NEL ASA

Good morning from Oslo. My name is Håkon Voldal. I am the CEO of Nell, 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, Willem Flinder. We have the following agenda. We're going to start out with the A one minute introduction to Nell 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. And we're going to end with the Q&A as usual. Now, Nell 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 three and a half thousand units installed to more than 80 countries around the world. And we have delivered these electrolyzers since 1927. We currently have one gigawatt of alkaline electrolyzer manufacturing at Hyria 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, etc., and close to 2 billion NOC 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 have almost a century of electrolyzer experience, and that's important. We have the 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 frontrunner 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 scale our production concepts to add more capacity if needed. Now, if you look at the third quarter highlights, revenues came in at 366 million NOK, EBITDA at minus 90, order intake at 161 million, and order backlog ended at 1.9 billion NOK. Cash balance close to 2 billion NOK at the end of the quarter. Very few announcements in the third quarter. We announced a follow-on equipment order for roughly 7 million euros for a European project. And unfortunately, the gigawatt capacity reservation agreement with High Store Energy in the U.S. was canceled. This project was based on providing green hydrogen for a green steel project in the United States. And due to an uncertain timeline around that project, High Store Energy decided to cancel the agreement with Nell. 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, a 100 megawatt tourniquet hydrogen solution that Saipem has built around Nel's core technology, and I'll come back to that in a minute. If you look at the group financials, revenues are up 21% driven by alkaline performance. PEM was on the negative side. EBITDA came in at minus 90 compared to minus 60 last year, and I have to say that 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 low 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 we 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 Häröja 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 Harajá at the moment. Hence, investments at Harajá will come down next year. rather positive story on the alkaline side the opposite on on the pem side 40 decrease in in revenues year on year due to timing or project revenues someone 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 the end of the 500 megawatt PEM production line expansion project, and this will allow this segment to be a more credible supplier of larger volumes to bigger projects. You need a certain install 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, 161 million NOC, most of it coming from the PEM segment related to the expansion order in Europe and also a containerized PEM project. As we've said many, many times, order intake is expected to vary between quarters as order sizes have increased. And unfortunately, in the third quarter, few projects took FID. Few of the projects that we are targeting took FID. But we expect this to improve in incoming quarters. That's also why the order backlog is down to 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 grey hydrogen or 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 that projects must limit sourcing of electrolysis tax from China to not more than 25%. This means that the EU takes 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 Nels technology platforms, Alkaline and PEM in their projects, and the total auction budget is 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 electrolyser OEMs like Nel. And the reason we are after 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 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 creates very cheap products and push those products into Europe. So that's important. And as Nell, 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 UK. The government is currently assessing applications to award up to 875 megawatt of capacity through what they call the HAR2. This gives project developers in the UK funding to pursue projects, and Nell is working with clients that got funding in round one and have applied for funding in round two. So that's extremely important in terms of pushing these projects forward. Similarly, in the Netherlands, projects such as Poseidon, which we will talk about in a minute, have received grants from the National Enterprise Agency. And yesterday, the RVO announced a new electrolysis subsidy scheme worth €1 billion. So remember that the hydrogen bank funding was €1.2 billion. In the Netherlands alone, we're talking about €1 billion. In the UK, the amount is expected to be even higher. Germany is doing the same. Funding through IPSA 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 projects 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 these 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 you know, the vehicle to put green technologies at scale in the markets. Unfortunately, regulations have not come out yet. They have been delayed, not by months, but years. And consequently, very, very limited money has been paid out to subsidize hydrogen in the UK. Now, U.S. Treasury have received comments on the proposed or 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 to quote Aviva Arundine 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 this ability 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, etc. So this is highly needed in order to create more demand in the U.S. summarize the political section positive signals both from the eu with the hydrogen bank a lot of initiatives on national level in in the eu and also finally we hope we get the clarity on on ira in the in the us if we move on to the commercial update this is probably the most exciting thing that we um announced during the quarter or I think it was October 1st, to be precise. CYPEM, 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, now strategy is to focus on stacks and balance of stack we are not experts when it comes to power electronics compression piping buildings etc so it's important for nell to have partners such as cypem that can offer the complete solution to end customers they have built this concept Using our technology, they've 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 Nell that represents a complete solution for customers in the market. This one is interesting. This involves a NEL containerized PEM solution installed on any offshore platform off the coast of the Netherlands, what we call the Poseidon 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 on shore. 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 a 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 megawatt. You can use these 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 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 or make that happen. The way Nel looks at this is in terms of different S-curves. We have the first S-curve involving the first generation of electrolyzers, where the alkaline stack is seen to be more mature than the PEM stack or the 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 one, 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. There are simply not that many things left that you can do in order to improve performance. When you introduce new technology, you get more buttons you can push and more levers you can pull. Nell 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 on 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 improve 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 2023 and 2024. And what we do see is that the maturity on a system level for large scale installations is maturing. I showed you the SiteBAM 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 plant 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 now 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 developed in close collaboration with General Motors and can be rolled out globally when demand picks up. 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 Nell 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. Onto 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 a quarter 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 a 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 percent of the footprint. Everything is inside 20 foot containers, making installation super easy and almost system level because you've boxed 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 the 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 one third. 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 dimensions same form factor as today's stack but it will have a three megawatt engine that little cube on the right hand side will produce 1200 kilograms per day and the power or energy needed to produce one 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 Wallingport 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 a summary and an 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 Nell'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 list 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 2 billion NOC 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, it will come down by almost 50% compared to 2024, because prior expansion programs in Haare and Wallingford will then be completed. However, we will put more emphasis on cash conservation 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. for the pressurized Alpiline 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 Nell, 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 now 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 them. with world-class partners, because we have signed up several EPC partners like CYPEM 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 Cypem, for example, working with Cypem enables Nell to focus only on the parts in the value chain that were actually good. They open up a new sales channel where they can promote this offering to their clients in settings and situations where Nell is not present. And they help us deliver that complete solution without Nell having to you know, 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 concepts 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 Bjørnson. Willem, you will do the usual introduction before we open up for questions.

Thank you. We have some questions coming in already, I see. As a reminder for the ones that wants to ask questions, please use the raise hand function and we will call up the name and activate the microphone to the one next in line. Please make sure to activate the microphone on your end as well. Please also keep a maximum of one question per person due to time constraints. If there is more time, you can always go back in 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 at melhydrogen.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 Irvin. Please go ahead.

Thank you for taking my question. I forgot if you said one or two questions, so I'm going to ask one and maybe a bonus question. So yeah, 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 4Q2024 too early or is it more 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? Thank you.