Hydrogenpro ASA

OSE:HYPRO

Earnings Call Transcript 2022-Q1

[Elling Nygaard, executive]

Dear audience. Welcome to HydrogenPro's first quarter presentation today, and thank you for your participation. My name is Elling Nygaard, and I'm the CEO in HydrogenPro, and I will work through this presentation together with my good colleague and CFO, Martin Holtet.

This is the agenda for today. I will start to introduce HydrogenPro and talk about the market outlook. And then Martin will continue to talk about the first quarter business updates about the figures first quarter and the finance.

Then I will continue with the strategy to HydrogenPro and talk about how we will become #1 provider in this market. Then I will end up to summarize, give you some takeaways from the presentations before the Q&A.

I will start to talk about some of HydrogenPro's core advantages. Then talk about the tremendous market we are entering into. First of all, HydrogenPro is delivering large-scale hydrogen production plant to the global market. We have moved from a distributor position to a full-fledged OEM supplier in the global market with leading electrolysis technology.

Our vision is to become #1 provider in this large-scale hydrogen production plant market and to extract global decarbonization by rolling out our technology and system solutions into the global market.

This is our 4 major strategic focus areas, technology leadership, by concept and technology improvement and innovation, global footprint together with large industrial players in the market, scalability, easy to scale, standardized, and off-the-shelf solution. And of course, full fledge life cycle partnering, building recurring revenue.

Hydrogen market today is mainly fossil hydrogen or grey hydrogen. HydrogenPro is delivering green hydrogen. This is simple process, splitting water into 2 gases, hydrogen and oxygen by renewable energy. The market -- main market today is industry sector like refineries, fertilizer industry, steel production, chemical, et cetera, and we have a large market power to gas.

Today, natural gas, transforming to first step blending in hydrogen and second step only clean hydrogen in the whole pipeline. And then we have the transport sector from fossil fuel to synthetic fuel to hydrogen and to ammonia.

And then we have the large -- largest markets is hydrogen to balancing the grid, hydrogen as energy carrier, balancing the grid together with renewable energy like solar and wind. Use hydrogen to equalize the difference between production, energy production and energy demand. And this is a large market where hydrogen will be the storage in the energy mix system.

The demand of hydrogen in 2020 was 80 million tonnes in 2030, this will be more than 200 million tonnes. And in 2050, it's more than 50 million tonne, and out of this, 60% will be green hydrogen in 2050.

And this means that 20% of the carbon abatement will be by hydrogen, and 22% of the global energy mix will be hydrogen. This is a huge amount. In gigawatt to produce all this hydrogen, you need 3,600 gigawatt production capacity have to be built until 2050.

This means 120 gigawatts every year from now and until 2050. In investment, this is USD 2,500 billion will be invested in this market from now and until 2050. This means more than USD 300 million every working day from today until 2050. And HydrogenPro will take a strong leading position in this market. So then we have business update. Please, Martin enter the floor.

[Martin Holtet, executive]

Thank you, Elling.

[Elling Nygaard, executive]

Martin, this has really been a very exciting start of this year.

[Martin Holtet, executive]

What a great start to the year. We have now matured on technology operationally and not the least, the award of the large purchase orders in April. So a fantastic start.

[Elling Nygaard, executive]

Yes, right. And then inside market potential is in front of us now.

[Martin Holtet, executive]

No question about it, and that's why I look forward now to walk you through the business update. Because today, I have a lot of great news I want to share with you. So the highlights of the business update during the first quarter. Our financials, we have a low cash burn rate and a well-capitalized balance sheet.

In -- it's the start of April, we were awarded a purchase order, which has an initial value in excess of USD 50 million. This is one of the largest electrolyzer contracts ever recorded. And in addition to that, we have also signed a long-term service and support agreement.

Later in April, we entered into a purchase order with Mitsubishi for a larger electrolyzer with an amount of USD 3 million to be located in Japan. We have now run a successful initial verification test results of our advanced electrode technology at our technology center at Herøya.

And this technology significantly reduces the cost of producing green hydrogen. And it's my pleasure also to say that now we have completed the fabrication of the largest electrolyzer in China that will now be shipped to Norway.

And the active sales pipeline as of end of the quarter stood at 12.7 gigawatts, which equates to a total bid value of USD 6.6 billion. So then let me walk you through the Q1 financials in more detail. So during the quarter, we recorded revenues of NOK 8.8 million, those revenues are then mainly related to the fabrication and the delivery of the electrolyzer being fabricated in China and a couple of ongoing FEED studies.

The adjusted EBITDA, meaning excluding noncash operating expenses ended at minus NOK 15.4 million during the quarter. The reported EBITDA came in at minus NOK 18.3 million, and the net loss was NOK 22.6 million.

We have a low cash burn. The cash balance ended at NOK 368.7 million as of 31st of March, so during the quarter, we have had a cash burn of only NOK 13.6 million. And we have no interest-bearing debt.

And of course, the financials, we now dramatically changed when we start to deliver on the recently awarded purchase orders. Elling briefly, presented the strategic pillars of the company, and he will walk through those in more detail in the next section.

But our growth plan is very, very clear. We want to grow this company through a partnership approach in combination with a very focused capital deployment plan. And capital deployment plan may consist of 4 main components: #1, being supply chain and fabrication together with large reputable industrial players, and our investment in China has enabled us to roll out a global fabrication setup.

#2, technology and innovation. We want to take the role as a technology front-runner and continue to invest in innovation and technology. #3, organization, we will also continue, of course, to scale up the organization in line with anticipated steep growth in this market. And #4, there is likely to be some working capital need on execution of the larger-scale projects.

And now the landmark purchase order entered into with Mitsubishi. So on 4th of April, we signed a purchase order with Mitsubishi for 40 electrolyzer systems with a total value then of in excess of USD 50 million. This will be fabricated at our fabrication facility in China.

The plant will be located in the U.S. and the main use of the green hydrogen will be for power generation. And then very important to bear in mind. On top of this, we have also signed a long-term service and support agreement with a duration of 10 years.

And why is that important? Yes because, as Elling presented, it's one of our strategic focus areas to be part of offering life cycle services to the customers to generate recurring revenues.

And then later in April on the 19th of April, we signed on the purchase order for a large electrolyzer at the same site approximately -- or the same size as we have fabricated now in China. Contract value of USD 3 million, and that will be allocated at the Takasago hydrogen plant in Japan. So this is a breakthrough for us as well because Japan is a very, very promising market as well.

And some more great news, I want to share with you today. We have now run successfully initial verification result test runs of our advanced electrode technology on our technology center at Herøya. And the efficiency that has previously been simulated at -- in the labs. We can now say that they prove that with initial test runs.

And now the next phase is to do longer-term testing of this technology. And of course, bringing the cost of producing green hydrogen down to outcompete fossil fuels is very, very important.

And then even more great news, we are now -- we have now fabricated the world's largest electrolyzer in China. Of course, the year started with COVID-19 restrictions with a lockdown in at the fabrication facility. But during the last few weeks, we have reopened and now we have finalized the fabrication of the electrolyzer.

That will now be shipped to Norway, just out of our headquarters at Herøya,, where it will be installed and commissioned. And now when this is completed in China, we will now start to prepare for the delivery of the 2 recently signed purchase orders.

And on the picture, you can see on the left picture, you see the cell stacking process. On the right side, you see the final electrolyzer. With regards to the establishment of the legal entity in China. The paperwork is now signed and done, and we're now waiting for the approval process from the Chinese government.

And the plan now is to have that legal entity up and running in June or by July latest. And when we have full production capacity in China, we will employ approximately 100 people at the factory site.

So the active sales pipeline was at 12.7 gigawatts at end of the first quarter. which equates to a total bid value of USD 6.6 billion. And this is then spread over a total of 97 projects. And on top of this, we are now doing on FEED studies because now we see a clear trend with large energy majors entering into this market. And it's definitely important for us to position ourselves for these type of players.

And these are typically -- of course, they are large companies, but they also have very robust balance sheet. And not that dependent on the funding schemes as many of the early movers typically smaller companies were.

And my last slide on the business update. Of course, public commitments is an important driver for green hydrogen. Going 3 years back, there were only 3 countries with a developed hydrogen strategy. But now -- we have more than 40 countries with developed hydrogen strategy countrywide.

And last week, we saw a big step-up in terms of public commitments when the EU Commission announced the REPowerEU, where it will be committed EUR 300 billion of -- to invest into renewable projects, 10 million tonnes of and 10 million tonnes of hydrogen by 2030.

So, one thing is sort of the total market size and for renewables and for green hydrogen in particular, also the speed and the EU now has accelerated the permit process in order to speed up the process to build more green hydrogen faster. So that sums up my section. And now back to Elling to walk us through the strategy section.

[Elling Nygaard, executive]

Thank you, Martin. Interesting figures you are showing. I will talk about HydrogenPro's strategy today and the next years. How to become a #1 provider in this large market. And I will start to talk about the strategy for core elements.

I started in my first presentation is that we are a technology leader through our high-pressure alkaline technology and the world's most efficient electrode technology. We are scaling up together with large players in the global market, scaling up production capacity, and we are scaling up engineering capacity.

Our concept is highly scalable [ Off-the-shelf-products], standardized and modularized, easy to scale according to the plant size and easy to scale according to market requirements, volume in the market and to take market shares.

And the fourth is a full fledge life cycle partnering where we are focusing on target -- to target recurring revenue together with customers of the whole installed base.

Yes, I will start to talk about this electrode technology, advanced electrode technology. This is -- gives us 14% energy savings during operation. And on the left picture, upper left picture, you see this electrode technology in microscope. So special nickel coating doing this efficiency.

On the curve below -- on the curves below, you see the highest curves is without this nickel coating technology and the lowest curves is with this coating technology. And the delta between these curves is energy savings that means 14% energy savings.

On the lowest picture, you see long-term testing of this technology in electrolyzer, where we had this nickel coating installed and is running for a long time period.

And electricity is by far the largest cost in levelized cost of hydrogen perspective. You see this pie on the left side, where electricity is between 70% and 90% of the total cost of the plant -- life cycle plant.

And the investment costs and other OpEx cost is between 10% and 30%. This is depending on the electricity prices, the size of these prices. On the right side, you see some examples in the middle, by $50 per megawatt hour, we will have 100% investment savings. That means over 12 years, you will save all the costs -- investment cost through operation and reduced energy costs during operation.

On the right side of this, you see $80 per megawatt hours that means you will save 1.6% the investment costs or you will have a payback time of 7 to 8 years.

And the electricity prices in Norway for the time being, is about $65 to $70 per megawatt hour for a long-term contract as 10 years -- 10 years contract. So we are in between this $50 and $80.

So our -- as Martin mentioned, our fabrication factories in China and Denmark is running. They are operating and we will have 300-megawatt production capacity within June, July this year. So now, we are looking into the next step. The next step will be more than 1 gigawatt production capacity and engineering capacity.

This scaling, we are doing together with large industrial players in the global market. We are working with partners in North America, in Europe and in Asia. This gives us global footprint, local presence and direct access to the customers and direct relation to the customers to do the partnerships.

We are focusing on standardization and scaling. On the left side, you see the core business to HydrogenPro, the core deliveries in all projects. This is electrolyzer cell-stacks itself and the gas separator skids. Both components is fully standardized, modularized off-the-shelf solutions.

On the right side, you see EPCs, auxillary systems and electro systems, which we are doing together with large partners like ABB, like Mitsubishi, like L&T and so on. This makes efficient production and lower the costs and easy to scale according to the plant size and to get market shares in the global market.

HydrogenPro will build recurring revenue through long-term service agreements. Services like digital, cloud services, remote monitoring, operation and maintenance support, local maintenance and overall services will be in our portfolio. This will create accumulated revenue for the whole installed base. And it will be a huge part of recurring revenue in the future. And we are preparing this in these days.

Sustainability is at the core in our business model and strategy. We have set clear goals within 3 dimensions: people, planet and prosperity. We have made our first sustainable report for 2021, delivered together with the annual report this year.

Then I will summarize, give you some takeaways from this presentation. First of all, I would say, this large purchase order, we have got with Mitsubishi, more than USD 50 million and 40 electrolyzer [ trains ]. In addition, 10 years long-term service agreement in addition to the project.

And the sales pipeline is growing. It's almost 13 gigawatt or USD 6.6 billion. The electrode technology reduced the energy costs by 14%, we have completed the fabrication of the world largest electrolyzer cell-stack in our factory in Tianjin, and this will be shipped to Herøya this summer.

And we're expanding our factory and engineering capacity globally with large global partners, industrial players in the market, in North America, in Europe and in Asia. EU have committed to invest EUR 300 billion by 2030 in the renewable energy industry. And they have -- will accelerate their permit process. Thank you. Now we start Q&A. Martin, will you please participate.

[Martin Holtet, executive]

Yes.

[Unknown Executive]

Yes. Okay. Let's start the Q&A session. One question for you Elling is related to the status on the H2V Dunkirk project? What could you tell us about that?

[Elling Nygaard, executive]

Yes. First of all, we have finalized all the engineering and we've done everything to fulfill our contract obligations, and now we are waiting for the final investment decision that we expect will come out second half this year, and we expect and hope that we start this project end of this year.

[Unknown Executive]

Good. And then I guess this might be for you, Martin. What is the status of the process with the DG fuels?

[Martin Holtet, executive]

Yes. So on the DG fuels project, the engineering study named FEL2 study has now come to -- or will be completed now the next -- during the next few days. And now they will enter into -- then a FEL3 study, even more detailed study. In conjunction aand with starting the financing process and the final investment decision is and also planned during the -- and before end of the year. So they are making great progress on several of the key contracts, including offtake and energy and feedstock.

[Unknown Executive]

Okay. Elling. I think this might be for you as well. You mentioned that the initial -- an initial delivery of 40 electrolyzers, does this mean that the project is bigger?

[Elling Nygaard, executive]

Yes. This is the first step. So the full step or the whole size of the plant is much larger. We don't disclose total project for the time being. But yes, it's much larger.

[Unknown Executive]

Elling, we also talked about the fabrication plans going forward. Where do you plan to go first, the U.S., Europe or in India?

[Elling Nygaard, executive]

All these markets is very important. It's very important. So we are working very close with -- in all the territories for the time being. And we expect and plan to finalize this during this year, so we can start building next year.

[Unknown Executive]

And then back to you, Martin. What do you foresee with regard to the capital need and the plans to raise funds going forward?

[Martin Holtet, executive]

Okay. As you saw in the presentation, so this quarter, we had a cash burn of NOK 13.6 million with a cash position of then close to NOK 370 million. So of course, if you extrapolate that, you would end up with a very large lead time. But of course, now we start to deliver on the projects, of course, with the margin.

But at the same time, of course, we want to grow this company. We have chosen a strategic path of vertically integrate into becoming an OEM player, which is, of course, a bit more capital heavy than our previous value chain position. But we are doing this in conjunction with large industrial players meaning that we have a more asset-light approach.

[Unknown Executive]

Okay. And another question for you, Martin, and that is with regard to the contract in Mitsubishi or this $50 million contract. When will you start booking revenues from that in your books?

[Martin Holtet, executive]

Yes. So we will start to deliver on those projects now. But of course, the main production upscaling will be during the second half of this year. So their main impact will be from third quarter and onwards.

[Unknown Executive]

And then a question related to the efficiency of the electrodes. You mentioned that the efficiency was some 93% of the theoretical maximum? what does that mean actually?

[Martin Holtet, executive]

Should I go with [indiscernible] I think just to simplify the answer to that is, of course, you can say the remaining 7% is basically the loss -- the energy that you're not able to convert into hydrogen.

So with sort of the current technology being hovering around 80%, we can lift that with an additional 14% with this technology. And we are at 80% today. So we are basically closing the gap then from, say, the energy loss, which is today approximately 20%, only down to then 7% with this technology.

[Unknown Executive]

And then a question related to your technology. The new electrolyzer technology, you are researching who is the owner of the technology. That is one question.

How did you get hold of that technology? The second one. And if you can answer on this one, how many people work with the technology development in the company?

[Elling Nygaard, executive]

Yes. First question was about who owns the technology and who have the IP right and that's HydrogenPro. HydrogenPro Norway also hold the technology and all the IP rights. That's for sure. This is not patented technology. So we have to keep this in secured, all the [ drawings ] and all what we are doing in to keep this secured, of course. And in addition, we work with new patents for new development and new innovation. What was the third question?

[Unknown Executive]

The third question was related to how many people does actually work with technology development in the company?

[Elling Nygaard, executive]

Internally, we have some people internal in Norway working with technology development, R&D, our technology innovation department in the Norwegian organization. Then we have a [ York lab ] in Denmark and the advanced surface plating technology factory, and we have a large lab working with electrode technology. And there, it's included students of the university in addition to our employees.

And the third, we have some working for us in the Chinese office, working for the Norwegian technology and innovation development.

[Unknown Executive]

Thank you for that. For how long have you been running the field test on the electrolyzer that proves the higher efficiency? One of you give some comments on that?

[Elling Nygaard, executive]

We have done lab test over the period of almost 1 year, we started even before that. Then we installed this technology in an electrolyzer at Herøya in this spring.

And we have started long-term testing. So this has started. So we don't have this long term. I mean electrolyzer will run over years and new development don't have this verification test over a long period before after many years.

[Unknown Executive]

Thank you. And then I think we are heading for the last question of this Q&A, and that is related to the operations in India. What is the time line for the operations in India? [indiscernible].

[Elling Nygaard, executive]

Yes. Our plans is to finalize all agreements and get all in place during this year and this autumn in fact. And then the plan is to build up the capacity follow-up after this agreement, everything in the agreement is in place. So next year, sometimes, we should have some production capacity in the area.

[Unknown Executive]

Okay. Then I think we have concluded the Q&A session.

[Elling Nygaard, executive]

Okay. Thank you.

[Martin Holtet, executive]

Thank you. Bye.