PowerCell Sweden AB (publ)

Welcome to the PowerCell Group Q3 2024 Report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the CEO Richard Berkling and CFO Torbjorn Gustafsson. Please go ahead.

Good morning everybody and a warm welcome to our Q3 Report, a line from a sunny Gothenburg morning. I'm joining you today with Torbjorn for the last time actually, reporting on Q3, which was a very intense quarter with a lot of activity. We are happy to report that we have strong market activity. Previously in the year we have communicated that we are operating in rather soft market conditions. We now see a significant improvement, not necessarily all the way into the books of Q3, where we report 3% growth in the quarter, 12% growth for the last 12 months. But especially in market activity and income orders. We now with the large order that we reported in September, 165 million of Q3 systems sold to a leading Italian and a member factor, that establishes us in a position where we now have zero production for customers starting up. So we have a roadmap of more than 100 systems to be produced and that is for the first time in parts of history where we have an ongoing zero production, which is really positive and a good trigger for Q3 going forward. We also reported that we received approval in principle from the Moscow Veritas for the solution you see to the right here, a combined methanolous warmer and fuel subsystem, which in essence is a five-phase solution where you have methanol as a fuel and then you have electricity out. Something that is, is we believe is going to create massive value for you, the customers in the green market and we will elaborate a bit more on that going forward. Beside that, we had a good order in July also from a European OEM and factory, which was important to get the season started and we have seen a lot of activity after the summer. What is interesting to see in the market fundamentals is the fact that we see a rapid acceleration and when we talk about that, it is from start of negotiation to when we see a complete delivery, where we see the invoice going to the NTSC and money into our account. So previously with the large orders to marine and also aviation, typically it was a five-year period from initial negotiation to complete the delivery. Now we see that that time is limited to 18 months and that is a very significant indication of that because that also gives us an opportunity to grow faster, but also that we have more mature customers with a good understanding of what to do with the products and how to put them in pre-presentation. And it is also driven by the fact that we now have commercial customers that need to get the products out there making money. So a significant change in the undeniable characteristic of the business, which comes from the focus we have had on OEM business, where we now see marine and power generation driving the market growth forward. As communicated, the order from a leading Italian marine OEM manufacturer is a milestone order for us. We have talked about finding the first really strong OEM manufacturers, designing in our solutions into their product offering and bringing it to market. This gives us a rather sticky business model, but also strong value and large order numbers. So for PowerSum, this was something that we agreed on quite hard on and we're very happy to be able to report this. So it is a milestone, not just for PowerSum, but for the industry on path to the pre-presentation and transition in the future. One of the orders also that we have to report was agreement for a concept study for a vertical takeoff and landing aircraft. This confirms our very strong position in the aviation sector, where we have reported before more than 20 commercial customers. We have also reported in the US, where of course Suraiga is the leading entity, pushing our technology and air flight offering into aviation certification, which is going very good. Aviation is a strong second-floor profile, so we will see continued growth and hopefully we can report on it in the next couple of weeks. We could dig slightly deeper into the numbers of what the three are handover to Google for an explanation deeper of this.

Thank you Richard. And yes, regarding net sales development, we have previously in quarter calls also explained that we've been in a softer market situation. But with that said, we are then growing quarter over quarter, but also year over year now with the 12 months rolling, growing with 12%. And given the fact that we've been in a softer market situation where dialogues have been more towards bigger OEM sales that have taken longer time, I think that performance is good. And like Richard mentioned before, the order intake coming in supporting sales from the former. Gross margin development. We have seen right now a downward trend on the gross margin side, but that is for power cells something that will happen quarter over quarter, not the trend that we can see going forward. So it's related to the product mix and how it works out. And at the moment, the product mix has been towards gross margin of still healthy above 30% gross margin. But we also see that this product mix will change over time and will also vary them on the gross margin side.

And if I can elaborate, we see an improvement from quarter two, which is the result of a very close focus on this one because we want to have a healthy gross margin over time. We can also conclude that quarter three was affected by exchange rates, which is the case for power cells. But as Tone said, quarter over quarter, we will see some shifts going up and down on the gross margin. But we have a strong focus on bringing the order cell mass up to an average where we feel comfortable. And we think that we will be able to report stronger numbers in the four and over.

And on the operating leverage side, which is which is one slide that we've been using before. And now again, we can still see on the long run a downward trend. And although we haven't had the net sales growth in the last quarters, we still are keeping the leverage. And we also are doing this with continuous building capabilities in both our industrial offering and commercial offering, together with keeping a high base on developing the technology. So we are safe guarding the operating leverage, but at the same time, still keeping the development of the company towards future growth.

And just to clarify, this is one trend where you want to see done. That's

right.

That's right.

And cash flow impacted by working capital and then having an operating cash flow of minus seven point four in the quarter. So so not for a trend from from last quarter. But then again, that we highlight also in the quarterly report that it had significant capital defects in the quarter. And customer payments from increased OEM sales will increase the cash position beginning of the fourth quarter. And a lot of it has already happened today. So so a good situation and a good momentum in cash flow situation.

And also here, we're noticing the improvement from from last quarter. The improvement through the year. So once again, strong focus on this one and we're happy to be able to report an improved situation. Still have a couple of potentials to report that. So if we then go back and look to what we have communicated previously, what has been in focus for 2024 or so. Of course, the OEM customer orders because we want to build a more solid portfolio, get competitive business, but also get the OEM customers that are actually using the products in commercial applications. Because that is the trigger that is indicating that this is now entering into a more of a normal market driven growth. So the order that we reported in 43 was a step in that direction. And the part that we see we don't go that long is in the same direction. We also have continued to grow and expand in the US with customers. The US is continuously a strong market for us and will be even more important. The position we have at the moment is to scale the current generation and driving ourselves towards break even and balance the cash flow. We see that we are doing that in a very good way. As we reported out, we think that we have managed the situation on the market in a very good way of making sure that we are gaining market share, growing despite the market. But especially put ourselves in a position where we now see the market accelerating, that we are in a position for that. We have a really strong product offering, a really strong industrial set up for production and also that we have continued to be presenting new product launches. In the quarter two, the Marine System 225, where we improved the performance on the existing Marine System with 12.5%, which is really valuable. And then in quarter three, the improvement principle for the methanol to hydrogen power plants, which will give us a very strong position for marine application where you want to have complementary tubes compared to hydrogen in the form of methanol. That's slightly more that we're going forward. With all that said, we have been able to also industrialize and accelerate industrialization of the next generation of our portfolio, which is extremely important. We are market-based when it comes to performance on our technology, the fuel and stack technology that we have to get in production and production. We are not resting with that leadership. We continue to build on that. So accelerating the development of our next generation of nuclear power is important. So the balance between performing short term, having a clear path to the freight even, while still investing into more capabilities, that is the balance point that is so important for a company like PowerSelt to manage. And we are quite happy with the position we have. We also indicate that it is a new phase in the market. We see commercial growth from the early next steps. That comes with new requirements and also new opportunities. As indicated before, the negotiation cycle is slightly longer when we are trying to negotiate an OEM contract because it's more complex and become designed into an industrial system. So the technical and commercial due diligence from the customer is more expensive. With that said, we also have a stronger position when we're doing this with the industry because then you are designed into their offering. So a really good opportunity that comes with rather strong requirements and performance on the company like PowerSelt. And we have developed abilities and capabilities to be able to support that with everything from the quality, internal quality process to the manufacturing process and also automatically support capabilities. So the order that we received in September was an important fruit of that because it's not just the order value, the fact that we are qualified to do those customers is extremely important. And we have prepared for this by investing heavily into our product offering, not just having superior technology, but packaging products that are relevant for the customers in different applications. We have also invested time and effort into this slightly boring concept of productivity and internal efficiency. Quite often in the early stages of entrepreneurship, companies focus very strong on their core product and forget these really, really important traditional competitive advantages like productivity, like uptime on your product and internal efficiency. So the industrial stability and the capacity we have is something that we're quite happy for. And we see that we have a structure that we need to break even in a low volume market. So in this growth journey that we have started and our now accelerated one, we have a very strong industrial footprint. We have our offering, Industrialist Innovation that is serving as a bridge between our industrialist core components and the end customers need for adaptation. We have a strong first mover knowledge from the fact that we are active in different applications, building knowledge from the aviation industry where we have really strong requirements on performance, safety, robustness. That we then apply in marine sector, in power generation, etc. So the mix we have is making our application on this really, really strong and that is a competitive advantage in the market of this industry. We're happy that the growth is coming in the shape of commercial orders and not just the tech exploration early stages of project orders. And we are now ramping up production for serial delivery to customer orders, which is a first for power. We have had strong growth previously, but it's been a bit of a up and down when it comes to production volumes. Now we can see that we have a stable pipeline where we can have serial deliveries going on. The fact that we have Bosch as our key partner, gives us both massive stability, but also credibility to customers when it comes to the customers with strong requests for industrial stability and credibility. So if we look at the market drivers and we attended the Jewen Climate Week in New York three weeks ago, we left there with a sense of strong acceleration in the market and a very positive side effect. Some of my colleagues went back feeling a bit discouraged because they felt that focus on decarbonisation is not as strong as it's been previously. To me, that is a positive thing because decarbonisation is no longer the only driver in this transition. It's still extremely important. We see massive commitment and investment going into making sure that we are in alignment with the Paris Agreement, trying to keep global warming below 2 degrees. But at the same time, we now have a strong focus on air pollution from combustion engines. And this is something that is important today. The climate issue is a big concern, but it has a 20-year perspective where air pollution today is causing massive health issues and costs for society already today. So in urban areas, we see now legislation trying to cut emissions of nox and sox. And there, the fuel cells and electrification in general is viewed as something that we create value immediately. And this is also one of the drivers we see in the marine sector where especially cruise ships will not be allowed to enter the port in urban areas and be portside idling the combustion engine. So either they will have to have an electric charger from the port, which is not available everywhere, or they need to have an electrification system on board for the port and local idling. And this is the driver behind the OEM business that we now see in the marine sector. Time to market on those products is also shorter because they are not safety critical because they're not necessarily function. So it's a really interesting acceleration into the market. But then they overall increase the amount of electricity in society. We saw a report from the International Energy Agency where growth in demand electricity is at the highest ever growing 4% year over year. You would think that 4% is not necessarily that high, but if you compound that year over year, you quite rapidly see that numbers are panning up. So society, we need to have different energy solutions. And while we see the green sources of solar and wind growth in contribution to the energy system, they are in their characteristic volatile. So you need to have an energy system where you can store energy to be able to control load and not cause stress into the grid of society. So the energy mix going forward will require different solutions where, of course, hydrogen and fuel cells are viewed as one solution. We can also see that the slowdown in battery electrification deployment is opening up a window of duty for hydrogen and fuel in certain markets. So interesting opportunity to be able to act on. And then we see continued strong initiatives when it comes to governments trying to accelerate the energy transition. For, of course, the purpose of climate change, for the purpose as we communicate now with the evolution and the hazardous what goes in the area in urban areas. But also to be able to build a new industry and make sure that we don't have dependencies to certain markets or certain suppliers of technology. So hydrogen as a central role in the coming energy system is recognized as a strength. And we see now the hydrogen industry, ensuring that the rapid pace where you see availability of hydrogen, both green and other sources of hydrogen improving and also being deployed in. So to summarize, we continue to see strong market drivers. We see that the energy transition is accelerating and it is supported by both the governmental initiatives, but especially of OEMs taking a new position, really investing into their transition towards what is a sustainable energy solution, but also sustainable business model. We do that with the leading technology and proposal where we have what we claim is the best technology in the industry, best performance and best elevated together with us. It is really a reliable, high power density and the contact forward, which is important because size, weight and cost will always be a competitive advantage in any application. The fact that we are starting serious deliveries to commercial application is an important point and an important shift in the industry. And we also see scalable production within our existing industry footprint that will carry us towards great even already in the early stages of this industry. Looking into where we will meet again, we will have our quarter of fourth report, a year end report on February 13th and then subsequently following as you can see, this schedule. So with this, we open up for questions and comments from the forum.

The next question comes from Sophia Soerling from Carnegie. Please go ahead.

Thank you Sophia here from Carnegie. Can you hear me? Yes. Great. Hi. So a couple of questions from my side. So in stopping questions on markets, you mentioned quite soft market activity, but could you elaborate on elaborate a little bit on that and which end market segment. But you also mentioned that you see progressing activity on your own. So could you also elaborate a little bit more on that as well? And also if you refer to discussions regarding add-on orders on current or existing customers or if you see like a higher activity level related to more new customers.

I'll try to remember all questions. I start with the last one. We actually see follow up orders and incoming customers, which to us is really important. The fact that customers who have been working with us for a number of years continue to trust in us and continue to invest in the business from us is an important point. So having customers that are satisfied and returning is of course really important, but equally important is the fact that we see the customer 5,000 new additions. So it is a good mixture of both commenting on the soft market. That is something that we have described in 2024 as a software market activity was slightly lower. It's not necessarily just because of lower activity, but also the transition away from the early stages where you have public sales, where you might be selling to a customer that is a one off, which has one budget that will be just for a single purpose. That decision process is faster than when you negotiate an OEM contract. So perhaps soft market is a bit exaggerated, but at the same time for us, the result is the same regardless of what is the driver behind it. After summertime, we see a complete shift in that where we have more market activity, more orders coming in at an higher average value. And as I also pointed out previously in the talk, the fact that you go from negotiation to complete the delivery and invoice in 18 months compared to five years previously. It means that we are accelerating through the order book in a faster way, turning prospects into revenue in a much faster way. And that is not just one customer. That is actually throughout the whole scale of segments. And then I think your question was also related to how it is distributed in the different segments. Of course, with this marine order that was a mine zone order, the value in marine is very high. We see activity actually in all different segments, both power generation, where we now have interesting dialogues, but also aviation. So I think it's evenly distributed and it will be interesting to see how we can report progress going forward.

So I thought there was some new information about this marine order that we actually will have some recognized revenue of this order already in Q4, but deliveries will not be until 2025. Can you give some more details on why is that the case? And also should we interpret that the deliveries will be earlier than previously expected or is it still as according to the press release?

Deliveries will be according to expectations when we sign the order and then on how this is reported, I will hand over to my very qualified CFO.

Yeah, so exactly. The delivery days hasn't changed. What is the case with this marine order and will be the case without the exactly knowing potentially future marine orders and other big projects? It will be revenue recognition according to percentage of completion. And then since and I think Richard talked about it also previously in the call that from order to delivery, the time spend there is much quicker now or less than what it used to be. So from now on or from signing the order and then starting the work within this project is very quick and we will be working with it. And that's what we also wrote in the report that there will be work being done already in the Q4 quarter to be able to deliver according to plan and deliver.

Yeah, okay. That's clear. And then maybe a final question on profitability. So you mentioned that the gross margin is still at quite decent level with this 32 percent. But what would you say is the main reason for still this is a lower margin compared to your historical margin of around or above 45 percent? And would you expect or should we interpret that we should expect and extrapolate this type of cross-margin levels? Why? Why not? If you can elaborate a little bit on that. And also what you expect is normalized gross margin levels for power cells in the midterm.

Yeah, and unfortunately, you will receive the answer that you don't appreciate that we are not commenting on forecast or from the press like that. But the variation is related to the fact that we have a number of revenue sources. I mean, we have the quality sales, we have the near sales, we have the loyalty sales. So we have a number of those that will vary over time. Unfortunately, in quarter three, it is affected by a current exchange that is far disadvantaged. The royalty development with Bosch is as always stronger in the end of the year. So hopefully we will see some improvement in quarter four. But there are some delays there. Quarter three last year had a very strong report on royalty. So comparing it year over year, we always give some variances. We are happy to see the improvement from quarter two with a better follow-up mix in quarter four. Hopefully we can see the continuing improvement. But it will vary. But it's been a priority for power cells over the last three years to have a strong and solid gross margin. Where the level will be going forward, that will be up for us to prove to you and for you to follow. We are not making any comments on how it will be developing. But it is a main focus for power cells because you cannot have a healthy long-term sustainable business without a strong loss margin. So that is a number one priority. Especially if you want to be able to continue to invest into new innovations that we are doing. Being able to present updates about use every quarter. Not necessarily having that activity in every quarter with new innovations. But this is the only way to control your investment. You can have a clear path to integrate with

that. Okay. That was all from me. Thank you so much.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Henrik Alviskog from Read.iAB. Please go ahead.

Hello gentlemen. Do you hear me? Yes.

Good morning Henrik.

Good morning. Okay. My first question relates to the Siam order and the deliveries to the Norwegian ferries. Will you... first I can recall you said before that they will... that delivery will be finalized in 2024. Is that still the case? And also when we are trying to figure out how much remains to be invoiced from that order, is it fair to assume that the sales that you are recording in the notes to Norway is mainly related to this order? And that what you have invoiced since Q4 last year to Norway is regarding to this Siam order. I hope you understand my question.

Yeah. First and foremost, I don't think that we have said that it will be completed by 2024. On the contrary, the shipyard was selected later than expected. Still, we have been able to develop our business together in a very good way. So we have not been affected in that way. We don't have any effects on cash. But we are building up the value as we go along. And the absolute majority of the revenues from Norway is related to that customer. But we are not giving any more details of breaking down the sales into the customers. But you are right in your conclusion that it is the absolute majority. But we will continue to have revenues also in the first part of that project.

Okay. Thanks. And then relating to the stationary segment and power generation and then your partnership with Hitachi. First, I'm wondering, are you also working in parallel in this segment on your own, so to speak? Or are you focusing entirely to the partnership?

No, the partnership with Hitachi is important to Parzah. They represent an OEM customer who has designed our technology into their product offering. With that said, as many OEM customers, they have long-term processes, which means that they sometimes have a long time to market. But on the other hand, when they go to market, they have a massive organization to push out products globally and to be able to manufacture in substantial volumes. So we still value the collaboration with Hitachi really, really high. We hope to see it materializes into actual orders and deliveries rather soon. So we have a good dialogue with them. But we have not just been waiting for them. We have a number of other applications out there in the power generation segment. It's been reported previously with the customer Tizen, who has been touring the world with Formula Extreme E, where they have actually the methanol reformer to generate power to charge the cars. So they have also massive market and application knowledge and expertise from this. So we have products deployed in that segment. We have reported also that this is one of the segments where we expect to see the highest volumes, but it's been slow in transition. So hopefully we can report on progress in this area, because we don't see that this segment has reached its potential in any way. So let's keep an eye on that.

OK, thanks. Just finally, a question on OPEX. Maybe you already explained this in the presentation. Sorry if I didn't catch it. But selling and admin expenses were a bit lower here, quite significantly lower in Q3 compared to what we've seen lately. Is it something temporary or is this more of the run rates going forward?

I think also on selling and admin, there will be some variances depending on what kind of projects or what we are doing. Looking at an overall trend, going back to a couple of quarters and then relating it to NetSense development and knowing that we are focusing on operating leverage, you will find sort of a way forward on putting that in the trend.

OK, excellent. Thank you. That was all.

And then we have a question here on screen on elaborating on the approval principle for methanol reformer and how does that fit into the growth strategy of PowerZone. Our growth strategy is quite simple. And in any technology shift, in the early stages, you need to focus on building more installations, a larger population, and you also need to focus on increasing your value for that installation. And value is not just sales value, but you also need to contribute, you need to create value in every installation. So the methanol reformer to hydrogen fuel cell is a very important plug and play solution. So PowerZone will be integrating a methanol reformer from RICS Industries, a very strong supplier from the US with experience to both naval applications and military applications. So they have really good knowledge on safety critical applications. But the fact that we do the integration is short in time to market for our customers. It's also complementing customers that are not either comfortable with using hydrogen or they cannot get availability of hydrogen. So methanol as a fuel carrier is something that will also open up more markets. So that will drive a number of installations. And then for PowerZone, by doing this integration, we actually doubled sales value. So per installation, we will have prices not revenue, which is then fully according to our growth strategy. So that is perfectly in line. And we were really happy to be able to report the Brooming Principle, which indicates that we have a safety system and solution that is according to marine industry standard. Hopefully, we can report you more progress in the following quarters on this one. But this is a very important step forward to accelerate the growth strategy for PowerZone. We also have a question here. With the order that you have already signed, do you have capacity to take orders from new customers? Yes, we do. Tell me how much you want to deliver. Now what we have, as we said before, we have an industrial footprint where we can scale up production quite both rapidly and in great numbers. The collaboration with Bosch is, of course, a very important contributor in that sense, because the fuel cell stack manufacturing is the most complex part of the manufacturing process. And having a small labor industry partner like Bosch in your corner is a strength. And then the assembly of different systems towards either marine or aviation or power generation applications is something we do in-house at PowerZone. And then we can scale up numbers quite rapidly and in a good way. We also have this asset-like business model where we can set up production close to the customer. So would we have a breakthrough order from the US market, which is another question here on the screen. We could have an assembly of systems in the US market in a very short lead time without any substantial investment. So the setup for PowerZone to be able to supply greater volumes and also in different locations geographically, we're quite happy with that positioning and that investment setup. So yes, we can be here. Do you see that there will be service and automotive sales for you in the future? Yes, we have reported previously that especially with the Norwegian Torrhatten V, there will be an automotive contract where we have a performance guarantee over 50 years. So that will be like a subscription based fee annually, which is a solid revenue for PowerZone when this boat is commissioned and deployed. And we see the same for a number of customers, both in marine but also in other sectors. As soon as you have your products in a commercial application, the customer is requesting what is called an SLA service name. So yes, we will see recurring revenues. We don't have any guidance on to what extent that will match the product sales. But in more mature industrial market, the auto market sale is a very good contributor to top line growth and an even greater contributor to cost margin and bottom line profits. So yes, this is something that we are exploring and developing going forward. We have two questions about collaboration with Serenia on the progress there and also whether or not we are part of their continued growth. We have a commercial order for the drive-line Serenia 600, which we signed in 2022. This is the drive down that we are now certified for the cabriation processes. It's a certification of the actual technology, but also certification of PowerZone, where we will have an audit in our facility a couple of weeks from now to be able to be certified to go into AS9100, which is a very demanding quality process. So that is progressing well in its division business. And then, of course, we have a good dialogue with Serenia. They are exploring other alternatives as well for their larger installations. But with this good collaboration, we hope to be able to deepen this going forward. But nothing is decided and we fully focused on providing value on the existing business. That is the best way to do the following business as well. So good question, but nothing new to report there. Let's see if we have something else that we want to answer. One question, and this might be the final one because we're running out of time. It seems like the marine segment is growing. How do you see opportunities in this industry? Well, marine is really important because we now see high market activity from OEM customers, we see them designing in our solution into their industrial manufacturing. And we see also the market drivers in water because the marine industry both need to be carbonized and electrified part of their operation. And they can do it. It's quite easy for them. And that is what a short lead time to market because you can have hybrid installations. For example, in cruise ships, you don't need to electrify the full propulsion. When you do that, that is something that will have a longer time to market. It will have more effect on how you operate your vessels. So if you instead electrify part of the installation, it could be that you use fuel cells for electrification on what they call hotel mode, which is in idle state or the internal energy supply of the system or of the vessel or air conditioning, elevators, etc. And then you can also use it for going in and out of port, taking out the emissions, which we talked about before. The air pollution in urban areas is becoming a focus on society. So if you could have that hybrid installation, then you can start your electrification during all your energy transition without taking too much risk as a vessel operator. So marine, yes, it is a very interesting segment because they have the perfect application for it. But they also have the logistics in Harvard where they are used to having different types of fuels from gaseous energy to liquid or pressurized energy or not. So it is a really interesting market development that we see. And we see the right activity from the right actors in the value chain. With this, I would like to thank you as always reach out if you want to have a dialogue. You're always more than welcome to come to the Scottish Lothar in Gothenburg to visit us. Otherwise, I would like to extend my gratitude to Tobi for serving on me for a number of years. And we still have some months to continue together. This will be his last quarter performance with you. So thank you. Thank you. And good luck going forward. But you still have some months to join me here. So thank you very much. Enjoy the rest of this report period. And as we said, reach out if you have any questions.