Ceres Power: electric vehicles and the path to profits

Ceres Power (LSE:CWR) is a rare British company selling technology to South Korea, Japan and Germany. Talking to interactive investor’s Lee Wild, CEO Phil Caldwell offers a controversial view and discusses the rapid shift to electric vehicles, when Ceres will begin making money, and how it could become a world leader.

Lee Wild, head of equity strategy, interactive investor: Hello. Today I have with me Phil Caldwell, chief executive of fuel cell technology company Ceres Power. Hydrogen might be the energy supply of the future, but it’s not cheap, it’s more expensive than fossil fuels at the moment. At what point does hydrogen become financially viable?

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Phil Caldwell, CEO of Ceres Power: It becomes financially viable today at about $2 a kilo, and that might not mean an awful lot to you but, you know, the reason that number is out there is because that’s the point at which you can generate hydrogen from renewables versus actually getting hydrogen from a fossil fuel base and, therefore, there’s not much benefit to doing that. But that’s now achievable and two-thirds of the cost of the hydrogen is really the energy input. 

As we’re seeing, you know, power prices fall on the back of cheap renewables, that’s really enabling this transition towards hydrogen as a fuel of the future. So, it’s about scale and getting the Capex side down on the electrolysis side that produces that and also, obviously, the trend on power prices and also high efficiency, which is where solid oxide has a role to play as well. 

So, it’s lower cost, high efficiency is really the target for electrolysis to generate hydrogen at the economic levels that we need but it’s totally achievable.

Lee Wild: In what sort of timescale, is it imminent?

Phil Caldwell: I think it’s, you know, in a time frame of the next five years. I think you’re starting to see announcements now, targets put out there from around the middle of this decade onwards where that becomes viable.

Lee Wild: What’s your view on the shift to electric vehicles? Stopping production of electric and diesel cars in the UK from 2030 is one thing, but what about battery sizes, journey range, infrastructure, that kind of thing? I mean, will we have mass adoption by the end of the decade, do you think?

Phil Caldwell: Yes, I do, actually. I think it’s behavioural, I drive an EV [electric vehicle] now and it’s fantastic. And, it used to be range anxiety was the big issue and, you know, most vehicles now will do more than 200 miles, so I think most people for the majority of journeys EVs are the better solution. I also think that, and this is controversial, but eventually there will be a real stigma as EVs come to the fore around driving combustion engine vehicles that are creating health problems and are, potentially, higher carbon. So, I think it will get to a tipping point.

Lee Wild: Potentially bad news for Top Gear then.

Phil Caldwell: Have you ever driven an EV, I mean, they are fantastic. My EV does 0 to 60 in 4.5 seconds, it’s much more exciting than driving a combustion engine vehicle.

Lee Wild: You’ve just published your results for 2020, 15% increase in revenue to £21.9 million was driven by licence fees and provision of technology hardware. Could you give us more detail on revenue generation and expected future trends?

Phil Caldwell: Yes, sure. So, you’re absolutely right, if you look at that revenue it’s increase in licence fees to the likes of Bosch in Germany, Doosan in South Korea and others. I think one of the things that’s really pleasing about that revenue is it’s 100% export, so we’re a great example of a British company selling technology to the Japanese, the Koreans and the Germans, you don’t get that every day of the week.

And, it’s growing, so the other thing we said is the order book has grown as well, so we’ve got just under £100 million of contracts at the order book or pipeline stage. So, we’re very confident on continuing a high growth trajectory on revenue, built upon a combination of licence fees and engineering, basically.

Again, you know, we talked about the business model earlier, that’s very significant margin, so a lot of that revenue goes straight through to funding the bottom line of the company. But where this company really gets to be profitable is, the deals that we do are licence deals and we get royalties a kilowatt once these technologies come to market. 

Our major customers like Bosch and Doosan are building up capacity for starter production 2024, so really where we get to the inflection point of value in this company is when we get royalties from mass production. So, we’re building revenue year on year and using that to really fund the growth of the organisation and putting money back into the organisation to open more markets, more applications because that gives us the future value for the business.

Lee Wild: Operating losses almost doubled to £14.8 million last year but if revenue does grow rapidly that should, well, more of that should drop through to the bottom line.  What does the path to profitability look like?

Phil Caldwell: Yes. Well, I just articulated, we’re in this growth phase now where we are funding a lot of the business through engineering services and licence revenues and we expect that to continue. And then, when we get to 2024 and royalties that’s really 100% margin revenue, which is the profitability of the organisation, so I think it’s that kind of timeframe that we’re looking at for profitability.

Lee Wild: OK. You’ve just raised £181 million from a share placing at £10.60, so could you just give us an idea what the money will be spent on and how long that will last.

Phil Caldwell: It’s going to be spent on growth and this new area of expansion into hydrogen electrolysis, so running the technology in reverse to actually produce green hydrogen, which is a huge emerging market. And, we think it’s sufficient money to take the company through to profitability, you know, one of the beauties of this business model is it is asset light, so we’re not having to invest capital into building large factories etc., we do that with our partners, such as Bosch, such as Doosan, etc.

So, really, it’s all about innovation and technology and generating high quality jobs in the UK, science and engineering jobs. I mean, during Covid we’ve created 100 new highly skilled science and engineering jobs in the UK to export technology to the world’s leading companies. So, you know, this is a fantastic business opportunity for UK companies like Ceres and we want to be world leaders and, hence, this capital raise positions us for that.

I think, you know, some investors, kind of, are looking at income stocks and profitability, but this is about growth, this is a high tech growth stock which has the potential to be a world leader and that’s where we’re positioning the company.

Lee Wild: And, retail investors were given an opportunity to get involved in the fund raising at some point, weren't they?

Phil Caldwell: Yes, we did. I mean, we did and institutional placing and we also had an offering so that retail could participate, as well. Both of those, the institutional and the retail, were heavily oversubscribed, so we, obviously, had to scale back both.

Lee Wild: Phil Caldwell, at Ceres Power, thank you very much for joining me today.

Phil Caldwell: Thanks for your time.