HTOOW - Fusion Fuel Green PLC (HTOO) Q2 2023 Earnings Call Transcript
2023-08-31 06:03:03 ET
Fusion Fuel Green PLC (HTOO)
Q2 2023 Earnings Conference Call
August 30, 2023, 10:00 AM ET
Company Participants
Benjamin Schwarz - Head of Investor Relations
Gavin Jones - Chief Financial Officer
Frederico Figueira de Chaves - Chief Executive Officer
Presentation
Benjamin Schwarz
Hello, everyone, and welcome to Fusion Fuel Green's Second Quarter 2023 Investor Update. My name is Benjamin Schwarz, and I'm Head of Investor Relations at Fusion Fuel.
So, we'll begin with the safe harbor statement. I'd like to remind everyone that this call may contain forward-looking statements, including, but not limited to, the company's expectations or predictions of financial and business performance, which are based on numerous assumptions about sales, margins, competitive factors, industry performance, or other factors, which cannot be predicted. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions, and they are not guarantees of performance.
I encourage you to read the disclaimer slide in the investor presentation for a discussion of those risks that may affect our business or may cause our assumptions to prove incorrect. The company is under no obligation and expressly disclaims any obligation to update, alter, or otherwise revise any forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law.
Thank you for joining us today. So, I'll quickly run through our agenda once again. So, I'll kick things off with an overview of Fusion Fuel at a glance. The management team will then present second quarter highlights, financials results, project, commercial updates, before wrapping up with a discussion of our milestones and priorities for the remainder of 2023. We will then open up the floor for facilitated Q&A with the remaining time. As in our previous quarterly calls, questions can either be entered in the chat box in the webcast platform at any point during the next hour, or you can submit your questions to me directly at the Investor Relations mailbox at ir@fusion-fuel.eu.
Okay. So, as always, let's begin with a brief refresher on Fusion Fuel, our value proposition, and our positioning in the green hydrogen sector.
So, our mission is to make the energy transition more accessible through the development and delivery of cost-effective clean hydrogen solutions. Our patented miniaturized PEM electrolyzer, the HEVO, is at the heart of everything we do in all of our products. Its simplified modular architecture is a true differentiator that unlocks multiple sources of advantage, including high throughput production, a scalable building block approach that positions us to create customized fit-for-purpose hydrogen solutions and cost competitive distributed production of hydrogen, mitigating the need for hydrogen distribution infrastructure, a critical and costly bottleneck in the market today.
We've built a robust pipeline of actionable near-term projects in our core market, Southern Europe, with significant grant funding tied to many of those foundational projects that strengthen the economics and derisk the investment case. We're also making promising inroads in new priority markets in Northern Europe and North America, geographies that have been unlocked as a result -- unlocked too as a result of the introduction of our HEVO-Chain solution.
We have a differentiated and synergistic business model that positions us across the value chain. In addition to selling our proprietary electrolyzer solution to third-party customers, we also originate and develop green hydrogen projects with diverse avenues for monetizing that value creation.
And finally, we are poised for a significant growth ramp as the market matures with an extensive long-term project pipeline and a world-class production facility in Portugal, where we're targeting 0.5 gigawatt of electrolysis production by the end -- per annum by the end of 2025.
So, with that, I'll now pass it over to Gavin Jones, CFO of Fusion Fuel, to share some highlights from the second quarter of 2023.
Gavin Jones
Thank you, Ben. Good afternoon or morning to all of you who have joined our second quarter investor update call.
During the second quarter, we were awarded a €2.5 million contract to supply a 550-kilowatt solar to green hydrogen plant by a Spanish government agency called CSIC. CSIC, also known as the Spanish National Research Council, is a public research institution dedicated to promoting innovation, scientific research and technological development. This project will be based in Zaragoza, Spain.
We also published our inaugural ESG report in addition to issuing further invoices to our technology cell customers.
After the end of the second quarter, we finalized the acceptance tests at our Exolum hydrogen plant; signed a long-term green hydrogen offtake contract with a Spanish industrial group; continue to work on a strategic partnership with Duferco to cover the Italian market, starting with a 1-megawatt HEVO-Chain, non-containerized version in Southern Italy; and signed an agreement with Hydrogen Ventures to reach final investment decision on a €20 million project in Portugal by the end of 2023. Frederico will cover these strategic partnerships with Duferco and Hydrogen Ventures in more detail later in the presentation.
We will now move on to the financial results for the second quarter. Please note that all values discussed for in euros, unless stated otherwise.
We recognized no revenue during the second quarter. We invoiced customers a total of €1 million during the quarter, but client invoices or inflows do not always equate to revenue recognition as the related accounting standard sets out a number of criteria that must be met before identified performance obligations within these customer contracts have been satisfied. The items that we have invoiced have been deferred until such time that the performance obligations will be satisfied. For our Exolum project, the key milestone pertaining to revenue recognition is provisional acceptance. As this was achieved during the third quarter, the associated revenues will be booked.
As we continue to transition from HEVO-Solar to HEVO-Chain, we identified a significant portion of our inventory that we do not expect to use on projects utilizing both the non-containerized and containerized version. The monetary value of these components was €7.2 million and we recorded an impairment charge for the full amount during the second quarter. Any inflows received as we dispose and/or recycle these components are expected to be credited against the impairment charge in future periods. We continue to source buyers for these components, but until we have agreements in place, we consider it prudent to write off the full value of such materials. This impairment has been recorded as part of cost of sales.
Our operating cost base decreased for the second consecutive quarter. Excluding the non-recurring €1.4 million expense that was recorded in Q1, we saw a reduction to our personnel-related costs due to a lower headcount when compared to the first quarter. This was coupled with further reductions to travel, administrative and consulting fees, but somewhat offset by increased legal and depreciation charges.
Our quarterly charge relating to our equity incentive plan reduced by €500,000 during the second quarter. This reduction related to the forfeiture of a significant number of instruments, which was offset by new grants during the period. The forfeiture of options resulted in a credit of €1.3 million, which is split between equity for those expenses booked in 2022 and profit and loss for those booked during 2023.
The pre-tax loss for the quarter amounted to €12.4 million, of which approximately €8.1 million related to non-cash items.
Moving to the balance sheet. The increase to property, plant and equipment is driven by two items. The first relates to the booking of new equipment that was invoiced during the quarter for our Benavente production facility. This increased the value of this asset by €4.5 million. The second relates to the recognition of a new land lease for our continued development of our own project pipeline. The inventory balance shown is net of impairment charge of €7.2 million that was recorded during the quarter. Other notable movements include a reduction in VAT as €3.2 million was settled during the quarter; an increase to trade as we book the equipment for Benavente, as mentioned above; and an increase to deferred income as we issued further invoices to customers and received more inflows from our C-5 grant award.
Next slide, please. No ordinary shares were sold through the ATM during the second quarter. Over nine trading days in July and on August 1, we raised $492,000 cumulatively by selling 222,000 ordinary shares at an average price of $2.35 per share. These sales were made on an opportunistic basis when the price of our ordinary shares and related volumes were at a level that we considered appropriate for us to be active in the market. The last sale that we made was at $2.28 per share. Our stock has since fallen to as low as $1.69 without us being active with the ATM.
I think this is the most appropriate moment to discuss our capital position. As we have discussed previously, it's a paramount importance that we raise capital to strengthen our balance sheet and to meaningfully extend our runway, which will enable us to generate revenues as we work towards cash flow self-sufficiency. Our main objective is to ensure we select the financing option that best protects shareholder interests while still meeting the needs of the company.
As a small cap company, the ATM has proven to be the most efficient method of strengthening our capital position as capital market transactions of late have tended to focus on larger cap or privately owned companies. We are in discussions with both existing and prospective capital providers regarding financing solutions to meet the above objective. While we have no firm details to relate to you regarding these financing solutions, we expect to update the market further as our discussions progress.
As part of our Q4 2022 investor update, we issued guidance for 2023 through 2025 for expected operating results. Our 2023 revenue guidance reflected amounts forecasted to be recognized on two of our own projects, both of which were expected to be completed during 2023. For the two projects in question, significant grant funding was awarded to each with the key criteria being that both projects were completed before the end of 2023. Given the licensing and permitting delays experienced to date, it will not be possible for these projects to be completed within the allocated timeframe. As a result of the foregoing, we are providing revised guidance. In our revised guidance for 2023, we have excluded the related revenues and cost of goods sold for these two projects. It's important to note that we consider this to be a delay rather than a reduction. For the two projects in question, we had identified investors for both and have now shifted these investors to other projects in our portfolio that are in advanced stages.
The shift from HEVO-Solar to HEVO-Chain will allow for a more streamlined licensing and permitting process. HEVO-Solar requires larger land plots in addition to requiring a more complex licensing process. Moving some of our own projects to HEVO-Chain should reduce some of the difficulties encountered during 2023 to date. We expect our technology sale revenues of €5 million to remain unchanged and are not revising this initial guidance. We expect our invoicing to customers to be ahead of plan, but our revenues will lag behind due to the nature of our technology sale agreements, where revenue recognition will be back-ended as opposed to over time, which is consistent throughout the industry. Slide 12 of this presentation aims to set out some of the key milestones in a typical technology contract.
Our cost of goods sold has been updated to reflect lower revenues for 2023 and the impairment charges recorded during the second quarter. We have estimated a lower production capacity for 2023, a reduction of 10 megawatts on the initial guidance. The investment in the second production line has been pushed to 2024 due to slower-than-expected client deliveries. We expect to issue a revised guidance for 2024 as part of our Q3 investor update.
I will now pass you over to our CEO, Frederico, who will guide you through the rest of the presentation.
Frederico Figueira de Chaves
Thank you, Gavin, and thank you all for joining us today.
I would like to start by sharing with you the latest developments from the work that's been ongoing throughout this year from Exolum. The project, the first of its kind in Iberia, going from solar energy to green hydrogen straight to a refueling station, all co-located, has completed its acceptance testing phase, and the project has been delivered to the client. In addition, we're proud to know that the HEVO-Solar and the HEVOs within them are producing at a higher rate than their [data sheet] (ph).
In this early stage market, Fusion Fuel has proved itself as having a leading engineering team, able to not only design, but also deliver a full solution to the client, having taken on the oversight of the design, construction, installation and commissioning of the plant. Currently, Fusion Fuel has the only green hydrogen plants currently live in Iberia, and we're working to deliver the third to CSIC. This is an experience level that has proven to have substantial value as we enter the negotiation of future sales contracts.
We now have a brief slide show of the Exolum project, which, as I mentioned, we oversaw every step, bringing together several partners throughout. The project included civil construction, installation of the HEVO-Solar, the installation of the balance of plants, the development of control software and processes, the commissioning of the entire plant. The team worked incredibly hard these months to bring a truly pioneering plant to life. This experience and knowledge are a strong competitive advantage the Fusion Fuel has in the Southern European market.
As we've mentioned several times, we've secured substantial strategic sites and started the development of key green hydrogen projects primarily in Portugal and Spain, but also in the U.S. and Morocco.
Focusing on Portugal and the five key owned projects underway. We continue to move forward with these projects, adding significant value to them as we continue to secure the elements required for their go-live, be it power [payments] (ph), connection lines, local permits or even offtake agreements. These, in addition to the €44 million of grants we have secured already for this portfolio and the €15 million already requested for the Aveiro project, create an enormous portfolio value for the company. This is in addition to the [IPCEI] (ph) project submission, where we are still awaiting to hear a decision on whether it's approved or not. We continue to receive questions and clarification points, which we are answering, but we do not know yet what the timeline for a final decision is.
We are currently negotiating the sale of three of the projects listed here to infrastructure investors. With the successful negotiation of these projects and the transfers of those SPVs, we will be able to secure significant revenue orders for '24 and 2025, as well as recognize some of the value of the stock already with those SPVs.
The Sines I and Azambuja projects alone represent €20 million each of potential revenues for Fusion Fuel given that we're looking to not only deliver the electrolyzer, but similar to CSIC and Exolum, we are looking to develop the entire hydrogen plant, including balance of plant, something that we are able to do as one of the only players to have done so in the last years in this market. Our expectation is to be able to close the negotiations on these projects by year-end.
Projects take a long time to take shape, unfortunately, a lot longer than we expected, but also longer than was ever considered in the various national hydrogen strategies. However, the recent negotiations with several large counterparts on the various projects in our existing portfolio, highlight the value these have for the company. Firstly, to create the backbone for technology sales in future years, and secondly, they enable us to engage with hydrogen offtakers and potential investors in a way that simply supplying the solutions with technology integrator wouldn't allow us to do. With this in mind, our team was busy during June and July in preparing three new solutions for our own projects for the latest rounds in Spanish and Portuguese programs as well as being highly engaged in the submissions for four client projects. If successful, these projects represent nearly 70 megawatts of electrolyzer capacity and around €65 million of potential revenues for Fusion Fuel.
The importance of creating these potential projects is only growing since the announcement of the European Hydrogen Bank earlier this year. As a recap, any project that seeks to benefit from the European Hydrogen Bank cannot receive other forms of support or grants. Therefore, if the project listed here are not successful in securing the grants we are seeking, the work to create these opportunities will not be in vain. We will still be looking to make them a reality by assuming the European Hydrogen Bank auction.
In June of this year, coinciding with the progression of our HEVO-Chain offering, the team began pursuing a more focused effort to secure third-party sales for electrolyzer deliveries. The HEVO-Solar proved to be a difficult product for clients as it required substantial land and a unique and ever-changing licensing landscape. To give an example, just in Portugal, the regulatory requirements for a hydrogen project have substantially changed and have had a lot of different introductions of new processes in the permitting process. This meant that things like our Aveiro projects, we would no longer be able to build them as they are today. This is how fast the pace is changing. We will still implement the HEVO-Solar in certain projects, Exolum and CSIC are examples of those, but it increasingly becomes harder as these things will be on industrial sites and the permitting process is much longer.
The HEVO-Chain solution was [relatively] (ph) our core offering today with its industry-leading efficiency for PEM system is receiving significant traction from projects developed by third parties MRO. We've been transferring the technology used in our own projects to the HEVO-Chain solution gradually. And this is proving substantially easier to advance with the licensing and permitting processes.
Since this transition to the HEVO-Chain, our sales team has already submitted around 40 offers for this new solution. These submissions are often complex, requiring full design specifications for hydrogen projects that go well beyond the supply of the electrolyzer alone. This is where our unique ability to design full project scope with our experience in getting these projects implemented is proving to be a competitive advantage. We have seen recent industry news of troubles inside a hydrogen project, and we believe that experience in executing, designing projects and we're being responsible for projects that are live is a significant differentiator in the years to come.
The sales to third parties have several stages, and we expect to be hearing final technology decisions on several of the offers in the coming months now that the European summer break is coming to a close. A highlight for us in this process has been the offering of our technology for the first project in Northern Europe, which was not possible before the HEVO-Chain solution, and something which we noted in the last update as a strategic priority for us. The reality is that although Southern Europe has enormous potential for green hydrogen, the northern countries in the continent are moving faster in establishing a series of projects in this space. And therefore, it's something we certainly want to participate in.
As noted in the previous slide, the sale of our own projects to infrastructure investors is something that we are actively engaged in and look to conclude before year-end, which will generate significant [confirmed] (ph) revenues for the firm as well as release substantial cash flows given that they will consume significant amount of product currently in our inventory.
We've received several questions on our business model as it differs to some of our competitors. Here, we've laid out the value chain of a green hydrogen plant, starting with the power supply and the electrolyzer system, the engineering, the balance of plant procurement, the construction process, finally leading to green hydrogen being produced and delivered.
For Aveiro and Exolum, as well as for CSIC, Fusion Fuel is responsible for the entire value chain, developing a full and rare experience within our team to be able to deliver this. Going forward, our primary focus on the delivery of the electrolyzer system and, in many cases, their installation and commission.
We will also look to provide engineering services and balance of plant dimensioning and procurement for selected projects and mostly limited to projects in Iberia. These are services that require a thorough understanding of the local regulatory requirements, something we have here, but instead of developing for other markets, we will look to partner -- we'll look for partners with the relative expertise.
Partnerships are a key enabler in our strategy and have a multiplier effect on a limited team and size. In Italy, we are working together with Duferco Energia, a company we have partnered on -- partnered with on two project proposals for Italians plants before to create a commercial partnership to promote the Fusion Fuel technology suites to the Italian market. This is an example of the strategic relationship with -- relationships we are looking to form. While we bring our leading technology to a partner with substantial local operations and knowledge and thereby accelerate our presence in the market beyond what would be possible alone.
The partnership with Duferco kicks-off with a 1-megawatt HEVO-Chain Series C electrolyzer system during 2024 to decarbonize local refinery. This is the first project that we'll be taking a containerized version of HEVO-Chain solution, something we're very excited to deliver.
There are further partnership discussions ongoing, covering new markets such as North America and India, with demonstrated project for Fusion Fuel included. We can't go into them now, but we'll share developments on these exciting discussions as soon as we can. We're working -- we're also working with a large renewable specialist entity for potential funding on some of Fusion Fuel's projects in Europe beyond Portugal. These are projects that have already begun to take shape, but they still require investments for their completion. The green hydrogen world is still in its early stage, and these partnerships are important to help us accelerate our growth while ensuring we keep our cost as low as possible.
We have been able to secure some of the first green hydrogen purchase agreements in Southern Europe. Green hydrogen offtake is still in its early stage and is a critical part of making any green hydrogen project viable. Our experience in negotiating contracts for industrial use, [gas spending and mobility] (ph) cases puts us ahead of the curve when establishing ourselves in these markets.
In addition to these three hydrogen purchase agreements, we've also secured several MoUs for the supply of green hydrogen for projects in our portfolio. The experience we established in the negotiation and framing the first agreement form a critical foundation to finalize these larger contracts, ensuring that the projects in our portfolio have an attractive unlevered IRR for their investors.
Before reaching the last slide of the presentation, I'd like to spend a few moments to dig into what is truly special about the HEVO-Chain offering and the HEVO itself. It is a really important evolution in the PEM market, so bear with me for a moment.
Firstly, we have a market-leading PEM stack efficiency of 47.8 kilowatt hour per kilo and an efficiency at the system level of 51.8 kilowatt hours per kilo. This compares to most peers in around 57-kilowatt hours per kilo, roughly a 10% efficiency advantage. Our system is one of the most modular and scalable of any electrolyzer solution in the market, able to be handled [when] (ph) components and dimensions as small as 20 kilowatts. This allows for a high-scale modularity in building hydrogen plants, but also minimizes the disruption during maintenance processes and during any system issues, reducing the risk of requiring an entire plant to shut down as has been seen in other systems.
One point to highlight, where we've gone through into this detail in the past, we have an industry-leading precious metal utilization. This is the chart you see here on the right. We are currently well below the targeted platinum group metals usage in both the EU Clean Hydrogen Roadmap and the U.S. Department of Energy Roadmap. Critically, we've completed more than 2,000 hours of new HEVOs using a lot of platinum group metals only targeted to reached around 2030 and about one-quarter of the value used by some of our more established PEM competitors. This highlights how truly differentiating the HEVO technology is and the advantages it has in the market.
I'll touch upon this slide briefly, but wanted to keep it in as we always look to highlight where we stand versus what we set out to do at the start of the year. Most of the points have been covered in previous slides, however, I'd like to note that HEVO-Chain is now in full commercial mode. And that for the first time, we've included the capture of oxygen for the electrolysis process for a client for a system delivery at the end of the year. The process of producing 1 kilo of green hydrogen releases 8 time that amount of oxygen, better yet, green oxygen, as no carbon emission were released through its creation. In this first case, the client has used oxygen in their industrial process, and therefore, we're able to add on to the system oxygen capture capabilities. We expect this to be included in more and more client proposals going forward.
Last quarter, we highlighted our strategic priorities, and we want to provide an update now on how we are executing against this. As noted, we have started all-effort push on tech sales with our HEVO-Chain offering. This has resulted in more sales offers going out in the last few months than the previous two years. Importantly, this includes the first proposals of projects in North Europe and in the U.S., both key markets for the green hydrogen industry.
And it's clear to us and to everyone that strengthening our capital position and balance sheet is a priority for the executive team. The very limited detail as Gavin noted that we can provide at this time, we're in advanced discussions with capital providers to strengthen our capital position. We do expect to make significant progress in the business in the coming months, given what I've mentioned before and where we are in project sales and tech sales, which should also put us in a position to take further steps to strengthen our capital without having such a distressed valuation.
As noted, the HEVO-Chain offering is well advanced and commercially ready, and we've been delivering offers for projects up to 5 and 10 megawatts already. It's important to note that the largest PEM electrolyzer in operation today is 20 megawatts only. So the path to going large in this industry is still something that everyone is pursuing. For us, delivering on smaller projects and scaling up gradually is how we intend to reach the delivery of larger projects in the future.
As the company grows and the industry evolves, we've also identified the need to review the structure and size of certain areas and, importantly, that we ensure that our resources are allocated in the most appropriate manner for our strategic goals. This is the process that won't stop, and in the coming months, will lead us to have some refocusing of our efforts and cost reductions where possible. The plan is that we can self-fund pursuing some of the new opportunities that we have identified.
Lastly, regarding strategic partnerships, as highlighted earlier, we're thrilled to be working with Duferco Energia, bringing not only our first 1-megawatt containerized order, but also importantly a plan for commercial coverage of the Italian market. We're pursuing other partnerships to help us grow and bring a multiplier effect to our business and are in very advanced discussions in both Europe and beyond. We can't say more now, but hope to be able to announce some of the items we're working on over the coming weeks.
I'll now ask Gavin and Ben to join me as we open the session for some Q&A. Thank you.
Question-and-Answer Session
A - Benjamin Schwarz
Great. Thanks, Frederico. I've gotten some questions in the e-mail as well as in the chat box. A quick reminder, if you do have additional questions, you can send them to the Investor Relations mailbox at ir@fusion-fuel.eu or enter them into the chat box in the webcast platform.
Okay. So, we'll begin some questions from Chris Tsung at Webber Research. There's a handful of questions on the H2 Pioneers project announcing that confirms €3.3 million in grant funding. How do you plan to fund the remaining €2.5 million of capital investment for that project?
Frederico Figueira de Chaves
Great. Thank you, Ben. So to note, this project is one similar to our Portugal projects. These are own projects that we are looking for infrastructure investors for -- to actually, the owners and the funding partners for these projects. We're already in advanced discussions with a renewable investor for that project. To note, that project is we call Toledo I in the slide of Perte and C-14 project front overview. We're in discussions with that same investor for Toledo I and Toledo II, right? The project has also been changed to HEVO-Chain. So, it is a HEVO-Chain offering as well. Most critically, together, these projects hold critical item was the hydrogen purchase agreement, something we have announced and secured already for that project. So, now we are in the next stage discussions with the investor. I hope that answer the question.
Benjamin Schwarz
Yes, that's right. I think it does. As a follow-up to that, we announced that there are four projects preselected for grant funding as part of the first H2 Pioneers call. Are the remaining three projects still in contention? And if not, how should we think about the viability of those projects?
Frederico Figueira de Chaves
Sure. Thanks, Ben. So of the four, one was awarded, and two we let go, and one has been resubmitted to the new purchase. So that is Toledo II is the actual one that we have resubmitted at present.
Benjamin Schwarz
Great. Thanks. What is the pathway to monetize the approved grants or the secured grants, given that only €6.8 million or so has been invoiced to date? Also, the approved grants decreased quarter-on-quarter from €70 million to roughly €60 million. What -- can you provide some clarity as to what happened there?
Frederico Figueira de Chaves
Sure. I'll tackle this in reverse order. The grants, that reduction of the €10 million are related to, as Gavin mentioned, the two projects that we could not complete due to licensing delays, right? So, even though we have been -- we were not the only ones to suffer this problem. In these government programs, there were 40 hydrogen projects approved. Not a single one was implemented given the delays on the government side. So, we were not unique. But effectively, that matches exactly the decrease in grant value was us formally acknowledging that we will not be pursuing the project. In reality, the grant will only expire at the end of the year, but we already reflecting in the numbers.
So, those -- sorry, yes, the recognizing of the revenues. So, effectively, the grants to support the CapEx expense of the project. So, as we try to sell the projects to investors, they will be the ones who will benefit most of the grant. So there are -- there is a certain amount of the grant funding that we are taking receipt as the current holders of the SPV. This allows us to sell some of our products to that SPV. But for the time, the grant, we do hope to see a decrease in that grant number in our own books as we transfer these SPVs to third-party investors. And so with the moving of the grants to third parties, we'll truly benefit from them, we will also see the contract sales related.
Benjamin Schwarz
Great. Thanks, Frederico. Final question for Chris. On the revised guidance, can you provide some clarity as to how revenue decreases -- expected revenue decreases by €20 million, but net income only decreases by €9 million?
Gavin Jones
Sure. I can take that one, Ben. So, in terms of that revised guidance, again, important just to note the split between technology sales and our own project development sales. So, the cost of sales related to the two projects that I mentioned has fully fallen away. And for those who have been following us, you might remember that as reported in our most recently filed 20-F and our Q1 investor update, we recorded significant onerous contract provisions for our technology sales in December 2022, which effectively under accounting standards requires you to book your best estimate of the loss for those contracts when you first realize that those contracts will be loss making.
So, we recorded provision in December and how that kind of works its way out as you record revenue, you will record the corresponding cost of sales. But as those losses have already been recorded in the income statement, the amount that will be recorded once revenue has been recognized, will actually be significantly lower and if a contract loss provision hadn't been booked in the first instance. So sorry, a bit of a worthy response to that, but hopefully, I've got the message across.
Benjamin Schwarz
Thanks, Gavin. A couple of questions from Erwan Kerouredan at RBC. What are the next steps regarding your product simplification strategy and the perceived phaseout of HEVO-Solar? Should we expect further impairments as part of that transition?
Frederico Figueira de Chaves
So I'll answer the next steps and Gavin, you take the impairment piece. So for us, we have -- we are already moving well along on the HEVO-Chain solution. We've been moving our projects towards the HEVO-Chain offering. So, took the advantage of simplified licensing process that offers us. At this stage, there's no real sort of further requirement for us to do a product simplification strategy. It's more just focusing our efforts on getting the projects transferred, which [then mostly] (ph) to the HEVO-Chain solution.
Gavin, I'll pass to you on the impairment.
Gavin Jones
Yes. Perfect. So, we don't expect any further impairments. But again, we can't be 100% definitive on that. What we have done is taking a pretty rigorous review of everything that we have in inventory. And we feel the number that we booked in this quarter correctly reflects the items that we won't -- we know for sure that we won't use going forward. As I mentioned, we're looking to sell those or recycle or scrap them. So hopefully, there will be inflows in the future.
But in terms of other items in our inventory that we have, as Frederico mentioned, HEVO-Solar is not dead. We still have projects ongoing. So, we will utilize the materials that we have. And our production and R&D team have also done a pretty good job at reviewing the materials to be used for HEVO-Chain, both containerized and non-containerized, and we've been able to utilize many, many components within the inventory. If that process wasn't done, then they would have had to be impaired. And we will continue -- we will be on this journey for the next couple of months until HEVO-Chain becomes a bit more recognized in the market, and then we're actually installing the product. So hopefully, not is the answer based on the review that we've done so far.
Benjamin Schwarz
Thanks, Gavin. Very good. Can you touch on the U.S. strategy? Has the U.S. market been deprioritized in the near term in favor of Northern and Southern Europe?
Frederico Figueira de Chaves
Thanks, Ben. No, absolutely not. So the U.S. market -- the North American markets, to throw in Canada in there as well, is certainly a priority for us. As I noted during my speech, we've been making offers for both Northern European markets as well as North American markets. The IRA is a phenomenal opportunity for everyone in the -- in hydrogen space. Any project that includes our technology can benefit from the $3 tax credit a kilo of hydrogen produced. So, it's certainly a focus. In fact, this is one of the partnership discussions that we are engaged in. So, we look forward to being able to sharing more with you all related to our efforts in North America. But just to know that it is certainly a priority for us.
How we plan to cover that market going forward beyond just the sort of answering for inbound technology requests and ongoing live home projects that were already in flight, I believe it will become clearer as we're able to announce details around our partnerships. So, I will be [vague] (ph), but hope to be able to communicate more in the coming weeks.
Benjamin Schwarz
Great. We'll pivot now to some questions from [Jeffrey Grant with AGP] (ph). What are the remaining steps required to reach FID on the projects with Hydrogen Ventures?
Frederico Figueira de Chaves
Sure. So, the project with Hydrogen Ventures, the one that we are discussing with them. This is a project that we've been -- already we have the licensing of the power grid, we have the power, and we have the hydrogen production land. So, at the moment, this is more around the contractual discussions with Hydrogen Ventures, then doing their review and due diligence on the project, all the project materials, the grant contracts and so. So in terms of FID, these are now the coming months. It's really on investor review of the project more than any particular milestone.
Benjamin Schwarz
Great. Second question concerns the reference made in the second quarter materials for more standardization and rigor in sales efforts. Can you expand on what you mean by that? And what benefit that standardization will have?
Frederico Figueira de Chaves
Sure. Of course. So effectively, when you do HEVO -- this is one of the advantages of HEVO-Chain. When you do a HEVO-Solar project, every single project needs to be completely tailored. The amount of hydrogen produced by HEVO-Solar depends on the local radiation of that site. The topography of the land can change the requirements and so on. So every single proposal needed substantial custom [indiscernible] and custom offering, nearly doing a full project review just to put out an offer. With the HEVO-Chain, we're able to have standard offers. So, we have effectively much more standard building blocks that can be applied anywhere, given that it requires certain amount of land to place the units. This has allowed us to have pretty much from standard designs to standard offer letters, layouts 3D -- 3D layouts, sorry, and so on. This -- the ability to be able to deliver heavy 40-plus offers in a couple of months would certainly not have been possible with HEVO-Solar offering. So that standardization is what we're referring to.
Benjamin Schwarz
Thanks. Moving now to some questions from the audience. What's the status of the HEVO-Solar given the permitting challenges referenced during the quarter? And can you provide some additional commentary on those permitting issues in Portugal and Spain?
Frederico Figueira de Chaves
Sure. So again, on permitting issues in Portugal and Spain related to the type of land and the rules and requirements that each hydrogen project has to go through. So for example, last year, Portugal passed the regulation that was called Simplex that allowed hydro projects to be spread through a number of regulatory and licensing requirements and sort of a licensing-light approach. As of this year, that position was reversed, and that accelerated the process is impossible to actually projects that were pursuing that Simplex system, they've been informed that they need to revert back to the old lengthier regulatory process. So that sort of change of goalposts from the regulators make it very hard for the various projects. It particularly hits the HEVO-Solar because the type and the -- I should say the original regulatory requirements that they now reverted back to the amount of licensing required -- I should say the required licensing hurdles significantly increases the footprint size of the project. So when you're doing a one-hectare project, it's very different when you're doing a 10-hectare project and so on.
So effectively the required licensing process for HEVO-Solar project with any sort of relatively decent size meant that it would immediately hit all the highest hurdles. Again, this is also a development in the regulatory process that caught us by surprise, given that the previous one was only implemented last year effectively changed the -- changed game for HEVO-Solar in these markets. It's not to say that, that applies to Morocco or other markets, but certainly for Portugal and Spain, these were one of the changes. So effectively what we have done is we have separated the hydrogen production from the power production in terms of physical separation, and we transfer the electronics to the electrolyzer. This proves still to be a very cost-effective manner because the HEVO-Chain is actually performing very well, exceptionally well with a very low or I should say very high efficiency, low kilowatt hour requirement per kilo.
Benjamin Schwarz
Thanks, Frederico. Can you provide an update on the Gedisol project which was announced last year?
Frederico Figueira de Chaves
Sure. The Gedisol project and the HEVO-Solar project to be specific, those are the two projects that were impacted by the delays of licensing, as Gavin mentioned. These were the projects that we were expecting to deliver this year, they have been -- we had to change the investors for those projects to other projects in our portfolio.
Benjamin Schwarz
Thanks. When should investors expect some clarity on the company's capital position?
Gavin Jones
So, I think as Frederico mentioned, we are in discussions with various counterparts regarding various different financing solutions. So, it's not appropriate for me to go through in detail right now, but hopefully soon. But again, what I will build on my previous comments is that our goal has always been for us to bridge our finances to cash flow breakeven. We continue to look at all the solutions available to us to protect shareholder value. We don't want to fully fund the business plan on day one, especially given our depressed share price because any significant financing ends up being a dilutive recapitalization of the company, so we must move a caution on these items. So hopefully, I'll provide an update relatively soon.
Frederico, anything to add to that?
Frederico Figueira de Chaves
No, that's right.
Benjamin Schwarz
Thanks, Gavin. Are you in a position to disclose Fusion Fuel's levelized cost of hydrogen from the HEVO-Chain solution? And then from a commercial standpoint, are you seeing customer willingness to pay a premium for green hydrogen?
Frederico Figueira de Chaves
Thanks, Ben. So, on the first point, I'd refer people back to slides we have shared previously where we noted our levelized cost of hydrogen for our HEVO solution. We already at that point in time recognize that levelized cost of hydrogen apply both the HEVO-Solar and the HEVO-Chain. And therefore, even in the slide at that point in time it simply said, HEVO solution. So we have made that public before. We believe it is industry-leading. And on the final levelized cost of hydrogen for any project very much depends on the cost of energy for a project and the load factor. So, it's solar-only or solar and wind. And again, we are seeing phenomenal results for projects we're modeling with solar and wind with the HEVO-Chain. So I would refer back to that.
Ben, sorry, there was a second part to the question.
Benjamin Schwarz
Yes. Just touching on customer willingness to pay a premium for green hydrogen?
Frederico Figueira de Chaves
So absolutely, as we noted, we've been able to close three hydrogen purchase agreement. This is something that is rare in the market and we are effectively seeing that happen more and more. We'll note that the guarantee of origin market is starting to truly take shape in Europe. And we see the first sort of -- I should say, demand and prices of that come out into the market. Those make green hydrogen projects extremely attractive. So, we certainly are seeing that appetite for a certain amount of volume of green hydrogen at a premium.
Benjamin Schwarz
Great question here on how the proposed three pillars regulations being considered in the U.S. would impact Fusion Fuel and aspirations or desire to utilize the $3 PTC, if at all?
I'll just chime in here as I sit here in the U.S. I invite Frederico and Gavin to add. So for those who aren't aware, the three proposed pillars are: temporal matching, so matching energy consumption with clean energy production on an hourly basis; additionality, it's only using installed -- recently installed, I should say, renewable production; and then deliverability, which is using renewables production that is co-located with the hydrogen facility.
Interestingly, those first two pillars are consistent with the delegated acts that were adopted earlier this year by the EU. So we don't -- it doesn't represent a meaningful hurdle for us as we're already ensuring compliance with our project design and definition in our European portfolio.
And then with respect to deliverability, our modular technology is designed for co-location, both with end users as well as with renewables production. So we don't anticipate meaningful changes to our approach to projects in the U.S. going forward.
Anything to add? Otherwise, I'll move on to the next one.
Frederico Figueira de Chaves
Please, Ben.
Benjamin Schwarz
Great. A question here on the status of the IPCEI submission. Has feedback been received? And how does the transition from the HEVO-Solar to HEVO-Chain impact that project, if at all?
Benjamin Schwarz
I'll say, we've been working in forming the -- I'm now speaking generally, not specifically for the IPCEI, but all programs, we've doing the transition from HEVO-Solar to HEVO-Chain in a coordinated manner to ensure that this doesn't cause problems to the different fundings and awards that have been granted. The IPCEI project, as I mentioned in my notes, we continue to await to final decision. We have been receiving questions pretty much continuously on projects throughout the last months. And we eagerly await the decision. No expectation on timing, sorry. We do not have nor received indication as to when the timing would be.
Benjamin Schwarz
Great. Thanks. Perhaps a question for Gavin. How are you thinking about reducing fixed costs, given the commercial challenges and revised revenue guidance discussed during the call?
Gavin Jones
Yes. So, we have embarked on a rigorous review of our cost base like from cost of materials to general operating costs. All costs are being considered. And I think it's a paramount importance for us to ensure that our cost base matches as much the reduction in the inflows, so that we can continue to be an efficient entity and meet our milestones as quickly as possible.
Benjamin Schwarz
Thanks, Gavin. What is the status of -- Frederico, you alluded to this earlier, but what is the status of the U.S. strategy given the departures of the previous co-Presidents of Fusion Fuel USA? And do you plan to hire new leadership at any point?
Frederico Figueira de Chaves
As mentioned, the U.S. recognizes definitely a core market for us. We've mentioned in the past that we've had several projects that we are pursuing there. We are actively engaged in partnership discussions for the U.S. market, which I hope will bring some clarity to that question. I will just leave everyone with a note that, yes, the U.S. market is a priority for us. And yes, we do intend to have coverage and work together with local partners to make most of the opportunity set there in the America. We have already also have been looking at the starting the process of licensing our HEVO-Chain solution to also be -- have all the required licenses for sale in the U.S. So, it's certainly very much in the -- in our strategic priority list.
Benjamin Schwarz
Thanks. With respect to the new information on BGR in India, what are the drivers of that project or Indian aspirations given the notable difference in the subsidy and grant environment between India and Europe and North America?
Frederico Figueira de Chaves
So, to note, India does have substantial hydrogen project support and also hydrogen technology support, making it an attractive market for future. This is why we already talked about the partnership with BGR Energy. It goes beyond just the demonstrated plant. It needs to be seen in context of a broader effort for the Indian market. Given those discussions and what the activities being done there are on BGR side and not on our side. I'm not going to go into the specifics of those projects, but just to note that it is in the context of a broader effort and attractiveness that we see in the Indian market.
Benjamin Schwarz
Thanks. Gavin, a question here from Torkjel Jordbakke at Fearnley Securities. Can you just help just contextualize a bit more of the €20 million reduction in revenue guidance for 2023? Is that due to grants not being recognized as revenue or due to delayed commissioning? Or perhaps just elaborate a little bit more on that?
Gavin Jones
Sure. Thanks, Ben. So the €20 million reduction is purely because of the two projects, so the HEVO-Solar and the Gedisol projects that will no longer go ahead in 2023. And so the revenue that would have been recognized on those contracts would have related to the electrolyzers, the HEVOs that we would have sold to those projects once investors have basically taken control of the special purpose vehicles who will develop the project, okay?
So, not related to grants other than the fact that because the grants required the projects to be completed in 2023. I think [indiscernible] because the project couldn't be completed in 2023, the grants were no longer relevant. They couldn't be drawn down. So, it was more a timing issue that the project couldn't be completed for us to recognize the revenue as opposed to grants not being recognized.
Frederico Figueira de Chaves
Gavin, I'll just also note that the -- one of the projects that was impacted was the HEVO-Solar project and the investor counterpart for that was Hydrogen Ventures. It is by coincidence that we have simply now moved Hydrogen Ventures to the Azambuja project. So effectively, the concept, the use case, everything remains the same. It is simply a change of site in the discussions. So, this is why we are well advanced and we believe that those contracts can be closed by year-end. This is an evolution of the efforts that we're already making with them with a change of location rather than a whole new discussion.
Benjamin Schwarz
Thanks, Frederico. Last question before we close here. It relates to strategic partnerships more broadly, but there was a question around whether the company is considering a partnership or collaboration with companies like J.C. Bamford given their stated desire to be a leader in hydrogen-powered heavy-duty equipment?
Frederico Figueira de Chaves
Just for us, we're looking at a broad spectrum of partnerships. As we noted before, we have the partnership with Toshiba in the R&D development and maintaining our leading position in that platinum group metals. We discussed with the Duferco Energia today a partnership on commercial coverage for the Italian market. I mentioned before a European partnership to fund and develop some of projects in our portfolio. So, we are looking at a number of them and specific users like industrial users or heavy users of hydrogen are included in that. I'm not going to speak about specific names and so on as you -- it's understandable. But yes, we have various types of partnership being engaged in.
Benjamin Schwarz
Thanks, Frederico. So that will do it for our second quarter webcast. Thanks to everyone who joined. If you have additional questions or if you'd like to speak with myself or with management, please feel free to reach out to me and the IR team at ir@fusion-fuel.eu, and we look forward to seeing you all again at our next update.
Gavin Jones
Thank you, all.
Frederico Figueira de Chaves
Thank you.
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Fusion Fuel Green PLC (HTOO) Q2 2023 Earnings Call Transcript