NLLSY - Nel ASA (NLLSF) Q4 2022 Earnings Call Transcript

Nel ASA (NLLSF)

Q4 2022 Earnings Conference Call

February 28, 2023 02:00 AM ET

Company Participants

Håkon Volldal - Chief Executive Officer

Kjell Christian Bjørnsen - Chief Financial Officer

Wilhelm Flinder - Head, Investor Relations

Conference Call Participants

Skye Landon - Jefferies

Deepa Venkateswaran - Bernstein

Yoann Charenton - Societe Generale

Alex Jones - Bank of America

Anders Rosenlund - SEB

Erwan Kerouredan - RBC

Kulwinder Rajpal - AlphaValue

Arthur Sitbon - Morgan Stanley

Thomas Mordelle - Bryan Garnier

Presentation

Håkon Volldal

Good morning, everyone. Welcome to Nel's Fourth Quarter 2022 Results Presentation. My name is Håkon Volldal, I am the CEO. With me today I have Kjell Christian Bjørnsen, our CFO; and Wilhelm Flinder, Head of Investor Relations.

Now let's start by looking at the following agenda. We have a short recap of Nel for those of you that are new to the company. Then we have the Q4 highlights. We talk about the main commercial developments in the quarter. We have a short strategy update on both electrolyzer and fueling and then we round off with a summary and a Q&A session facilitated by Wilhelm. So if you have questions you can start to send them in now.

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

Some quick facts about Nel, the modern Nel. Although we can trace our roots back to 1927, the modern Nel was started when we were split out from Norsk Hydro and Equinor and were separately listed in 2014 on the Oslo Stock Exchange. We have the largest installed base of electrolyzers in the world and we have delivered more than 3,500 units to more than 80 countries during the past 95 years. We are also a leading manufacturer of hydrogen fueling stations and have delivered more than hundred stations around the world to more than 14 countries.

We have manufacturing facilities in Norway where we produce electrolyzers, in the US where we produce electrolyzers, and in Denmark where we produce hydrogen refueling stations. We have a global sales network and offices around the world to serve customers across a large variety of industries. We are now close to 600 employees, actually a tad above and we are preferred partner with industry leaders within different sectors. We are well-capitalized. We have more than NOK3 billion or €300 million in cash reserves to finance our growth.

Now to the highlights for the fourth quarter. When it comes to the financial results, we generated revenues of NOK414 million. That's up 25% I think versus last year. EBITDA was negative NOK216 million. We had an order intake close to NOK1 billion driven by some of the key developments you can see to the right. The high order intake means that we now have a record high order backlog of NOK2.6 billion. And we have as I commented earlier, a cash balance of NOK3.1 billion.

The key developments in the quarter were a NOK600 million purchase order from Woodside Energy for electrolyzers needed for a project in Oklahoma, United States. That was, of course, a record order for Nel. It represented the largest single order that we have ever received. We also received a nice purchase order from Statkraft for NOK120 million for one of their projects in Norway. We have received a $7 million capacity reservation agreement from a major US energy company for 16 hydrogen refueling stations.

We signed a very important agreement with General Motors for development of our PEM electrolyzer stacks. And we received $6 million in funding from Department of Defense for accelerating advanced PEM electrolyzer stacks. So a lot of events in the quarter and also after closing of the quarter during the first two months up until today, we have some subsequent events.

We got the NOK125 million purchase order from HyCC for a project in the Netherlands. And we also made a decision to automate and expand our PEM production facility in Wallingford, Connecticut to 500 megawatts.

If we talk about the numbers in the fourth quarter and full year preliminary full year figures for 2022, let's maybe focus on the full year figures. Just short of NOK1 billion but still a revenue growth of 25% versus 2021. We expect growth to be strong going forward based on the high order backlog. EBITDA was negative minus NOK 780 million, which is down 64% versus 2021. It's a significant operating loss.

And of course, the EBIT number is also impacted negatively by write-downs, we have done in our Fueling division, based on the current performance and the cleanup of the intangibles. So we're now at for the full year minus NOK 1.3 billion in EBIT. These are quite substantial negative numbers. And of course, going forward, the focus is on converting the high order backlog into higher revenues, with a better margin.

So, I would say, these numbers reflect high investments in the organization, during a period where we had limited work. It also reflects some contracts that were not particularly attractive and also some delivery issues from Nel's side in terms of, managing deliveries on time and on budget. So a lot of these factors contributed to the weak numbers in 2022. We believe of course that from 2023 and onwards, the numbers will be better.

We are looking at, as I said, a cash balance of NOK 3.1 billion despite these losses so we are well capitalized to fund both operations going forward and the planned investments in facilities and equipment, to sort of deliver on the high order backlog and generate new orders going forward.

The financial results are a bit mixed, if you look at the different -- of the two divisions that we have. If you start with Electrolyser, you can see a quite significant increase in revenues in the fourth quarter compared to the fourth quarter of 2021, up 75% and also for the year, as a whole up 61%. This is driven predominantly, by increased sales of alkaline electrolyzers, for the full year.

In the quarter, we also benefited from a catch-up effect on deliveries of industrial PEM products. EBITDA minus NOK 66 million, but as you can see actually better than in the fourth quarter of 2021. So maybe, the bottom has been reached and we now start to see a positive trend in results versus previous quarters and year-on-year figures. Still EBITDA was minus NOK 304 million for the year, so we have a job to do in terms of, turning that around and bringing that to black figures.

Order intake on the other hand, and this is important, because order intake drives revenues and revenues drives margins and profits in Nel. That's the nature of our business. So, when we get all these orders close to NOK 1 billion in the fourth quarter and almost NOK 2 billion for the full year, that's a massive increase over 2021.

And the good thing about these orders is that, they are not only going to contribute to revenue growth but the inherent margin structure. The attractiveness of these orders and our ability to deliver on the contracts is, different than in the past. So, we have reasons to believe that the margins are more attractive, and that we will be able to deliver on a more narrowly defined scope, in a better way than we have done in the past. So the order intake, will translate into better operational performance.

But bear in mind, that it takes time to convert orders into revenues. From we sign a contract and announce it to the capital markets, and we start to recognize revenues, we might need 12 to 18 months to do that. So for instance, most of the contracts signed in the second half of 2022, will impact Nel's finances in end of second half of 2023 and 2024, and going forward. So revenues are up.

Results negatively impacted by low-margin contracts signed then in 2020 and 2021. These are the contracts that we report on now. Inflationary pressure on previously, non-hedged components so that's something we have learned. We learned our lesson to hedge raw material prices steel and nickel. So, on the new contracts, we don't have the same commodity risk that we have had on previous contracts.

And also suboptimal project execution, we're pioneers. We're doing this in a new industry and it takes time to learn how to deliver projects and solutions in a good way. We make some mistakes, and we try to learn quickly. And of course, we've also built the organization. We have increased personnel expenses, related to scaling up the organization to handle a larger order backlog and more projects.

As I said, revenues and margins are expected to improve and contracts signed in the second half of last year reach revenue recognition from the second half of this year and onwards. But predominantly in 2024, we will see these more attractive contracts coming to P&L.

On the Fueling side, we had a good increase in revenues in the fourth quarter, driven by delays in previous quarters, so a catch-up effect also on shipment of fueling stations. For the year as a whole we struggle with the low order intake in 2021 and first half of 2022 combined with the supply chain challenges in getting components to actually ship all the equipment. So we're down 26% for the year as a whole.

EBITDA in the quarter weak; and for the year as a whole, minus NOK 352 million a significant operational loss. And the results are negatively impacted by increased costs of stations under warranty and the fixed rate service contracts due to increased utilization. So I think it's fair to say the technology that was installed years ago is immature or was immature. The quality was not good enough and we struggled with all the work we have to do in order to keep these stations running to fix issues to send personnel out on site. We invest therefore in service and maintenance and in increasing their product robustness and reliability. And we will continue to incur high costs related to these activities going forward.

The order intake in the quarter, same as last year; for the year as a whole, it's actually up 45%, which bodes well for revenue recognition going forward. And our order backlog is also up 30%, compared to the end of 2021. So that's at least a good thing.

Order intake and backlog, this is important because I guess a few people invest in Nel because they believe the next quarter will be fantastic. They invest in Nel because they want Nel to build a competitive position going forward. And how do you then judge whether Nel has a competitive position or not? Well, I think order intake and order backlog is a good indicator.

In the quarter, we signed contracts for almost NOK 1 billion and it's more than double, what we signed in the fourth quarter of 2021. It's up 135%; and for the full year NOK 2.3 billion, up 135% versus 2021, so a significant increase in order intake. And of course that translates into an order backlog, which is more than double, what it was at the end of 2021. It now stands at NOK 2.6 billion. And importantly, the backlog consists of high-quality contracts with inherently attractive margin structures.

The main commercial developments in the quarter, let's talk about those. I'll just start with Woodside Energy. I think we mentioned that also in the third quarter as a subsequent event, but it was a contract that was signed in the fourth quarter. Close to NOK 600 million with Woodside, which is a leading global energy company headquartered in Australia. This contract that they signed with Nel is for electrolyzers that will be used to generate liquid hydrogen in Oklahoma for major transportation companies in the US.

For Nel, the delivery consists of stacks electrolyzer stacks, what we call balance of stack which is the gas separation system and engineering services. And this contract is of course expected to have a substantial positive impact on our financials. It's with a high-quality customer and really it represented a step change for Nel in terms of the type of contracts that we sign.

We'd also like to highlight this contract with Statkraft, given that Statkraft is Europe's largest producer of renewable energy and they have an ambition to have a production capacity of two gigawatts of renewable hydrogen by 2030. So, of course, being the first equipment supplier for Statkraft to one of their projects is an honor. 40 megawatts is a nice start.

The picture shows the CEO of Statkraft at our facility in Herøya together with two Norwegian ministers and a German minister. So it's a high-profile project that we're doing with Statkraft.

We also received -- I wish, I could disclose the name of the customer because one thing is the order itself for 16 stations, which is quite substantial. And it's a capacity reservation agreement for $7 million, but we're talking about a contract that we will try to finalize now in the first quarter, which could be worth up to $17 million. And it's with a leading engery -- US energy company. So I guess we will come back to who the customer is but it will be a reference customer for Nel and one of our prioritized accounts going forward.

Another important development is that we signed a joint technology development agreement with General Motors. And I would like to comment on this a little bit because I've read some press coverage about this saying that well Nel needs to team up with General Motors in order to develop PEM stacks because what they have is not good enough. That is not the motivation.

We have a plan that will significantly improve the cost of the PEM technology and the efficiency of the Nel technology that will take the technology to a completely different level than what the industry is witnessing for PEM technology from Nel and our competitors today.

But bear in mind that General Motors has invested tens of billions of dollars into fuel cell technology. A fuel cell is an electrolyzer run in the other direction. So what they have invested into understanding material properties and production processes is something that Nel can learn from.

General Motors scanned the market approached Nel and said, we want to work with Nel. We want to help you guys develop more efficient and even cheaper electrolyzers than you can achieve on your own. And what is their motivation? Well of course their motivation is that unless hydrogen at the pump becomes affordable doesn't matter if they have the best fuel cells in the industry because nobody will buy fuel cell vehicles. So we need to get the cost of hydrogen down. So it's in their interest to help Nel develop cheaper and better electrolyzers.

So we are now working closely with GM. The cooperation has started and it's like going to the candy store. You get good insights into what kind of developments you want to bet on in terms of developing the future PEM stack that will be cheaper and more efficient than anything around in the industry so far.

So this is a high-level partnership for Nel where we will both leverage our own R&D and insights and plans, but we will use the partnership with General Motors to really accelerate the development. So maybe we'll get access to better thinking on certain adjustments. And as importantly we get insights into how to automate and industrialize it.

Moving on to a subsequent event signing of a 40-megawatt contract with HyCC. It's a Netherlands-based company specializing in development of hydrogen projects. The client has received the environmental permit for a project in the Netherlands and is working towards a final investment decision in 2024, but they have due to as we have commented on several times capacity constraints in the industry decided to sign a purchase order with Nel for 40 megawatts or close to €12 million.

We will work together with Kraftanlagen. So again going back to our strategy of doing stacks plus balance of stacks we need a partner to do the rest. And the partner on this project will be Kraftanlagen who has been contracted for the FEED study related to the project and the balance of plant delivery.

We also signed a letter of intent for a potential 120-megawatt purchase order from a German company called HH2E. It's a German hydrogen production company. The LOI, we hope to firm up as a purchase order during the first half of 2023 and the project will be two times 60 megawatts in Germany. Of course, largest economy in Europe important for Nel to be there, working with smart and forward-thinking project developers like HH2E.

HH2E has an ambition of 4-gigawatt to green hydrogen production capacity by 2030. So if you look at Woodside, Statkraft, HyCC, HH2E, these are all customers that we can grow with, expand with, and that's how we select our projects. We select projects based on a high probability of reaching FID attractive margins and terms for Nel, because we need to reverse the financials. And then also customers that we can grow, with where there's not only one project, but multiple projects that we can do with them.

Based on the record-high order backlog and a strong momentum in order intake we the have capacity program ongoing. You can see here, it looks like an empty building, but it's the other half of the building at Herøya, where construction has now started for Line 2 establishing a 500-megawatt additional line bringing the total capacity at Herøya to one gigawatt from April 2024.

Again, it's fully automated. It's a copy-paste of the first line with some improvements. So what Nel has that a lot of other companies lack is a production concept, a proven production concept. We have now run the first line for a couple of years. We can take that line and implement it when we expand to build the second line with a copy-paste approach just incorporating the learnings and improvements that we see we can do in order to increase the nameplate capacity and to improve the quality of the processes.

We have also decided to expand our production capacity in Wallingford to 500 megawatts by 2025. So it will be a gradual ramp-up. It will also include a lot of automation of what I would characterize as manual processes today. So, again, we're trying to separate ourselves from competition by not only increasing production capacity, but also automating the different steps of the production process to get competitive advantages and cost down. The CapEx of that expansion in our existing facility is expected to be around $25 million.

Site selection is also ongoing for a US gigafactory. So we are thinking ahead. We have room to expand at Herøya. We can bring Herøya from currently now 1 gigawatt to 2 gigawatt. We are building out Wallingford to 500 megawatts, but if orders continue to pour in and we need to meet increasing demand, we also need to have a plan in place to meet that demand. And due to the IRA and the political developments in the US, we expect a lot of demand to come from the US. That's why we're looking to establish a US. Gigafactory. We're in the final phases of that process. Three finalist sites across three different states have been selected and a decision will be made shortly on where we will locate.

As opposed to Norway, it's easier to get subsidies and grants, when you do something in the US and also we will be closer to the end market. So that's the rationale for looking at the US instead of another building in Norway and because we have the factory in Norway, we can also serve Europe with that. So this will sort of complement our manufacturing footprint.

Strategy update. If we start with electrolyzers, the electrolyzer industry is going from small to large scale. That's a fact. Several large-scale purchase orders have been placed with Nel and with other electrolyzer manufacturers. So the jury is not out anymore. The jury has decided, this is happening.

We also see that policy support mechanisms are in place to drive growth going forward. So this is not something that only happened in 2021, 2022, we expect this to continue in the years ahead. We aim to capture 20% to 30%, excluding China of the market. So a market share of 20% to 30% won't be that every single year but over time we want to be between 20% and 30%.

Why? Because that's a market share needed to be a leading player in this industry. If we believe that this industry will follow the same sort of market concentration as we see in other equipment industries then we need 20% to 30% to be a leader and we want to be a leader.

How do we plan to become a leader? Well, we want to rapidly scale manufacturing capacity in line with market demand. So we will be ahead of the market, but we won't build dozens of factories that are empty. We want to phase in capacity in a smart way. We want to offer the best technology. So we want to have the most efficient and undisputed best technology at a competitive and market-enabling price.

So, we won't necessarily be the cheapest but we have to be competitive when we look at the cost of ownership for the customer and the equipment has to enable our customers to go forward with projects. And we want to adapt our business model through these large-scale project deliveries and create required focus during execution. So let me elaborate a little bit on that.

According to Nel, we believe that more than 90% of capacity in 2025 will come from large-scale orders. So the market is shifting from small to large-scale projects. We see that already that medium-sized projects, are taking over from small-scale projects. Maybe we should have included 2020, because then small scale was everything.

That was the market, right? In 2021 we started to see some larger projects being placed and in 2022 that trend has continued. And we believe, it will continue into 2023, 2024, 2025 and beyond. It's going from small scale to 4, 5, 10-megawatt plants to several hundred megawatts.

To meet that demand, we need to scale up. And I've just explained that we can scale up to 2-gigawatts at Herøya alkaline electrolyzers. We will now expand up to 500 megawatts in Wallingford PEM electrolyzers. We had the opportunity to build a 4-gigawatt site in the US. That will be a combined alkaline PEM site where the split exact split depends on what the market wants. And we also start to prepare for a new gigawatt site if needed. So, capacity will be scaled in line with demand.

If we get gigawatt orders, we need the ability to deliver that equipment fast. So that's why we're thinking ahead in terms of planning where to have the capacity. But, because we have the manufacturing concept, we have the production concept already figured out Nel is one of the companies that can scale deliveries faster than anybody else.

It doesn't help you to win in the market just to have the capacity. You also have to offer the best technology. And what we do want to do is to beat competition on knowledge and cooperation. We are the one company in this space that has close to 100 years of experience with electrolysis.

We started in 1927. And of course, these people are no longer with Nel, but we have access to operational data spanning almost 100 years learnings that they have done mistakes that they have done. And we still refer back to these reports every now and then.

But of course, today, Nel is something different. We have, I would say, the deepest hydrogen competence in the industry. We have several hundred employees that are engineers, PhDs, scientists that spend their entire working day on improving our technology and understanding hydrogen in a better way. And because we also work with partners, we think we can continue to develop.

We won't have all the best insights ourselves. We also need to work with partners. That is why we have teamed up with General Motors. We do think we will learn from Statkraft, Woodside Energy. We are working with Woods and other EPCs. We are working with the Department of Energy on R&D initiatives NREL. We are working with Chemours in terms of understanding PEM membrane technology better. So collaboration with customers and partners will make Nel better.

And, of course, saying all of this, we need to translate this into products that are better than probably from other companies. We have today alkaline electrolyzers and PEM electrolyzers, and we believe that the fact that we can be technology-agnostic puts us in a unique position. Yes it is more expensive to have two platforms.

But on the other hand you can meet different market demands. For some applications, alkaline electrolysis is the better option. For other applications, PEM is the better options. We don't believe that one technology will be better across all dimensions in the future. The people that argue for that are the ones that are one-trick ponies. They have one technology and they pretend that that technology is the answer to everything. But it's rare to see that one technology can meet all needs. That's why we have two technologies.

Then I see that some people characterize Nel's technology as far as first-generation technology. And yes what is sold now is maybe first-generation technology, but I will say this that we also have a quite ambitious road map for our alkaline electrolyzers and PEM electrolyzers. And we don't want to go into details about that now, but I can assure you that we will have third-generation alkaline electrolyzers and PEM electrolyzers when the market is ready for it.

Bear in mind that the reason we are not introducing these products second and third-generation already is that when you do it you have to make sure the second and third-generation products beat the first generation. And as the atmospheric alkaline electrolyzer is cheaper than anything else then, of course, the bar is set higher. So that's why we are still working on the second and third-generation to make sure that when we launch these products, they actually represent something new. They will bring the efficiency down and they will be affordable for the customer.

So over time, we plan to have the most efficient and reliable electrolyzer technology and we want to take the cost down by 40% on alkaline and 70% on PEM, because PEM electrolyzers are more expensive today than alkaline electrolyzers. So an ambitious plan on cost targets more or less in line with what we have communicated previously but more specific to the different platforms.

Now if you have the capacity and you have the best products, you also need to execute. And I think this is the biggest shift for Nel. We will go from delivering a few complete small scale hydrogen plants to delivering parts of large scale hydrogen plants. We will not do the full balance of plant. We will do the stack, the electrolyzer and the balance of stack, the white stuff on top of the electrolyzer tubes you can see in the middle. So we will focus on stacking balance of stack and collaborate with EPC partners. We will standardize deliveries and do less customization.

The reason that we are not making good money today on previous orders is because we do too much with pass-through revenues, too much customization, tailoring, things that we haven't experienced where you run into issues and then you have quality costs and you have a replacement cost and number of hours go up and we have worked all over the world. We want to focus on Europe, North America and large export hubs initially.

So this focus will help us execute and also deliver better margins than we have done in the past. And the reason we can do this now is because the market is growing. So we can be more selective. We don't have to run after everything. We can be more picky. Picky means better margins.

Fueling strategy. We continue to see short-term challenges in fueling. I mean, we just took a hit on write-downs and then the intangibles so more than NOK300 million in the quarter. So why is that? Well, an unfocused market approach has led to high organizational and operational complexity and that drives cost. We have tried to do everything for everybody, everywhere and that's expensive. We have immature and non-standardized technology that we put out there and that has resulted in high-quality costs within -- which basically increase with higher station utilization. So the more stations are being used, the higher the cost for Nel for keeping these stations up and running.

So then why are we in fueling you might ask? Well, we believe that the market potential for heavy-duty fueling is high. Global efforts to decarbonize the transport sector increases demand for high-capacity hydrogen fueling stations. And this is probably the most important reason we are still in fueling and why we sort of see a future for fueling.

And that is some of the largest energy companies in the world they are Nel customers. And they have made long-term commitments to developing this infrastructure. They are working with us. They are being patient. They want this to work. They're not running away. And I might add fortunately even though we have our problems, Nel is still considered one of the best providers of fueling technology in the industry. So this is not Nel specific. This is an industry challenge that we are working together with some of the largest energy companies in the world to fix.

So how will we then handle fueling going forward? Well we need to capitalize on the fact that we have a highly experienced workforce and market-leading fueling technology. Even though there are lots of improvements that we need to do to the technology it is considered market-leading by our customers. So we need to reduce the complexity and transition towards standardized high-capacity products.

We need to get the complexity down and reduce the burn rate. And we also need to assess strategic partnerships and alternatives to improve the business case. We don't -- we cannot do everything on our own. We cannot fix this completely on our own. We need partners to work with to fix it.

So just as for electrolysers. Electrolysers are going big. Hydrogen fueling is also going bigger. It's moving towards high-capacity solutions. And that means that you fill more than 4,000 kilos of hydrogen per day with one single fueling station. So demand for high-capacity fueling for heavy-duty vehicles so trucks is expected to grow and become the largest market segment over time and we will focus on developing the best product offering in this segment.

What is different? Well market focus. We have focused on low- and medium-capacity vehicles, light-duty vehicles personal cars vans buses et cetera. And customized deliveries to a wide range of customer often a single station in a market fairly remote from where we normally operate. So this sort of diversity and complexity we need to bring that to a high-capacity and trailer-filling solution focus and standard products to selected high-volume clients. So not a ton of different customers with different requirements but a few high-volume accounts that we can work with.

We had a broad product range too many products. And everything developed in-house including pressure compression from 50 to 1000 bar. That's not a good idea. So in the future we will have a single product platform. We will have core technologies in-house so high-pressure compression but not from 50 to 1000 bar but from 300 to 1000 bars control and cooling. That's really what we are excellent at.

Other components will be developed externally by partners. So in the past we have no choice. There wasn't a supply industry for this. We had to do everything. Now we can work with high-quality counterparties and not do everything. And we will also shift from component assembly to module-based assembly again reducing the complexity and relying on partners to develop modules instead of just sourcing thousands of different components.

To sum it up and move on to Q&A I know Wilhelm is eager to get going. Fourth quarter summary, we have an ambition 20% to 30% market share for Electrolyser. What are some of the proof points? Well record-high order intake and backlog including the largest contracts so far won in the quarter. We have teamed up with General Motors to develop the best PEM electrolysers in the world.

We are continuing our capacity expansion. It's on track at Herøya to one gigawatt and Wallingford to 500 megawatts. And we're making a strategic shift in fueling to reduce complexity and improve profitability by focusing on high capacity solutions and we received a capacity reservation agreement for 16 fueling stations from a large US energy company.

Thank you. Wilhelm?

Question-and-Answer Session

A - Wilhelm Flinder

Thank you. We have some questions coming in already. 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. Please make sure to activate the microphone on your end as well. Note that, we will keep the camera for the ones dialing in disabled. Also please keep maximum of one questions per person due to time constraints. If more time, you can always go back in the line. If we have time, we will also take written questions submitted through the Q&A function. If there are questions we don't have time to answer please reach out to us on ir@nelhydrogen.com.

As a reminder also 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. Multi-questions, we would also appreciate is taken off-line directly with me. So the first line comes from Skye Landon. I have activated your microphone. Please go ahead.

Skye Landon

Hi, can you hear me?

Wilhelm Flinder

Yes.

Skye Landon

Thanks for taking my question. My questions revolve around the US and the expansion there. Can you confirm if the US$25 million expansion in Wallingford includes or excludes the 6 million funding from the US Department of Defense or will the 6 million come on top? And then what can you tell us about the three shortlisted US sites? Are there any big differences between the sites in terms of costs and construction time lines? When do you expect to be able to provide a full decision update? And also if you could maybe quickly run through how you're currently envisaging the phasing of the 4-gigawatt build-out in the US that would be great.

Håkon Volldal

Yes. So the DOE grant is not used to offset the CapEx in the US. It's a full amount. $25 million is what is needed to automate and then build capacity in Wallingford all in. Not using grants to reduce that number. On the three remaining sites, I think we are now going through a comparison on different parameters. So labor cost, support packages, logistic cost, construction costs. And I would say we have three very good finalist sites.

It's not a big variation. So it's down to sort of – yes, it's really something we will work on in the coming weeks. But it's a tight race and we expect to conclude on it in – as we said in the first half and probably in a few months we will make a final decision.

Skye Landon

And then the phasing of the 4-gigawatt build-out in the US is there any…

Håkon Volldal

It depends on order situation. So there's no point in building a lot of capacity unless you have the orders. So let's – it's really hard to answer that now. You can add capacity from 2025 you can wait until 2026 you can do it in 2027. It depends on the order intake.

Skye Landon

Understood. Thanks, Håkon.

Wilhelm Flinder

So the next question comes from Deepa Venkateswaran. I have not activated your microphone. Please go ahead.

Deepa Venkateswaran

Thank you, Wilhelm. So my one question was to just talk about some recent policy developments in Europe, the delegated act, the EU green industrial strategy. So I was just wondering whether you see acceleration of FIDs for larger projects coming through because of the delegated act? Do you see other constraints still binding? And do you see any kind of the EU response to the IRA being beneficial to you in any way directly or indirectly?

Håkon Volldal

I think the delegated act was passed just fair – oh it's – yes. Has it been passed? I don't think it has officially been passed but they have clarified what they mean by the delegated act. So it's too early to say that this has had any impact on Nel. It's positive that they have made sort of a position clear, but with I think the industry specifically, the people looking into hydrogen investments need more time to digest, how things will actually look like in Europe. A lot of good intentions from the European Union in terms of matching the IRA but it will take time before customers and Nel customers feel comfortable about exactly what they can expect to achieve in Europe. So I think at the moment, the US is still in the lead.

Wilhelm Flinder

The next question comes from the line of Yoann Charenton. Please go ahead. Your microphone is activated.

Yoann Charenton

Good morning, everyone Just a quick question, maybe as well trying to come back on to this policy developments. Some electrolyzer manufacturing peers have announced capacity reservation agreements in recent quarters, including one earlier this week, if I'm not mistaken, while yourself you have recently struck CRA for fueling activities. I understand that no CRAs were signed, between Nel and Electrolyser customers. Does this reflect a lack of high-quality counterparties in the market at the moment? And if so, is policy support such as absolute certainty, on renewable hydrogen standards, likely to change your risk tolerance, with regards to talks on potential CRAs for electrolyzers?

Håkon Volldal

Well, I think, we just spent a ton of time talking about massive order intake and a record-high order backlog. So the fact, that we have not received anything on the electrolyzer side, is wrong. I mean, it's better to have a firm purchase order, than a capacity reservation agreement. So, I think we've just -- we spent a lot of time talking about Woodside, Statkraft, HyCC, et cetera. So I think that the numbers speak for themselves. It's almost NOK 1 billion in order intake, in the fourth quarter. So the interest in Nel technology is definitely there and we feel that we are more competitive, than we've ever been, announcing large-scale contracts and boosting order intake and backlog. So, I don't really understand the question.

Yoann Charenton

Okay. That’s very clear. Thank you.

Wilhelm Flinder

Next question comes from Alex Jones.

Alex Jones

Great. Good morning. Thanks for taking my question. If I can follow up on the Fueling division. I think in prior quarters. when you've been asked about the strategy for it. you haven't outright missed the sale or sort of disposal of that asset. I wonder. if you now have come to the conclusion. that it does have a place within Nel. given your comments about sort of large energy customers being interested and whether that helps you in your -- with them, if they want electrolyzers or whether you're still open to a sort of strategic solution whereby you sell the Fueling division in due course? Thank you.

Kjell Christian Bjørnsen

So, yes, we have commented about that in the past. And we see good opportunities, for the future of the Fueling Solutions, the team we have, the technology we have and then we are pragmatic about how we best address that. So, that means that we continue to take operational measures and also strategic measures, on how to best capitalize on that technology.

Alex Jones

Okay. So that means that, the sale's being sort of put on the back burner for now?

Håkon Volldal

I think it's -- you want to have -- how do you best capitalize on what you have done? Is that by continuing on your own, or is that to work with somebody else, or is that to get somebody else to further develop, what you have started? That really depends, right? I think we are open. We're not saying that this has to be owned 100% by Nel, for eternity. We're not sort of saying that, we will not consider a sale. It really depends on, who approaches us and then what the value proposition is, and how we best think we can meet and serve an attractive market in the future.

So, the market is there. We have a good starting point, but some financial issues with performance. So, it's really down to okay, how do we address that market and get rid of the financial losses in the best possible way? There are numerous ways to do that. So, I don't think, we will exclude anything at the moment.

Alex Jones

Thank you.

Wilhelm Flinder

Next question comes from James Carmichael. Please go ahead. James, please activate your microphone on your end. Okay. Then, we jump into the next in line, Anders Rosenlund. Please go ahead.

Anders Rosenlund

Thank you. On -- in the fourth quarter, revenues were extremely strong but the cost of goods sold, they didn't really increase compared with the third quarter, whilst revenues more than doubled. And at the same time, you have a significant increase in other operating expenses operating costs. What's the reason for this? And yes, what's the reason?

Kjell Christian Bjørnsen

Yes. So, shortly on the raw material side, we do have some currency fluctuations -- raw material price fluctuation. Some changes in scope as they go from quarter-to-quarter. And also, there is a minor reclassification from other over to other OpEx. So, it's a bit too low in the fourth quarter seen in isolation.

On the other operating expenses, we have that reclass going the other way, but we also had quite high, I would say, a catch-up on external R&D that we don't capitalize. We capitalize some of it not all of it; also, on other external services like legal fees and other things. And then finally we had -- did take quite some provisions in the quarter specifically related to the Fueling division and some loss-making contracts.

Anders Rosenlund

Okay. But it's not a significant increase in procurement being filtered through as other operating expenses?

Kjell Christian Bjørnsen

No.

Anders Rosenlund

Okay. Thank you.

Wilhelm Flinder

Next question from Erwan Kerouredan. Please go ahead.

Erwan Kerouredan

Thanks Wilhelm. I have a question on -- and congratulations on the strong commercial growth. By the way, I've got a question on the capacity expansion in the US and the CapEx per megawatt. So, if we look at the announced economics this morning that comes down to roughly NOK520,000 per megawatt. And this compares to NOK768,000 roughly for the expansion in Herøya. So, can you just clarify how much of that is automation? How much of that is DM versus alkaline? Yes, can you just give a little bit of granularity on the different economics between the two expansions? Thank you so much.

Håkon Volldal

Yes, I think at Herøya we are at €35 million to €40 million per line which is 500 megawatts. If you look at Wallingford, it's $25 million for 500 megawatts. If you build a gigawatt site and you can do multiple lines at the same time or you can at least indicate that you would build multiple lines, you can, of course, get volume discounts.

So, I think both if you were to build a 4-gigawatt site in the US with 2-gigawatt alkaline and 2-gigawatt PEM, I would not take Herøya one line and multiply it by four, I expect it to be a bit cheaper. And PEM will actually be also a bit cheaper than four times 25. So, there were some economies of scale involved.

On the PEM side, I mean alkaline is almost fully automated. But it's a large line with a -- what is it 80-meter long chemical line a lot of steel. So, it's expensive on the PEM side. More process steps, more different components going into the stack requiring different automation processes. So, I think what we're doing now is to in Wallingford automate the different steps. And then in a new factory you can also ensure a really nice smooth flow throughout the factory.

So, a gigafactory will be slightly more efficient than what we do in Wallingford but it's a very good start I would say. So, yes, I think the numbers you have received are okay as estimates for one line, but you will have some volume discounts if you do multiple lines.

Erwan Kerouredan

Thank you. And so just a confirmation the Wallingford facility is not automated yet. And if not, can you just give us a rough time line as to when you intend to make it fully automated? And is it something – is it a near-term priority?

Håkon Volldal

Yeah. So with the $25 million, you increase capacity from 50 to 500 megawatts and you automate it. So you – but you don't do everything in one go there. As I said, there are different components requiring different processes. So by the end of 2024, you have probably automated most of the steps and you have maybe 50 – a couple of hundred megawatts. And then by the end of 2025 you have 500 megawatts.

Erwan Kerouredan

Understood. Thank you.

Wilhelm Flinder

Our next question comes from the line of Rajpal Kulwinder. Please go ahead.

Kulwinder Rajpal

Good morning, gentlemen. Kulwinder Rajpal from AlphaValue. I wanted to understand you mentioned that, there are some costs coming from legacy projects that weighed on the 2022 results. So looking forward from 2023 and beyond, how do we expect to phase out these legacy projects when they will be executed? And you also mentioned that, you are now becoming more picky about securing orders within the Electrolyser division. And so what exactly are the factors you are looking for in your discussions with the customers before you take those orders on? Thank you.

Håkon Volldal

All right. Yeah. So, I think 2022 is sort of burdened with legacy projects. But bear in mind that in 2021, there were very few projects that you could actually take. So in order to have something to do you took these projects. And I think the reason the margin is not very attractive is that one the starting price wasn't fantastic; two, you made some margin calculation mistakes, not thinking about the contingencies you needed.

And then it's new. Everything is new. So you make mistakes and then costs go up. I think we will carry with us. The second, I would say, throughout 2023, we will still have these legacy projects. By the end of 2023, I think most of them are delivered and gone so these will be good projects for our customers, but not fantastic projects for Nel in terms of financials.

I think from 2024 we start with a clean slate. Then you get the Woodside contract, you get the Statkraft contract, you get some of these other contracts into the P&L. So I think 2023 is still going to be a bit challenging at least the first six months with the old legacy projects and then it will start to improve from second half of 2023 and definitely from 2024.

What we are looking for in new contracts is of course we need a decent margin. We want to have an attractive gross margin, after we have done the contingencies and the calculations. So the good thing is that, when you make mistakes you learn quickly. So what we have learned during 2021 and 2022 is how to calculate margins on projects in a better way.

So we're looking for good margins. We're looking for the right scope of supply where we can actually deliver what we're good at and we don't have to do everything else that we're not good at. We're looking at contracts that balance the risk between the customer and Nel, where we are not made responsible for absolutely everything, and we're looking for customers with high likelihood of doing FID that are well capitalized that have sites in place, permits in place, financing in place, power supply in place, and that we can grow with.

So we don't want to do business with customers that only have one single project unless that project is fantastic. We do want to have a portfolio of customers in different industries, different geographies, but we need to have more than one project.

Kulwinder Rajpal

Thank you so much. That was very helpful.

Wilhelm Flinder

Next question comes from the line of James Carmichael. Let's try again. Your microphone is activated. James, are you there? Okay. We have two more questions on the line that we will take and then end the queue for now. Next question comes from Sean. That's all I have here. Please go ahead, your microphone is activated. Sean, your line is open. Okay. Next in line Arthur Sitbon, your microphone is now activated. Please go ahead.

Arthur Sitbon

Can you hear me?

Wilhelm Flinder

Yeah.

Arthur Sitbon

Great. Thank you. Yes, my question is there is a slide in your presentation where you show the discrepancy between PEM costs and alkaline costs. I was wondering if that slide is about your own cost to produce -- to manufacture PEM and alkaline or is it a broader industry slide? And I'm wondering as well if there is a meaningful price gap between you and your peers in terms of manufacturing PEM electrolyzers with in mind the fact that obviously you have quite small operations at Wallingford as of today while some of your competitors I suspect have more scale. And so I was wondering more generally speaking how long it will take you to catch up on that potential cost gap, if there is one? And will that mean that it will take time to secure large orders? Thank you.

Håkon Volldal

Yes. So I think the lines that we saw are for Nel electrolyzers. But bear in mind, it's not the full system cost or if a TCO, it's the stack cost, okay? So an alkaline stack is cheaper than a PEM stack. Doesn't matter what we compare with. That's the fact. Then when you look at the system cost of course, the alkaline system has a more complex balance of plant and a higher footprint. So you can save on buildings and you can save on some of the peripheral equipment. So it's not a TCO comparison. And then the TCO comparison also depends on power cost and cost of land and yada, yada, yada. So we looked at stack cost. It goes for Nel and it goes for the industry.

Then I think PEM will have a steeper learning curve than alkaline because there are lots of improvements you can make. I don't know the exact cost position of our competitors. And yes, 50 megawatts is still small, but the largest PEM facility in operation is 20 megawatts. So who has actually produced and delivered hundreds of megawatts yet on PEM? Nobody. So I think also what we see in the market is that some companies have been very aggressive at buying or building market share. So what they price at is maybe not a sustainable margin.

So I think yeah, it's difficult to comment on exactly where we are on the PEM. I know on alkaline, we have the cheapest stack hence flat down. I'm 100% convinced we have the cheapest alkaline stack. On PEM, I'm not 100% sure we have the cheapest PEM stack. That's why we have also teamed up with GM to accelerate the development. But it's hard to know what you're competing with because there's no PEM gets set that you can open and just look up cost prices of the different suppliers. So we'll see. The best way to judge it is to see if we get orders and we still get orders for PEM contracts. And as we expand going forward we're in a position to take larger orders than we have been in the past.

Wilhelm Flinder

I see we have one last question. I'm running a bit over time. We'll do this last question from Thomas Mordelle. Please go ahead.

Thomas Mordelle

Thank you. Hi, everyone. Tom Mordelle from Bryan Garnier. Thank you for taking my question. I'm wondering how you see competition going forward on your atmospheric alkaline electrolysers.

I mean industrials tend to use, 20-plus bars pressurized hydrogen in their process. Hydrogen production process is already characterized by inefficiencies when it comes to electricity consumption.

We see Chinese such as LONGi that are already ready with four-to-10-megawatts pressurized alkaline systems. This electricity consumption represents the higher share of an electrolyser lifetime cost.

How are you able to compete with Chinese and Chinese-related players? And my second question, how much of R&D are you expecting going forward to develop a competitive pressurized system such as alkaline systems or PEM systems? Thank you.

Håkon Volldal

Yeah. So when you do this, I think you should be very careful in drawing conclusions on what is, the most efficient and the cheapest electrolyzer because it really depends on the input parameters.

And you can get to very different conclusions based on what is the power price? Where do you plan to have it? And what is the end-use of the hydrogen. So there is no exact answer. You cannot say that alkaline is better than PEM or the other way around.

It really depends. We have the cheapest atmospheric alkaline electrolyzer. We do have a pressurized system. We will launch a pressurized alkaline electrolyzer at some point but that has to be better than the atmospheric.

And the reason customers are buying atmospheric, is because that is the technology that meets their business case. Why are they not choosing big PEM or pressurized alkaline? Because it's not mature yet and maybe it's too expensive.

In the future, yes, I agree that pressurized makes sense for a footprint reason, for output reason but an industrial compressor to bring it from one bar to 30 bars, that's a fraction of the total system cost anyway. So I think it's really hard to generalize.

The reason we are betting on multiple technologies is that the jury is still out right? We don't know yet what will be. PEM has fantastic opportunities, but there's risk involved. PEM is the least efficient technology at the moment in terms of power consumption, the least efficient.

So -- but with membrane technologies it might become fantastic. You still have reason to believe that atmospheric alkaline can become cheaper and more efficient. There's a lot happening on pressurized alkaline.

So I think we have to acknowledge that we don't know yet. And that's why we at Nel invest in R&D multiple platforms to have the opportunity to -- when we see a clear tendency that one technology will be the leader then we can go all in on that.

But at the moment, we decide to keep our options open. And I think to say something else that you know PEM will be the best or you know alkaline will be the best across all dimensions you cannot back that with facts.

Wilhelm Flinder

So that concludes the Q&A session as well as the Q4 presentation. I'll give the word back to Håkon, for any final remarks.

Håkon Volldal

No just thank you for attending. And hope to see you again, when we do the first quarter announcement.

For further details see:

Nel ASA (NLLSF) Q4 2022 Earnings Call Transcript