and with the Linde-Bosch collaboration. We have also had significant investment, including capital investment in our test facility in collaboration with Miura as well.

As I have mentioned before, a number of these projects are sort of fairly non-recurring in nature. They are spread over 2 to 3 years. So in terms of the pace of investments, we would expect continued growth and investment in ‘23, but not at the same increases we saw in ‘22 versus ‘21. So, the level of growth of investment is flattening from what we saw in 2022. And again, it’s in line with our expected plan of investing in the future. And of the £180 million fundraise in ‘21, about £100 million of that was pegged for investment asset we see. And we are about 40% through that particular investment program.

This chart maybe familiar to some, this is a reminder of our – the development of our revenue streams in line with our business plan. So where we are today and as you saw earlier, we have revenue primarily from SOFC, the power fuel cell side of the business and that’s in the form of license fees, engineering services, and hardware sales. Over time and moving into next year with the start of receiving royalties, that’s a darker purple part of the chart there and that becomes increasingly important and sizable over time is our partners move to the announced 250 megawatt capacity and beyond.

Layered on top of that in green is the hydrogen side of the business. So we would expect to see to a small extent from this year, an element of income from SOEC and that’s with the particularly from the Shell demonstrate when that comes live and over time growing with Bosch and Linde and that we expect to be more significant as and when we receive license fees from SOEC which there aren’t any currently. And again, similar to SOFC over time once stacks and systems are being sold by our partners and as in hydrogen and SOEC then we will expect royalties as well coming from those contracts.

With that, I will hand back to Phil.

[Phil Caldwell, Chief Executive Officer]

Okay. Thank you, Eric. So just a few words about the business strategy. As I mentioned at the beginning of the presentation, there is three key pillars to our business strategy. The first pillar is enabling our license partners to succeed and that’s all about supporting them to scale up and get into production. The second pillar is building the commercial scale of the business. So, this business doesn’t operate just on one or two partnerships, we need to have more licensees and hence the growth agenda diversifying into electrolysis, but also adding licensees on both the EC and the FC side. And maintaining technology leadership, if we don’t stay ahead, then you cannot operate a licensing business model.

Just taking each of those in turn, we are very focused on supporting Bosch and Doosan to start production next year. And we are still working on the third planned collaboration for China JV with Bosch and Weichai. So, that’s our near-term focus. In addition to that, we have been investing quite heavily in the commercial team and we are starting to build the ecosystem, as I would call it, of potential partners on the SOEC side with Shell and Linde Engineering as new names into the mix this year. So we are very pleased to have those as collaboration partners.

And then maintaining the technology leadership, we will talk a little bit about some of the progress we’ve made this year on technology, particularly on the electrolysis side. And as Eric has outlined, we have put quite significant investment into the business, into the professionalism, the vigor at which we actually develop this technology, because of the company we keep and the partners that we have, Ceres needs to be as rigorous to high quality, to high standards of any of our partners, which are of all blue chip partners.

We have already discussed the scale. But as you can see, on this map, we have two plans at the being scaled build stage and a third in the planning stage. We don’t often – we are not often able to always show the progress here, but this is the picture of the plant that’s now being built in South Korea in Saemangeum. And that’s going to be 50 megawatts to begin with coming on stream in 2024. But there are plans there to expand that to 170 megawatts.

So we are pretty excited to see that starting to happen. Again, we don’t always talk too publicly about progress in China, but it was nice to see a few weeks ago quite a big public exhibition, if you like of the progress that’s been made by Weichai. What you can see here is actually stationary power systems using the Ceres technology 120 kilowatts in total, which achieved EU certification. So I think Weichai quite proud of that, because again, the quality standards from China are as good as anywhere in the world. And Weichai’s own estimates are if they can produce a gigawatt of stationary power based on the Chinese power system, they would save about 2 million tons a year of carbon. So you can see the big opportunity there.

We are still working on the China joint venture. Obviously, we are frustrated it’s taken longer than we had hoped. But we are now waiting for the progress to be made with Bosch and Weichai to get that one finalized. Bosch, we have already mentioned are investing up to €500 million in this technology. They are recipients of IPCEI funding. So you might have heard of various different initiatives around the world as the IRA bill in the U.S., there is also REPowerEU in Europe. One of the benefits of our business model is even though we are a UK company, indirectly, we benefit from our partners receiving some of the incentives that are going in, in different parts of the world. And Bosch are one of the people that will benefit from that IPCEI funding. They have a number of systems in different trial locations in Germany. So one is now in a hospital [indiscernible] in Germany and another is in things like data centers. I think if you go on Bosch’s SOFC website, you can see a lot more of the pictures and a lot more the progress that’s happening on the SOFC side with Bosch.

And then that kind of segues a little bit into where else the technology can go. So just recently, we announced a three-way collaboration with Bosch and Linde Engineering onto the electrolysis side, the SOEC side. And that’s to really assess this technology, again at a megawatt scale, but this time at a Bosch facility near Stuttgart in Germany. The reason for this collaboration is we are not a pure-play manufacturer. Bosch is one of our leading industrialization partners. Bosch and Linde have obviously quite a strong history and collaboration and they bring different things to the party. If you think about the value chain for electrolysis, we bring the core technology. Bosch potentially could bring the industrialization of the technology in the manufacture of the core cells and stacks. And then Linde is world leading in hydrogen in terms of integration into electrolyzers and into also selling to the end market.

So, I think this is a good example of again our licensing potential into the value chain, because we occupy a very strong position as a technology provider, but we work with partners who can then scale and bring this to market. So we are very pleased to get that one underway. And when we raised the capital just 2 years ago, as Eric mentioned, we allocated about £100 million into the electrolysis development. Pleased to say and this was a schematic of what we intended to do. We are pleased to say we have the first results on the module level. And we are already achieving less than 40 kilowatt hours per kilo of hydrogen. That’s significant. If you think this chart is interesting, because very often when people are looking at electrolysis, they are very fixated on the CapEx particularly how does this compare with alkaline or PEM etcetera.

What they sometimes overlook is efficiency really matters. And if you can achieve the targets here for SOEC and these of industry targets of as low as 37 for the same million tons a year, you are basically saving 26% of the upstream CapEx, which when you think about upstream, wind or solar, all of that infrastructure. That’s a very significant saving, also the energy costs, the biggest input into green hydrogen is the cost of energy. So again, 26% OpEx reduction is significant.

And on the CapEx side, even if SOEC may cost more than alkali, it could cost us as much as a third higher and still have the same CapEx basis if you see because you actually need fewer of the units to give you the same production. So I would encourage analysts to start to think more about the overall system rather than compare the Ceres technology to low temperature technologies. And then finally, this technology really plays for industrial decarbonization where you can use the waste heat. And I believe that’s firmly one of the unequivocal areas where hydrogen must play to decarbonize green steel, green ammonia, petrochemicals, synthetic aviation fuels, etcetera that for me is the key target market and where SOEC can really make a big impact.

And then finally to bring to life some of the pictures, some of you may have seen this in our facility, but here is the containerized system that’s been built and will be filled with the modules which we have on test in Horsham. These modules will go on test in Germany with our partner AVL later this year and then be shipped and go on test at Shell in Bangalore in India in the second half of this year. So again, we are doing exactly what we said we would do. We raised the money. We said this technology would be class leading. It is said we would sign big partners we are and we continue to invest in the business. And we are continuing to deliver on exactly what we said we would do.

So as we look forward to the year ahead and our focus, we are going to continue the growth of investment, as Eric has talked about into both the SOFC and the SOEC side, because we think we are one of the world leaders in this technology. And this opportunity is huge. We are supporting our partners as they scale in Germany and South Korea. We are building new commercial partnerships with the expanded team. And as you can see, we are starting to expand into electrolysis on the commercial side as well. We haven’t talked too much about it, but we are making progress on some of the new applications, higher power systems, utility scale and marine systems. And that’s definitely some of the markets that Doosan are looking to go after as well and part of that capacity that’s coming out of South Korea will go into those markets. We are continuing to progress on the China JV that’s obviously a focus for us in this year. And we are still looking to move up to the premium list and the main market on the London Stock Exchange. So I think we have got an exciting year ahead. We are very pleased with the progress we have made. And I think 2023 will be a year where we can build on the significant investment we have made over the past couple of years.

With that, we will take any questions.

[Phil Caldwell, Chief Executive Officer]

So Eric, thank you very much indeed for your presentation this morning. [Operator Instructions] Before we take online questions perhaps if I may perhaps hand over the mic to you to share with those in the room. And we will take the questions from the room and then hand back to me for the online.

[Maggie Schooley, Stifel]

Hi, good morning. It’s Maggie Schooley from Stifel. And I had a few questions if I may. And the first on Slide 14, the indication of capacity for Doosan at 170 megawatts I hadn’t seen that number before. Is that just based on the footprint of what they are building? And it would be – would it be your expectation that that would be fully served by Ceres technology, so the 50 they have possibly going to 170 and if that is the case by what timeframe? And then the second question I had is on SOEC, I understand your argument on efficiency and CapEx, but just to understand a bit more, the lifecycle of SOEC how long do you think versus alkaline and PEM that system would last and how often do you need maintenance for it just to have a better understanding of the end-to-end costs when you are thinking about pairing this with industrial projects? And I am sorry, finally, the third question and possibly not able to answer, yes, but given the test data that you have had. And obviously, you have always said you wouldn’t hook up an electrolyzer to solar or wind. So you will be using grid power in these industrial, some of which will be fed in with solar, some of which will be fossil fuels. But on a blended basis, what’s the GHG reduction, do you think you can get in terms of the green electrolysis versus gray if you know that? And then if it was fully green when we see more renewables overtake the grid what you think the reduction would be on that basis as well if you know it at this point?

[Eric Lakin, Chief Financial Officer]

Okay. I am going to struggle to remember all those.

[Phil Caldwell, Chief Executive Officer]

So do some first, the factory that’s been built is 50 megawatts, this Doosan as a public company. So if you go on their websites, etcetera, that’s where you will see the plans for the 170. My understanding is that would be an additional build-out of the facility, but yes, using Ceres technology. So that was the first question. The second one, Maggie.

[Maggie Schooley, Stifel]

Lifecycle?

[Phil Caldwell, Chief Executive Officer]

Yes. So yes, the modeling we are doing on this, where you would expect stack replacements, the plant life around 20 years, I think is what most people look out with several stock replacement cycles. I think we start our modeling minimum of 60,000 hours and it was from there. So even on that basis, we have previously talked about levelized cost of hydrogen approaching $2 a kilo, we are still very confident towards those kind of numbers. The question…

[Maggie Schooley, Stifel]

I was just trying to get some understanding of until we get a fully green grid in its stages what the reduction of carbon…

[Phil Caldwell, Chief Executive Officer]

Yes, that’s quite a complex question. I mean, look, the way I think you have to think about it is you are basically 25% or more efficient. So whatever you are feeding it with, you are going to save that much carbon or if not carbon, then you are going to require less capacity upstream to feed it for the same tonnage of hydrogen. But I couldn’t give you a simple rule of thumb right now I think that’s probably the best indication.

[Eric Lakin, Chief Financial Officer]

Yes. I mean, there might have been an implication to the question, I don’t know whether that the solid oxide, it’s likely to be baseload power and therefore, from the grids and lots of mix of the grid. But it’s worth noting, we think as with the increase in renewables, it’s actually very compatible with our technology, because you have got basically with a buffer, whatever that buffer could be [indiscernible] or others that have batteries, I think that’s going to be increasingly important part of the overall system. So you can have renewables, so fully green electrons, if you like with a buffer with solid oxide, with the efficiency from that. So there is other technologies of better responding to dynamic load, etcetera. If you look at the overall economics actually, it’s not very appealing for the point you made earlier, you need a lot more of them, because of the efficiencies. You have got that potentially higher CapEx, but also the overall levelized cost of hydrogen is dominated by the overall efficiency or cost of electrons. So you are doing the math, it’s renewables with a buffer and solid oxide is quite compelling as well as the ones we’ve talked about before, obviously, having a baseload power, whatever source that might be. So it’s true. I mean, even with the improvement we make in durability and so on, if it doesn’t quite meet standard of durability of other technologies like alkaline and we expect the cost per kilowatt is always going to be higher, because the lower amount needed in terms of the total system capacity, it could be more or less a wash, but even if it ends up still being a high overall CapEx over the lifetime, including replacement, it’s going to be a lot, basically your cost per kilogram of hydrogen is going to be much lower overall and a lower upfront CapEx need because of the lower capacity.

[Phil Caldwell, Chief Executive Officer]

Yes. I think there are so many different use cases we are starting to do feasibility studies with a number of people. That’s the beauty of this business model is some of the work that we are doing with the partners we have announced, but also sort of EPCs etcetera, we are starting to look at different use cases for this technology.

[Martin Wilkie, Citi]

Thank you. Hey, good morning. It’s Martin Wilkie from Citi. A couple of questions on the U.S. Obviously, you touched on the Inflation Reduction Act, are your agreements with Shell and Linde global, could they use your technology in the U.S. now or to access those tax credits for $3 hydrogen in the U.S.? Do you still need to find customers or partners in the U.S.?

[Phil Caldwell, Chief Executive Officer]

It’s a good question. Look everybody is very focused on the U.S. right now. Part of our agreement is to grow the number of licenses, so we would look for U.S. partners as well. However, we tend to avoid exclusivities and to be clear the relationships with Shell and Linde at the early stage they are not at licensing kind of stages. But in terms of the freedom to operate of our partners, our existing licensees could potentially extend on the FC side already into the U.S. So Bosch and Doosan have licenses that wouldn’t allow them expansion into the U.S. On electrolysis, we haven’t granted any licenses yet. But again, we have – it’s such a big opportunity, we would obviously look to license into that market.

[Martin Wilkie, Citi]

Thanks. And with regards to your question on Europe as well, I mean, you talked about the projects of common interest. But obviously, we have now got this Net-Zero Industry Act, which is obviously not yet finalized. Obviously, the EU has highlighted both fuel cells and electrolyzes as strategic technologies. Do you have a sense here as to whether that is going to mean that the IP has to be sort of European or it’s sufficient that your customer whether it’s Bosch or whoever else can be within the EU and therefore, you still benefit from that or is it just still too early to say?

[Phil Caldwell, Chief Executive Officer]

If you look at what’s happened with the IPCEI kind of funding, it’s really about EU content, EU manufacturing rather than IP. So obviously, the relationship we have with Bosch and we are starting to get incoming interest on the back of favorable subsidies in the EU as well. So look, if you are trying to grow the infrastructure rapidly that you need for green hydrogen etcetera, I think it’s all about capacity rather than who owns the IP. And under our licensing model, where we can enable capacity in any of these regions, for our partners without them having to, it’s very hard to stimulate a market if new entrants have to start from scratch and develop solid oxide. It’s problematic. One is it’s hard and two, it’s quite – the freedom to operate is quite limited, because people like ourselves and some of the other players have got pretty extensive IP portfolio. So you are much better coming to Ceres and licensing technology rather than trying to start from scratch and it will take too long and a lot of money to do it. So that’s why I think some of the initiatives that are going off in different parts of the world actually can stimulate demand to license our technology.

[Martin Wilkie, Citi]

Thank you.

[Unidentified Analyst]

Aaron from RBC. Thanks, Phil, Eric and Elizabeth for hosting. Two questions have been partly answered, but one on the Bosch-Linde partnership and second on policy. So on the on the Bosch-Linde partnership, can we still refer to the Stage 1, Stage 2, Stage 3, three framework that you put out for fuel cells? And is it fair to assume that the Bosch-Linde is right now in the Stage 1? And do we still stick to like the same kind of like timing from moving to Stage 1 to Stage 2, Stage 3? And then second question on the policy front, I assume the discussion with the Bosch and Linde have taken place before the Net-Zero Industrial Act. But I’d like to have your view on like a) whether it’s game changing for you and b) whether it potentially forces you to update your longer term growth plans in the second part of the decade?

[Phil Caldwell, Chief Executive Officer]

Okay. So the Stage 1, Stage 2, Stage 3, yes – we are at the Stage 1, we are doing evaluations and some joint developments with Bosch and Linde. The time it takes to step through is that changes from partner to partner. The one thing I would say is the thing that’s often a criticism for electrolysis is there is a perception out there that electrolysis has this potential to be the highest efficiency, but it’s still early stage and the same level of industrialization hasn’t gone in, as with mature technologies, like alkaline which has been around for decades. However, a lot of the work that we are doing currently on the scale of supply chains of manufacturer on the FC side, I believe will mean that our partners can potentially scale faster. One of the beauties of solid oxide is it’s truly reversible. So the same factories that you started to see being built now with an extension license could be producing cells and stacks for EC as well as FC. So the timing of once the license has taken the timing to market could be shorter is what I’m saying. So I think that’s key. In terms of our plans, I think the third part of your question was about, is this a game changer for our plans? I think what we are seeing with electrolysis I think if we can get electrolysis right, I think that could be a game changer for us in terms of the amount of demand that’s out there. Now, look these deals take time. So yes, this predates the more recent announcements in the EU, but I think what it does do is it creates the demand for our partners the pool, which then pulls on the licenses.

[Unidentified Analyst]

Okay. And within the Net-Zero Industry Act, which is the most like I’d say, game changing instrument, is it like the 40% domestic electrolyzers manufacturing, is this the potential production tax rate it’s the way we see in the U.S. with the IRA. Is there any particular part of the act that is more attracts you as more game-changing?

[Phil Caldwell, Chief Executive Officer]

Well, I think the 40% is significant, because I think there had to be a response towards what’s happening in the U.S. And I think we will see a response in other parts of the world as well. But I think it definitely creates that stimulus for the European market. And I think we are definitely seeing a lot of interest now from European players as well.

[James Carmichael, Berenberg]

Excuse me. James Carmichael from Berenberg. Just thinking about the year ahead, I guess, obviously, the China JV is a big moving part, but also sort of relatively easy to take a view on. Could you maybe just give us a sense of some of the other moving parts we should be thinking about when we are trying to model the financials for this year? And then I guess just thinking about the Bosch-Linde partnership, can you maybe just run through some of the steps that the three of you need to get to before a license agreement sort of discussion becomes a bit more concrete? And then just lastly, just because Phil mentioned earlier, you’ve increased stake in RFC earlier this month? What’s the thought process around that? Would you expect to take the rest of it next year?

[Phil Caldwell, Chief Executive Officer]

Yes. Okay. You want to talk about this year?

[Eric Lakin, Chief Financial Officer]

Yes. In terms of EC we are not giving any much quantified outlook guidance for this year. So, I’d appreciate that given our stage of the development as a business. However, what I would say is, as a guide and I mentioned earlier, in terms of the investment in the future, that will grow again this year compared to last year, the rate of growth won’t be as high. So we do expect increase in OpEx. CapEx, I can say we certainly expect to spend in the range £15 million to £20 million, so again, up from last year, but that’s not as I mentioned, we have got some non-recurring projects. So that’s not expected to be a continued level investment. So from £24 million, I expect it to be lower than that that range. So that leaves a not insignificant point around top line growth. All I can say is that’s hugely dependent on the timing of new license fees, including the JV. And I can’t really say much more on that. But there is a range of outcomes.

[Phil Caldwell, Chief Executive Officer]

And then the second question you have?

[James Carmichael, Berenberg]

Just the steps need to get through?

[Phil Caldwell, Chief Executive Officer]

Yes. So, look, that’s a very fresh agreement as of last week. What it does, open the door now is to share information. So, we are going to start, look, we worked closely with Bosch already on the FC side. So, a lot of the – it gives them – allows them into the tent, if you like on what we are doing on electrolysis in terms of the data that we are already producing, and then at the megawatt scale, as a three way. So, it really allows that assessment to happen with Bosch, and Linde. And it’s a 2-year evaluation. It’s obviously going to take some time to prepare the sites in Germany, which is going to happen from now to probably early 2024. And then the deployment will start after that. I would say though, that before that we will be sharing data progress, etcetera. So, it doesn’t have to always be sequential as to when the next stage could follow-on from that. So, that’s our focus this year with Bosch and Linde. Yes, so yes. Look, we have interested in technologies that contribute towards our mission and sit in our sweet spot of being world class in electrochemistry, which is what we really focus on. We have seen quite a lot of progress from our FC work. And yes, we have taken the decision to increase the collaboration by another year and put some additional funding into really prove it at a system level. We have seen some interesting results selling stock level. And yes, we are pleased with the progress there that it kind of is complimentary because long duration storage, we believe is going to be one of the key things for decarbonization.

[Eric Lakin, Chief Financial Officer]

Yes. So, just to recap, what we did, the investment we did in the year. We invested a total of £2 million, £1 million in cash to provide funding for the business and other £1 million in factory services that we are providing over the course of 18 months. So, that increased our stake from 8.4%, we are around 24%. And we renegotiated our option to acquire the remaining shares so to get 100% from 1st of January to the end of April next year. So, it’s given time to as Phil talked about to really get a better understanding the business and support them in their development investment, particularly standalone demonstrator, which is the really important part of their about diligence basically.

[Sean McLoughlin, HSBC]

Hi, it’s Sean McLoughlin, it’s HSBC. A couple of questions. Firstly, just on the Bosch-Weichai JV. I mean any incremental detail or assurances around completion of that. And also it does sound like it’s coming out of your hands at the moment. Is there an expiry on this agreement? I mean is there a risk of completion simply just slides back to H2 and beyond? And secondly, just thinking about applications, specifically I think there has been a lot of – I think if you look at industrial processes hydrogen, it looks like steel is the most talked about area? I mean are you in discussions directly with steel makers, or is this an avenue that you would probably be pursuing through your existing customer partnerships?

[Phil Caldwell, Chief Executive Officer]

Okay. We will take the second question, first. Look, where we sit in the value chain, one of the reasons we are building the partnerships that we have with people, let’s say like Linde Engineering is, they have the footprint into a lot of these kinds of end use cases. However, what we what we do, like our partnership with Shell, we often go to the end user to create the pool for the core technology. So, we do – we are discussing all different kinds of use cases with some of these applications like steel, like ammonia, etcetera. A lot of people come to us looking for this kind of technology. So, it’s a bit of both. But ultimately, we are not going to be the company selling directly to the steelworks or whatever that will be through a partnership and our businesses, obviously, to license the technology that enables that to happen. Going back to your first question on which I guess at this point, it’s largely out of our hands, it’s a very significant investment. If you think about we will be a minority and one of the joint ventures, but the significant investment decision will be between Bosch and Weichai. It doesn’t have an expiry on it. But we obviously want to get to a conclusion on this, because we have been pursuing it for quite some time. But obviously, Bosch and Weichai will also have significant investors in this business as well. So, I think they have also minded to conclude on this. So, when we can do, I will obviously update you.

[Unidentified Analyst]

Hi. This is [indiscernible] from Investec. Just on the SOEC business again, what would you deem is success over the next 24 months from both demonstrators? And what are the key data points that you are looking out for? Is it the same that to confirm the same as 100 kilowatt in terms of less than $40? And then secondly, just on, in the announcement, you put the second generation of fuel cell tech, anymore color there on the improvement on the product offering, any more detail there would be great?

[Phil Caldwell, Chief Executive Officer]

Yes. So, next 24 months on SOEC, yes, exactly that success will be proving at that megawatt scale, similar kind of efficiency performance is sub-40 kilowatt hours per kilo. And where the results on the module give us a very high confidence level on that because you are going to have some puts and takes on power statics, etcetera. But you are also going to get some efficiencies with scale as well. So, proving this out at that scale to partners like Shell and potentially Linde is a key endorsement of the technology. How have the modules that we have got are not the modules that we would expect our partners to industrialize, they need to be larger. So, hence the part of the second generation, Gen 2 technology we are developing on the FC side, which is also going into the EC side will be larger stacks, larger stack footprints and simpler construction. And those of you that have actually visited us in Redhill may have seen some of those lighter cell technologies actually starting to come through the development side there. So, that’s well underway now. And that’s really about industrial scale and cost of manufacture. And we anticipate building those into larger modules, larger repeating units for the electrolysis market, really.

[Chris Leonard, Credit Suisse]

Hey, Chris Leonard from Credit Suisse. If I could just ask two please. When we – and kind of following up on the electrolysis opportunity, when we think hypothetically, a partner comes in on licenses in 2025? Is it, do you have an assumption of when you think the royalty could hit? Is it now quick as you were saying, if we could just expand hypothetically what you think the timing might look like? And then secondly, maybe to Eric on gross margins for 2023? Is there some kind of broad range you can think about clearly, we haven’t seen the license revenue as high in ‘22, as a big question into ‘23, I guess. But is there some kind of ballpark range you would be thinking about, or are you happy with where consensus is? And then just the last one on the order book, is the way to ideal or potential license fees? Are those within the order book now? And equally, would we expect that the main market as you spoke to come post any potential wage higher license deal? Thank you.

[Eric Lakin, Chief Financial Officer]

Okay. Do you want to take the last two, three, Phil, and then I will do – pick up the one on SOEC timing or…

[Phil Caldwell, Chief Executive Officer]

So, the SOEC timing, and as I have alluded to, the incompressible part of actually getting this technology into production is standing up the first factories, getting the supply chains up in different parts of the world as well, European, Asian, etcetera. Once you have factories in place, whether that cell is going to a fuel cell or an electrolyzer cell, in many ways, it’s the same. So, if somebody decides to extend their license, they could be paying royalties very quickly, if they decide to utilize capacity they have already put in or capacity that they want to add on quite quickly as an additional production line. So, even though we have still got development work, to go through the stages to get to electrolysis licenses, I think that the ramp up on electrolysis could happen. You don’t have to go through the same. We have been in a 3-year period, if you are like with the likes of Bosch, 2 years with Doosan to actually get to the point where they are building factories and putting that in. That will be much shorter for like electrolysis, obviously, for new partners, though, they have to go through that stage. But there is a lot of learning. We are doing a lot of work on compressing the timing for factory builds in the future. So, that’s one of the key things for us is how do we enable more factories faster to get us into royalties. So, that’s my answer to that.

[Eric Lakin, Chief Financial Officer]

Yes. I think Chris, thanks and good morning. Thanks for the question on gross margin. In fact, I meant to add that to the mix with James’ question on guidance. So, yes, we still, as we have said previously, we expect gross margins to be in the range of 60% to 70%. And where it is in that range is dependent on total revenue. So, you have got level of cost absorption to that equation, also the mix, so the proportion of license fees, which is a very high margin compared to engineering services and hardware. Order book, the current order book includes close to £30 million from the China – existing 2018 China JV agreement. And I think that was your question. So, that’s in the order book. If as and when the new China JV agreement is signed, that effectively adds £30 million of new order intake, but the pre-existing would be eliminated. So, it will be a net neutral impact overall, all else being equal. And in terms of the timing of the main market listing, I think it’s reasonable to say that the plan is to, if we are going to move up this year, it should be by the end of June, because we want the last set of audited accounts, 2022 accounts would need to be within six months of listing. And there is – given the uncertainty and timing of the JV which affected decoupling it from the now – from the China JV timing. It’s just not something we want to be beholden to.

[Operator]

That’s great. I think we’ve touched on a lot of questions from the room. If there are any more obviously, we will give you a – raise your hand up one at the front.

[Unidentified Analyst]

And perhaps – sorry, Ken from Good Buddies. Perhaps it’s been answered by the gross margin question. But I wanted to ask about inflation. I mean engineering work implies wage inflation, steel prices, materials costs imply, the costs of hardware that you supply to people. So, basically you are saying, you are happy that you are able to pass through those cost increases? And could you give and obviously you are not buying materials at the scale the manufacturing partner would buy? But what’s your impression of what the cost inflation on the CapEx bill as it is for all equipment that’s made of metal, basically. But what do you think the cost inflation has been over the past year for hypothetically, for manufacturing partner?

[Phil Caldwell, Chief Executive Officer]

Yes. Okay. Yes, great question. So, the inflation is something that has affected us as it has every other company, particularly those in our peer group as well. And I wouldn’t put a number on it, but it’s material if the order of magnitude, call it 10%. If you take into account many different factors, whether it’s labor costs, supplier costs, raw materials, it’s obviously a big range within that. So, it’s something we monitor closely and look to offset through various measures. And we also have our own pilot scale manufacturing. So, that’s directly affected. But as you have said, can it also affects the economics of our partners. So, what we do to offset that is, is looking to accelerate with our development and get it down the cost curves looking at changing materials, supplies of steel, for example, lower wasted, as I say in the year, the gross margins held up well relative to the amount of revenue and the mix, because we have managed to improve yield in our factory, reduce scrap in other areas. For our partners, where it’s a different order of magnitude challenge, they are looking to do similar things. It’s really about sourcing supplies and looking to offset some of those inflationary pressures, which are there. So, I probably got some good answers I can give it a high level at this stage if that’s helpful.

[Unidentified Analyst]

And if I can ask a supplemental question we haven’t heard much from Japan that meant to be preparing renewed hydrogen fuel cell incentives, as it ripples around the world. Any comment on that?

[Phil Caldwell, Chief Executive Officer]

Yes. Japan is interesting, because I think Japan has lost the leading position I think they had when I have started out in this industry, 20 years ago, it was all about Japan. I think now, South Korea has taken a leading position, what’s happening in the U.S., in Europe, Japan does need to respond. And I think they are preparing to respond. We had, again, our team out in Japan last week at the FC Expo, big keynote speech, etcetera, huge interest. But I think Japan needs to catch up again. We have opportunities there. But I think they have – it wouldn’t be surprised to see similar kind of incentive plans coming in Japan and other parts of the world I think. I think what’s happened in Europe and North America isn’t the last of this. I think you have already got very strong policies in South Korea. That’s why South Korea is one of the best markets where there are several other players who are in South Korea, I think Japan probably needs to reciprocate as well.

[Operator]

Thank you. I think you have touched on a lot of topics. But this was if I may hand back to you just to see if there is any questions from those online that maybe we haven’t touched upon. And of course, we will review all questions submitted today. And we can publish those responses post the meeting as well.

[Elizabeth Skerritt, Director, Investor Relations]

Yes. That’s great. Thank you. Sorry, I know we are at time, but we have had a lot of interesting questions come through, so maybe we can take a bit of a quick fire guys. And, Eric, if I can come to you. Could you just remind us when we should expect royalty revenue starting from the Bosch scale up?

[Eric Lakin, Chief Financial Officer]

Well, I would say generally we are expecting royalties started production for both partners Bosch, Doosan in the second half of next year and that’s probably…

[Elizabeth Skerritt, Director, Investor Relations]

Yes. Great. And just a question in terms of, can we assume we will still see an investment in the China JV this year from our side.

[Eric Lakin, Chief Financial Officer]

Well, so the investment in the China JV will be triggered once the agreement is signed by all the three parties. And as a reminder, that would lead to the regulatory clearances process, which could take anywhere from two months to four months. And at that point of establishment of the JV, then under the contracts, our total investment is of the order of £20 million, that represents 10% of the total funding for the system JV, of which around, it will be broken into phases over a number of years. The initial investment will be around £8 million. So, if it does happen, the net cash impact is fairly neutral to receive about £10 million of license fees from the first tranche and invest about £8.5 million.

[Elizabeth Skerritt, Director, Investor Relations]

That’s great. Thank you. And just a question around any plans for fundraising in 2023?

[Phil Caldwell, Chief Executive Officer]

No, I think the input goes out, do we need to fundraise, I mean the answer is our current business plan is fully funded and investments in line with plan. But the caveat there is very dependent on revenue and income, which is uncertain.

[Elizabeth Skerritt, Director, Investor Relations]

Yes. Absolutely. Great. Thanks. And then just coming to you said, if I may, just obviously, we spoke a lot about the development of Weichai, and the system for buses in the sort of first phase, any update on this with the JVs coming into play, is it more focused on the stationary products.

[Phil Caldwell, Chief Executive Officer]

So, the systems or venture that’s plans that Eric referenced that we will be a minority shareholder and we will actually combine system by pay both from the Bosch and the Weichai side of collaboration. So, that will continue as part of the system JV. I think what we are seeing is we will actually see a near-term opportunity, I think for stationary power in China. So, I think the first products will be more focused on stationary.

[Elizabeth Skerritt, Director, Investor Relations]

Great. And a quick question that’s come through on Linde is, they obviously have existing partnerships with other electrolyzer technologies. Do we see this as competing or how do we view that?

[Phil Caldwell, Chief Executive Officer]

I think that it’s been like fuel cells, different technologies have different strengths. And I think the key thing for us is, I think people talk about alkaline and PEM, now people turned over alkaline PEM and solid oxide. And most companies in the molecule business have solid oxides somewhere on their roadmap, particularly for industrial decarbonization coupling with waste heat. So, I think it’s not a zero sum game, as in I think alkali has its place, but PEM potentially has its place. I think solid oxide will have its place. So, it’s not unusual, I think to have different technologies being focused on different parts of the market.

[Elizabeth Skerritt, Director, Investor Relations]

Yes, absolutely. Okay. And then just a couple of final questions, if I may. Just around, we have obviously continued to increase our headcount, are we seeing any challenges within the market, securing kind of talented engineers and scientists, and any issues around relocating people achieving visas for overseas recruits?

[Phil Caldwell, Chief Executive Officer]

Look, we have been through a very significant period of growth, from 200 to 600 people over the past 2 years or 3 years. The market has got tighter. I think it’s maybe getting a bit easier again more recently. But we have always been able to attract the talent that we need. Hybrid working helps. So, it’s not all about relocation always. And we are able to collaborate different ways. And look what we are doing, like say, with Miura etcetera we are starting to look at how do we actually locate people in different places to continue to grow the business. As Eric said, we have probably seen the peak increase in heads, so we will add more heads this year, but it will probably be in response to new commercial partnerships and servicing those, so we will have headcount growth this year, but it will be more modest than what we have done previously.

[Elizabeth Skerritt, Director, Investor Relations]

Great. And then final one, just someone mentioned. Do we still have the sites in Horsham and are we keeping this plus as sort of Redhill manufacturing centers are and UK footprint what does that look like?

[Phil Caldwell, Chief Executive Officer]

Yes, very much so. Horsham is as busy as ever. And Horsham is really the technology center, the R&D innovation center. And Redhill is our manufacturing innovation center. So, they perform very different roles. And we have invested quite significantly in Horsham this year, and that will continue to be our base.

[Elizabeth Skerritt, Director, Investor Relations]

Fantastic. I will hand back.

[Operator]

Thanks Phil, Eric, Elizabeth, for your updates this morning. Before I redirect investors online to give you their feedback, Phil, which I know is particularly important to you and to the company. I wonder if I could just ask you for a few closing comments. And then I will redirect investors for your feedback.

[Phil Caldwell, Chief Executive Officer]

Yes. Certainly. Well, look, thank you everybody for attending this morning and online. I think it’s great to get the level of interest and support. And I think it shows you how important these technologies are to people. I think we have been investing in the past couple of years. What I hope you can see is we continue to do exactly what we said we would do. It’s very much about delivery for us. We set out plans, and then we execute against those plans. I think the company, 2022 was a difficult macroeconomic environment for many reasons that we have talked about today. However, the investment that we have portrayed in the past year or so I think will really start to bear fruit as we continue to grow into ‘23 and ‘24 and as partners progress to market and scale that’s really where we validate this business model. And I think that will actually just enhance the demand for this technology and with new initiatives coming through like electrolysis, etcetera, we continue to layer on the growth. So, I think we are very excited about the prospects of this company. We are well positioned or well capitalized. We look forward to sharing updates with you all in the future.

[Operator]

That’s great. Phil, Eric, Elizabeth, thank you very much indeed for updating investors. Can I please ask those investors online not to close this session as we will now automatically redirect you for the opportunity to provide your feedback in order the management can better understand your views and expectations. This will take a few moments to complete, but I am sure be greatly valued by the company.