Nel ASA (OTCPK:NLLSF) Q3 2022 Earnings Conference Call October 20, 2022 2:00 AM ET
Company Participants
Håkon Volldal – CEO
Kjell Christian Bjornsen – CFO
Wilhelm Flinder – Head, IR
Conference Call Participants
Christopher Leonard – Credit Suisse
Erwan Kerouredan – RBC
Zoe Clarke – Goldman Sachs
Arthur Sitbon – Morgan Stanley
Deepa Venkateswaran – Bernstein
Håkon Volldal
Good morning everyone. Welcome to Nel’s Third Quarter 2022 Results Presentation. My name is Håkon Volldal, I’m the CEO. With me today I have Kjell Christian Bjornsen, our CFO; and Wilhelm Flinder, our IR — Head of IR.
We have put our purple ties on, it’s time to go through the quarterly results. We have the following agenda, Nel in brief, a bit boring for some of you. Hopefully interesting for those of you that are not familiar with Nel yet. Then we will dive into the third quarter highlights; we will cover some important political events during the quarter; the main commercial developments; summary and outlook; and then we get to the Q&A session.
We’re doing this slightly different this time around. [Operator Instructions].
Okay, so Nel. Nel is the global dedicated hydrogen technology company that delivers optimal solutions to produce store and distribute hydrogen from renewable energy and our mission is simple. We unlock the potential of renewables, and we enable global decarburization by doing that.
Nel in brief, we are a pure play hydrogen technology company with a global footprint. We are listed on the Oslo Stock Exchange. We’ve been that since 2014, although our roots actually traced back to 1927 when we installed the first electrolyzer. We are the largest electrolyzer manufacturer in the world, with more than 3,500 units delivered to more than 80 countries around the world. We have a production capacity of 500-megawatt currently for alkaline expanding that to one gigawatt.
We have a PEM production capacity of 50 to 100 megawatt expanding that to 200-megawatt. We are also a leading manufacturer or hydrogen fueling stations with more than 100 units installed in 14 countries around the world.
We have large manufacturing facilities in Norway at Herøya; the U.S. in Connecticut; and Denmark, in Herning. We have a global sales network. We have close to 600 employees now. We are a preferred partner with industry leaders and we have a cash reserve of NOK3.5 billion to fund our expansion and growth.
Next topic then is the third quarter highlights. In terms of the financial results, revenues came in at NOK183 million, a bit of a mixed picture that I will add some color to later on, down 20% versus last year.
EBITDA minus NOK214 million, down versus NOK113 million last year. Order backlog more than doubled since the third quarter in 2021, so we’re now at NOK2.1 billion and that does not include the latest large scale order announced in October.
Order intake increased by a factor of more than five to almost NOK800 million in the quarter and our cash balance is still solid, actually up 20% since the corresponding quarter last year and stands at NOK3.5 billion.
The main developments in the third quarter were that we received our — could argue is the first — well is the first large scale purchase order for alkaline stacks, 200 megawatts of alkaline stacks going to a U.S. client with a value of roughly €45 million. We also received small and mid-sized orders; one to Denmark for an alkaline system valued at €4 million. We have two containerized PEM systems one to Australia, one to the U.S. We had also a nice contract win with the European client for fueling stations valued at €8 million.
Based on the rapid growth in the order intake and the order backlog, we decided also to expand our capacity in Norway for alkaline systems to 1 gigawatt, so we will add a second line at Herøya, bringing the total capacity to 1 gigawatt by early 2024.
Then also some nice events after closing of the quarter. We received our second large scale contract and this is actually higher in in NOL value compared to the one we signed in July. This one with the — with a disclose customer Woodside Energy for stacks — balance of stacks and engineering services at NOK600 million.
And we also received funding from the U.S. Department of Defense for accelerating development of advanced PEM electrolyzer stacks. So that was two nice events after the third quarter that we will, of course, take with us in the fourth quarter.
Now, when we look at the numbers, I would like to clarify a couple of things. Because there were some times comments that based on the contracts that we have signed, we expect the numbers to improve quite a bit. And it’s important to remind you that when we sign a contract, it’s a large scale project. It’s not — an electrolyzer system, for instance, it’s not something you take off the shelf, put in a cardboard box and ship and then we included in our P&L. The revenue recognition period is quite long from we signed a contract.
For instance, the one we signed in July, we will start to recognize revenues on that — the bulk of the revenues will come in 2023, the NOK600 million contract we signed in October will basically hit the P&L in 2024. So, what you see on the topline in this quarter and so far this year, is the result of contracts that were signed in 2019, 2020, and 2021. And because order intake in that period was lower, we also have a lower revenue recognition in 2022.
And as some of you might expect, the impact of the large scale orders will come in 2023, 2024 and subsequent years. So, NOK193 million is down 20%. We will elaborate a little bit on why that is because electrolyzer is actually stable and within electrolyzer alkaline is growing rapidly, whereas PEM had a decline.
The main reason for why revenues are down is fueling, we had a low quarter in terms of revenues in fueling. So, I’ve explained a little bit why it takes time to get the new contracts into the P&L. It’s not going to change in the fourth quarter. The big contracts will not impact fourth quarter either.
But on the operational expense side in terms of OpEx, we need to front-load, we need to invest in production capacity ahead of contract signings. We need to hire people, educate them, train them on how to develop and deliver projects, we need to invest in R&D to make sure we have the best people. So, whereas revenue recognition takes time OpEx, of course, hits Nel immediately, and we need to front-load. Unless you front-load, you’re not going to win. So, this is the reason why EBITDA is negative.
And then you could argue is that sustainable? Of course not. But we’re investing now in order to grow the company. And this is also the reason why we raised a lot of equity, we have a cash balance of NOK3.5 billion to fund exactly this period. This is the important thing; we have the funds to get through it. But of course, we will look for solid revenue growth and improving profitability. And the way to get there is to increase order intake and order backlog because that will help us in the coming periods.
When we also look at the total financials, I think is important to differentiate between the two divisions. We haven’t spent a lot of time on this previously, but actually in this quarter, it makes a lot of sense. Because if we look at the electrolyzer, in this quarter revenues, it’s flat. Alkaline actually had a growth of — the increase revenues by a factor of 10 compared to last year, so tremendous growth in alkaline even without the large scale orders hitting the P&L.
In PEM, we had a large delivery to Iberdrola last year, so comparing — so compared to that, we are down. We also have supply chain issues on some of the industrial products. So, despite record high sales of these PEM electrolyzers, we’re not able to ship the products from our factory to the customer. The lead-times on certain components is currently very high. We expect it to improve, but right now it’s a bit challenging.
So, the fact that we’re down in PEM doesn’t mean that the market for PEM electrolyzers is drying up or that we are not winning orders. It’s a supply chain challenge.
Also on the on the electrolyzer side, if you look at the year-to-date figures, I think there’s a better gauge for how things are developing. Revenues are up 50% — more than 50%. So, despite the fact that we have not taken any of the big contracts to P&L, revenues are still up 50%.
If you look at profitability, it’s negative and it’s impacted by the fact that these smaller contracts that we are delivering on now that we signed in 2019, 2020, and 2021 had a different margin structure. The market was not as vibrant and dynamic as it is today, we had to fight hard to win the contract, some of them were taking with a low margin, we have not been fantastic in project execution either, we need to learn. So, some of these projects have been executed with the — with higher than anticipated costs.
But we learned and all these learnings and all these improvements that we are making in the project delivery model will of course, help us going forward. There’s also inflationary pressure on the cost, which is difficult to pass on. So, when you sign a contract and metal prices start to increase, it’s hard to adjust for that.
In recent contracts, we have had seen mechanisms, which means that we are less exposed to raw material increases, but we are now being hit by contracts that we signed with a different structure in the past.
We also hired a lot of people, as I said, so with the increased personnel expenses, no wonder operating expenses go up. So, this is a little bit the story on electrolyzers. Revenues and margins are expected to improve or will improve when we take the newly signed contracts to P&L in 2023 and 2024. So, with increased revenues, we also get better margins and we also don’t have to add as much on the OpEx side as we’ve done. So, OpEx, as a share of revenues, will come down and this will positively impact EBITDA. So, we are positive in our outlook for electrolyzers.
Then you have fueling and the main reason we are down versus last year is of course that we are down 57% in fueling. It shouldn’t come as a big surprise. We have commented on this in previous quarters that order intake has been low. And it’s basically a reflection of that, also the year-to-date figure, as you can see is down 45% on the revenue line. And again, it’s a consequence of weak order intake in previous quarters, plus the fact that we have some supply chain issues that are delaying deliveries.
Again, what these supply chain issues are vary from month-to-month. I think that goes for all companies that try to manufacture products that you’re hit by certain shortcomings. We’re working our way through that to get components, but in this quarter, sales of fueling stations has been extremely low.
Also fueling continues to contribute negatively to the overall results and it’s not only the market, it’s also the fact that we have high quality costs. We have an installed base of products; utilization has been low. As consumers start to use the stations more of course, there’s more wear and tear. And we’ve had some quality issues on the stations, which means we have to replace components, we need to send service technicians out. This also drives higher personnel expenses. So, it’s not only market related, there are also a lot of things we can improve internally.
And we have to admit that in fueling, we are dissatisfied with the profitability. And we are intensifying actions to improve both the performance of the products in the field and therefore also profitability and look at other measures to improve profitability, in particular on the fueling side.
This is a more positive story and this is why we are investing, this is why we are running with negative EBITDA because we need to see order intake growth and backlog growth and on the order intake side in the third quarter, almost NOK800 million, that’s very high. So, far this year — this quarter — in the fourth quarter, we were already above NOK600 million, so of course the fourth quarter will also be great.
And if you look at the order intake, this is the story. This is why we’re doing it. We’re building this order backlog. This will come to P&L in 2023 and 2024. And as we win more contracts, the order backlog will continue to grow. As we will comment on in the outlook section, we expect more large scale orders that will fuel the backlog, give higher revenues, and then also better performance overtime.
So, I think on the order intake and the order backlog side, we are extremely pleased with recent developments. We see that Nel is competitive, we’re able to win large scale orders and we’re building a healthy backlog not only revenues, but contracts with reasonable and actually quite solid margins that we can translate into better figures in the P&L in the years to come.
Some political events that are important to understand the backdrop of Nel’s business. First of all, IPCEI, which means Important Projects for Common European Interest, typical EU abbreviation. The second wave is likely to accelerate project final investment decisions across Europe.
The EU has appointed 35 projects, Nel has its fair share of those projects not directly, but we are working with customers that will receive potentially funding from the EU to drive these projects forward. And with the support from the EU, of course, it’s going to be easier to make a final divestment — investment decision.
The timing of these projects will vary, but we were in discussions with customers on a lot of different IPCEI projects. So, we expect that some of them will come sooner rather than later and some might still be pushed out a little bit.
Should also say that even though a lot of positive things are happening on the EU side, it’s still a bit unclear exactly how the mechanisms will work. We are waiting for some clarifications in terms of the regulatory framework, both when it comes to the definition of what renewable energy is, which is important for project developers and also for the renewable energy directive to be finalized by endo 2022.
The EU is a bit stressed at the moment. They have put hydrogen high on the agenda, they want to be successful in hydrogen and not only successful, but lead in hydrogen, hydrogen. And then this happened. So, the EU is now worried that the U.S. will take the lead. And to be frank, the U.S. has taken the lead due to this Inflation Reduction Act passed by the Biden administration its possible, as we said in the previous quarter, to get up to $3 per kilogram of hydrogen produced in support and in tax breaks — tax credits.
So, if you look at Nel and the direct implication to the two largest orders that have been placed with Nel are both U.S.-based. And I think our client Woodside Energy commented that with the passage of the Inflation Reduction Act, the drive to accelerate the energy transition in the U.S. is underway. And of course, this impacts their investment decisions in the U.S.
So, clearly, the IRA is helping our customers improve the business cases, it’s easier to also then make purchase decisions and purchase orders with Nel. So, this is clearly positive.
As a consequence of this, the number of high quality projects increasing we are accelerating our site selection process. We have previously communicated four gigawatts potential capacity in the U.S., we need to find the right location. And then of course, we also want the government to support Nel in establishing this facility.
So, we can see that a lot of electrolyzers manufacturers in Europe are getting grants. Norway is not so keen on giving grants, but in the U.S. is possible. So, we will find a suitable site from a logistics point of view, from a business point of view, but also trying to get some grants for establishing capacity in the U.S. to serve the booming U.S. market.
We expect the U.S. to be a key market for Nel, going forward and it could be global hydrogen hub and also Nel’s second home so to say. We already have a sizable organization there. We have production capacity that we are expanding, but given the development in the U.S. market, we need even more capacity in the U.S. in the years to come.
Some comments on the commercial developments and we have to start with this the record size purchase order received in July that represented the start on Nel’s large scale area. We spoke a lot about our pipeline and the big projects would eventually come and then it came in July.
We have to be patient, but this is a high quality project. It’s a purchase order that includes 200 megawatt of stacks only. So, when analysts look at the announcements, I understand that they are sometimes confused because order sizes cannot be directly compared, it depends on the scope. This is just the stacks, just the tubes, the electrodes.
And it means that it’s a contract that over time might increase in value as we add peripheral equipment and will be called balance or stack and also services on top. And the client actually chose Nel based on the internal research. This was a client that went through all the potential suppliers and came to Nel and said, we have concluded you have the best solution, we want to work with you. How do we do that? And it was a fairly quick process to sign the contract.
This will be a very positive contract for Nel. It has a different margin structure than then we had on contract signed when there was limited demand. So, this is a contract that will have a considerable positive effect on both the P&L and for Nel in terms of learning and delivering large scale projects.
Another very interesting project, not similar in size, but it’s with the Skovgaard Energy in Denmark together with some high quality partners, sort of like Vestas. The project is the world’s first dynamic green ammonia plant. So, renewable electricity from wind and solar connected directly to the electrolyzer. So, it’s a demo plant that will test how an ammonia reactor can fluctuate operations based on renewable power input. So, interesting project together with Skovgaard in Denmark.
Two containerized systems sold in the third quarter, one to U.S. for making sustainable aviation fuel to basically decarbonize the aviation sector and one to Australia for making fuel grade hydrogen directly to a fueling station. So, these are compact systems that are quite sort of modular and easy to use to — for the customer to install, commission, and getting operation.
We also received a nice purchase order finally for fueling stations from a European client. You can see from the past that order intake on the fueling side has been limited, so this was this was a helpful contract, we will start to deliver on that in early 2023. So, the lead-time on this is a bit shorter than normal. And it includes service and maintenance overtime. So nice fueling contract.
Then subsequent event we received close to $6 million from Department of Defense to improve our PEM technology or further develop our PEM technology. It includes development on new membranes, looking into high volume manufacturing methods, how we can reduce the use of — usage of precious metals and also some interesting testing opportunities at ERDC and CERL in the U.S.
Then we got — then broken another record. In October, we recently announced a NOK600 million contract with Woodside Energy, very interesting project. They will produce liquid hydrogen for major transport companies, deliveries will or production and deliveries of stacks will start in 2024. The contract includes both the stacks and what we call the balance of stack with the separation system.
Again, this will have a substantial positive financial impact on Nel. Margin is healthy, terms and conditions are good. It’s similar in scope and size to the other contract that we signed in July. So, we’re moving from 10, 20 megawatt projects to 150, 200, 250 megawatt projects and over time, even bigger projects. So, it’s a nice learning curve. And it’s — it fits into our strategy of selecting customers — high quality customers that have a high potential reaching FID and that are willing to commit to placing orders early on.
So, Woodside Energy is a very interesting client for Nel. It’s a customer that we can also develop together with scale with there are lots of opportunities for repeat business. They’re building five — six of these sites in the U.S. They also had large plants in Australia for major hydrogen export hubs out of Australia to Asia. And as this company has a lot of experience in LNG is one the world’s largest exporters of liquid natural gas. It’s a high quality customer for us and very interesting partner also to work with, because they have the industrial background and experience that we’re looking for.
Then to the summary and outlook. I think even though the results go a bit up and down and we still report on the backlog that was the result of contracts made in 2019, 2020, and 2021, and maybe not the best contracts, I think I would like to make the point that we do actually deliver on what we promise.
We have been a bit conservative in terms of what we have communicated when it comes to these large scale contracts, and when it will happen. We have said that we — historically, we have said that we are confident that they will come. So, in the first quarter presentation, we said the pipeline grows and projects are getting bigger. Then we won the 200 megawatt order. After that we said, the 200 megawatt order is not a one-off.
And I think it’s nice then to report a NOK600 million contract a few months later. And now we are saying more large scale orders are coming. We are confident that there will be more large scale orders and that actually, the large scale orders are the ones that we are going for, that’s what makes this business interesting. It’s not the small pilot cases and demo plants, now we’re moving forward with large scale orders.
And I think I would like to go back to the U.S. a little bit because what has been our main markets, especially for alkaline products has been the European market and Europeans take it step-by-step. They do a small demo plant and then they might consider a Phase 1 investment into a larger facility whereas in the U.S., it’s pedal to the metal and they go large, immediately, especially now with the funding, they bypass all the testing stages. They go straight to the large scale projects, and even the project we are delivering on have Phase 2, 3,4, and 5 over time. So, it will not stop with these orders. They might develop into gigawatts projects. I think that’s important. They have plans to expand from an initial phase of 200-megawatt maybe up to more than 1 gigawatt.
Why are we saying that more large scale orders are coming? Why we’re so confident that this will happen? Well, first of all, the market outlook is extremely positive. We can see it in our pipeline, the pipeline continues to improve and mature. We’re not talking to dreamers anymore. We’re talking to people that have industrial backgrounds, that have financing in place, they have secured land, they have secured electricity, they have all the prerequisites in place, and they have a solid business case. So, it’s more about finding the right timing to do it.
Customers realize that they are not the only ones looking into hydrogen. And even though there are 25, 30 providers of electrolyzer stacks, not all of them are experienced, not all of them have the scale to deliver. Actually very few have the scale to deliver. So, they are concerned that near-term, it will be difficult to get sufficient electrolyzers.
I know external market research says that the capacity in 2025 will be 40 to 50 gigawatts. I disagree. I think it will be a fraction of that. There is no way it will be 40 to 50 gigawatts by — in 2025. It will take much longer, much longer and customers realize that. So, they come to now because we have installed production capacity, we take them to Herøya and they see that this is not just power plant, it’s a real factory with real outputs, automated equipment, trained operators. And they also know we have a track record of delivering on what we promise.
So, we continue to secure high quality, large scale orders with attractive markets. In a market where customers are concerned about supply, of course, you’re able to increase prices. So, even though the outlook is very positive, I should caution and we shouldn’t expect a large scale order every single quarter, that’s not what we’re saying we’re saying in one quarter, it might be zero in the next quarter, it could be two or three overtime, right? But it will vary.
Also realizing that these large scale contracts require commitment, and you’re dealing with professional counterparties that need approvals from seasoned Board members, and they have an authorization matrix and it’s not just something they sign off on. Tens of millions of euros and hundreds of millions of euros require a thorough in approval process. So, the timing from the start discussions until the contract is ready for signing is — it takes time, but that’s a sign of quality.
So, our pipeline is extremely promising, some are fast tracking, some are spending a bit more time. But again, we are extremely happy with the quality of the prospects that we are working with.
When it comes to how we select our projects, we start by looking at the business case and the application and then we need to decide on do we have a suitable technology offering. And because we have a broad technology base, we can meet customer requirements by being the technology agnostic. We’re not a one trick pony, we don’t only offer alkaline or only offer PEM, we have the luxury of actually choosing the right product for the application.
And that also creates trust among customers that we’re not just bad mouthing, competing technology and speaking highly of our own technology, but we are sort of, neutral in a way, we can pick what is right for the project.
We’re also looking for high quality counterparties. A lot of people are trying to get through the door and book production capacity that we need to make sure that the products we actually sign are high quality projects with customers that can actually take FID.
And we need a high probability to win, we need to see that Nel is in a position to create value for the customer, but also get paid what we need in order to build a profitable business. So, there has to be a good match between what we can offer and what the customer appreciates in terms of doing business with Nel. And that means we’re looking for attractive margins and acceptable risk profile.
I think I mentioned that earlier, prices are going up and they will continue to be attractive as long as capacity is limited. And as I said, my personal belief is that capacity will be limited for a much longer period than some analyst reports and market reports believe
As a consequence of more large scale orders coming we have decided to increase the threshold for what we regard as insider information. So we will no longer disclose all orders above €2 million. We will only disclose orders above €5 million. Unless an order is seen as very strategic it could be a €3 million, €4 million contract with a very reputable company and we might disclose that. But as a general rule a rule of thumb, we will now start to disclose contracts that are above €5 million.
And we think that sort of supports the equity story and also our strategy of pursuing large-scale projects over time. And as they are now coming I think it’s a meaningful shift so that when we communicate something from the company it’s aligned with what the investor community is actually looking for and finds material for the Nel share.
So to sum up a bit of a mixed bag of results in the third quarter, again related to what happened several quarters ago. In terms of order intake, what pleases us is that the order intake and the backlog is increasing because it means that we will report higher revenues and better profitability in coming quarters. But it’s not a quick turnaround. When we sign a contract, it doesn’t hit the current quarter or the next quarter or the quarter after that, it takes usually 12 months to 18 months for that to happen. So that’s an important reminder.
Having said that, Nel is uniquely positioned to capitalize on the increasing market demand that we see is coming. It’s now finally happening. It’s not only Nel that is receiving large scale orders also competitors and that’s good because we need to build the hydrogen industry.
Now we will take our share of that and we will fight for 100%, but realistically speaking, we cannot win 100%. So it’s good that all these orders are being placed because it proves that this is finally coming of age. And why are we in a position to claim sort of the leading position? Why do we say that we are number one by nature? Well, it’s because we have an unrivaled track record. We have decades of experience. We go back to the black and white pictures from 27 and actually the two largest electrolyzer systems that have ever been built and operated were delivered by Nel, 160 and 135 megawatts. We have the largest installed base, which means we have gathered operational data for decades.
Now if you buy electrolyzer systems for hundreds and millions of NOK, do you buy something that has never been tested from a supplier that has no track record, no experience? You’re buying a product because you expect it to last for eight to 10 years. Now, unless you have had a product in the field for eight to 10 years, how can you trust that it actually will last for eight to 10 years. We have done that. We have the operational data for lots of systems going back decades, and we have proven technology and we can offer performance guarantees, which means when you do business with Nel, you also end up with a bankable solution.
As I said, we have a broad product portfolio. We have high system efficiency and high durability, and we have world class safety. So we have – we claim that we have technology leadership and I’m proud to stand behind that. We also claim that we have cost and scale leadership, and I am also proud to stand behind that because we are a front-runner in cost reduction. We are the market-leading company when it comes to automating production processes. We have leading production capabilities, we have numerous initiatives to bring the cost down, and there to say that we offer the best total cost of ownership for the customer. And we’re also supported in terms of strong financing because we need to front load. We need to take early investment decisions in order to grow.
If we try to sort of run this by optimizing the coming two, three quarters, Nel will never be number one. You can’t be number one in this industry if you take that approach. You need to front load, both in terms of people and in terms of assets. And that’s why we have the strong financing. So customers can actually rely on Nel to be around even though numbers in certain quarters maybe are not so good. We have the funding in place to secure that over time. We develop this into a profitable business and become a reliable and trusted partner as they scale their products.
That’s it. We then move on to the Q&A session. I will be joined by Kjell Christian, our CFO, and Wilhelm, you will take the lead on the Q&A.
Question-and-Answer Session
A – Wilhelm Flinder
Yes. Thank you. So we have some questions coming in already. And as a reminder, for the ones that wants to ask questions, please use the raise hand function and we’ll call out the name and activate the microphone to do one next in line. So please make sure you have activated the microphone on your end. Note that, we will keep camera for the ones dialing in disabled. Please also maximum only two questions per person due to time constraints.
So if more time, you can always go back into the line. Also, if we have time, we will also take written questions through the Q&A function. And if there are questions, we don’t have time to answer, please reach out just on ir@nelhydrogen.com.
And as a reminder, we will not comment on outlook-specific targets, detailed terms and conditions on contracts, as well as questions on specific markets. Multi questions, we would also appreciate is taken offline directly with me.
So we’re going to start with Christopher Leonard. Your microphone is now activated. Please go ahead. Christopher Leonard. Please go ahead. Your line is open.
Christopher Leonard
Yes. Hey, guys. Can you hear me now?
Wilhelm Flinder
Yes.
Christopher Leonard
Hi. Good morning. Thank you very much for the presentation. And just go with two questions, please. So you’ve spoken about the weak profitability for historic orders and obviously, your conviction here is that the rollout of giga-factories from your competitors will potentially be weaker than what the market is expecting. So just wondering what your conviction is around that, given that you also stated that they are winning orders. I mean, do you think you’ve got some sort of differentiation on your pathway to increase your capacity?
And then the second question, sort of what are you doing on your current density for the alkaline electrodes that you have given that from the data we see, it looks like you are behind some of the peers and where are you I guess in your sort of technology pathway for your alkaline technology? How much further do you have to go on that? And that’s my two. Thank you very much.
Håkon Volldal
Yes. So I think when it comes to production capacity expansion, we have made a final investment decision on Line 2, which will be up and running early 2024. And then if we get additional orders, I think it’s a natural pathway to expand Herøya, the Norwegian facility to full capacity, two-gigawatt. We are expanding our PEM production capacity in the US towards 200-megawatt initially and probably double of that for 500-megawatt over time in the existing location. But we’re also looking to establish a new gigawatt facility in North America given the high demand from North America.
The exact timing will, of course, depend on site selection and funding processes. But I think we have a pathway towards during this decade, 8-gigawatt to 10 gigawatt of production capacity is what we have communicated as an ambition, and Herøya will deliver two, maybe US will deliver an additional four on top of the 500, so then you are at 6.5, and then you need another facility. And whether that’s in the European Union or in Australia or somewhere else, we have to come back to.
But the reason I’m saying that, I think capacity, I don’t trust the capacity expansion plans is that well, if you look at what is actually installed, it’s limited, then you look at what is actually under construction, then it’s a bit more. But a lot of people just take what has been communicated as an ambition. So they put in all, Nel is going to have 10-gigawatt and it will probably be by 2025 and they do the same for our competitors. And that’s not the fact. That’s an ambition.
So what is actually under construction is maybe 40% or 30% of that number. And then knowing the lead times on getting equipment, I don’t understand how all this capacity will be available. It takes time to get the equipment. It takes time to train the operators. We have the production concept ready, we’re just copy pasting that and that takes more than a year. So how can competition just add something that is brand new and do that with a factor of five, I don’t believe in that. I think it’s grossly overstated some of these ambitions. And you can see also that some companies have gone out and said that, we’re not going to pursue the same aggressive expansion. We’re going to settle with something less.
So do the analysis, what is installed, what is actually being built and then what is the ambition. And then I think what is actually being built is what we need to base it on because that is what will be available to customers in the coming few years.
Kjell Christian Bjornsen
As regards to the current density question, a second bench question on technology. It’s not a problem to increase current density by throwing in more expensive components. You can throw in a lot of platinum and then you can just up by current density quite easily. What we have done through several years is to optimize on total cost of ownership for the client. So, of course, then we will be higher on some parameters and lower on other parameters when it comes to how the technical specification of the electrolyzer works. But you optimize the current and the total cost of producing hydrogen over time. We are of course, working to increase the current density and also increase the active area, but that are steps that will take us down to the cost targets we need to go through. And that being said, all technology platforms will not end up at the same current density.
Håkon Volldal
I think it’s also fair to say that, what is written in the product fact sheet cannot always be trusted. It’s like when you buy a car and you buy – what is the range on an electric vehicle is 500 kilometers, oh yes, there are these conditions. But under normal conditions, it might be 420 kilometers. During winter, it’s 380 kilometers. So I think, don’t always look at the fact sheets and compare directly. I know it’s tempting to do that, but it doesn’t tell the full story.
Some of these products that there are fact sheets about are only lab-tested products. They haven’t been tested out in the field over time. So what you see in the factory, it is an ideal condition at SAT measured after two years or one year, do you have the same performance, probably not.
Christopher Leonard
Thanks very much. Appreciate those honest answers.
Wilhelm Flinder
So the next question comes from the line of Erwan from RBC. Your microphone is now activated. Please go ahead.
Erwan Kerouredan
Hi, there. Thanks for taking my question. So another question on profitability, please, and a forward-looking one. So you guide to electrolyzer revenues and margins improving when the recently signed contracts reached revenue recognition in 2023, 2024. The key question for me is, when should we expect this to be reflected? Is it more like the first half 2023 story, second half? Can you give a little bit more color on that? And then what kind of gross margins should we expect? Thank you.
Håkon Volldal
I think when it comes to gross margin, we will not disclose that because as we already disclosed capacity and revenues. Say, if we also then disclose margins, it’s quite easy to figure out our cost structure, and I think we would like to keep that a secret for now given all the contracts we are working to sign, don’t want to have pressure on this in the negotiations. So we don’t want to comment on gross margins. I understand the question. It will probably be easier to gauge that when we get more revenues and these orders come in, then you can also see it from the P&L a bit better. So I think I’ll let Kjell Christian handle the other part of that question. Sorry for not answering directly.
Kjell Christian Bjornsen
When it comes to the revenue recognition part, we can’t be more precise at this point in time. Our experience to date is that when you do the detailed planning with the client, then there will be adjustments in the timeline and more often than not that is a delay. So the historical projects that we have signed have all taken longer from signing to revenue recognition than the shared ambition between the customer and ourselves at the time.
Erwan Kerouredan
That’s it. Thank you very much.
Wilhelm Flinder
Next question comes from the line of Zoe Clarke. Please go ahead. Your microphone is enable.
Zoe Clarke
Hello. Can you hear me?
Wilhelm Flinder
Yes.
Zoe Clarke
Thank you very much. This is Zoe from Goldman Sachs. I have two questions, if I may. The first one is regarding the very challenged fueling division. Clearly, it’s been a drag this year and a little bit more volatile if that’s even possible on revenues and profitability. What is the strategic outlook here? What can you do to make this better? Or will it perhaps be the right time to look to monetize this? I’m just wondering strategically wise, how does the Fueling division fit into your strengths and whether it is part of your long-term ambition?
And then the second question is regarding your site selection in the US. It’s been ongoing for some time. Can I just confirm that here the plan is to actually expand both in PEM and alkaline, which I believe was mentioned previously? And what are the key factors? Let’s say that you consider when you’re choosing the state, where do you see currently the biggest opportunity for where to shortlist locations? Thank you.
Håkon Volldal
Yes. So maybe to start with the second question regarding site selection, we can confirm that we’re looking for a facility where we have the pool of the opportunity to build both PEM and alkaline capacity. The North America has historically been PEM, but our two recent contracts more than large scale contracts have been alkaline equipment. So I think the North American market will demand both technologies. So, we will look for a facility where we can do both.
The exact location will — we’re not doing this on our own. We have some external professional help in terms of selecting the right sites. And what we’re looking for is of course, a site that from a business perspective makes sense. And what does that mean? Well, you need to qualified labor, you need people that are willing to work shifts, you would like to have cooperations with the universities that have some experience in what we’re doing, or similar industries, you would like to have an okay starting point, when it comes to logistics, and shipping all these products out in the field, you would like to, of course, then also add the dimension of receiving grants.
So when you looked at all the — we have a range of selection criteria from a business perspective, and then you need to overlay that with, okay, where can you get state support? Where do you get additional support from, let’s say, hydrogen hub initiatives? So we will try to maximize what we can receive in terms of supporting grants. But at the core of it, it’s the business, of course, that drives it.
So we have said that we will conclude that selection process in first half 2023, of course, aiming to close it as soon as possible. So we’re not going to — I’m not going to spend six months just to spend it. But I think, there’s a lot of changes happening on the political side, and not on the political side, but the support side in terms of available schemes and grants. So it might be that it’s wise to call options on a few different sites, and then make the absolute final decision when there’s more clarity on how much money you can get in support, but at least then start the purchasing our long lead items for that site. Will you take the first one?
Kjell Christian Bjornsen
Yes. On the fueling side, we do see that and as we have talked about that revenues have been poor for the quarters now, because we have had a lag in signing large new contracts. And fueling came into the company at a point in time when the belief was that here there will be a lot of cross-selling between the division. So you will typically buy a package with electrolyzers for making hydrogen and fueling for fueling it, that synergy has been much less than expected. So the businesses are to a large extent and on operating individually, of course, with a shared back office and shared hydrogen competence. And then a few limited cases there is that cross-selling state. And we are continuing to develop them more a like independent businesses. And we’ll be looking at options how we can improve the total position of Nel and the fueling division.
Håkon Volldal
And listen, further my — may add, we’re not — as we clearly expressed in the report, we are not happy with the current performance of the fueling business or we will be looking into ways to improve profitability or address the losses and intensify that work going forward. So it’s a valid question.
Zoe Clarke
Thank you.
Wilhelm Flinder
Okay. Next question comes from the line of Arthur Sitbon. Please go ahead
Arthur Sitbon
Thanks for taking my question. One is on fueling, the fueling business. I mean, I was wondering if basically you could consider sell the business or at least look for a partner? Would that be one of the options to try to improve the profitability there?
My second question is you talked about the gap in profitability between all the others and more recent ones. I understand that you can’t comment on what you’re targeting exactly. But maybe you could give us some more details on that gap that you’re trying to close on? How much of an improvement to you would like to see?
And my last question is, I was wondering if you could provide a bit more detail on your involvement in projects that got approval through the IPCEI in Europe? And if you expect others coming from that and under which time horizon? Thank you very much.
Håkon Volldal
I think the second question we answered during the presentation that 35 projects are now being notified, and we have our fair share of those projects. We’re involved in 40%, 50% to those projects, meaning we have discussions, it doesn’t mean that, the customers will always select Nel, but we are working on 40%, 50% of that backlog.
The first question regarding, fueling, I think we have alluded to that, I understand the questions, and it’s — I would probably also ask the same question, but if you were me, you wouldn’t answer that question. Because if you say, oh, we’re going to sell this business or that business or we will close it down, then you don’t put yourself in a very favorable strategic position.
So when it comes to portfolio, adjustments, and divestments and strategic partnerships, and how we think about the business strategically, I think, we have to come back to you on that. I think what we are seeing today is that we recognize that we have a challenge when it comes to profitability and fueling and we will address that. And then when you say we will address that, I think that includes a lot of different opportunities to address it.
Kjell Christian Bjornsen
There was a question in between there on the gross margin improvement. And we aren’t — we’re not giving exact gross margins, but it’s a significant improvement. And of course, when we are looking at the future, we need to see a mix of gross margin and overall cost structure that gives us a reasonable return on the capital investment that — so it is a massive step up from the currently realized margin picture.
Håkon Volldal
And the realized margin picture is a result of lower prices than we have today. But also higher costs on Nel side and execution that definitely can be improved. So it’s not only linked to the margin on the contracts. It’s also Nel’s ability to deliver these contracts in a profitable and good way, where we will learn and improve. So the improvement potential is somewhat externally driven, but also internally driven.
Arthur Sitbon
Thank you.
Wilhelm Flinder
All right. Next question is from an anonymous user, but I understand it’s Alexander Jones from Bank of America. Please go ahead.
Håkon Volldal
See this one [indiscernible].
Operator
Alexander Jones, your microphone is open. Okay. Then we’re going to do the next question from Deepa Venkateswaran. Your microphone is now activated. Please go ahead.
Deepa Venkateswaran
Hi, there. Thank you so much for taking my call. This is Deepa Venkateswaran from Bernstein. So, my two questions. One is just on the recent Woodside order. Could you comment on the order size or at least confirm that it’s largely similar to the previous large order or in that ballpark?
And second question is on European customers taking FIDs. Do you see that the slowdown there is driven by, I don’t know firefighting, because of the energy crisis because maybe some of these industrial customers are also facing some problems over there, or is it related to the bureaucracy with IPCEI? The IPCEI approvals coming later or even delays to the definition of green hydrogen? Could you maybe talk about what you’re seeing on the FIDs on the European side? Thank you.
Håkon Volldal
Yes. So on the Woodside contract. It’s again, I understand the question, it would be preferable to give both megawatts on contract value so you can calculate it. But again, we have to in the interest of protecting a little bit, our pricing and how we — if we want terms and conditions to be good on future contracts, we cannot disclose all details, but I will — I can say this, it’s ballpark similar to the contract announced in July. But it’s smaller in megawatt.
Kjell Christian Bjornsen
But then with a wider scope, yes.
Håkon Volldal
With a wider scope. So if you compare the two, if you compare the two, Stock Exchange announcements, there is some hints to them in terms of scope and what is delivered and what is not included. So that is what is really driving the difference.
Kjell Christian Bjornsen
Yes.
Håkon Volldal
And when it comes to the European FIDs, I think a lot of projects will go ahead, irrespective of IPCEI funding, but it doesn’t help that the IPCEI funding process is delayed, and it doesn’t help that we have regulations that are not clear to companies. And I think that is also our message to the European Commission that businesses prefer schemes, like IRA in the US because then the market actually dictates which projects that will be run in the EU, bureaucrats are selecting which projects that will be run. So I think it doesn’t help FID that it’s dragging out, but I think some of these larger energy companies, and companies that are properly financed will still move ahead with hydrogen because there is a need to do it.
Wilhelm Flinder
So time is running out now, we have to end the presentation. I’ll give it back over to management for any final remarks.
Håkon Volldal
That wasn’t in the script, will have caught us off guard. I think not totally thrilled with the numbers. But again, we’re not — we have to impact and influence what we can and that is the future and I think we’re doing everything we can and the ordering tech is increasing the backlog is increasing and know that we will be able to convert that increasing backlog into good or better numbers, far better numbers going forward.
So we’re not so concerned about that. We were looking at the business right now, I think the outlook has never been better for electrolyzers, I have to say. So it’s a very interesting time and I think we are well positioned to capture our fair share of that market. But now it’s happening. Now is not only PowerPoint and graphs, it’s — there’s a real orders coming. And remember that that is the key takeaway from this presentation, more large scale orders are coming.
Kjell Christian Bjornsen
Thank you.
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