Nel ASA (NEL.OL) reported its Q3 2024 results, highlighting a 21% revenue increase to NOK 366 million, despite challenges in the hydrogen market. The company, a global leader in hydrogen technology, maintains a solid cash position of nearly NOK 2 billion and an order backlog of NOK 1.9 billion.
Key Takeaways:
- Revenue increased 21% year-over-year to NOK 366 million
- EBITDA at minus NOK 90 million
- Order backlog stands at NOK 1.9 billion
- Cash position remains strong at nearly NOK 2 billion
- Partnership announced with Saipem for a 100-megawatt turnkey hydrogen solution
Company Outlook
- Anticipates improved performance in Q4
- Focuses on scaling production and reducing capital expenditures in 2025
- Expects finalization of U.S. Inflation Reduction Act regulations by year-end
- Plans to reduce CapEx by nearly 50% in 2025
Bearish Highlights
- Cancellation of gigawatt capacity agreement with Hy Stor Energy due to project delays
- PEM revenues fell 40% year-on-year
- Regulatory delays hindering financial progress in the U.K. and U.S.
- Market softness and delays in project orders
Bullish Highlights
- Partnership with Saipem for comprehensive hydrogen solution
- Development of containerized PEM electrolyzer for PosHYdon project
- New contract with City of St. Cloud for wastewater treatment
- Signs of market recovery with high-quality projects nearing final investment decisions
Technological Advancements
- 2% improvement in power consumption for alkaline solutions
- 8% cost reductions for alkaline solutions in both 2023 and 2024
- New production line for PEM stacks expected to reduce costs by 30%
- Next-generation pressurized alkaline solution projected for Q1 2025
Q&A Highlights
- Cash burn rate of NOK 200-300 million per quarter
- Alkaline segment showed positive EBITDA of NOK 4 million
- Current system costs between $1,800 and $2,000 per kilowatt
- Efforts to reduce costs to $1,000-$1,200 per kilowatt in the future
Nel ASA reported mixed results for its third quarter of 2024, with revenue growth offset by challenges in the hydrogen market. The company's CEO, Hakon Volldal, emphasized the firm's strong cash position and strategic partnerships as key factors in navigating the current market environment.
Despite the cancellation of a significant agreement with Hy Stor Energy, Nel has secured new partnerships and contracts, including a collaboration with Saipem for a 100-megawatt turnkey hydrogen solution. The company is also developing a containerized PEM electrolyzer for the PosHYdon project, aimed at producing hydrogen offshore in the North Sea (NYSE:SE).
Nel's financial performance showed a 21% overall revenue increase, driven primarily by alkaline electrolyzers. However, PEM revenues experienced a 40% year-on-year decline. The company reported an EBITDA of minus NOK 90 million for the quarter.
Looking ahead, Nel anticipates improved performance in Q4 and is focusing on scaling production while reducing capital expenditures. The company plans to cut CapEx by nearly 50% in 2025, aligning production with market demand while maintaining essential technology investments.
The hydrogen market faces challenges, including regulatory delays and competition from cheaper gray hydrogen. However, Nel sees positive signs with high-quality projects nearing final investment decisions. The company's top 20 prospects indicate significant market potential, with over 5 gigawatts for alkaline and more than 1 gigawatt for PEM technologies.
Nel continues to invest in technological advancements, reporting improvements in power consumption and cost reductions for its alkaline solutions. A new production line for PEM stacks is expected to reduce costs by 30%, while a next-generation pressurized alkaline solution is projected to produce green hydrogen in Norway by Q1 2025.
During the earnings call, management discussed efforts to reduce stack costs and system prices, aiming to lower costs from the current $1,800-$2,000 per kilowatt to $1,000-$1,200 over time. This cost reduction is seen as crucial for unlocking numerous announced projects globally.
While the third quarter showed lower-than-expected EBITDA, Nel's management expressed optimism about market recovery and expects stronger results in the fourth quarter. The company plans to provide a more detailed outlook in its February report, as it continues to navigate the evolving hydrogen market landscape.
InvestingPro Insights
Nel ASA's recent financial performance and market position can be further illuminated by data from InvestingPro. The company's market capitalization stands at $631.43 million, reflecting its significant presence in the hydrogen technology sector. Despite the reported revenue growth, InvestingPro data shows that Nel ASA has been facing profitability challenges, with a negative P/E ratio of -15.7 over the last twelve months as of Q3 2024.
InvestingPro Tips highlight that Nel ASA holds more cash than debt on its balance sheet, which aligns with the company's reported strong cash position of nearly NOK 2 billion. This financial cushion is crucial as the company navigates through market uncertainties and invests in technological advancements.
Another relevant InvestingPro Tip indicates that Nel ASA has impressive gross profit margins. This is consistent with the company's reported gross profit margin of 59.99% for the last twelve months as of Q3 2024, showcasing its ability to maintain profitability at the product level despite market challenges.
However, it's worth noting that InvestingPro Tips also point out that Nel ASA is quickly burning through cash, which correlates with the company's reported cash burn rate of NOK 200-300 million per quarter. This burn rate underscores the importance of Nel's focus on reducing capital expenditures and improving operational efficiency.
For investors seeking a more comprehensive analysis, InvestingPro offers 14 additional tips for Nel ASA, providing a deeper understanding of the company's financial health and market position.
Full transcript - Nel ASA (NLLSF) Q3 2024:
Hakon Volldal: Good morning from Oslo. My name is Hakon Volldal. I am the CEO of Nel and I'm here to present the third quarter 2024 results. With me today, I have our CFO, Kjell Christian Bjørnsen; and also our Head of Investor Relations, Wilhelm Flinder. We have the following agenda. We're going to start out with a 1-minute introduction to Nel for those of you who are not familiar with the company, then we're going to jump straight into the Q3 highlights. We're going to comment specifically on the political situation in the hydrogen industry. We're going to talk about the commercial highlights in the quarter, the technology strategy that we are pursuing. And also, we're going to have a section at the end where we summarize and look into the future, then we're going to end with the Q&A as usual. Now -- Nel is now a fully dedicated electrolyzer technology company. We were listed on the Oslo Stock Exchange back in 2014. We are a leading pure-play electrolyzer manufacturer with 3,500 units installed to more than 80 countries around the world. And we have delivered these electrolyzers since 1927. We currently have 1 gigawatt of alkaline electrolyzer manufacturing at Heroya in Norway, and we have 500 megawatts of PEM manufacturing capacity in Wallingford, Connecticut, United States, almost 430 employees, investing heavily into R&D to stay at the forefront of electrolyzer development, global sales network and offices, preferred partner with industry leaders such as Reliance, General Motors (NYSE:GM), et cetera, and close to NOK 2 billion in cash reserves, making Nel one of the better capitalized electrolyzer OEMs in the world. Our value proposition is based on three pillars. First of all, we have an unrivaled track record. Very few companies has almost a century of a electrolyzer experience, and that's important. We have decades of experience, and we have a large installed base, both of which we learn from. We apply all those learnings to make better products. And we have technology leadership because we have technologies available on two platforms, both alkaline and PEM. We have guaranteed and proven performance of those products, and we're also working on game-changing next-generation solutions. We believe that we have cost and scale leadership. We've been a front-runner in cost reductions, and we're also in the market with market-leading production capabilities, not necessarily the highest gigawatts at the moment but we have sufficient capacity to serve projects with gigawatt needs and we can easily and -- scale our production concepts to add more capacity if needed. Now if you look at the third quarter highlights. Revenues came in at NOK 366 million, EBITDA at minus NOK 90 million, order intake at NOK 161 million and order backlog ended at NOK 1.9 billion. Cash balance, close to NOK 2 billion at the end of the quarter. Very few announcements in the third quarter. We announced a follow-on equipment order for roughly EUR 7 million for a European project. And unfortunately, the gigawatt capacity reservation agreement with Hy Stor Energy in the U.S. was canceled. This project was based on providing green hydrogen for green steel project in the United States and due to an uncertain time line around that project, Hy Stor Energy decided to cancel the agreement with Nel. And I believe it's my understanding that the company is no longer pursuing green hydrogen opportunities in the United States. So it's not that Nel has been substituted with somebody else. It's just that this project is no longer seen as something that the company would like to pursue. Subsequent to the quarter, we announced together with Saipem, 100-megawatt turnkey hydrogen solution that Saipem has built around Nel's core technology, and I'll come back to that in a minute. If we look at the group financials where revenues are up 21%, driven by outline Alkaline performance. PEM was on the negative side. EBITDA came in at minus NOK 90 million compared to minus NOK 60 million last year, and I have to say that the EBITDA is unusually low in the quarter. I think I can already now promise that the fourth quarter will be significantly better than what we see in the third quarter. Solid cash position still. No need to raise additional cash given lower CapEx from 2025, and I'll comment specifically on that later. Based on the current market development, utilization of production capacity is now and staffing will be adjusted to market demand. I do get a lot of pop-ups on my screen. That's why I'm a little unfocused, sorry for that. See if we can get those pop-ups away. Now if you jump into the alkaline electrolyzer financials. Solid performance in the quarter. Revenues grew by 37% quarter-on-quarter and 54% year-on-year. And the positive underlying quarterly EBITDA was driven by this volume, in fact partly offset by higher fixed costs. The business model is now proven with clear scale effects in quarters where we have good capacity utilization. And with completion of line 2 at Heroya in 2024, we have room to grow revenues substantially. And also CapEx in the segment will come down in 2025. There's no need to add additional capacity at Heroya at the moment, hence investments at Heroya will come down next year. Rather positive story on the alkaline side, the opposite on the PEM side, 40% decrease in revenues year-on-year due to timing of project revenues, some of that will slip into the fourth quarter and unusually low shipments of small kilowatt units what we typically refer to as industrial products. Based on low revenues and low cost absorption, EBITDA was also very low. I think we can expect better performance here also in the fourth quarter. We're nearing at the end of the 500-megawatt PEM production line expansion projects, and this will allow this segment to be a more credible supplier of larger volumes to bigger projects. You need a certain installed capacity for customers to trust that you can deliver high volumes. I'll show you later what the PEM status is when it comes to expansion, but we're, as I said, nearing the completion of that. Some equipment is already in use. Other equipment is being installed and finalized as we speak. We expect to see the same scaling effect in this segment as we see in alkaline, where higher volumes will substantially improve results. And also in this segment due to the finalization of the 500-megawatt production line project, we will see lower CapEx from 2025 overall and specifically related to production lines or manufacturing capacity. Order intake in the quarter was soft, NOK 161 million. Most of it is coming from the PEM segment, related to the expansion order in Europe and also containerized PEM project. As we said many, many times, order intake is expected to vary between quarters, as order sizes have increased. And unfortunately, in the third quarter, a few projects took FID -- few of the projects that we are targeting took FID, but we expect this to improve in coming quarters. That's also why the order backlog is down to NOK 1.9 billion, and most of the revenues we recognized in the quarter came from the backlog, and we were not able to fully replenish that. Now political update. This is important because we are at a cost disadvantage with green hydrogen compared to gray hydrogen on fossil fuels. And we need political help in order to get the markets started. That's why it's very positive that the EU has launched their second hydrogen bank. Significant steps also taken towards creating a level playing field. What I mean by that is that the European Union has introduced non-price criteria. And these include the projects must limit sourcing of electrolyzer stacks from China to not more than 25%. This means that the EU take significant steps towards a level playing field where we compete based on the same rules, I would say. Winners of the auction can utilize both Nel's technology platform, Alkaline and PEM, in their projects and the total auction budget is NOK 1.2 billion for production of green hydrogen within the European Union or EEA. Auction opens in December and closes in February. And the winners then will get funding from the EU needed in order to place purchase orders with electrolyzer OEMs like Nel. And the reason we are asking a level playing field is that we are bound by certain rules and regulations in the European Union that Chinese suppliers are not bound by. And there has to be a fair competition. If Chinese suppliers can produce electrolyzers in Europe following the same rules and regulations as European electrolyzer OEMs and betas, they're simply better. But there's no need to use state subsidies and more relaxed environmental regulations and labor regulations to create very key products and push those products into Europe. So that's important. And as Nel, we are happy that the European Union recognizes this problem and is trying to again create equal opportunities for electrolyzer OEMs from all over the world. What will actually drive demand in addition to the hydrogen bank are national programs and auctions happening in different European countries. And these auctions and programs are in addition to the hydrogen bank. And some examples include the U.K. The government is currently assessing applications to award up to 875-megawatt of capacity through what they call the HAR 2. This gives project developers in the U.K. funding to pursue projects and now Nel is working with clients that got funding in run 1 and have applied for funding in around 2. So that's extremely important in terms of pushing these projects forward. Similarly, in the Netherlands, projects such as PosHYdon, which we will talk about in a minute, have received grants from The National Enterprise Agency. And yesterday, the RVO announced a new electrolyzer subsidy scheme worth EUR 1 billion. So remember that the hydrogen bank funding was EUR 1.2 billion. And in the Netherlands alone, we're talking about EUR 1 billion. In the U.K., the amount is expected to be even higher. Funding through IPCEI has triggered Final Investment Decisions on several large-scale projects, and they have additional hydrogen auctions following the same model as the European hydrogen bank, but applied on German project specifically. In Norway, the government will significantly increase funding for zero-emission express ferries, heavy-duty vehicles and related infrastructure through the state enterprise Enova. And this initiatives are all important to create demand to help projects along the way. And we see that funding is now going towards building hydrogen capacity in the markets, hydrogen production rather than subsidizing electrolyzer manufacturing capacity. And that's needed. What we need is to stimulate demand. In the U.S., we expect finalized rules by the end of the year linked to the IRA Section 45V. The U.S. came out with the inflation Reduction Act, and everyone thought this would be the vehicle to put green technologies at scale in the market. Unfortunately, regulations have not come out yet. They have been delayed, not by months but the years, and consequently, very limited money has been paid down to subsidize targeting in the U.K. And now U.S. Treasury have received comments on the proposed draft rules that they announced many, many months ago, and they're working to include appropriate adjustments and additional flexibilities to help the industry grow and move forward. So the quote Aviva (LON:AV) Aron-Dine, performing the duties of Assistant Secretary for Tax Policy, we intend to finalize rules for section 45V Clean Hydrogen Production Credit by the end of the year. If this happens or when it happens, this will create visibility on what to expect in terms of government support, and we expect that to help projects move forward. Right now, people are waiting for these regulations to come out to finalize their business cases, to finalize their capital stacks, et cetera. So this is highly needed in order to create more demand in the U.S. To summarize the political section, positive signals, both from the EU with the Hydrogen Bank, a lot of initiatives on national level in the EU and also finally, we hope we get clarity on IRA in the U.S. If we move on to the commercial update. This is probably the most exciting thing that we announced during the quarter or I think it was October 1 to be precise. Saipem, which is a big EPC operating in Europe but also doing a lot of projects in Africa and the Middle East, they have built a complete hydrogen solution around Nel's core technology, the stack and the balance of stack. And this is important because Nel's strategy is to focus on stacks and balance of stack. We are not experts when it comes to power electronics, compression, piping, buildings, et cetera. So it's important for Nel to have partners such as Saipem that can offer the complete solution to end customers. They have built this concept using our technology. They have come out with a specification that now lists the total system energy consumption. They've done the CapEx planning. They're working on ways to get the CapEx further down, but this means that you have as a customer a concept that you can start with. You have a plus/minus X percentage estimate on what your project probably will end up costing and how it will perform. So that cuts a lot of the engineering work out. It makes it easier and faster for customers to move forward, if they work with partners like Saipem. So this makes the sales process easier. We get an additional sales channel through Saipem, and we also get a concept associated with Nel that represents a complete solution for customers in the market. This one is interesting. This involves a Nel containerized PEM solution installed on Eni's offshore platform off the coast of the Netherlands, what they call the PosHYdon project. So this electrolyzer will undergo a rigorous test to demonstrate its capability and its ability to produce hydrogen under varying electrical local conditions at sea. This could open up opportunities to produce hydrogen on platforms and then transport molecules rather than electricity onshore. Again, expected to be super important in the North Sea, given all the renewables that will be added in that region and you need to decide whether you want to transport electrons or hydrogen onshore. What is cheaper, we don't know yet, but this is a project to help increase the understanding of the merits of hydrogen distributed hydrogen production at sea. So super exciting project when Nel is pioneering this together with important partners. In the quarter, we also signed containerized PEM contract with the City of St. Cloud, where they will use Nel's electrolyzer for wastewater treatment. Again, the MC Series is a standardized complete solution comes in containers. You put them on site and you're almost ready to go and start producing hydrogen. So it's a very simple solution for, I would say, small-scale applications, 1.25, 2.5, 5, 7.5, all the way up to 20 megawatts, you can use this containerized PEM solutions. And we see increasing demand for these solutions because they help reduce the implementation time of hydrogen projects, and they also box in the different elements in containers, making the installation and deployment quite simple and easy. I thought I should spend some time on technology because that will be important going forward. We are in an industry where probably the first couple of -- or the past couple of years have been all about showing customers that you have something that works in the field and scaling up capacity. But going forward, we need new solutions in order to enable projects to move forward. We simply need to bring the levelized cost of hydrogen down and make it more competitive versus a gray hydrogen or fossil fuels. That is the challenge that the industry is facing. And we need to invest in new platforms in order to help make that happen. They way Nel looks at this is in terms of different S-curves. We have the first S-curve involving the first generation of electrolytes where the alkaline stack is seemed to be more mature than the PEM stack or PEM technology. On these two platforms, there is still room for improvement. We expect continued cost reductions and efficiency improvements. And these are the only two products that you can install right now and you have a guaranteed performance, and you can go and visit other installations, and you have trust in the products and that they will actually work. So these products are important for today's projects. But in order to, as I said, enable more projects, to take final investment decision, we need to shift performance. We need to move on to the next S-curve, where we almost from day 1 see an improvement in performance and where there is additional room to improve performance over time because when you work with a technology platform, over time, you exhaust the potential. Then there are simply not that many things left that you can do in order to improve performance. When you introduce a new technology, you get more buttons you can push and more levers you can pull. Nel specifically is working on a new pressurized alkaline solution, and we're also working on a new PEM stack in collaboration with General Motors. But that's our next-generation portfolio. Long term, there might be disruptive technologies in certain market segments like solid oxide, like AEM or other technologies. And Nel is monitoring the development of those technologies. We also have worked with AEM for more than a decade. So it's not that we're not exploring these opportunities. But if you think about order intake and projects this decade and first part of next decade, we're in the middle section or in the first section. So what is happening? If we start with Nel's workhorse, the alkaline atmospheric solution, that solution keeps on getting better. We improved power consumption year-on-year. In 2023, we achieved a 2% improvement. In 2024, we achieved a 2% performance improvement. And next year, we might achieve another 2% improvement. We've also cut costs by 8%, both in '23 and '24. And what we do see is that the maturity on a system level for large-scale installations is maturing. I showed you the Saipem concept. That significantly reduces the pre-FEED and FEED expenses for clients. You get bankable performance guarantees on system levels through these EPC partners. And I would say, there's high potential for further balance of planned cost reductions related to compression, piping, layout and civil works and power electronics. All of that can be further improved to get the cost down. And some of these savings are much more important for the end result than Nel making small adjustments to its electrolyzer stacks. So still a potential on the atmospheric side. PEM is getting more and more interesting. Our current PEM stack is ready for mass production at a 30% lower cost. The new 500-megawatt production line in Wallingford is soon completed. We've started to use some of the equipment. It will be fully utilized early part of 2025. And with this production line, we're positioned for large-scale projects for both PEM and alkaline. The production concept is developing close collaboration with the General Motors and can be rolled out globally when demand picks up. And thanks to process, design and sourcing advancements. We will be able to reduce the price of our PEM stacks by 30%. So that will put Nel in a position where we have a very competitive offering for PEM stacks and we think that will significantly drive order intake for -- especially containerized products in the coming quarters. On to the second wave, the next-generation solutions. This is the evolution of the alkaline solution from atmospheric to pressurized. Our pressurized alkaline concept is now rapidly maturing. And our approach is very different to other pressurized solutions in the market, i.e., from China. So our cell stack performance is now verified. We've done the testing on the cell stack itself internally, and we're building a prototype, almost 1/4 of what you see below -- a little bit more than a quarter internally to verify system performance. We have received the power electronics, all long-lead items are in-house, fabrication of the skids are ongoing and the stack manufacturing is in progress. So we will hopefully produce green hydrogen using our pressurized alkalizer in Norway in the first quarter of 2025. And we're already in dialogue with several potential customers about the full scale pilot. What you see below is a 25-megawatt building block. That's how it looks. Compared to the atmospheric concept, it occupies probably 20% of the footprint. Everything is inside 20-foot containers, making installation super easy and on a system level because you box everything in and you have gas under pressure. We expect the overall system savings to be significant compared to today's solution for both PEM and alkaline. Nel's share of the total scope is higher than for alkaline atmospheric solutions. So more of the value is in the stack itself and the gas separation skid than what you typically see for PEM and atmospheric alkaline. So on future projects, more of the scope or more of the value, I should say, will be delivered by Nel compared to today's situation. So very interesting development. We'll keep you posted on that. We're also advancing PEM -- next-generation PEM solution that we are developing in collaboration with General Motors, is already at a mini-stack level. On the left-hand side, you see the current PEM stack. It's a 1.25-megawatt module producing roughly 500 kilos of hydrogen per day and using 53-kilowatt hours per kilogram of hydrogen. Now with the new technology -- I don't want to go into all the details because we want to protect some of the thinking and the design approach. But in essence, we're reducing the platinum group metal usage to 1/3. We're reducing the membrane thickness to allow higher efficiency and the cell thickness is also reduced. The concept itself will have the same footprint, same dimension, same form factor as today's stack, but it will have a 3-megawatt engine. That's little cube, on the right-hand side, will produce 1,200 kilograms per day. And the power or energy needed to produce 1 kilogram will be 47.5. So a substantial reduction in energy consumption and a substantial cost reduction. I already said that we expect to reduce the stack cost by 30% when we produce what we have on the left-hand side in our new Wallingford facility. That thing on the right-hand side could easily reduce that again by 60%, 70%. That's the potential of it. If we then move on to summary and outlook. Some thoughts on the current market. The market has been slow or soft in recent quarters. Purchase orders have been pushed out in time, as projects have become larger and more complex and developers make more thorough assessments. Lack of visibility on political processes and subsidy programs that initially or originally were aimed at accelerating renewable hydrogen uptake have also caused delays. So that's a little bit gloomy. However, the market is now showing signs of recovery and projects continue to mature towards FID. There are high-quality projects that are moving forward with high-quality clients. Clarity around political regulations in combination with the national hydrogen auctions will definitely help short-term demand. And I would say many of Nel's target projects, where we haven't seen FIDs in the past quarters, are expected to take FID in the coming quarters. Our top 20 prospect lists or target list for alkaline has a total capacity need of 5 gigawatts or above 5 gigawatts. If we do the same for the top 20 PEM prospects, we're talking about more than a gigawatt. The market potential is there. We need the projects to take final investment decisions and place purchase orders. And I think I said in the press release today this morning that I'm confident that these orders will come. However, while we wait for orders to materialize, we need to be smart about our cash management. We are well capitalized with NOK 2 billion in cash reserves, making Nel one of the best financed electrolyzers OEMs. And there's no need to raise additional funding in particular, as CapEx, next year, will come down by almost 50% compared to 2024 because prior expansion programs in Heroya and Wallingford will then be completed. However, we will put more emphasis on cash consolidation and smart spending and align production output with real market demand. What do we mean by that? Well, first of all, we will only invest in the most important initiatives, and that's predominantly next-generation technology development, order pressurized alkaline concept and for the new PEM stack together with GM. We will protect the technology investments. We will not compromise on technology investments, but we will still reduce the production-related investments, hence, CapEx will come down by 50%. We will reduce inventory of parts and components, as project lead times have increased, and that will have a positive impact on working capital. And we will adjust the organization to align with current strategy and market demand, i.e., staffing will be revisited, both consultants and permanent employees. When the market rebounds, we are ready. We have improved our current technologies. As I said, better performance of the alkaline stack, 30% cost down on PEM and we're rapidly maturing next-generation solutions, which are important, both to unlock orders for current products and for new orders themselves because the next-generation products, they show to clients that if you partner with Nel, you're not only getting products for today but you're also getting products for tomorrow, and that's important. You have typically a pipeline of opportunities that you want to develop together with a couple of partners. And Nel aims to be one of those preferred partners that have solutions for today that are tested and proven. And together, we can test the next-generation products to unlock new projects. Together with the world-class partners because we have signed up several EPC partners like Saipem and technology partners and other partners like Reliance, and these partners help us achieve focus. They help us grow, and they help us with the execution. If you take Saipem, for example, working with Saipem enables Nel to focus only on the parts in the value chain, but we're actually good. They open up a new sales channel where they can promote this offering to their clients in settings and situations where Nel is not present, and they help us deliver that complete solution without Nel having to have thousands of engineers or contractors involved in delivering projects. And we're ready for high-volume deliveries with limited further CapEx, having 1.5 gigawatt of production capacity in this market is sufficient. And if demand requires more capacity to be added because we have the production concept ready, we can expand production capacities very fast. All right. Then we're on to the Q&A section, and I will be joined by our CFO, Kjell Christian Bjørnsen. Wilhelm, you will do the usual introduction before we open up for questions.
A - Wilhelm Flinder: Thank you. We have some questions coming in already, I see. [Operator Instructions] If there are questions we don't have time to answer, please reach out us on ir@nelhydrogen.com. As a reminder from previous quarterly presentations, we will not comment on outlook specific targets, detailed terms and conditions on contracts as well as questions on specific markets. Modeling questions, we will also appreciate, is taken offline. First question comes from Erwan Kerouredan.
Erwan Kerouredan: I forgot if you said 1 or 2 questions. I'm going to ask 1 and maybe a bonus question. So yes, my first question is on Reliance. Can you perhaps give a little bit of color on when we could expect first licensing revenue recognition? Is 4Q 2024 too early or is it more a 2025 story? I appreciate you mentioned it in the second quarter report, but not in the third quarter. And then the bonus question is on the CapEx cut for next year. You touched a little bit on it on the Slide 29. My question is what's your capacity to flex back up? Can you expand on that a little bit if you see outlook increasing faster than expected at the beginning of 2025?
Hakon Volldal: Maybe I can answer the Reliance question, Kjell Christian you can talk about the CapEx. I'm not allowed to disclose too many details about the contract with Reliance, but we expect revenues to be recognized from that agreement in the fourth quarter. And that's also why we believe fourth quarter will be a much stronger quarter than the third quarter. However, bear in mind that when you have a licensing agreement, there is usually an upfront part distributed over time as you make preparations and get ready for production and then there's a more variable part related to volume. So I wouldn't bank on every quarter, bringing in revenues on that contract, but fourth quarter, yes.
Kjell Bjornsen: On the CapEx part, just as a reminder, we do have space to double, again the capacity on atmospheric alkaline in the building where we are. We have earlier communicated that we have done pre-studies, engineering studies. We've even done building modifications to be ready to put in new lines. Of course, with the change in market conditions, the long lead time items that we have secured are no longer as secure as they were earlier, but we can turn around fairly quickly. On the PEM side, keeping in mind the current size of that market, 500-megawatt looks to be sufficient for some time. However, both for PEM, alkaline and future generation technology, we do have secured the Michigan site with substantial grants and are ready to move on that if the market comes back very fast.
Wilhelm Flinder: Next question comes from Anders Rosenlund. Anders, please activate the microphone on your end as well.
Anders Rosenlund: Do you hear me now?
Hakon Volldal: Yes.
Anders Rosenlund: Okay. Well, it's tricky. Teams, it's new to me. So I haven't really -- anyway, yes, the undisclosed U.S. customer, your biggest customer in 2023, it still owes you some 450 million. And you've previously been very clear saying that you think the balance sheet will remain unaffected regardless of whether the customer ends up paying what it is or not? And that's fine, and it's good. But if payment does not come, will you have to reverse the recognized revenues in your P&L?
Kjell Bjornsen: The current understanding is that we will not need to do that. Of course, it depends a bit on how that comes back, but current understanding is that we will not need to reverse revenues.
Wilhelm Flinder: Next question comes from Alex Jones.
Alex Jones: You talked in the presentation about 8% cost reductions in both 2023 and '24 on the alkaline stacks. Could you talk a little bit about whether you reflected that in lower sales prices on future orders to try and entice customers in or whether you're trying to use that to boost your margins? And also sort of how you would think about that trade-off in the next-generation technologies, which you've highlighted further cost reductions from?
Hakon Volldal: I think I have said in previous presentations that we are quite happy with the margin level on contracts that we win, hence cost reductions are passed on to customers through reduced sales price. If we can keep current margins, we are happy that we need more volume. And the way to get more volume is to pass cost savings on to customers to put them in a position to make more FIDs. And that is the goal with this. The reason order intake, not for Nel, specifically, but for the industry as a whole, has been soft in recent quarters is that cost has gone the wrong way. We need to get that cost down and we need to do our fair share of that by passing on the savings to customers. On future generations, that is the idea. I mean, we have a margin target that we need in order to reach profitability and good return on capital invested and for shareholders, but we expect that still to enable us to pass on most of the percentage savings to customers. That's the whole idea. The only reason we're pursuing second-generation technology is to make it cheaper for end customers and unlock additional demand.
Wilhelm Flinder: Next in line is Arthur Sitbon.
Arthur Sitbon: So thanks for the color on the balance sheet, saying that you believe the group is well capitalized. That's helpful. I'm just trying to understand the situation a bit better on that front because it seems your approach is changing a bit with a stronger focus on cash management. How long do you estimate the cash management mode can work for you? I think you're burning NOK 200 million, NOK 300 million of cash by quarter and you have NOK 1.9 billion of cash. If no significant revenue pickup is observed in -- how long could it last before you need to change your approach again?
Kjell Bjornsen: So if we -- if you look at the cash burn you referred to, just keep in mind also for those of you modeling to really look at the continuing business and factor in the fact that we are now talking about a 50% CapEx reduction year-over-year from current year to next year. So that will, of course, stretch the cash available. We have already implemented cost out on consultant agreements that happened late in the quarter, so we'll start to see some effect of that in the fourth quarter when it comes to reduction in permanent employees. We should expect that to go down, but there's some implementation time in terms of notice periods, which will start to see the full effect of that going in from next year. So with the actions we've taken so far, we have stretched it a bit. And then we will continue to look at what is necessary depending on market intake, whether if there's an uptick in market, we need no further adjustment. Of course, if the market stays in a negative mode, we will do what is necessary.
Wilhelm Flinder: Next question comes from Chris Leonard.
Chris Leonard: Hopefully, you can hear me. So you stated on the call about your developments in technology, particularly on alkaline and moving to pressurized alkaline as well. Can you maybe just give us an update on what you gained from your partnership with De Nora who make powerful electrodes for alkaline electrolyzers?
Hakon Volldal: Yes. We -- on the pressurized side, it's true that we are collaborating with De Nora on parts of it, but that's -- it's just a minor part of it. It's not that we receive ready-made electrodes from De Nora. De Nora is a development partner on, let's say, a small portion of the complete electrode. So we have our own recipe for how to make these stacks and electrodes. And as I said, it's different from what you see in the market. We have smaller electrodes in terms of form factor. It allows us to -- from a shipping logistics point of view, it's important -- from a manufacturing point of view, it's super important because you can use certain steel and nickel materials that comes in rolls. So you don't need specialized dimensions. You can use a standard industry dimensions. When you look at [die] fragments and other things, innovation happens on smaller scale before you expand it to several meters. So we get access to the latest and greatest when we have smaller dimensions compared to the Chinese, who might be a 2 or 2.5 diameter electrodes. And also from a safety perspective to handle the pressure inside a small tube easier than inside in a big tube. So there were numerous advantages to the design we have chosen. Probably the most important one is that if you take a square opening and look at how do you maximize the surface area you're seeing circles inside that where you actually produce the gas, you get more surface area with 4 electrode tubes that were just one big. So we -- there's 6, 7 years of concept development behind our pressurized alkaline stack. We had something in the past that was very similar to what you see in the market today, but we don't believe in that concept. We don't believe in the shunt currents in the manifold systems. We believe our approach is better, will give us a lasting energy efficiency advantage. And that's what we are exploring, and De Nora is one out of many, many R&D partners that we're working with in order to make this happen as soon as possible.
Wilhelm Flinder: Next question comes from [Damian Sparaga].
Unidentified Analyst: I hope you can hear me. I'd like to ask what is the reason of such a high level of SG&A cash cost amounting to NOK 322 million in the third quarter, which is almost the same as 1 year ago before spin-off. And on a comparable basis, the SG&A cash costs grew by almost NOK 100 million to -- from NOK 226 million in the third quarter 2023 and was higher by NOK 36 million compared to the previous quarter. It is by 13% quarter-on-quarter. And generally, what should we expect in the coming quarters in this area?
Kjell Bjornsen: So we have grown our organization to be ready for a larger volume. Much of that growth happened during last year, and we have the full year effect of that now, and it takes some time to adjusted down again. And so we will be working diligently to have the right cost base. I know that's a general comment. When it comes to the individual details on the SG&A cost, we can come back on that in off-line as a modeling question.
Wilhelm Flinder: Thank you. Next question comes from Yoann Charenton.
Yoann Charenton: I would like to ask about the cash flow statement and the line purchases of other investments. I understand that this reflects collateral for guarantees that are required in contracts you have with customers. If I look at the third quarter, you posted quite an increase on that line, and that represented some 28% of the cash burn in the quarter. At the same time, this happens in a quarter where you reported a very low order intake. So I'm trying to understand the relationship between these two, I would say, trends. And in relation to these points, I will be keen as well to better understand what a collaboration with a large EPC provider and you unveiled this quarter this new module. What it could mean for guarantees on future contracts?
Kjell Bjornsen: Yes. So the cash collateral, which you refer to is our main way of securing that when we provide bank guarantees. We get them at a reasonable cost and that we actually have availability of those. That posting of cash collateral is linked to payments from customers, not necessarily order intake. And we would typically have a staggered payment profile over the life of a project. So you would actually expect to see limited payment and limited cash collateral at the time of order intake and then a bit larger when it comes to milestones along the way. That is the main driver for that apparent disconnect.
Hakon Volldal: If we look at the EPC part of your question, the fact that we're working with EPCs means that Nel will primarily sell stacks and balance of stack systems and that's a risk we can live with. That's -- those are products we have made for a long time. We're not afraid of giving performance guarantees on those components, where we have struggled in the past, and we still see some of that in the P&L. We have a lot of projects that were signed in 2020, 2021 that we're still working through, where Nel had a complete scope. That means we would take the full responsibility for the complete plant. We will source power electronics, compressors. We would contract in people to do the piping, et cetera. So we would take the full responsibility. And that's running a lot of cost to our P&L with limited upside for Nel and -- where we have the warranty and the guarantees and we were not too happy with that. We're not trained to be an EPC. And that's why we have changed our strategy to be more of a product supplier, and that means the partnership with Saipem and other partners that I hope we can disclose and announce in the near future, help us apply that model. Working with Saipem, they take all the parts that we don't want to take, to put it simply.
Wilhelm Flinder: Then we have another question from Anders Rosenlund. Please, also activate the microphone on your end, Anders. We can't hear you, Anders. Then we go to the next question. Skye Landon, you're up next.
Skye Landon: Quick 1 on Alkaline EBITDA. You posted positive EBITDA in 3Q versus kind of like a small negative in general across previous quarters. How much of this relates to the higher revenues and how much reflects the fact that you're kind of now burning through some of the older backlog? And what do we expect going forward?
Kjell Bjornsen: So the question -- could you please repeat the question because it wasn't fully clear what you were asking.
Skye Landon: Sorry, on Alkaline EBITDA, you posted NOK 4 million of positive EBITDA in 3Q. How much of this relates to higher revenues within Alkaline and how much reflects the fact that you're burning through older backlog and the newer backlog perhaps has higher margins?
Kjell Bjornsen: Okay. And then I think I understand the question. So the revenue that we have is increasingly on the new contracts where we have a better scope and a better margin profile and a better risk profile. We continue to drag along some of the older projects, now mainly being delayed by delays that our customer initiated. And as long as the customer is delayed, then, of course, we need to continue to keep the project open. There will be a continuous drip FEED of some of that in. But I would say increasingly, our revenue -- our mix is on the newer contract.
Skye Landon: So should we be expecting a positive EBITDA for Alkaline going forward?
Kjell Bjornsen: Well, the main driver there, as I said earlier, is that we are happy with the scope and the margin that we now have. What we need is enough volume to have a reasonable fit in the factory. So as long as we get new orders in, so we can have a reasonable fill in the factory, then we see that the business model for alkaline is proven. It's just about pushing volumes through.
Hakon Volldal: But the mix effect is increasingly positive. So the -- this is more and more higher margin contract and less and less low to negative margin contracts in what we post, but we've also ramped up the organization because we saw an increase in order intake and the market momentum. And we -- so I would say that in addition to mix, the most important thing is volume. And if there's no volume, then, of course, you have an immediate negative effect in terms of cost absorption. So it's -- that's why based on what we see -- have seen in the market over the past few quarters, we need to adjust some of our capacity in order to have a decent profitability, while we wait for the market -- expected market uptick. And when that comes, you will see increasing margins in the segment.
Wilhelm Flinder: Thank you. Next question, [Damian Sparaga].
Unidentified Analyst: Could you update us on the current pricing of the market? I mean stacks alone or with balance of the stack, alkaline versus PEM technology. And what are your expectations for the next year? And how could pressurized alkaline units be priced in the future? I mean somewhere between PEM and alkaline or where?
Hakon Volldal: Yes. I think on the system level, both PEM and alkaline, unfortunately, have turned out to cost $1,800 to $2,000 per kilowatt, that's the CapEx on large-scale projects and even up to $3,000 per kilowatt on smaller projects. And that's -- if you look at an alkaline system, Nel's portion of that is 15% to 20%. The rest is civil works, engineering hours, other modules building, et cetera. So our -- even if we gave Nel's equipment away for free, the system cost would be fairly high, both for alkaline and for PEM. On the PEM side, the stack is actually a bigger part of the overall because the materials are more expensive. So on the atmospheric alkaline, the single most important thing we can do to get the cost down is to work together with EPCs to help them get cost out. What can we do with our stack, our system in order to allow them to take cost out? With PEM is actually to get the stack cost down, which we're doing now and also working with EPCs on how they can simplify the complete plant. If you move on to the next generation products, then for alkaline, you basically -- the stacks will be more expensive than the current stacks, but the system cost will go dramatically down because it's been designed to remove a lot of the modules, standardize the layout, the fabrication, et cetera. So you remove all the engineering hours, all the civil works, the building costs because it's in containers so that $1,700 to $1,800 might go down to, let's say, $1,000 to $1,200. With the new PEM stack, you take out 70%, 80% of the most expensive component of the system. So it's hard to give a generic answer. There are different paths towards lower system cost for alkaline and PEM and we're pursuing all of them. And over time, the reason we're investing in second-generation technologies, as I said, is because we believe on the alkaline side that we have today and the PEM product we have today, you will reach a certain threshold where it's difficult to go further down. That's where the second-generation technologies kick in. So I think we need to come down from $1,800 to $2,000 per kilowatt to, let's say, $1,000 to $1,200 over time in order to unlock many of these 1,600 projects that have been announced around the world.
Wilhelm Flinder: Unfortunately, I see the time is running out now. So we have to end the presentation here. So please reach out to us on ir@nelhydrogen.com for further questions. There are a couple of questions we haven't had time to answer, I see. So with that, I'll give the word back over to management for any final remarks.
Hakon Volldal: Yes, I think we had a third quarter, as I said, that came in decent on the top line. And I would say below -- unusually low on the EBITDA. We expect the fourth quarter to be much better on the bottom line. And we'll show you in time why that is. But I think we can already now promise a much better fourth quarter than third quarter. We make adjustments to the organization and to our CapEx plans to protect our cash position because that's important. We are well funded and financed. We can live through a soft period in the market. But the reason we are investing in second-generation technologies, the reason we have people employed is that we are fundamentally positive about the market opportunity. And we see early signs of a recovery. We see that a lot of the, let's say called, very opportunistic projects are not moving forward, but a lot of high-quality projects with high-quality investors and customers, reputable companies, both in North America and in Asia and in particular in Europe, will move forward, helped also by more visibility on the political side. So I think we -- it might be -- the jury is still out, but we see signs of early market recovery and actually a bit more positive and upbeat about the outlook than maybe a quarter or 2 ago. So hope to come back to you in February with a very good fourth quarter report and end to 2024. And in the meantime, we will work as hard as we possibly can to bring in new orders and we'll, of course, announce those as we sign them. So thank you for listening in, and see you back in -- we'll see you in February.
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