Hydrogenpro ASA

OSE:HYPRO

Earnings Call Transcript 2023-Q1

[Tarjei Johansen, executive]

Good morning, everybody, and welcome to HydrogenPro's Q1 2023 Presentation and Webcast. My name is Tarjei Johansen, I am the CEO here at HydrogenPro. I'm here today with Martin Thanem Holtet, our CFO. And we're very excited to be presenting the Q1 results for everybody today.

HydrogenPro, we are a global provider of market-leading large-scale green hydrogen technology and systems. We have what is today the world's largest electrolyzer. We have this installed at our tech center in Heroya Industrial park down in Porsgrunn. We are also working on game-changing electrode technology that, combined with the world's largest electrolyzer, we believe that we have the market-leading levelized cost of hydrogen for our clients.

Achievements and major developments during the quarter. We reported revenues of NOK 83 million. That is up 230% from the fourth quarter of last year. We are building our global manufacturing capacity across three continents. Our partner, DG Fuels are getting ready to start the FEL 3 study in June and expect an FID in early 2024. We are well underway with testing of our third-generation electro technology. We are expecting to have those testing finalized in July this year.

And then we are very excited about our lab tests, our fourth generation electrolyzers that are showing an even higher efficiency than what we have today.

Our global expansion is well underway. We announced a few weeks ago our plans to set up manufacturing in North America in the state of Texas. We are planning 500 megawatts worth of manufacturing capacity there with the option to grow that to several gigawatts. We've also announced our strategic partnership in Europe with ANDRITZ, a global EPC provider out of Austria for assembly and manufacturing to the European market. And in Asia, in our factory in China, we are currently working on upgrading that from 300 megawatts worth of capacity to 500 megawatts. And we are targeting 5 gigawatts of global manufacturing capacity in the next 5 years.

We have gone through a lean exercise in our factory in Tianjin in China, gone through some debottlenecking and lane optimization exercises. Combine that with a minor investment of roughly NOK 5 million, we are going to be able to increase the capacity from that factory from 300 megawatts to 500 megawatts within the next several months. And we're running close to 24/7 operations out of our Tianjin factory.

Our partnership with ANDRITZ, we believe we will be able to take a leading position in Europe. We are providing best-in-class green hydrogen technology and systems. We have industry-leading research and development and extensive engineering and project expertise. We combine that with ANDRITZ's capabilities in unmatched global competence within manufacturing and assembly. This will enable us to speed up our offering to the European market. There's very strong synergies between our two companies that will enable a successful partnership. And this will give us an asset-light setup with the ability to gain a very large market share.

And then as we announced our plans to go into the U.S. to set up manufacturing in Texas. We chose Texas based on several strategic criteria. We ranked all the states in the U.S. The site of the Texas is the place where we will set up our brownfield manufacturing site. What we mean by brownfield is that we will take over, excuse me, an existing facility, and we will build that out by introducing -- excuse me.

My apologies for this. I completely lost my voice there for a second. I've been struggling with this for a few weeks. But we will try to make it through this.

I want to talk about China for a second. We are fully operational with our manufacturing in China, and we are progressing with contract deliveries. We have delivered the first electrolyzer from the upgraded manufacturing site in Tianjin. Manufacturing is running at full capacity of 300 megawatts as of right now. And the capacity is to be upgraded, like I said, to 500 megawatts by the end of the second quarter of 2023. We are manufacturing currently ongoing for the ACES project, the world's largest green hydrogen energy hub. And we are delivering, as we have communicated before, 220 megawatts worth of electrolyzers to this project.

Our partner, DG Fuels, I have announced that they plan to start the FEL 3 study in June. We are the exclusive supplier of roughly 800 megawatts worth of electrolyzers for the sustainable aviation fuels plant in Louisiana. And DG Fuels have already sold out 100% of the expected initial production at this site. They have secured offtake agreements with Air France, KLM, Delta as well as GE. The contract value for HydrogenPro here is roughly 10x the size of the contract that we have with Mitsubishi. We will be recognizing roughly USD 500 million worth of revenue here, excluding life cycle services.

FID is expected in early 2024. The FEL 3 study is due to start, like I said, in June. And we are very excited about what this contract has as a potential for us.

I'll hand it over now to our CFO, Martin to talk you through the financials, and then I'll be back with a technology update and a wrap up.

[Martin Holtet, executive]

Thank you, Tarjei. Our strategic vision is to become #1 in this industry. That goes for technology, goes for operations, global presence, but not the least, financials. And I think now with the Q1 numbers we show today, we are on the path to demonstrate that.

Our revenues came in at NOK 83 million during the quarter, which is 230% higher compared to the fourth quarter last year. Our gross profit ended at NOK 13 million. That equates to a 15% gross margin. But what we have made an adjustment in order to better reflect the gross margin on the ACES project. So, if we deduct the R&D expenses related to the validation of the electrolyzer at Heroya, which was NOK 6 million during the quarter, the adjusted gross margin ended at 22.9%. And this then is a better representative in terms of the actual margin and on the ACES project.

Adjusted EBITDA came in at minus NOK 16 million compared to minus NOK 34 million in the fourth quarter. The backlog ended at NOK 648 million as of end of this quarter.

Looking at our cash position. The quarter ended with NOK 208 million of available cash, down from NOK 257 million at the end of the year, meaning end of 2022. We invested NOK 6 million during the quarter, and that was mainly related to some upgrades in our site in Tianjin in China.

And then looking at the right-hand side, you will see then the breakdown of the changes in the cash position during the quarter. So we started the quarter with NOK 257 million, NOK 16 million -- so minus NOK 16 million of adjusted EBITDA, minus NOK 5.5 million of investments and then minus NOK 28 million is the residual, which is then mainly consisting of changes in net working capital during the quarter.

How will then the rest of 2023 look like? First of all, we do not provide specific financial guiding, but we want to shed some light on the P&L impact on the ACES project in the rest of 2023 because the rest of this year will be heavily influenced by that project. So the revenues on that project are recognized in line with the percentage of completion principle, IFRS 15. We will now see a step-up in revenue recognition as the manufacturing activity in Tianjin continued to increase. And we reiterate that we plan to recognize 90% of the contract revenues during 2023 now with a healthy project margin.

We believe we have a very good strategic position in order to generate industry-leading returns. We have a focused capital deployment plan consisting of four key elements. Number one, being global manufacturing and assembly capacity. So what we will -- what is on our main focus area is to expand in the U.S. and also then do the expansion in China. Number two, on the capital deployment plan is technology and innovation front runner. The main use now of funds is related then to the testing of the third-generation technology. Number three, scaling up the organization. We will now continue to build up the US organization. That's the first and foremost most important now on the organizational side. And the last one is that there is typically some working capital requirements on execution of large-scale orders. And that's what we now typically see then on the ACES project delivery, So that's back to you, Tarjei.

[Tarjei Johansen, executive]

Thank you, Martin. What we see in green hydrogen today is a trend that everything is really going all about large scale. And this plays in perfectly with our strategy. We are a large-scale provider of green hydrogen systems. If we look at the installed electrolyzer capacity in the world today, it's roughly at 1 gigawatts. Now compare that with globally announced green hydrogen projects between now and 2030, there's roughly 345 gigawatts that have been announced which is still only 10% of what we need to have installed by 2050 in order to reach the IEA's net zero scenario. So what that means for us and why that has us so excited is because there will be a lot of need for our equipment going forward. We also see that the size of the projects that are being announced are also getting larger and larger. So all of this, like I said, placing perfectly with our strategy.

High-pressure alkaline, which is what we specialize in, is the best-suited green hydrogen technology for large-scale users. It is suitable for renewable energy input, which means it's not necessary to connect to the grid. It's easily scalable with no use of novel material, rare earth elements or PFASs. There's a medium cooling need. There's no need for a compressor. The hydrogen is delivered at a minimum of 15 bars. And it's a well-proven technology that has been around for decades.

We believe we are taking the lead role in the hydrogen technology revolution and we really believe there's big rooms for improvement. This is a technology that has been around for almost 100 years with very little advancements in terms of efficiency. With our third-generation high-pressure alkaline system, which is based on the next generation of electro technology, we're taking a huge leap forward in terms of electrolyzer efficiency and overall improvement in the balance of plant. These efficiency gains and balance of plant improvements will have a huge impact on the overall OpEx spend for running a green hydrogen plant.

We've been developing our third-generation electrodes now for the past 10 years. We're very happy to say that we are getting close to final testing, and we expect to have these on the market by the end of this year.

We currently have the world's largest electrolyzer. The core technology here is based on the second-generation technology, which is about 60 years old. Our standard-sized electrolyzer system is a 5.5-megawatt single stack module. It is modular based to very easily meet the requirements of the customers for megawatt up to gigawatt size projects. Hydrogen and oxygen are delivered at 15 bars. And we have a market-leading efficiency of roughly 80%. We are delivering big stuff, creating big impact.

With our next-generation electro technology generation 3, like I said, we've been working on this for about 10 years, we see significant efficiency improvements. We see the ability to produce the same amount of hydrogen with 14% less electricity. Also, with a 75% reduction in water cooling needs. We did the first container test of these electrodes last fall, and we're expecting to finalize the testing in July this year.

We are ready to begin manufacturing. We have 100 megawatts worth of electrode manufacturing capacity in Denmark at our R&D facility there. And that one can easily be scaled to 400 megawatts per year. It is plug-and-play, everything we do. These new generation electrodes can be installed in our second-generation electrolyzers without any retrofitting.

And then we are working on our fourth-generation electrolyzer. Now this will be a complete redesign of the electrolyzer body. We have already a couple of years in on this research. And we have a test electrolyzer that has been running in the lab with some very encouraging results. This like I said, will be a complete redesign of the electrolyzer body, but also plug and play with using the third-generation electrodes.

And we presented this one in some various forms and fashions before. This is just to illustrate our current offering, what we are about to bring to the market. And then the fourth generation that's -- we estimate we should have that ready around 2026 or thereabouts. They're all high pressure. So you get high-pressure hydrogen and oxygen out of all three of these, second, third and fourth generation. The electrolyzer efficiency on our current second-generation unit, we say is medium with the third-generation, efficiency being high. And then the fourth generation, even higher than that. So we're very excited about all the technology developments that we are doing.

These are all suitable for renewable energy input. And cooling water needs, we see also, as we do these modifications, as we do these technology updates, we're showing a less and less need for cooling water. Obviously, a great benefit in areas where water resources are scarce.

So we are on track to deliver on our 2023 key priorities, complete product delivery for the ACES project. That is progressing as per plan. We are expanding our footprint, setting up manufacturing in Texas. Our partnership with ANDRITZ in Europe. Order backlog is increasing. We have several projects that are getting closer to final investment decisions. And we are engaged in multiple FEED studies. One thing to keep in mind, we have a strategy of going large scale. So you will not see us in the competition for smaller-scale projects, which is important to keep in mind. The large-scale contracts are coming. We are definitely confident about that. It's just that they take some time.

We are well on our way to securing a gigawatt worth of manufacturing capacity with the upgrade of the China factory now to 500 megawatts as well as our 500-megawatt facility in Texas. And then final verification of the third-generation electrode. We expect to -- we're starting the final 1,000-hour test this month, and it will be concluded, like I said, in July.

So that will conclude our presentation. I'm sorry about the technical glitch we had halfway through. The voice is back, but Martin and I will now take your questions.

[Ida Nygard, executive]

Thank you. [Operator Instructions] So first question, what can you say about other FEED projects you're working on and order probability from players other than Mitsubishi and DG Fuels?

[Tarjei Johansen, executive]

Yes. There are several, like I said, that we -- and we can't disclose the name of any of them, but there are several promising studies that we are doing right now. Like I said, we're very excited about our backlog, and we're very confident that the orders will come.

[Ida Nygard, executive]

Can you tell us more about the types of grants you can apply for and receive for the Texas factory?

[Tarjei Johansen, executive]

Yes. So the interesting thing about Texas is not only on the federal level, are there grants and incentives that we can apply for. We have an application in with what is called the Bipartisan Infrastructure Law from the federal level. There are several incentive opportunities in the state of Texas itself as well. It's down to the county and local levels in the different Texas counties. So we're working through all of this right now, and we are compiling a list of initiatives that we are eligible for and that we can make applications for.

[Ida Nygard, executive]

Thank you. For you, Martin, can you provide more information on the financing of the Texas facility?

[Martin Holtet, executive]

Yes. So what we state is that we're looking to invest USD 30 million up to USD 50 million in the Texas facility, depending on the scope. Of course, our most -- I would say, most important goal financially as well is to grow this company. And we're now looking into various funding alternatives in order to achieve that, that goes with equity potentially with it. But what I can tell you is that sort of given where we are in sort of the life cycle of sort of our story, we will not burden the balance sheet with too much debt at the moment.

[Ida Nygard, executive]

Is it correct that the time line for the DG Fuels project is delayed another time? Last time you said in 2023. Do you have any insights to why they are delaying?

[Tarjei Johansen, executive]

Yes, that's correct. I mean we have been communicated that we expected the FEL 3 to be completed by the end of this year with a final investment decision shortly thereafter. There are some delays now from -- that DG Fuels have seen. They've worked through those delays, those issues. And like I said, the FEL 3 is now going to start in June.

[Ida Nygard, executive]

What level of revenue will you need before being EBITDA positive on a group level with expansions included?

[Martin Holtet, executive]

Again, we do not provide specific guidance. We have research analysts covering us. That's their job to provide those type of estimates. So I advise you to enter into discussions with the research analysts. But I think that said, we are, I would say, in a very, very favorable position. We have a very lean and cost competitive setup. I think we'll be among the first players in this industry to reach profitable levels.

[Ida Nygard, executive]

What is the rationale in looking at the fourth generation electrolyzers before you have completed tests on the third generation and before you have delivered the second generation electrolyzers to ACES?

[Tarjei Johansen, executive]

That's a great question, but it's always -- you have to have several things running in parallel. And like I said, the second generation is a well-proven technology. It's been around for 60 years. The third generation is basically an upgrade of the inside of the electrolyzer, not of the electrolyzer design itself. And then the fourth generation, like I said, is a complete redesign of the body of the electrolyzer, but then with the plug and play to use the third-generation electrode technology. So we are continuing -- this is a continuous loop for us. We'll never stop focusing on R&D. We'll never stop putting money into research and development. We believe that, that is really how we will maintain our #1 position in this industry.

[Ida Nygard, executive]

Thank you. When will your U.S. plant be up and running? And will you begin construction of the factory in Texas before the final investment decision is taken by DG Fuels?

[Tarjei Johansen, executive]

Yes. So the decision to set up manufacturing in Texas is not based on the contract with DG Fuels. That is based on the enormous market that we see in that country. We are currently going through a short list of facilities of sites. We mentioned that this is a brownfield development, which means we will not build something from the ground up. We will acquire or lease an existing site with existing buildings and infrastructure already there. We will then retrofit that building for our specific manufacturing needs.

So we're going to take some time to go through that short list, pick the best site for us. Once we have that, we already have the blueprint for how to do the retrofit based on our factory in China. So we expect to be installed and have a facility up and running by the end of next year.

[Ida Nygard, executive]

So -- and that's -- the final question coming here. Does HydrogenPro still plan to build a production line in Europe as in the States? And if so, alone or together with ANDRITZ?

[Tarjei Johansen, executive]

Yes. So the partnership that we have entered into with ANDRITZ is in its initial stage. It's a partnership for assembly and working together in Europe. And then as that relationship evolves, we may or may not look at setting up manufacturing together with them. But that's an option that we will continue. We'll have the dialogue with them. If at some point that we decided something that we want to do, regardless if we have a partner or not, then we will go ahead and do it at that time.

[Ida Nygard, executive]

Perfect. Thank you. And to you who listens, you're welcome to contact the Investor Relations team if you have further questions.

[Tarjei Johansen, executive]

Thank you very much again.

[Martin Holtet, executive]

Thank you.