Nel ASA (OTC:NLLSF) Q2 2022 Results Conference Call August 11, 2022 2:00 AM ET
Company Participants
Håkon Volldal – CEO
Kjell Christian Bjornsen – CFO
Wilhelm Flinder – Head, IR
Conference Call Participants
Håkon Volldal
Good morning, everyone, and welcome to Nel’s Second Quarter 2022 Results Presentation. My name is Håkon Volldal, and I am the CEO of Nel. With me today, I have our CFO, Kjell Christian Bjornsen; and Head of Investor Relations, Wilhelm Flinder.
The agenda for today is as follows. We will briefly recap Nel. We will go through the second quarter highlights with an emphasis on the commercial developments. We will touch on some of the political events that impact our business. We’ll have a summary and the outlook section, and then we will round it off with a Q&A session.
Now to recap Nel. Nel is a global dedicated hydrogen technology company that delivers optimal solutions to produce, store and distribute hydrogen from renewable energy. And we have a mission to unlock the potential of renewables and enable global decarbonization through green hydrogen. This is the reason why I decided to join Nel. I joined 1st of July, and this purpose is what attracted me to the company. I think there are a few companies out there that can say they have as meaningful a purpose as this.
And this, in combination with Nel’s boldness to be a leader in this emerging industry is really what would speak to me. If you look at Nel and some facts, a pure-play hydrogen company listed on the Oslo Stock Exchange since 2014. We are the world’s largest electrolyzer manufacturer. We have an installed base of more than 3,500 units in 80-plus countries, and we have a 90-year legacy.
We are also a leading manufacturer of hydrogen fueling stations with more than 120 units delivered across 14 markets. We have manufacturing facilities in Norway, the U.S. and Denmark. And we have a global sales network and offices. Right now, we are close to 550 employees.
We are the preferred partner for industry leaders in various industries, so they come to Nel for Nel to help them realize their hydrogen projects around the world, everything from technology companies to industrial companies to transportation companies, and to fund our growth and make sure Nel has a leading position in this industry. We have NOK 3.6 billion in cash reserves, which gives us sufficient funding to pursue our growth strategy.
Okay. So let’s get to the beef, the second quarter highlights. Revenues, up 12% year-on-year to NOK 183 million, EBITDA minus NOK 197 million, which is down from NOK 120 million in the second quarter last year. Order backlog is actually at a record high at NOK 1.4 billion, and it’s up 33% year-on-year.
Order intake in the quarter was NOK 236 million. Obviously, the big 200-megawatt order is not included in these figures that happened in July, but still the order intake was up 67% versus last year. And as I said, cash balance of NOK 3.6 billion, up 17% — 19% from the corresponding quarter last year.
So the main events in the second quarter, we received purchase orders for an alkaline electrolyzer in Norway, alkaline electrolyzer in India. We had several fueling orders. We opened the Herøya production facility, the world’s modern and professional manufacturing plant for electrolyzers in April.
We also decided to secure long-lead items for a second line at Herøya, expanding potentially our production capacity from 500 megawatts to 1 gigawatt. And following the closing of the second quarter, we announced a record purchase order for 200 megawatts of alkaline stacks from a U.S. customer with a value of approximately EUR 45 million.
We also received additional purchase orders for an alkaline system in Denmark. One system for PEM technology in Australia. And yesterday, we also announced from an undisclosed customer in Europe an order for fueling stations with a value of around EUR 8 million. And today, we’ve also announced that we have made the final investment decision for the second line at Herøya. So we will now go ahead and make sure we have 1 gigawatt production capacity — installed capacity as of beginning of 2024.
Financial highlights. As I said, revenue is up. We did expect stronger growth probably in the coming quarters based on the order intake and the backlog, but still, it was up 12%. Operating expenses are up as we build our organization. We have ramped up cost and scale-up costs related to new technology, new markets, new products that we are putting out. And consequently, EBITDA came in at around minus NOK 200 million.
Yes. As I commented on the cash balance, this is important to us. This is what signals revenue growth going forward, and we are now at an all-time high order backlog of NOK 1.4 billion. If we include the large order announced in July, we are close to — and to take — include the order yesterday, we are close to NOK 2 billion in order backlog. The order intake in the quarter without any significant large orders were still up more than 60% year-on-year. It was up 17% from year-end 2021.
And I think as we see that contracts are getting bigger, the order intake will vary more from quarter-to-quarter. It takes longer time to negotiate some of these large contracts than to sign smaller contracts. There’s more work involved. There is more process related to financing and signatures and all of that. So it takes a bit more time.
But at the end of the day, the large orders also give you real order intake and a boost in order backlog when they happen. And we see that the pipeline continues to grow across all segments and industries, and I think we’ll come back to that in the outlook section.
If you recap some of the main commercial events in the second quarter. This project is actually interesting because it’s a purchase order from Glencore in Norway to be delivered mid-next year, value around EUR 3 million. This client was actually Nel’s first commercial client. The initial system to Glencore was delivered back in 1961. And why is this important? Well, it’s 60 years ago.
So if you take a look at competition, a lot of them have never ever delivered a commercial installation. Most of our competitors don’t even have a system that has been in the field for more than 4 or 5 years. This was sold 60 years ago.
The system that they bought is something they are familiar with because what they have now is also a Nel installation. So they will get a new alkaline electrolyzer system from Nel. It’s a nice customer to have.
The second order we got was from Skovgaard Energy in Denmark. Why is this important? It’s EUR 4 million, it’s nice. But it’s also the world’s first dynamic green ammonia plant, where actually renewable electricity from wind and solar will be connected directly to the electrolyzer. So it’s a demo plant, could grow larger, but it will test how an ammonia reactor can fluctuate operations based on renewable power inputs, intermittent power.
And there are some interesting partners on this project, like Haldor Topsoe and Vestas. So it’s a true sort of Scandinavian setup with Nel, Topsoe, Vestas, and Skovgaard.
We also received a purchase order for a PEM electrolyzer system in Australia. It’s a containerized solution, EUR 4 million. The electrolyzer will be the biggest in Australia. And as you probably know, Australia would be one of the important hydrogen hubs going forward. So it’s important for Nel to be present in this market. The system is a containerized solution with a production capacity of roughly 1,000 kilo per day, and it will supply fuel cell-grade hydrogen directly on site to dedicated fueling station for vehicles in Australia.
That brings me to the fueling side of the business. We received several purchase orders for fueling in the quarter, and we needed that. Revenues so far this year have been a bit on the low side, driven by low order intake in previous quarters. Demand is now picking up in several markets, and we expect to see more orders in the second half of 2022.
And to sort of demonstrate that we sent a press release yesterday on the order from a European client, 5 stations for EUR 8 million. So that’s a nice add-on to our fueling backlog.
Another important event in the second quarter was in Norway, Nel’s home turf. We have a government agency that distributes funding or financing to hydrogen projects in Norway. And in June, Glomfjord Hydrogen was awarded NOK 150 million in support for its 20-megawatt hydrogen project, which is for the maritime sector. You might know that Nel owns 23% of Glomfjord Hydrogen so it’s natural for Nel to be involved in the rollout of this project with a 20-megawatt electrolyzer.
Four other hydrogen hubs in Norway also received support totaling NOK 669 million. And Enova, which is this government body also announced NOK 121 million to support Celsa Armeringsstal for green reinforcement steel production. And we have a letter of intent with the main players behind this project.
So Norway, actually, if you sum up across all these different projects, could be a very interesting market going forward for Nel electrolyzers. And we expect to be involved on these sort of mid-scale projects in the coming years.
Now what did we say 6 months ago? Well, I wasn’t there. But apparently, we said pipeline is booming, projects getting significantly larger, and we expect to break order-size records in 2022. It’s nice to see that we actually did that. In July, we received a record order for 200 megawatt of alkaline stacks. It’s from an undisclosed customer in North America. Production of these stacks will happen from February next year until mid-2024 is EUR 45 million, and is stacks tax only. The purchase order could double in value depending on where the Nel is chosen or not to provide the balance of plant equipment following a paid FEED study that we will conduct.
The client has secured, and this is interesting, a 20-year green power purchase agreement, and even more importantly, a 20-year offtake agreement for 100% of the end product. So Nel was chosen by this customer based on maturity of our technology and installed production capacity.
Then what do we mean by stack? So we included this for educational purposes. There was some confusion around the value of the contract and you calculate sort of the price per megawatt. But it’s important to bear in mind that for some orders is just the stack. But for most systems, it’s the complete stack plus balance of stack. So what you see on the left-hand side is the stack with surrounding equipment, which you call balance of stack. The order to North America is just this circular tube, the cylinder. That’s the stack, stack only.
If you include the gas separation system, the line system and also look at the balance of plant, we have power supply, you have light tanks, you have gas scrubbers and cleaners, compressors, et cetera, typically the value of a delivery doubles. So the stack part is only 40%, 50% of the total CapEx of a project. So bear that in mind, it’s not — you cannot compare order sizes and then based on megawatts only, it’s not always apples and apples.
Now what will this contract mean for Nel? Well, of course, it will have a positive impact. It’s an important reference project. It means that Nel plays in the Champions League of electrolyzers. It means that we will have a positive financial contribution. It’s a standard product delivery, standard stacks, which we are perfectly set up to produce at Herøya with solid margins. We have passed through all the most important input factors, which means even though raw material prices might go up, we’re not that vulnerable to margin erosion based on commodity pricing.
Herøya baseload is now secured. Volumes enable further cost reductions. So of course, a big part of driving the cost down and attracting additional customers is that you can fill the plant. And this contract is actually a blueprint for future large-scale projects in terms of how it’s structured, financially, legally and in terms of delivery.
It’s not going to be a one-off, right? There will be more significant orders coming our way. The pipeline is still growing and projects are getting larger. A couple of years ago, a 5-megawatt installation was a large project. Now 20 is midsized. We’re talking about hundreds of megawatts, even gigawatts for single projects around the world. So customers are actually concerned about industry supply constraints, whereas you might think that with all these announcements by electrolyzer manufacturers during the past quarters, there would be an abundance of supply, there would be oversupply, overcapacity.
When most customers think it will be difficult to get supply for their projects. FIDs will happen faster. It will accelerate. The need to place orders and secure electrolyzers will grow. We have a documented installed capacity. So it’s one thing to announce plans to build capacity and other is to have a real factory, where we actually produce something and it works without all the teething issues and initial startup problems. So we were first out of the blocks to build the Herøya facility. We will expand it, and we’re seen as a credible partner to deliver high volumes of electrolyzers going forward.
So what kind of projects will we pursue? It’s not difficult to fill the factory, but you want to fill the factory with high-quality contracts. So we will pursue contracts where we see that we have a suitable technology offering, what the customer is asking for, actually fits with what we can supply without too much rework, without too much customization, high-quality counterparties, high probability for project FID.
It’s possible to waste a lot of time on projects that will never happen. So you have to be a bit picky. It’s not only to announce a purchase order, the project has to happen. So when you see all these orders announced in the industry, not all of them will happen. You need a high probability to win and you need an acceptable risk profile.
We’re not going to take just any order. As I said, we want a decent margin on what we deliver, and we want to contract where we’re not exposed from a risk perspective. So we’re a bit picky when it comes to what kind of projects we pursue. It has taken a bit of time to announce the first big contract but there will be more big contracts.
Line 2 is expected to go live in April 2024. The CapEx for the equipment is estimated to be around EUR 35 million. So it’s not cheap, but it’s not that expensive either to continue the expansion. And of course, Line 2 will be based on the same production concept as we have for Line 1. We will reuse a lot of what we’ve done on Line 1, but we will also implement improvements based on what we’ve learned on Line 1.
So these 2 lines will be fairly similar. We have the setup to run it. That’s also why we can do it fairly fast. The reason it’s not operational until 2024 is, of course, there’s a lead time on certain items, but we also want to phase in capacity in connection with our planned deliveries.
There is one main event on the political side. I guess you are familiar with some of the positive things that have happened in Europe with REPower and the ambition of the European Union to produce 20 million tonnes of hydrogen, 10 million tonnes inside the EU and 10 million tonnes in neighboring countries, bringing the electrolyzer need to 300 gigawatts. But now finally, North America is following. And maybe not only following, they could also take the lead.
So with this Inflation Reduction Act that passed the Senate is now positively getting through the house, involves a tax credit for hydrogen projects. The max tax credit you can get is equal to $3 per kilo of hydrogen produced. What does that mean? That means green hydrogen will become competitive with gray hydrogen in many applications and in many regions in the U.S.
As a matter of fact, the U.S. could become the cheapest place to produce hydrogen. And who would have thought that a few months ago. So the U.S. will become increasingly important for hydrogen production and also for Nel. So we see a lot of inbound activity. We see a lot of accelerated plans for planned hydrogen projects in North America, and that’s nice to see. So we have both Europe and North America leading the way now in hydrogen, and we will capitalize on that development.
Summary and outlook. I touched upon this. But if you look at the industry right now, the main triggers for large-scale green hydrogen projects are finally coming together. They are pushing projects towards final investment decisions. On the one hand, you have the political push to do something. And it’s backed not — I mean it’s not only talk, is backed by real financial incentives. A lot of projects get funding not only loan guarantees, but direct investments to support hydrogen projects.
We see that the financial markets are becoming better and more experienced when it comes to financing hydrogen. They understand the market better. They understand the drivers. They understand better how to package it. So it’s easier to raise financing for hydrogen projects.
We see that the equipment costs for electrolyzers but also for balance of plant equipment and for other things is coming down. So the total CapEx need is coming down. Also the OpEx is coming down in terms of the efficiency of the equipment and also available energy. And even though we’re in a period where energy prices are high, you are very often competing against fossil fuels. And the oil price is fairly high and natural gas prices are not all-time low. So even though electricity prices are high, the relative difference is actually shrinking.
Two other important factors, you have available intake of renewable power. So all these solar plants and all these wind farms actually now deliver renewable energy. It’s possible to buy renewable energy, either from the electricity supplier from the grid or you even include renewable power supply in your project because these projects we’re talking about are not small.
If you’re building a steel factory or an ammonia plant, you need a tremendous amount of energy. And then it might make sense to even include the power supply in your — energy supply in your project plans, and you are able to secure offtake. So the customer we had had secured offtake for 20 years or 100% of the product. They don’t need a marketing department. That’s why it’s also undisclosed. They don’t want 200 people knocking on their doors to tell them about what they’re doing. They’re sold out for 20 years. So when you can also do that, it’s easy to get financing. So these things reinforce each other and drive the industry towards large-scale green hydrogen project final investment decisions.
Nel is uniquely positioned to capitalize on this. And why is that? Well, we have an unrivaled track record. Nobody can match us on this. We have decades of experience. We’re not a PowerPoint company. We’ve been around for 90 years. We have the largest installed base with the operational experience in terms of how to handle hydrogen.
We have learned from all the mistakes of the past. We know why certain designs work and why they don’t — and others don’t work. We have proven technology. It’s not just a concept. We have technology out there, which is producing hydrogen molecules every day and is backed by performance guarantees. We can actually stand behind the performance. It’s not just a fact sheet. It’s a real performance guarantee.
We have technology leadership. We are a leader in PEM, proton exchange membrane technology. We are the leader in alkaline technology. And of course, we’re a leader also in fueling technology. We have optimal system efficiency and durability and lifetime, which means why is this important? Well, 70% to 80% of the total cost of ownership or producing hydrogen is OpEx. So you need a highly efficient electrolyzer, right?
And you need it to last for a long time. If you need to replace the stacks after 5 years, it’s not going to be — it’s not going to do it. You need to give the customer comfort that the equipment will last longer than just a couple of years. And how can you do that when you haven’t got one system out in the field for more than 2, 3 years.
We have world-class safety in terms of understanding how hydrogen should be treated in a responsible way. And we have cost and scale leadership. We are a front-runner in cost reductions. We were the first to announce our $1.5 per kilo target. We’re the market leader in installed production capabilities and capacity, and we continue to expand, and we have financing so that customers actually know that if they want more, we can invest and we can help them with the deliveries because most of the projects that we see, even the large projects for 100, 200 megawatts might be Phase 1 of a big gigawatt project.
So if you go with one supplier for 100, 200 megawatts, you need to know whether that supplier can also back you when you want the next 500 megawatts or the next gigawatt. So these are — I mean, these are basically split up into different phases. You start with what was previously a pilot of 10, 20 megawatts, now we are at a commercial rollout of 100, 200, 300 megawatts. And the next phase might be double of that —
So if you make all these investments in to one supplier, understanding how the technology works, you do the FEED study, you figure out, okay, this is the blueprint for how we want to do it. But can that supplier grow with us? Can they actually supply 500-megawatt or gigawatt in 2, 3 years, but we can.
That concludes the presentation. So I will ask my colleagues to join me for a Q&A unless everything was crystal clear, and you have no questions.
Question-and-Answer Session
A – Wilhelm Flinder
All right. My name is Wilhelm Flinder. I am the Head of Investor Relations here at Nel. I will facilitate this Q&A session. Before we kick off, I just want to give a heads up that, we want to do a lot of comments on outlook and guidance as well as framework conditions on specific contracts as well as specifics on the individual market conditions. Also questions that already have been answered in the presentation, we want to do here in order to not standing here repeating ourselves.
In addition, I will try to aggregate questions on the same topic as best as possible. And before we take questions from the charters, we can start with taking questions here from the room.
Unidentified Analyst
[Pareto]. It’s possible to give a bit more color on the revenue update or the revenue figures this quarter given the decline quarter-on-quarter? What was the main drivers clients you deliver to, et cetera?
Håkon Volldal
So it’s — if you look at the breakdown, electrolyzer is up and fueling is down. So it’s basically related to low order intake in the previous quarters on the fueling side, which might also carry into the third quarter. If you have followed our announcements, you can see that we have announced fueling orders. So — but with yesterday’s announcement and also what we see in terms of the pipeline, we expect fueling also to pick up, but fueling has been soft in the quarter, and that’s the reason why it’s a bit low in total.
Unidentified Analyst
Okay. And also on the gross margin side, I mean, you delivered very good gross margins last quarter, and understandably, it’s down with the higher raw material prices. But given the significant drop, I think that some expectations of what we can expect ahead is in order?
Kjell Christian Bjornsen
So it’s also driven by mix effects from quarter-to-quarter. But in this quarter, we have been hit by raw materials and there’s mix effect. We haven’t guided on margins and won’t do so for sometimes then because it’s so dependent on individual contracts.
Håkon Volldal
What we can say, though, is that there is a delay between raw material price increases and what we are external price lists. Especially if you look at the U.S., where you work with dealers and distributors, there’s a lag effect. So I think we get a negative impact now and you probably get a positive impact when raw material prices come down again.
Unidentified Analyst
Okay. I have some more questions. On the stack side, what do you think will that be more common? You alluded to it a bit that you will deliver both just stacks only and also complete systems. How do you see that moving forward? And what you see in the market? What do clients prefer?
Håkon Volldal
Yes. So I think for this, let’s call it, now small projects, they used to be big projects, but up to 20 megawatts it could be a fairly standardized solution where you deliver everything in one go. So it could be a containerized PEM solution or a complete alkaline solution because these projects are rather small and they need to get everything from one supplier. They don’t want to do a separate FEED study, they cannot afford that.
But for these large projects, I think what they want to do now is to secure supply. So that’s why they place the order for the standard component, which is the same regardless of what project you run. So I think that will be common that they — we placed the purchase order for the stack and then the balance of plant you decide on after you’ve done the FEED study.
So then you can make design changes to the plant design, you can also decide on the local content, which might now be increasingly important to unlock funding mechanisms and get additional support from government grants, et cetera. So I think, yes, what we see for this 200-megawatt project is at least what we are pushing in terms of the contract structure. We like it.
Unidentified Analyst
Thomas Næss from SpareBank 1 Markets. Could you give us an update on the expansion plans beyond Herøya and the time line for this?
Håkon Volldal
Yes. I think priority number 1 is to increase at Herøya. So until now 2 lines, if we get additional really big contracts, I think, it’s natural to think about Line 3 and 4 because ultimately, we could get to 2 gigawatt at Herøya. Then for our PEM production capacity, we have opportunity to expand that at the existing facility in the U.S., but I think we’ve also communicated previously that we are in the site selection process, where we want to establish additional production capacity in North America. It could be for both alkaline and PEM.
So that’s sort of step number 3 then. So also Herøya, increasing existing capacity in the U.S. and then get a new site in North America. But it — the reason it takes a little bit of time is to find the ideal location, both from a logistics point of view, competence point of view and grants.
Unidentified Analyst
Okay. And other companies you mentioned today, some of them might be PowerPoint companies. I’m just curious to know kind of which companies you believe would fail in expanding their capacity because we find names such as Thyssenkrupp, Siemens, Cockerill Jingli, [LONGi group] , Haldor Topsoe, et cetera. So just wondering kind of what are the companies we should be afraid of in terms of competition and what are the ones you consider as less likely to succeed?
Håkon Volldal
I think you mentioned more or less the serious ones. And there could be additional. But if you count the number of electrolyzer manufacturers, you probably have 20 plus maybe half of them will be unsuccessful. And then maybe 10 will remain split on 2 different technology platforms. Serving a market which is potentially hundreds times larger than it is today. So we should actually be happy that this competitors are serious. They are household industrial names, and we’d rather compete against Thyssenkrupp and Siemens than some of these crazy startups because they want to run a profitable business. So it will be more disciplined, and there will be higher quality, and it will be a fair competition.
And right now, I think we should celebrate also competition successes. So I’m happy that a competitor won Shell in Holland. That project was actually FIDed not long ago because it means that we, as an industry, are growing. We cannot expect even though we would like to have 100%. I think it would be — we need to be satisfied with something less than 100%. We want to be a top player, but it’s more important that the cake is big, and that we have a nice chunk of that big cake, than to have everything on a little cookie.
Unidentified Analyst
Okay. And one last question. I’m not sure if you will answer or not. But could you give some more insight on — you said that the order that you received this summer would double in size if you got the whole balance of stack, balance of plant. Could you give us some insight into how that would — or how much the gross profit would increase because I suppose you’re not producing the additional equipment yourselves, it’s kind of reselling of compressors, et cetera, et cetera, et cetera?
Håkon Volldal
It’s — so some of the designs are sort of Nel proprietary and we could have — so stacks typically have to stop to much. Stacks would probably have the highest margins on. Then you have balance of plant equipment that you produce externally based on your drawings and IP and whatnot. And then you have certain components which are just pass-through with its cost plus x percent markup to handle it, both externally. I mean we don’t make our own transformers and rectifiers. So that is cost plus.
Unidentified Analyst
And kind of insight into how much the gross profit depends between the stack only contract and…
Kjell Christian Bjornsen
It is implicit in that, and I think we’ve noted on that before that on the generic components, we get basically handling fee. So there’s lots of revenues and a little margin, but it is not the major margin driver. The major margin driver is what we produce in-house and to some extent, the things that we really decided and has produced to our specification around it.
Unidentified Analyst
Okay. And thank you for your first presentation. I guess the big orders are coming as you came into the company.
Håkon Volldal
Which is not something I should take credit for. I’m just lucky to be around to talk about it.
Wilhelm Flinder
Any more questions from the room? No, then we can go over to the chat. Substantial amount of questions have come in. A bit on the side not related to Q2 isolated. So regarding the unsponsored ADRs in the U.S., Oliver [indiscernible] ,apologies for the pronunciation there. I know the ADRs in the U.S. under the ticker, NLLLSF and [NLLSY] are unsponsored and as such has very little to do with Nel ASA, yet I would spare a thought for your U.S. shareholder’s base, which is currently mostly prevented from trading, thanks to the ticker being moved from by OTC to the export market. I’m hoping that you can informally engage with the sponsor of these programs so that the SEC information requirements can be met and the tickers can resume normal trading. Do you think this is too much trust?
Kjell Christian Bjornsen
We get this question now and then from the U.S. We know that several shareholders have found ways of trading indirectly in the share. We are listed in a regulated market in Europe and believe we have recent market coverage. So with all the time and effort required to go for sponsored ADR or secondary listings, that is not a priority at this point in time, unfortunately. We would encourage people to talk to the brokers and see if they can find some way of trading without trading ADRs.
Wilhelm Flinder
Question from Peter Low from Redburn. How do you see the competitive environment evolving for electrolyzers? Can you compete with the likes of Thyssenkrupp and Plug Power, for instance, for orders?
Håkon Volldal
Yes. I think we have covered that when I went through sort of Nel’s strengths and review. Yes.
Wilhelm Flinder
So a couple of questions regarding contracts that we are already producing on. Arthur Sitbon from Morgan Stanley, asking in your report, you mentioned delivery delays. Can we still expect 100% recognition of the revenues linked to the Iveco, [SNG], Nikola and Everfuel orders by the end of 2022, which orders, in particular, are seeing delivery delays.
Håkon Volldal
So if I may expand a bit on delivery delays, delivery delays, in particular on the small and many on the PEM side, and also because there you can’t really pay expediting fees and send people to China to get components. On the larger projects, you can normally justify a bit extra cost to get it through. On the contracts mentioned, we did announce or the customer has announced a finalization date when the contract was announced, and some of these go over into 2023. So not all of the contracts you mentioned will be fully recognized in 2022. We are there consistent with what has previously been mentioned.
Wilhelm Flinder
And Anders Rosenlund from SEB is asking if we can give an update on these product deliveries.
Håkon Volldal
Well, that’s according to plan. As we have said, the electrodes are being produced, shipped, delivered and paid for this year. So far, Nikola has not announced where they need the site. And before we have that, the part related to balance of plant components, the pass-through cost, we can’t really order and, therefore, not recognize the revenue on. So that’s the same and unchanged from previous quarters.
Wilhelm Flinder
James Hosie from Barclays. How should we think about Nel’s ability to win balance of plant orders alongside electrolyzer stacks for large projects? Is now constrained by size or purchasing power in this segment?
Håkon Volldal
I think if — we briefly touched upon it. The attractive margins are in the electrolyzers for us, not so much on the balance of plant. So it’s not that Nel necessarily wants to have the balance of plant delivery for all projects. If we have a good design that can be reused with good profitability, we will do it. But there’s a reason why we have decided to work with EPCs also and why big EPCs are involved on the big projects because they can handle it. So I think our number 1 priority is to get the stack orders. And when you get the stacks, you typically also deliver the balance of stack. So stack plus balance of stack is our main focus. If we get additional balance of plant deliveries, as Christian said, this is lower margin. It could be out of scope for Nel, but really the interesting part, the [indiscernible] is the electrolyzer and the balance of system — balance of stack coming.
Wilhelm Flinder
Good. A bit back to expansions. It has been touched upon in the room here, but there still some questions on U.S. expansion in particular related to IRA and hydrogen production tax credit, if this process now is accelerated? And also Patrick Jones from JPMorgan said that the expansion in Norway came a bit as a surprise, giving the message around potential greenfield sites. So can we give an update on previous indication that Nel was considering greenfield site selection in the U.S. and potentially also alkaline greenfields in sites ex Norway?
Håkon Volldal
Yes. But for short-term deliveries, meaning in the next midterm, the next couple of years, Herøya is a natural choice. You have a production concept. You have a trained workforce. I mean it’s cheaper for us to sort of build the second line at Herøya than to start the process of finding a new greenfield site in Europe. So from a cost point of view and from a time line point of view, Herøya is unrivaled in terms of alkaline capacity.
Now if we want to — if we get big orders from North America, and we see that this picks up, then it’s natural to produce locally in the U.S. for the U.S. market or the North American market. Even Chile, which is becoming a big hub. So that is in line with our site selection process, and we work hard to find an appropriate site.
And then I have to say that I think we are also a bit — we’re extremely excited about the increasing momentum, but also we might have to accelerate our capacity plans based on what we see at the moment. But Herøya is that, that’s number one. We can do more in the U.S. at the existing site, that’s number two . And a new greenfield site in North America is probably step number three. If there’s enormous demand in Europe, then yes, we need to find the second site also in Europe, but that’s probably a step number four.
Wilhelm Flinder
Navin [indiscernible] asking how does increased electricity prices affect the total expense for the company at its production facilities at Herøya?
Håkon Volldal
So we don’t go into details of the cost structure, but we have said earlier that raw materials cost, especially steel and nickel are major cost drivers and then with the electricity on a distant third.
Wilhelm Flinder
Chris Leonard from Credit Suisse, having 3 questions here. First, can you update us on pricing for electrolyzers? Do you still expect this to be around $400 per kilowatt in 2023? And also, is there still strong pricing pressure?
Håkon Volldal
I think if you — again, what do you mean by an electrolyzer, so back to the picture that we showed, it’s almost impossible to compare price per megawatt for announced orders because you don’t know exactly what’s included in the scope. So if you look at the cost for stack on the megawatt level, we’re far below $400 already. If you include the balance of stack and other things, then you are above $400.
So we are planning to supply electrolyzer stacks with declining prices. I mean, prices will come down because that will also unlock a bigger market opportunity and customers expect it. So we will — that’s why we focus on cost reductions. We want to have a healthy, nice margin. But in order to have that, you also need to pass on some of the savings to the customer. Otherwise, you’re never going to open up the market.
But there is room to keep a nice, good gross margin on electrolyzers going forward, absolutely. And costs will come down. Exactly how fast they will come down, it depends. I thought they would come down faster than we see. I think our customers are actually willing to pay a bit more to get capacity. So this has to do with supply and demand. Now that demand is so strong, I think prices will be really attractive for a period of time. And then it might be as new capacity comes online, there will be a sharper decline. So this will not be as linear trend down or it will be a step function downwards.
Wilhelm Flinder
Good. A couple of questions going back to the 200-megawatt order, the educational slide, from Eivind Garvik at Carnegie, asking, did I understand you right that the 200-megawatt order only consisted of number 1 part, i.e., only stacks on the 200-megawatt educational slide.
Håkon Volldal
Yes.
Wilhelm Flinder
And Erwan Kerouredan from RBC, asking 200-megawatt order, can you clarify again the share of stacks and balance of plant for the contract.
Håkon Volldal
So that we don’t know yet, right? That’s the reason why we do the FEED study to figure out what is the expected CapEx on the remaining part. But if you take typical figures for these large-scale installations based on previous FEED studies that we’ve done, the CapEx split is maybe 40%, 50% for stacks only. And then — so let’s make it easy, 50% for stacks and 50% for balance of plant.
Wilhelm Flinder
Good. And I also had a follow-up question dollar per megawatt for electrolyzers tax versus balance of plant. I think that answered that question. So back to Chris Leonard, how many IPCEI projects are you associated with? And how many gigawatts does it include?
Kjell Christian Bjornsen
We have no updates there since the last one we gave a couple of quarters ago. So we’re still waiting for that wave of IPCEI projects to come through.
Wilhelm Flinder
Good. From Eivind Garvik, again, Carnegie, can you say something about the revenue achieved in the second quarter? It was way below market expectations.
Håkon Volldal
Yes, I think we covered that. It’s — if you look at the electrolyzer side, it’s up. But again, it depends on the projects, right? I mean if you follow Nel and you track the orders and you know the expected delivery schedule, you have a fairly good view on what’s coming quarters should bring in terms of revenues. And order intake hasn’t been strong enough to support higher revenue than we had in the second quarter. So that’s why the increase that we now see in order intake is important.
We had a good second quarter, the book-to-bill that was nice, and it will be very nice in the third quarter. So we’re already close to NOK 600 million based on 3 announced contracts in order intake. And that will, of course, drive revenues in the coming quarters, but it’s fueling, as we said, low order intake in previous quarters, low revenues on the fueling side.
Revenues on the electrolyzer side, actually good, could have been a bit higher if we had enough components and parts. So we’re partly hit also by supply chain constraints, especially for the industrial products in the U.S.
Kjell Christian Bjornsen
I think, again, what we have said earlier is that on electrolyzer orders, typically 18 to 24 months from order to final delivery, with the bulk of revenue recognition coming in the second half of that time period and for fueling orders 12 to 18 months. And then we have commented specifically if there’s a deviation from that either in quarterly report or in the exchange notices themselves.
Wilhelm Flinder
Good. Deepa, from Bernstein, asking, can you clarify the proportion of electrolyzer stack and balance of stack and not balance of plant.
Håkon Volldal
40-10, if you take the 50%, that is — what do we say here, Christian? If it’s — if the stack is [50%] and then balance the plant is 50% , then maybe balance of stack is 10 percentage points of the other 50% . So stack plus balance of stack would be [60%] out of the total CapEx.
Wilhelm Flinder
Good.
Håkon Volldal
But again, I mean, it’s important to say that these are figures that vary a lot depending on what kind of projects you’re doing and how much you can consolidate the balance of plant equipment. So the ratios don’t work between a small project and a large project because you consolidate the balance of plant equipment. So for a small system, a balance of plant could be much higher than the electrolyzer. And for a large system, it could be the other way around. So it is a bit hard to sort of make it very schematic and give you rule of thumb figures, but I would say 10 percentage points out of the 50% for balance of plant.
Wilhelm Flinder
Good. A bit back and forth there, questions keep pouring in here from back to Erwan from RBC regarding EU IPCEI funding. When is the next milestone? And how much can Nel expect?
Kjell Christian Bjornsen
Earlier I also commented that we are not policy experts and that we, of course, would have loved the time from political ambition to money in the hands of project developers to be shorter. And we’ve been waiting for this next important round of IPCEI since last autumn, and we are still waiting. Indications are sometimes later autumn. I think the decision to build in Norway doesn’t really affect that. Norway is part of the EEA. So in that respect, part of the European in the market. So when EU politicians call together European or EU electrolyzer manufacturers, and Nel was an important contributor to that gathering.
Wilhelm Flinder
Good. From [indiscernible] is the current production capacity sufficient for your order backlog?
Håkon Volldal
Yes. Very simple answer.
Wilhelm Flinder
From Lars [indiscernible], are you moving in the same speed or faster as your competitors? Or do you see them investing and building production capacity faster than Nel, thus securing the large orders that Nel was expecting to get?
Håkon Volldal
Well, they have announced plans, but it takes a long time to build the capacity. And then you need to go from a theoretical capacity to realized capacity, a real actual capacity. So that will take some time. I think we have a head start and that’s also why we are now investing in the second line to stay ahead.
And as I said, we have room to expand at Herøya 2 gigawatts. But we will be — we will have a disciplined approach to this. We’re not just going to install 5 gigawatts of production just to have it. We want to see the order intake coming and then we follow with production capacity.
We have capacity now to handle our order backlog with the second line, and we have more capacity in the coming years. And with the second line, we also have capacity to do lots of large-scale projects, which we expect to get. So as we’ve said, the 200 megawatts is not the first one. There will be more. That’s why we are expanding. Unless we have been confident that we will get additional large orders, we would not invest in the second line.
Wilhelm Flinder
Good. On a bit wider market, could you update on Asia, what we’re seeing there, especially India, Korea and Australia activities and market expectations?
Håkon Volldal
Yes. So Asia is interesting from the point of view that I think long term, most reports conclude that Australia will be the hub for Asia in terms of bringing hydrogen to Asia, and that’s because of the renewable power situation. But there could be captive demand among big customers in Asia. So they have big steel plants or methanol facilities or ammonia production plants that they want to turn into green facilities and use hydrogen for that. So I think short term, there are a few sort of attractive opportunities to pursue in Asia, but midterm and definitely long term, Asia is a market where you need to be. But I think right now, the action is in Europe and North America.
I don’t know if you want to add to that, here, Christian.
Wilhelm Flinder
So we are almost done with the questions. One last one, more kind of modeling. How does the 35 million CapEx for Line 2 at Herøya face, could you comment on that?
Kjell Christian Bjornsen
Well, about a quarter this year, about half next year and about a quarter in the following year is the very short answer. These are preliminary figures, and we’ll update in the quarterly reports as we go on actual spending.
Wilhelm Flinder
Good. I think we’re through with most of the questions. We have gotten some other modeling type of questions. I will reach out to those later. One last one. We can take one last quick one from Chris Leonard from Credit Suisse. Will the strategy to look for another EPC partner to help flow more stacks orders your way rather than just Nel working to convert studies to order.
Håkon Volldal
Yes. I mean, we’re open for business. And I think this market will become so big, so to be tied just to 1 strategic partner or 2 strategic partners. I think you need several. But at the moment, bear in mind, that the EPC companies have limited experience with hydrogen, and that is why the end customer comes to Nel.
So this could change over time as the market matures, then maybe one EPC partner is a natural speaking partner and contact point for a customer. But right now, Nel, who else has 90 years of experience in electrolyzers or electrolysis? Nobody. So no wonder they come to us, and we’re happy to help. And then maybe some of the scope we pass on to EPC. But for the electrolyzer stacks, nobody knows more about electrolyzer stacks than Nel. I sound like Donald Trump now, but a minute. Nobody knows more about the electrolyzers than Nel.
Wilhelm Flinder
Very good. Then we are through for wrap up. Do you have any final remarks before we end the discussion?
Håkon Volldal
No, I think we just repeat our positive outlook. So we’re, of course, truly happy with the 200-megawatt order. There will be more nice orders coming our way. And that’s why we are expanding our production capacity at Herøya. And I see that as a very positive thing. It’s a no-brainer to build a second line at Herøya compared to the other alternatives. So we’re happy to keep on pushing for more orders and more capacity and then more business in a growing market.
So thank you for attending and listening to us. And hopefully, we’ll be back in a short while with positive update on the business.
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