FREYR Battery (NYSE:FREY) Q3 2023 Earnings Call Transcript

FREYR Battery (NYSE:FREY) Q3 2023 Earnings Call Transcript November 9, 2023

FREYR Battery beats earnings expectations. Reported EPS is $-0.07, expectations were $-0.4.

Operator: Thank you for standing by. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the FREYR Battery Third Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Jeff Spittel, VP of Investor Relations. Please go ahead. Jeffrey Spittel Hello and welcome to FREYR Battery’s third quarter 2023 earnings conference call. With me today on the call from are Birgir Steen, our Chief Executive Officer; Oscar Brown, our Chief Financial Officer; Jan Arve Haugan, our Chief Operating Officer; Jeremy Bezdek, Executive VP of Corporate Development and President FREYR Battery US.

During today’s call, management may make forward-looking statements about our business. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expectations. Most of these factors are outside FREYR’s control and are difficult to predict. Additional information about risk factors that could materially affect our business are available on FREYR’s S-1 and annual report on Form 10-K filed with the Securities and Exchange Commission, which are available on the Investor Relations section of our website. With that, I’ll turn the call over to Birgir.

Birgir Steen: Thanks Jeff and hello to everyone, for joining today’s call. We’ll start today with an overview of what we believe is FREYR compelling equity story where value propositions based on the premise that electrification is both inevitable and reliable mass deployment in batteries. But in today’s higher-for-longer cost of capital environment, the companies who will emerge as the next leaders of the energy transition, must balance growth aspirations with rigorous financial discipline. Our team at FREYR is unified in that vision of the business and we’re committed to build upon a unique competitive position with that approach. With that in mind, we’re excited about the opportunities we have to establish FREYR as a leading developer and scaler of battery technologies across the energy storage and electric mobility sectors.

Tesla asserted earlier this year, the long-term growth potential in our core markets is profound and aligned with decarbonization initiatives. Western Energy Security that a plummeted public policy highlighted by the Inflation Reduction Act in the US. As stewards of your precious capital, our responsibility is to maintain the liquidity we need to convert these opportunities, which are punctuated by growing universe of real options into lasting shareholder value. We intend to do that by protecting our strong balance sheet and deploying capital selectively, while we advance our ongoing transformation initiatives. Diversifying on the technology spectrum and battery value chain, maximizing the IRA incentives and finally developing our highest return projects.

Turning to slide four. Let’s review our key messages this quarter. As you saw on this morning’s release, we’re contending with the delay in our progress to fully automated reduction at the CQP and we have implemented a detailed plan to address the complex challenge of scaling the 24M semi solid platform. In light of the current CQP calendar, the US team has rescaled Giga America to pursue the full scale project on two parallel tracks. Track one is based on the 24M semi solid technology. Track two is to leverage conventional technology. As Jeremy will document shortly, these two tracks are not mutually exclusive options for the Giga America site and they’re aligned with our strategy of expanding on the battery technology spectrum. Turning to the Giga Arctic project.

We have elected to minimize spending in 2024, while our work continues at the CQP, and while we engage with Norwegian and European government stakeholders to establish framework conditions that place the project on globally competitive economic terms. Moving to slide five. The playbook to navigate today’s high volatility environment as it follows. We’re initiating a cost rationalization program to reduce our total run rate cash spending by over 50% in 2024, which will extend our liquidity runway to two-plus years. Oscar will elaborate on it short. While we safeguard our balance sheet, we won’t be able to move as quickly as we’d like in the front, but I want the following point to be clear. FREYR is not going into hibernation. We’ll continue our important work at the CQP where we will hold our vendors and partners jointly accountable for our progress.

We’re pursuing conventional technology partnerships which will mitigate the risk to the business and open new opportunities. We will continue to fund critical initiatives that we believe will generate value for our shareholders, and we will advance the key priorities while we maintain the strategic flexibility that the necessary to drive in today’s high volatility dynamic. To slide six. Here, the latest on the CQP. The timeline to achieve automated production of inspect cells has pushed beyond our previous goal of the fourth quarter 2023. Commissioning of the casting unit cell assembly equipment, which is highly complex proving to be more difficult and time consuming than we previously envisaged. We’re attempting to scale a new battery technology with intricate next-generation equipment, which has and will continue pose engineering challenges.

Our response to these challenges to implement a plan to prevent further delays. We have implemented changes in project governance. We’re heightening coordination with our vendors and ecosystem partners, and we are elevating the involvement of our battery subject matter experts and other relevant partners inside and outside FREYR. This initiative is spared by the formation of the technology advisory board, comprised of some of the industry’s foremost minds, including Dr. Dan Steingard, FREYR Board member and co-director of the Columbia University Electric Chemical Energy Center. Dr. Steingard and his fellow advisory board members by drawing on their collective wealth of commercial operating experience to assist our team at the CQP. Let’s go to slide seven for a brief overview of technology strategy.

Our strategy has always been to establish FREYR business across the technology spectrum and into value creative adjacencies within the battery technology chain. And we are working on that front. We’re pursuing conventional technology partnerships to complement 24M semi solid to unlock avenues to financing and commercial development and potentially accelerate project development timelines. Conversations we’re having are exciting and are a testament to the unique position we’re establishing in the marketplace as an industrial partner of choice. The pursuit of technology diversification is intended to be complementary and add to 24M semi solid and in no way diminishes our excitement about 24M’s potential as a fit-for-purpose solution across a variety of growing use cases.

Although, scaling the 24M platform at the CQP is proving to more challenging and we anticipated, we believe we have the financial organizational resources to do it and we believe that it’s a worthwhile investment of our time. Now I’ll turn to slide eight in Giga Arctic. We announced this morning that we’re minimizing spending on Giga Arctic in 2024 because we need to prioritize the liquidity during the CQP scale-up and focus on capturing IRA incentives in the United States. We value our partners and supporters in Mo i Rana, where the CQP remains our first operating assets and the technological heart of the company. The higher-for-longer interest rate environment and introduction of the IRA have changed the business case for Giga Arctic. We must operate within reality.

And today the project is no longer in competitive economic terms, but the opportunities that we have in the US. As stewards of your capital, we have a fiduciary obligation to invest in our highest return projects and we intend to fulfill that duty by making sensible business decisions. While we minimize spending on Giga Arctic in 2024, we’ll continue to work with stakeholders in the region European governments to develop framework conditions that are competitive with the IRA, with Canada’s variable cost offsets under capital spending initiatives in countries and in the rest of the world, all of which are required to counter China’s structural cost advantages and dominant market share across the battery supply chain. We look forward to engaging locally to promote the virtues of establishing decarbonized battery production here in Norway.

In interim, we will spend the previously committed CapEx to Giga Arctic to secure the asset to serve the option value of the project. And with that, I’ll turn the call over to Jeremy.

Jeremy Bezdek: Thank you, Birgir. Please take a look at slide nine for the Giga America update. As we highlighted in the second quarter earnings call in August, continued feedback from potential investors related to the Giga America financing has stressed the importance of technology validation at the customer qualification plan. The CQP delays that Birgir mentioned have impacted our ability to close the Phase 1A two-line fast track project financing within the previously discussed timelines. With that, the Giga America team has decided to take a refreshed look at the project and the business case. The value of the time advantage related to the fast track project has decreased significantly, leading us to make the decision to terminate the two-line project.

We see significant value in adjusting our focus to the larger project, Phase 1B. That was the original plan for the site. We believe that with validation at the CQP to come, we have the right roster of potential investors to secure the equity financing for a 24M based production facility in Georgia. Additionally, the larger project aligns well with our DOE financing plan that Oscar will discuss. We are now working toward a potential FID of the larger 24M base project, along with potential DOE and equity financing, some point late in 2024. Additionally, we are pursuing a second track for Giga America as Birgir mentioned. We are currently in multiple conversations with potential conventional technology partners around advancing a project, utilizing that conventional technology at the Georgia site.

Due to the lack of technology risk involved with that option, timing of both FID and startup production could provide us an earlier entry into the US market. Our plan involves making a technology and partner selection in the near-term, and we will announce that decision when that selection is made. We are excited about the opportunity to get into the US market with production assets sooner, and the site in Georgia is large enough to accommodate both a conventional and the 24M production facility with plenty of room to spare. We look forward to providing you more updates on both tracks as we progress through the end of the year and into 2024. I will now turn it over to Oscar to provide a general finance update as well as an update on the redomicile affiliation efforts.

Oscar?

Oscar Brown: Thank you, Jeremy. On slide 10, we provide an update regarding our announcement to redomicile from Luxembourg to the United States. This move dramatically expands our opportunity for equity index inclusion. Today, only an estimated 3% of our shares are held by index funds paired with a peer average of over 20%. Redomiciling has the potential to drive incremental holdings of up to 45% of our current market capitalization if we were held by all the index funds we would qualify for, as well as associated actively managed funds who benchmark against those indices. Moving our domicile to the US also has the added benefit of aligning flare with the country that has offered the highest bids for battery manufacturing at scale in the world, as well as the world’s largest market for our products.

The US and Delaware have well understood corporate governance and disclosure requirements, and we will still be able to maintain our European strategies alongside our US efforts. The transaction to move from Luxembourg to the US requires an extraordinary shareholder meeting, which is now set for December 15th for shareholders of record as of October 25th. The transaction requires 50% of our outstanding shares to vote in order to ensure a forum and two-thirds of those shares voting must vote in favor of the transaction for it to close. It’s very important that all shareholders vote. Details of the transaction can be found in filings under FREYR Battery Inc. on the SEC’s website and through links on our own website. We expect to close the transaction by year-end.

Moving on now to slide 11, the financial update slide of the earnings deck, I will review our recent financial results. The quarter ended September 30th, 2023, FREYR reported a net loss of $10 million or $0.07 per share and compared with a net loss of $94 million for the same period last year. Net income from last year’s period was impacted by a $70 million non-cash loss on our warrant liability fair value adjustment due to changes in our stock price. This line item reflects a gain when our stock price declines during any reporting period and a loss when our stock price increases. For the third quarter of this year, we recognized a $24 million non-cash gain on this item. For the nine months ended September 30th, 2023, the company reported a net loss of $48 million or $0.34 a share compared with a net loss of $124 million or $1.06 per share in the same period of last year.

More importantly, the company reported higher general and administrative expenses as well as higher research and development costs for the third quarter in the nine months ended September 30th compared with the same periods last year. Logically, this is a function of our larger organization, which has been managing more projects around the world. Looking ahead to 2024, we have initiated a significant cost cutting and resource prioritization program focusing on the CQP and Giga America, which will significantly reduce our annual cash burn rate as we seek to extend our liquidity runway more than two years and into 2026 and focus on those two projects, all before we raise additional capital. We expect a material reduction in G&A and capital commitments in 2024 compared to 2023.

Regarding our cash investment rate and liquidity, we spent net cash of $235 million during the first nine months of 2023, which included $169 million on capital expenditures. During the third quarter, FREYR spent $41 million on capital expenditures, of which $32 million was spent on Giga Arctic, and about $7.5 million was spent on the customer qualification plan and test center. Capital expenditures were partly offset by a receipt of a $3.5 million grant in the United States. We ended the third quarter of 2023 with $328 million of cash, cash equivalents, and restricted cash and no debt. For the rest of the year, our remaining capital expenditures will focus on completing and securing the initial buildings of Giga Arctic, as well as completing and ramping up the customer qualification plan.

Major additional capital expenditures in 2024 will be dependent on project level financing as we preserve ample burn rate and runway for the company. Our near term priorities, again, remain ramping up to CQP, securing the initial buildings of Giga Arctic as we continue to seek a globally competitive incentives package of scaling battery manufacturing from the government of Norway, as well as progressing Giga America. We provide additional guidance on capital expenditures only upon the success of Giga America initial capital raise, which we now expect in 2024 as it is tied directly to the successful automated production of batteries at the CQP and the testing of those batteries by our largest customer. While we continue to work with the Norwegian government on incentives programs, and we’ll do so throughout next year, we are not currently forecasting any capital expenditures for Giga Arctic in 2024.

We expect capital expenditures in the fourth quarter of this year will be in the $40 million range and we expect that we’ll end the year with cash and cash equivalents of approximately $250 million when G&A, R&D and Giga America costs are included. Again, any significant capital expenditures in 2024 will only be sanctioned once new financing is secure. Given our cash balances expected spending through the year of 2023 now reduced cash requirements for 2024 pending any new financing, we’ve insured FREYR has a cash runway of more than two years. As a result, our total cash uses in 2024 will be less than half amount of 2023 at least until we secure project level financing. Slide 12 reemphasizes our key financial messages as we position the company for the current environment.

Checking the balance sheet and taking actions within our control on costs and spending to extend our runway into 2026 are key focus areas, but the actions we are taking now, we are targeting an annual cash burn rate in 2024 less than half of that in 2023 with the priorities already mentioned. This enables us to invest in some additional R&D and related items to enhance our manufacturing projects and our products, but we will proceed with those with caution as incremental technology investment would, of course, reduce our cash runway modestly. Again, we will not spend any meaningful capital expenditures until incremental financing is secured. Our pursuit of non-dilutive capital remains in high gear in this currently challenging financing environment.

Given our liquidity position and our lower burn rate, we do not have any intention to raise common equity from our shareholders in 2024. As Jeremy described, project level equity for Giga America is available. It’s clearly tied to getting the CQP up and running as designed with reducing testable batteries and receiving those acceptance of those batteries, which is now expected again in 2024. In parallel, we continue to progress the US Department of Energy Title 17 loan for the project and are awaiting invitations to part two of the process from the DOE. After receiving that invitation, we will file part two of the application, but then the effort becomes very similar to a project financing process, which will — we will anyway run in parallel to ensure timely access to funds.

The DOE could in theory provide for all of our debt — capital ambitions, but more likely we’ll be part of an intricate capital stack. We will keep investors informed over the next several quarters as we make progress on these efforts. Section 45X of the IRA with its annual production tax credits spreads key underlying support to the financing of Giga America, unlike anywhere else in the world. In addition, we are staying vigilant for federal grant opportunities in the US that could be applicable to our businesses. We’ll continue to preserve the project financing option for Giga Arctic as well, and we recently announced that we were awarded €100 million grant for Giga Arctic by the European Innovation Fund, the EUIF, which is an outstanding validation of our business model.

The review by the EUIF has been very intensive, covering hundreds of pages of documentation of the course of the last year. We continue to work with them extensively, finalize the terms of the grant and a relatively flexible timeline to continue the project when globally competitive scaling incentive programs is available. While we also have been grateful for the support and indications of interest expressed by all our expert credit agencies, including ECA and the Nordic Investment Bank, the European Investment Bank, and the EUIF Innovation Fund is important to note that FREYR has not received any cash from these entities so far and all progress on Giga Arctic and the CQP to date has been made without yet having received funding from any of these entities.

With Giga America prioritized in large part due to its superior returns driven by eligibility for US IRA production tax credits will also evaluate partnership based upstream opportunities, address decarbonization of the supply chain, and leverage our growing — leveraging grow our Energy Transition Acceleration Coalition, the ETAC, another industrial partnerships where possible. With that, I’ll turn it back over to Birgir for additional comments.

Birgir Steen: Thanks Oscar. Before we take your questions, let’s close with a look at FREYR path forward on slide 13. In today’s high discount rate environment, cash is king. We have a clean balance sheet with no debt, and we are reducing our cost to extend our liquidity runway to two plus years and beyond. We will not authorize any significant new CapEx in 2024 until new financing is committed. We are pursuing conventional technology partnerships, advancing the redomicile into the US, progressing through the commissioning and 24M scale up processes at the CQP. We will communicate news on all three fronts with the investment community as things develop. Our partnership approach to industrialization is generating dozens of interesting strategic conversations with our customers, with members of the Energy Transition Acceleration Coalition and other partners, all of which are focused on commercial opportunities and catalyzing FREYR’s next wave of capital formation.

Norway in Europe, we’re working with key stakeholders to establish a globally competitive incentive center program while we preserve Giga Arctic’s option value. And finally, we’re executing our strategic plan with clear priorities. And as we have learned over the last two and a half years as a public company, adaptability is paramount to succeeding in a highly volatile environment. I’ll conclude by emphasizing our appreciation for the continued support of our investors and all our partners in our mission to decarbonize energy storage and transportation systems by producing the world’s cleanest batteries. The FREYR team is unified in our purpose, and we’re dedicated to rewarding your faith in us on this exciting journey. And with that, I’ll turn it call back to Jeff and we’ll take your questions.

Jeffrey Spittel: Thanks Birgir. Operator, we’re ready to open the line for Q&A.

Operator: Great. Thank you. [Operator Instructions] And your first question comes from the line of Adam Jonas with Morgan Stanley. Adam, go ahead.

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Q&A Session

Adam Jonas: Thanks everybody and appreciate the extra details on the cash outlook. That’s helpful. But so much of the story really does rely on the technology of 24M. So at a high level, Birgir, how much of FREYR’s success is tied to 24M? If this turns out to be a dud, and I’m curious at what — when will you — when would you potentially be in a position to understand whether 24M really is scalable as you originally anticipated or not? Because it does seem that everything else kind of triggers off of that and I appreciate the diversification strategy, but it’s important for shareholders to know how tied the entire story is to 24M specifically. So if you could realize it’s a qualitative question, but I would appreciate your impressions, please.

Birgir Steen: Sure. Sure, Adam. The first, as you indicate, we think of two tracks. We’ve now indicated towards getting started in Giga America is one track where we have some technology risk, we’ll talk more about in a second. And even that’s geopolitical advantage and very low risk. Then pursue another track, which will be licensed in conventional technology with essentially the opposite characteristic. Some geopolitical risk, but very low technology risk. So two uncorrelated paths, if you will. And then inside of the 24M path, I think it’s fair to say that as we progress towards the last commission packages that we’re delivering in the CQP and getting ready for production, we’re also getting into some of the harder stuff.

And it’s also fair to say that we are discovering aspects of our chosen solution that I might not have had the technology readiness level that we would’ve anticipated in making choice and until now, in fact. That’s just a part of getting the stages we’re at now, very difficult to foresee upfront. All of that said is we haven’t discovered anything that says this is not a viable way to get to a scalable automated cell reduction. And we think we see a path through to that. We’re making a few changes to make sure that we debottleneck and unblock that path. We continue to have, and I think we’ve spoken about before, the delivery of cells in an automated way at the CQP as company priority number one. And along with, selected members in my leadership team start every day 9:00 AM with a daily follow up call to make sure we remove all blocks from the path in front of that.

We have all fair battery talent now engaged at the CQP. We might have been more diverse in terms of our priorities previously. We have key vendors like Mpac, 24 and others onsite. Mpac is running double shifts. And we have a lot of thresholds for getting more help on site when we discover that we need it. We’re aligning with other [technical difficulty] licensees. We have people on site with several of them and making sure we learn the most from our — or the maximum from the other people who’ve gone to forwards and that we share experiences with those who are traveling at the same rate of speed as we do. And we’ve also involved both the customers and vendors directly into our daily standup, follow up meeting here. So through all of this, we’ve created a lot more transparency.

We have a better view of the runway ahead of us, and we are solving problems every day, but at the same time, we’re getting, as I said, closer to the more difficult part. And that’s what’s extent as it called the extension on the timeline here. If we had a conclusion here that said this is not going to be viable, we would, of course, have shared it, let’s say, based on the input of our technology advisory board, and some discussions that we’re now conducting continuously. If anything we’re strengthening our belief that there is a very interesting technology path ahead of us, both in the current configuration of the CQP and future generations of the semi solid.

Adam Jonas: Thanks Birgir. And just to follow up on the runway discussion. I was going to ask whether the two-year-plus runway began at the end of the third quarter or the end of the fourth quarter, but I think Oscar, your comments about getting into 2026 answers that question, just confirming that the two-year-plus runway.

Oscar Brown: That’s great.

Adam Jonas: Oscar, also I want to know whether that two-year-plus bakes in a minimum cash level to run the business for payroll expenses, et cetera, or whether that was a mathematical, down to near zero cash flow. Sorry for the housekeeping there, but just wanted to assume whether you had a minimum cash in there, and if so, what that would be. And then what specific cost cuts are required? You alluded to in the release that you would take in addition to pausing the CapEx subject to project financing or funding, what OpEx cuts are being considered, and are there any upfront costs related to those cuts? What I’m trying to get at Oscar is, is the two-year-plus runway a really conservative base case, something you really have line of sight to, and that’s achievable? And is that base case or is it kind of more of a stretch goal? Thanks.

Oscar Brown: Yeah. No, great questions, Adam. Thank you. So there a couple of things. So just reconfirming, yes, the runway 250 starts at the end of 2023. Now runway extends into 2026. The amount of cash you needed just to hold on the balance sheet to sort of run the business like a working capital is very low. So that’s not significant. Just responding to, and from a burn rate perspective, we’ll have the quarterly burn rate well under $30 million a quarter. Also keep in mind when you look at 2023 and our cash spending, the largest component of that was the Giga Arctic, that we’re pausing now until we get any kind of new financing related to that. So that’s a significant piece of the puzzle, but clearly that’s a more focused level of activity with the CQP.

And then, Giga American development and the ones that Birgir mentioned, that requires a different organization. So we are looking at the organizational structure. We’ve made a lot of progress on that. So we’re going through that process there. So this is not an aspirational goal. This burn rate reduction is happening right now. And so we’re pretty confident or very confident in that.

Birgir Steen: I think we’re not providing numbers on headcount today, Adam. But the priorities that the company was pursuing up until quite recently were more than what we have now. We’re very laser-focused now on delivering sales and expanding runway and keeping optionality around our operations. And that’s going to allow us to take down headcount quite dramatically without infecting our key priorities. So that’s what we’re doing. We’ve had all-hands meetings across the company today. There’s perhaps unfamiliar territory from somebody, but there’s a fairly straightforward process of running reduction-in-force processes in Norway where we have most of work staff to, we’re well advanced and executing on those in accordance regulation, and no barriers [technical difficulty]. So this is, as Oscar said, not aspirational. This is stuff that’s in the machine, the processor.

Adam Jonas: Thanks Birgir and thanks Oscar. Just one last follow up, just to clarify, my second question, I’ll finish the questions here. The time to get to $30 million per quarter burn rate, would that be — is that something that would take a couple of quarters to settle on, given some — perhaps some adjustments to get there, including some one-time payments, or I didn’t know if you had an idea of when a $30 million burn rate would be achievable within — presumably sometime in 2024, but I didn’t know if it was the first half was achievable to get there. Thanks.

Oscar Brown: Yeah. Thank you. And so reemphasizing — the burn rate will be below $30 million a quarter, and it will be as of January 3rd. We will take a small kind of single digit, one-time charge related to severance. But the fact you’ll see this out of the box in Q1.

Adam Jonas: Right.

Oscar Brown: Very clear, January 1, Q1.

Adam Jonas: Thanks.

Operator: All right. Great. Your next question comes from the line of Tyler DiMatteo with BTIG. Tyler, please go ahead.