NLLSY - Nel ASA (NLLSF) Q1 2023 Earnings Call Transcript

2023-04-28 18:20:22 ET

Nel ASA (NLLSF)

Q1 2023 Earnings Conference Call

April 27, 2023 02:00 AM ET

Company Participants

Hakon Volldal - Chief Executive Officer

Kjell Bjornsen - Chief Financial Officer

Lars Nermoen - Head of Communications

Conference Call Participants

Erwan Kerouredan - RBC

Gard Arvik - Pareto

Deepa Venkateswaran - Bernstein

Arthur Sitbon - Morgan Stanley

Yoann Charenton - Societe Generale

Sean McLoughlin - HSBC

Presentation

Hakon Volldal

Welcome to Nel's first quarter 2023 results presentation. My name is Hakon Volldal. I am the CEO. With me today, I have our CFO, Kjell Christian Bjornsen; and our Head of Communications, Lars Nermoen.

We have the following agenda. We will go through Nel in brief before we get into the first quarter highlights. We will talk about commercial developments, the strategy update, a quick summary and then, of course, Q&A. And you can pose questions along the way, and then Lars will take us through them in the Q&A session.

Nel is a pure-play hydrogen technology company with a global presence specializing in electrolyzer technology and hydrogen fueling equipment. And our mission is to unlock the potential of renewables and enable global decarbonization.

Nel at a glance. We were listed on the Oslo Stock Exchange in 2014. We are the largest electrolyzer manufacturer in terms of number of units, with more than 3,500 delivered to more than 80 countries since 1927. We're also a leading manufacturer of hydrogen, the fueling stations, with close to 120 solutions delivered or in progress to 14 countries.

Manufacturing facilities in Norway, the United States and Denmark. We have a global sales network and offices, a bit more than 600 employees. And we have become the preferred partner with industry leaders in hydrogen. After a successful capital raise, we now have NOK4.6 billion in cash reserves and are well capitalized to fund further growth.

Now if we look at the first quarter. We are pleased with the development. And on the top line, we grew that by 68% to NOK359 million. EBITDA ended at minus NOK121 million, an improvement over last year. Order intake, close to NOK600 million, driven by two key contracts; and that means we have a record order backlog of NOK2.9 billion by the end of the first quarter. We also have a cash balance, as I said, of NOK4.6 billion.

Key developments in the quarter included a NOK125 million purchase order from HyCC, a project developer in the Netherlands; and a NOK360 million purchase order from HH2E for a couple of projects in Germany. We also decided to automate and expand our production facility for PEM technology in the United States from 50 to 500 megawatts per annum. We concluded a successful private placement of NOK1.6 billion, bringing our net cash balance to NOK4.6 billion.

Looking at the numbers in more detail. As I said, the top line is up by 68%, primarily driven by the electrolyzer division, we will take a look at in a moment, but also solid growth in Fueling year-on-year. EBITDA improved by NOK30 million from last year, still have a way to go to get to profitability, but it's a step in the right direction. Also on the EBIT side, we improved versus last year and the pretax income, of course, last year driven by adjustments to our holdings; and this year, no significant adjustments.

Looking at our two divisions. We have the electrolyzer division and the Fueling division. In the electrolyzer division, we grew revenues on the alkaline side of the business by 145% year-on-year, whereas revenues in -- for PEM electrolyzers increased by 9%. As you can see, EBITDA improved versus last year, driven by better margins now that some of the large-scale contracts with improved profitability start to kick in. Solid order intake, up 160% versus last year; and also a very solid backlog, 160% above what the backlog was a year ago.

On the Fueling side, we grew revenues by 50% from, I would say, a low level in the first quarter of 2022 to a decent level in first quarter of 2023. EBITDA, more or less in line with last year. And this is driven by the fact that we still have high warranty costs. And also increased utilization of stations on fixed service -- fixed-rate service contracts mean that we have operational losses on the Fueling side. Order intake was insignificant in the quarter, but the order backlog is still up 20% versus a year ago -- actually, that cannot be. That must be -- more than that. It's 40% up versus last year.

Order intake and backlog. We have had three solid quarters with strong order intake. The NOK580 million in the first quarter was a doubling of what we recorded in the first quarter of 2022, again driven by electrolyzer up 61% year-on-year and Fueling which was down 64%. Over the last 12 months, we've had an order intake of NOK2.6 billion, again, an increase over the previous period of 160%. Now please note that order intake is expected to vary between quarters, as order sizes have increased. We can't expect to, every single quarter, land or win significant contracts even though we have done that in the past three quarters and the pipeline and outlook is still good. It will vary between the quarters.

On the backlog side, it's up 126% year-on-year, again driven by the electrolyzer division which is up 159% and the Fueling division which is up 19%. The order backlog is solid, but it's still subject to risks such as delays and/or cancellations if customers are not able to take the final investment decision on their projects.

In February, we -- in March, we raised NOK1.6 billion through our largest private placement ever, yes; and we will spend the proceeds to continue to invest in our technology development. We will scale up the organization to deliver large-scale projects and we will further expand our production capacity. And this includes both the planned expansions at Heroya in Norway for the alkaline electrolyzers and in Wallingford for the PEM electrolyzers.

If we look at key commercial developments in the quarter. Let's start with the 40-megawatt purchase order from HyCC in the Netherlands for production of sustainable aviation fuel or SAF. HyCC is a Dutch company specializing in hydrogen production. They have received an environmental permit for a project in Delfzijl and is working towards an FID in 2024. Our partner on this project is Kraftanlagen as the EPC. And Kraftanlagen has been contracted to do the FEED study, with Nel also contributing.

Another nice win for Nel in the quarter was the 120-megawatt contract with HH2E. We announced an LOI with this company in January 2023 in connection with the visit from Germany's Minister, Habeck and minister of industry and the energy minister from Norway at our Heroya plant. They have now confirmed their interest in working with Nel through a purchase order for 2 times 60 megawatt in Germany. HH2E is a German hydrogen production company or project developer. And we will work with HH2E on these two projects, but moreover, they have an overall ambition to reach 4 gigawatt of green hydrogen production capacity by 2030. And then maybe not all of that will come to Nel, but it signals an opportunity to really develop this business together with HH2E.

I would also add that, in addition to the two key contracts we have signed, there's great interest in Nel as a company. And as renewable hydrogen is seen as key to society with low emissions, we are visited by politicians from Australia, Europe and the U.S. They all travel to Norway to see our manufacturing facilities and learn more about electrolyzers and Nel's technology. We have been invited to discussions with policymakers and other stakeholders all over the world, for meetings with the European Commission to meetings with governors and energy ministers. And I think that also proves that hydrogen is definitely on the agenda in many areas of the world.

The EU is gradually catching up with the United States in developing favorable framework conditions. I guess you all are aware that the United States passed their Inflation Reduction Act, which made it very attractive to invest in hydrogen projects. And the EU now has relaxed EU state aid rules and also introduced the so-called hydrogen bank as a response to the IRA in the U.S. And we can see that this will drive further growth in the hydrogen industry in Europe, whereas the U.S. is also speeding ahead with new projects.

Short strategy update. We spent time in the previous quarter to talk about our strategy, which we have coined bigger, better, focused. And if we start with the Fueling side of the business, we have an overall ambition to be the preferred high-capacity hydrogen fueling equipment provider with a 15% market share in 2025. Again around the themes of bigger, better, focused, we want to be -- develop a high-capacity hydrogen fueling station for sales and supply from 2025. The industry is moving towards high-capacity solutions for heavy-duty vehicles, buses, trucks, et cetera. We will prioritize bigger strategic accounts. We will not sell single units all over the world. We will focus on customers that have a high potential for a high number of stations.

We will become better. We have alluded to the fact that Nel and also the hydrogen fueling industry is immature and needs to step up its efforts to improve the technology. We need to improve the performance of our equipment to reduce ongoing operational costs for stations in the field, both warranty costs; and also increase availability; and make it more attractive to invest in hydrogen fueling infrastructure for heavy-duty vehicles. We also want to foster a culture where everyone works in line with common expectations, values and strategy. And this might sound as a soft point, but it's important for Nel as we transition from being visionary and startup minded into something which is bigger, has to be better. And we also need to become more professional. We need more structure; more, I'd say, cold business judgment into the decisions that we make. And we need everybody to work in the same direction in terms of making Nel a profitable and growing company.

We also have to become more focused. It's not enough to become bigger or better -- or actually, let me rephrase that. To become bigger and better, you have to be focused. We will phase out selected legacy product variants. We will focus on what we do best, not everything. Every single component in our fueling stations will not be made by Nel. We will focus on the core technologies. And those technologies are the high-pressure compression from 300 to 1,000 bar, not the low-pressure side; cooling; and controls. And we will prioritize and focus on existing markets. There is enough business for Nel in Europe and North America predominantly to serve the market and realize this ambition.

On the electrolyzer side, we also have the bigger, better, focused themes. On the bigger side of things, we have communicated that we will target large-scale projects. We will not do complete hydrogen plants that are small. We will do our part of the large hydrogen plants that are being built. To do that, we also need to scale up production. We will establish 2 gigawatts at Heroya, 500 megawatts in Wallingford in Connecticut. We will build a 4 gigawatt facility in a new site in the U.S. And we will also prepare further gaga factories around the world in connection with where demand is and where it should be produced in a good way to serve the markets.

In addition to becoming bigger, we also need to become better. We need to develop the most efficient and reliable alkaline and PEM technology. We will significantly reduce stack costs over time. Nel not -- might not offer the cheapest stacks, but we will have the best stacks so that the [TCO] (ph.) still favors Nel over competition. We will utilize and leverage our deep insights and knowledge in hydrogen to lead the industry. This is an immature industry. We will work together with leading partners and customers to further develop our knowledge base and make sure that hydrogen becomes affordable and competitive with fossil fuels. Also on the electrolyzer side, of course, we need to foster a culture where we work in the same direction and also be -- professionalize the business. And we will learn how to say no to things. Everything will not be strategic. Everything cannot be prioritized. We cannot pursue every single opportunity out there. We need to become more business minded and steer the company towards profitability over time.

Again we need focus. We will go from building complete hydrogen plants with responsibility for every aspect of the project and all the components, even components not manufactured by Nel, to really focusing on what we produce and what we develop. Therefore, the scope of supply will be limited to stacks and balance of stacks, so the electrolyzer and the gas separation system on top of it and the control system. We will work to standardize deliveries and offer less customization. This is needed in order to get the costs down and also get the speed up in terms of project deliveries. Our primary focus will be on Europe and North America. Over time, we will also serve Australia and Chile as important export hubs. We do have projects ongoing in Australia as we speak, but we see that demand is today stronger in Europe and North America than in other parts of the world, again driven by favorable legislation and incentive mechanisms for Nel's customers.

We'd like to comment a little bit on the capacity expansion. This is a picture from Heroya, and we are now constructing the second line. The first line was opened, I think, in 2021. We inaugurated the facility in April 2022. A year later, that line is up and running. It's roughly 500 megawatts of annual production capacity. We're now adding the second line, building on the experience from line one, with copy-paste of equipment and processes with certain improvements. And we are progressing this according to plan. We intend to have the second line up and running and producing for commercial orders by April 2024. That brings the total annual production capacity to 1 gigawatt in Norway. And as you might be aware, we can double that again to 2 gigawatt if we get additional orders.

We will try to match supply and demand in the smart way. There's no point in building production lines that will just idle. We -- but we have the opportunity to quickly ramp up. Compared to competition, I think that's something Nel has that is unique. We have a proven and tested production concept. We know what kind of equipment to order. We know how to put it together and we can make it happen fast.

On the PEM side, we have decided to expand capacity by a factor of 10. We will go from roughly 50 megawatt in capacity per year to 500 megawatts by 2025. Already by the end of 2023, we hope to have a nameplate capacity run rate of roughly 200 megawatts in our PEM facility. And it's not only about scaling up the capacity. It's also about improving the underlying processes; ordering smart, new equipment that will take costs out and that will improve the quality of the products. In the same way that we've done on the alkaline side, we want to improve the way we manufacture our PEM products.

Now we have for a period of time said that we are looking into establishing a giga factory in the U.S. and that we have been involved in a site selection process. That process has now been concluded. We, I think, started with looking at every single state in the U.S. and more than 150 potential factory sites. The announcement of the winner, so to speak, the state that will have the honor of hosting Nel's giga factory, will be announced shortly. We have decided to do that together with the winning state potentially next week. We aim to build a factory that can have a capacity up to 4 gigawatt, split between PEM and alkaline, but again in the same way that we have added capacity in Norway, we will not build 4 gigawatt in one go. The factory will be built out in phases so that we can match supply with demand.

No final investment decision has been made yet. The current Wallingford expansion is important to create the blueprint for the PEM expansion. We will develop a production concept, test the equipment and then bring these innovations to the new site when we scale up further, but this should put Nel at the forefront of automated smart manufacturing techniques for electrolyzers. And it also signals a capacity commitment to the industry. In case we get large orders, we are -- really large orders like gigawatt-type orders, which we are working on, we are ready to go, if we get them.

So let's try to summarize then before we do the Q&A session. First quarter overall: continued strong order intake and record-high order backlog, happy with the significant revenue growth of 68% and also the positive margin impact from large-scale contracts that have improved profitability. We have concluded a successful private placement, raising NOK1.6 billion. And that means we are well capitalized to fund our growth. If the burn rate comes down, we will -- we can live long on the NOK4.6 billion that we now have available. And also we are continuing with our capacity expansions, line two at Heroya, the Wallingford expansion; and now also concluded on the U.S. site selection process.

Thank you. Then I will hand it over to Lars to manage the Q&A session.

Question-and-Answer Session

A - Lars Nermoen

Good. Thank you, Hakon. My name is Lars Nermoen. I'm Head of Communications. Apparently, something happened with the presentation so the PowerPoint wasn't visible during Volldal's presentation, so we apologize for that, but the presentation material is available on our web pages, on the IR pages.

[Operator Instructions] In case there are questions we don't have time to answer, please reach out to us on ir@nelhydrogen.com. A reminder from previous quarterly presentation. We will not comment on outlook-specific targets, detailed terms and conditions on contracts as well as questions on specific markets.

So let's go ahead with the Q&A session. The first question is from Erwan Kerouredan. I hope I pronounced your name correctly. You microphone is activated. Please go ahead.

Erwan Kerouredan

Can you hear me?

Lars Nermoen

Yes, we can hear you.

Erwan Kerouredan

Yes. And thanks for the efforts trying to pronounce my name. Congratulations on the clearly improved profitability across the board. So I've got two questions, please, first, on profitability; and second, on policy. So on profitability, so especially on the electrolyzers: So we clearly see improved and at least much lower loss. So we were at an EBITDA margin of minus 12% in the first quarter, which is much better than last year which was around minus 47%. How much of that is the fruit of the higher-margin contracts? Based on what you write, this is still a small contribution, right, so how much of this is the fruit of higher-margin contracts signed then recognized? And obviously, if you could provide any color of like if we should see any further improvement in the second quarter, that will be awesome.

Second question, on policy. We -- there was a recently published report from the IEA in the U.S. suggesting that very few green hydrogen production methods would actually qualify for the full $3 per kilo production tax credits in the U.S. due to emissions from the manufacturing of equipment such as solar panels, et cetera. So we always knew that $3 per kilo was a maximum credit, but I was wondering if this had caught your attention and this had changed your views or discussions with customers in any ways in the U.S. These are my two questions. Thank you.

Hakon Volldal

Okay. If we start with the margin question: The improvement is definitely driven by the monetization of the high -- the large-scale contracts with improved margins that we have referred to previously, but bear in mind that the quarter is a combination of all contracts with weaker margins and some revenues from large-scale contracts with improved margins. And that will continue in the coming quarters. Further improvements, I think, we will see when the legacy projects, so to speak, signed in 2020 and 2021 are delivered out of our books and we can get more of the large-scale contracts into our P&L. That will bring further improvement.

On the policy side, I think it will vary. Some projects are good projects that might not need the full $3 to be viable. Others depend on $3 and maybe more. And the important thing for Nel is that there is a sufficient number of projects to pursue. And I think our customers have a fairly good grip on what is available in terms of funding and support. Maybe there are some deductions, but that will vary. The base fee is $0.60, and then there's a multiplier on that where you need to meet different criteria. And I think some customers meet all criteria. Other customers meet fewer of these criteria, but for Nel, there's enough to work on.

Erwan Kerouredan

Thank you. That’s very helpful.

Lars Nermoen

Okay, the next question is from Gard Arvik. Please go ahead, Gard.

Gard Arvik

Thank you. Firstly, I would just like to say that we can see the slides, so that was no issue. And I have two very quick questions. First, on FX, how much -- I know that you hedge out some back-to-back in your contracts, but how much of the effects this quarter is driven by a weaker NOK when you translate the -- most of your income from euro and dollars into NOK?

And my second question is on the gross margin. I mean now we've seen two quarters with stellar gross margins. Could you also give some flavor on what's driving that? I mean you commented briefly on the total margin picture from the last question, but yes, some more flavor on that would be great. Thanks

Kjell Bjornsen

So first of all, when it comes to the currency and currency translation effects, keep in mind that a very large share of our cost base, the vast majority of our cost base, is also not in Norwegian kroner. So a weakening NOK will inflate both the revenue side and the cost side, and that in combination with hedging makes the net effect relatively small.

On the second part, when you are referring to margin, I assume you are referring to the cost of raw materials as a percentage of revenue. And what we see after the change in strategy that we've had, where we narrow our scope, is that we have less of the pass-through equipment, so equipment where we basically get a handling fee and lots of hassle. And that, of course, is something that influences that ratio more than the total margin on the project. I hope that was helpful.

Gard Arvik

Yes. Thank you. But if you were to say at constant currency year-over-year, how much will the effect be this year compared to Q1 2022?

Kjell Bjornsen

I don't have to -- that top of mind, so I'll have to come back with that figure.

Gard Arvik

Okay. Thank you.

Lars Nermoen

Good. Next question is from Deepa Venkateswaran. Please go ahead. Deepa, you microphone is activated.

Deepa Venkateswaran

Sorry. My question was really if you could comment on what you are seeing in terms of your customers' behaviors going towards FID, because we've talked in the past that FIDs have been lagging. Do you see -- as a result of now more clarification on the rules in the EU and then the net zero industrial act and so on as well as this hydrogen auction that they've announced, are you seeing any improvement? Or could you at least give a sentiment check, versus the last time we spoke, how things are going?

Hakon Volldal

Yes. I think we then need to look at the U.S. and Europe separately to simplify it. In the U.S., you have attractive incentive schemes available, but a year ago, there were few people in the U.S. that thought about hydrogen projects and so the number of projects that were available were not that many. Now that you have the attractive incentive systems in place, people are developing these business cases, but they need time to mature and progress their business plans and the business cases. And that's why FIDs, I think, in North America is lacking. What we've seen is that the good projects move forward. We have signed a few of them. Others have also signed contracts. I think the speed will pick up as the business cases mature.

In Europe, the story is a bit different because there we have a number of business cases that companies have worked on for a long period of time. They're ready to go ahead, but there is uncertainty around financing of these projects. Developing green hydrogen projects is not straightforward. And I think a lot of companies realize that right now it is more expensive than maybe they thought. And they depend on some external support during this transition period. And the EU has made good progress on headline level, but for companies looking at specific investment cases and wanting to go to FID, they need more certainty.

What and how much money can I get? How do I get it? And by when do I get it? That is not crystal clear. I think the hydrogen bank auction and other mechanisms will help, but it's the auction hasn't been run yet. That's why investors are still working on their business cases but not taking the final investment decision.

Lars Nermoen

Next question is from Arthur Sitbon.

Arthur Sitbon

Thank you for taking my question. First one, on the results that you published for Q1. I was wondering if in the electrolyzer business we should consider that the EBITDA margins have troughed now and if the level of EBITDA margin that you've seen in Q1 is a good reflection of what we could expect for the whole year?

And the second question, on revenues in Q1. I was wondering if you could tell us how much was booked on the basis of the Woodside, Statkraft and the 200-megawatt order in the U.S. And well, basically the idea is to try to understand how much of that is still left to be booked.

And my last question would be on the market share comments that you've made on Fueling and electrolyzer. So 15% in Fueling; 20%, 30% in electrolyzer. I was wondering what is the -- what is your underlying forecast for the size of the market in gigawatt or in number of station? Thank you very much.

Hakon Volldal

Yes. If we talk about margins, I don't think we want to be very specific about our margin expectations in the coming quarters. We are still -- yes, there's an improvement in the first quarter. We have said that we expect margins to improve as we start to monetize more of the large-scale contracts and get rid of the small-scale contracts, but it's still a bit volatile. The long-term trend is clear. Based on the order backlog, the margin will improve. We have more attractive terms and conditions than we had in the past, but exactly how that will play out quarter by quarter, I don't think we will provide detailed guiding on that.

When it comes to the revenue mix, yes, there is some revenue in the quarter from large-scale contracts, but I think, if you look at the announcements we have made, we've also said when we will start to make deliveries of equipment on the different contracts and some of the contracts you referred to. We have not booked anything on the Woodside and Statkraft later.

So yes, I don't want to comment specifically on which contracts we are monetizing because then you can work a little bit backwards what the margin might be and we don't want to be that transparent towards competition. So sorry about being a bit blurry on this, but there's a reason why we don't want to go into too much details on the quarterly financials. The second part of your question, I've now completely forgotten. Maybe you can refresh my mind...

Lars Nermoen

Arthur, can you please repeat it?

Arthur Sitbon

Yes, yes. It was on the market share targets, 15% and 20% to 30%. I was wondering. What's the underlying assumption in terms of market size? So 20%, 30% of how many gigawatt; and 15% of how many fueling station basically.

Hakon Volldal

I think on the electrolyzer side you have lots of different forecasts from different companies and analysts. We have our own forecast, but let's say -- it's a broad range, but let's say we need to book somewhere between 6 gigawatt and 9 gigawatt then to deliver on that margin -- not margin but ambition. In Fueling, exactly how many high-capacity stations that will be in 2025, I think we need to revert to you on. I don't remember the figure off the top of my head, but the high capacity market will apparently be a fast-growing, market. And it will start to grow from 2024 or 2025, maybe, from a low base and gradually become more important than probably the light duty market. So 15% is more interesting long term, in 2025, 15% might be 15 stations.

Lars Nermoen

Next in line is Yoann Charenton. Your mic had been activated.

Yoann Charenton

Good morning, gentlemen. Thank you for the presentation. I would like to come back on Fueling as well given the statement you made in the opening remarks. We had some policy developments in Europe in the first quarter related to half year, for example. Can you tell us how this has participated in shaping your Fueling strategy? And then maybe more specifically on the two points you made: You are clearly focusing on high duty or, let's say, heavy-duty high fueling capacity. You are saying as well that you are focusing on the number of strategic accounts. Can you please provide us with an idea of the size of this high fueling capacity in terms of stations? So thinking about the distribution, compression and storage, if possible; just a sort of what is the typical station you'll expect will represent the bulk of orders going forward. And when thinking about the strategic accounts, are you able to say a rough number? How many of them have you identified? Thank you

Hakon Volldal

Do you want to take a crack?

Kjell Bjornsen

So on the number of strategic accounts, there's a quite few. There's a handful that we would need to work with. And the reason for that is that the high capacity market isn't there yet and the projects aren't ready yet, so really what you are asking for is the product specification of a product that has not yet been launched to customers that see the need for it in 2025, 2026 time frame. In the interim, we will, of course, continue to develop our own existing portfolio and to continue to serve the light-duty vehicle market, but it's clear that what needs to come from, I will say, 2025, 2026 onwards is something with significantly higher capacity and significantly better stability so that we will take down the ongoing operational costs for the station owner.

Lars Nermoen

Next question is from Sean McLoughlin. Please go ahead. Sean, your mic has been activated.

Sean McLoughlin

Hopefully, you can hear me now.

Lars Nermoen

Yes, we can.

Sean McLoughlin

Super. Just a question just building on the last question. I'm assuming that your strategy to expand both PEM and alkaline in tandem is more around PEM is the technology for refueling, whereas alkaline is the technology for electrolyzers. Or are you seeing actually much more crossover. I’m just understanding how you're actually helping your customers decide which technology would be the better one in the case of crossover?

Hakon Volldal

I don't think one technology lends itself, per definition, better to mobility applications. I think we have large-scale projects involving alkaline electrolyzers that will deliver hydrogen for fueling applications. We have PEM facilities that produce hydrogen for fueling applications, and so I don't think there's one way to answer that.

So you have to look at the specific needs of the customer. If you want distributed fueling with the generation of hydrogen at small quantities in several locations, then the containerized PEM product is a very good solution. If you want to produce larger quantities of liquid hydrogen or compressed hydrogen, then maybe an alkaline facility is better. So there's no given answer to that. So the benefits we have is that we can be a bit technology agnostic. We can discuss with customers, what is the best solution for your application? and whether that's in mobility or in another industry. And we don't need to be a one-trick pony that only talks about the positives of PEM and -- or the -- only the positive things about alkaline. We can have a more balanced view. And then the decision on fueling equipment versus electrolyzers is not very related. Those are two separate discussions. We have few customers that buy both fueling equipment and electrolyzers.

Sean McLoughlin

Understood. Thank you. And secondly, just you'd -- last year, you had announced the development of pressurized alkaline system. I'm just wondering kind of where we are there. Is that now the core product that you're offering on the alkaline side?

Hakon Volldal

Yes, I think we will get back to the market on an update on the pressurized technology. That is definitely an interesting technology that we are spending time and money on to progress. It is progressing well, but when we launch it, it has to beat the existing technologies. So we were not the start-up where that's the only product we develop. We have, as I said, a portfolio of different solutions. We have atmospheric alkaline. We have PEM. We have pressurized alkaline. And there's no point in launching something new unless it clearly beats what you already have. That's why we have set the bar fairly high for our pressurized technology. And we could come out with a product today, but we want to come out with something which is clearly different from what we already offer. And that is sort of the next generation of electrolyzers, but I think it's a valid question. And we will get back to the market on an update on the pressurized technology.

Sean McLoughlin

Thanks.

Lars Nermoen

We still have time for a few more questions, if there's anyone out there that would like to take the opportunity, yes. Okay, [indiscernible], please?

Unidentified Participant

Hello. Can you hear me?

Lars Nermoen

We can hear you.

Unidentified Participant

Thank you for taking my question. So just a quick question, probably a follow-up, on refueling stations. We see an improvement in the margin. I'd like to know: This is due to that you're reaching large-scale projects also for refueling station. I understand, for electrolyzers, that is the think, but for refueling stations, are you receiving larger orders and there is an improvement in the margin that you're able to charge on your client? Or is it more due to the fact that you've been able to solve some of the operating costs -- increased operating costs, due to higher demand and usage of the final product? If you could give us a little visibility on this, I'll appreciate it. Thank you.

Hakon Volldal

We don't really have large-scale deployments on the Fueling side yet, well, but the reason we are targeting larger accounts on the Fueling side also is not because you will roll out thousands of stations. But you get the same design, less customization. You can -- there's less complexity and less costs involved, and that means we can protect our gross margin. Having said that, I think the gross margin in Fueling is okay. What sort of negatively impacts that business is the OpEx of running the stations where we have had some unfavorable contracts. And also we have had quality issues on the stations and we are working hard to fix that. We expect improvements on the, let's call it, costs of poor quality. We expect those expenses to come down. And then we've also worked to sort of streamline and then optimize our organizational setup. There are some savings on the OpEx side that have contributed positively to the margin improvements, but it's still at a level that we are not happy with, so more work needs to be done on the Fueling side.

Lars Nermoen

We have one more question, from [Patrick Shuquist] (ph). Please go ahead, Patrick.

Unidentified Participant

Thank you. It's actually sort of a follow-up [indiscernible] pressurized electrolyzer discussion. It was more around -- you also mentioned in your yearly report that you're looking at larger electrolyzers. Maybe you can elaborate on time frames there; how that will benefit the customers; and how that also will affect the infrastructure that you're installing in the Heroya plant, for example.

Kjell Bjornsen

Yes. So I think there's two ways of going larger. We can have the basic electrolyzer stack we produce and then just put more of them next to one another. Or you can work on the size of that stack. So far, the main positive effect comes by putting more of those stacks together and then consolidating the equipment around it. And that is the main effect that we are addressing now. If it, over time, makes sense to work on the size of its stack -- of the stack itself, we will, of course, do so, but as for now it's more with the system design, the surrounding components which we then consolidate.

Unidentified Participant

Thank you.

Lars Nermoen

We have another question from [Damian] (ph). Damian, you are activated.

Unidentified Participant

Can you hear me now?

Lars Nermoen

We can hear you, yes.

Unidentified Participant

Okay. Thank you. So I have a question regarding SG&A cash costs. This quarter, you recorded NOK311 million compared to NOK221 million a year ago, which is 41% higher year-on-year. Could you please elaborate what should we expect in the future, in the coming quarters in that area? Thank you.

Kjell Bjornsen

So we have scaled up the organization a lot, and that hits that line. i.e., quite a lot of those costs that come in they will, over time, be charged to the projects. So it is engineering hours and other things that we are then going to charge on. And we have seen a rapid buildup of the cost base during the last two years. It's been a bit less -- more stable lately, but I would say that we continue to invest for growth, so continued also growth in the cost base will be expected; hopefully, at a lower rate than what it has been historically.

Unidentified Participant

Thank you very much.

Lars Nermoen

Okay, thank you. It seems like there's no more questions coming in, so I'll leave the word to Hakon now for some final remarks.

Hakon Volldal

Yes. I -- as I said, we are pleased with the development in the first quarter. We still have a way to go to get to profitability, so it doesn't mean that we are truly satisfied with the performance, but it's a step in the right direction along several dimensions. And I think we are developing the company in a good direction and hope to continue to do that in the coming quarters also. So thank you for watching. And I hope to see you back again for the second quarter update.

For further details see:

Nel ASA (NLLSF) Q1 2023 Earnings Call Transcript