Good morning and welcome to HydrogenPro's Second Quarter Presentation. Today, I'm accompanied by CFO Martin Holtet, who will present the financial figures. I will take you through the highlights and our recent developments, market updates, and our partnership strategy. About HydrogenPro, I know many of you have seen this before, but for those of you who do not know us so well, we are what we call a pure-play OEM company, focusing on core electrolysis technology, which is well suited for the renewable energy sources. We deliver high-pressure electrolyzers and the gas separation skid. We are addressing the market for decarbonization of selected large-scale industry segments, already using grey hydrogen or where decarbonization is hard to achieve through electrification.
HydrogenPro is delivering to two of the largest projects in the world: a 220-MW project starting up now and a 100-MW project, which we have delivered main components and now producing our 3rd Generation electrodes in our new factory. Few other electrolyzer OEMs are delivering to projects of the same scale. Of recent highlights, HydrogenPro announced last Tuesday a partnership with Indian EPC and technology company Thermax. Our new production line in Aarhus is now fully operational, producing Generation III electrodes to the SALCOS project. ANDRITZ inaugurated its giga assembly plant for HydrogenPro electrolyzers in Erfurt, Germany. We completed the last transaction in the NOK 140 million equity raise by our partner LONGi , finalizing their contribution of NOK 70 million. We have improved and continue to lower the energy consumption for our electrode technology, based on the full-scale testing and new production line in Aarhus.
In the second quarter, we saw several European projects receiving EU funding from various programs and now initiating engineering studies and inviting to the tender process. Health and safety being on top of our agenda, it is satisfying to see the good trend continuing. The ACES project, as we call it, is now ready for hot commissioning and ready to start the first electrolyzers. I must say things are going in the right direction at site, and we will for sure hear more from them as they are progressing towards full operation in the next coming weeks and months. On the SALCOS delivery, we have delivered all components and assembly of the Generation II electrolyzers coming to completion. As some of you might remember, approximately 50% of the electrolyzer consists of Generation II electrodes and 50% of Generation III electrodes.
We have now started production of Generation III electrodes in Aarhus, which will be produced and delivered during the next months. ANDRITZ is demonstrating their commitment to the energy transition and having invested in a giga capacity line for assembly of HydrogenPro electrolyzers. The Salzgitter electrolyzers are currently being built now in the Erfurt plant. The new coating line, which is actually called line one, despite having one former smaller line, is now in operation. We are currently producing the Generation III electrodes for SALCOS, as I mentioned. It is encouraging to see the quality results from that line. It's high consistency and very good uniformity, which improves performance in the electrolysis process. The full-scale test last spring, we saw significant improvements, but some variations between electrodes produced in the old production line. Now we are eliminating any variations.
We're focusing on increasing productivity, but at the same time, expanding quality control and developing new and even better recipes for enhanced electrolysis performance. I'm happy to see that the new line is actually giving us a great platform for further improvement, driving down the levelized cost of hydrogen. Comparing various electrolyzer OEMs, few are documenting performance data based on physical measurements of energy consumption and produced gas volume. We have to recognize that measuring gas volume is difficult, as hydrogen is a very light gas and it's difficult to accurately measure the volume. This is one of several reasons why we, together with ANDRITZ, conducted a comprehensive full-scale test of the electrolyzer as we informed last quarter. The good result was physically measured and well documented as to where we stand.
It has also given us a unique insight in areas we can improve further to put HydrogenPro in the absolute forefront. With a combination of full-scale testing and a stable and uniform production of electrodes in the new line one, I will show you something very interesting. The main cost factors when producing hydrogen are the energy consumption per gas volume unit, measured in either cubic meters or kilos. The energy consumption is measured by the voltage in each cell. The graph I'm showing is illustrating the constantly measured cell voltage over time. There are three things we can observe. The first, you see a big gap between the upper curve and those below. The upper gray line is showing the cell voltage of what we call Generation II , and what we have delivered to, for instance, ACES project. They're uncoated.
The red line marked full-scale test is the result of the test I just showed you and produced on the original coating line, the old one, so to speak. There's a difference of 17% in energy consumption. The second thing you see is that all curves start quite low and are increasing in the beginning for them to flatten out. This is an immediate degradation effect you will see in any electrolyzer. Here, it is the matter of getting the curve as low as possible and to flatten out as quickly as possible. The third thing we can observe is under the red line. There are several lines close to each other, purple and green, each representing an improved new coating recipe for electrode plating.
We will not produce all these, but are now testing them out in lab scale for further and larger testing in September, October, in our stack test center in Porsgrunn. With these improvements, together with shunt current improvements we have developed, we will get down to record 4.5 kWh /m³ and hopefully even better. We will update you as soon as we continue our performance improvements. This concludes my first part of the highlights and recent developments. I will now give the word to Martin.
Thank you, Jarle. I will go through the financials for the second quarter this year. Revenues in the quarter came in at NOK 13 million, and these revenues mainly relate to the deliveries to the SALCOS project, to ANDRITZ, which is our customer. We are now ramping up the manufacturing in Denmark, and the remaining share of our deliveries to the SALCOS project will be delivered from Denmark during the second half of this year. Gross margin in the quarter was 22%, negatively impacted by some issues related to transport and storage on our delivery to the SALCOS project. Personnel expenses were down NOK 7 million versus the first quarter, mainly due to the fact that we now start to see an impact of the cost-saving measures. The EBITDA came in at NOK -48 million, compared to NOK -50 million in the first quarter.
Net financial expenses are driven by an NOK 18 million impairment of the convertible note to DG Fuels. DG Fuels has suffered some delays on their first project in Louisiana, and a fair value assessment has resulted in this impairment. The net loss in the quarter ended at NOK 76 million. Let's look at the development in the liquidity position in the quarter. The cash balance at the start of the second quarter was NOK 165 million and ended at NOK 107 million. The changes in the cash position were as follows: the EBITDA was NOK - 48 million, changes in net working capital of NOK -6 million, driven by an inventory buildup, and in the quarter, we recognized NOK 2 million of investments. The investment budget is related to the ongoing expansion in Denmark, and the investment budget was originally at NOK 70 million.
We have reduced it to NOK 60 million. By the end of the second quarter, we had recognized some NOK 35 million out of that, meaning that there is a remaining NOK 25 million to be paid during the second half of 2025. It is important to say the equity investment from LONGi is not reflected in the cash balance at the end of the second quarter, as that transaction was completed in July this year. The backlog was decreased from NOK 318 million to NOK 287 million. Cost discipline is very important to us, and we have initiated a cost-saving program consisting of three main elements: one being downsizing in Europe, reduced use of external consultants, and number three, reduced costs in our China operations, both in Tianjin and in Shanghai.
We have previously guided that we will take out more than NOK 40 million annually, and we are on track to deliver on that. As of the end of the second quarter, we have achieved more than NOK 25 million. In the second half of this year, we plan to take out an additional NOK 15 million, mostly related to reduced activity in our operations in China. That will place us in a position by the end of the year to take out more than NOK 40 million of annualized savings. I will now give the word back to Jarle, who will go through the market update.
Thank you again, Martin. In the last quarterly presentation, quarter one, I highlighted the three market geographies we are focusing on. We have a foothold in the U.S., which we maintain together with Mitsubishi Power Americas. Since the last quarter, we see that the projects are moving quite slow towards possible FID. The so-called 45V in the IRA policy was expanded with two more years, which is good, with the effect that the already granted project FIDs are being pushed out in time, as they have two more years to break ground and still get the incentives. The market is by no means dead, but developing slowly. Europe remains our main focus together with ANDRITZ. Tuesday this week, I announced our cooperation with Thermax, and thereby getting a foothold in India.
Our next step is to get a foothold in the Middle East, and I'll give you a bit further on the rationale for the three main focus areas. This is a busy slide, but in essence, describing the regions with most attractive prerequisites for hydrogen production. The world map in the background picture paints the attractiveness for hydrogen production based on cost-effective renewable resources. The green areas, we see countries and regions like India, Middle East, North Africa, South America, and Australia as the most attractive, in addition to parts of Scandinavia. On top of the attractiveness based on renewable resources, there are three main drivers as space for hydrogen production. Economics, obviously being one, that is production cost and competitiveness in the country or region itself, regulatory incentives, and obviously off-take.
Based on these drivers, we see that China is having the strongest prerequisites for the hydrogen economy with all three drivers in green. Other areas are coming up, much driven from low renewable energy in the own region, but based on off-take markets in Europe. Looking closer at Europe, infrastructure and distribution are key factors for driving demand. A 122 GW pipeline project has been announced with COD by 2030, also resulting in a compounded annual growth rate around 30%. This means that the projects are going into pre-engineering and tender requisites. We see competitive energy prices in countries like Spain and the Nordics, but higher production costs than, for instance, the Middle East and Africa. Europe has also the strongest regulatory regime to support the energy transition. Developers and strong EPCs like our partner ANDRITZ are taking position in this development.
Regulatory incentive schemes and funding programs have for long been unclear, but they are now taking shape, and as we have seen during the last six to nine months, we see more developers initiating engineering studies and tender invitations, with Spain and parts of Northern Europe in the forefront, together with Germany. India, after China, is emerging as the fastest growing hydrogen market. With some of the lowest levelized cost of hydrogen, due to attractive renewable energy prices, hydrogen becomes competitive to other energy sources. India is dependent on importing fossil fuels, and to lower their dependency of imports, get resilience and increasing self-sufficiency of energy production, and at the same time, reducing carbon emissions are now factors excelling the hydrogen projects. India is a very competitive market in all aspects. Public tenders, as we know, are seeing coming out, are limiting Chinese suppliers due to political climate.
Most of the off-take will be for domestic consumption, but the low levelized cost of hydrogen also opens up for export of, for instance, ammonia and biofuels. The Middle East and North Africa are two other regions with attractive prerequisites for hydrogen production. Renewable energy prices are among the lowest in the world, if not the lowest. Although the Middle East is a fossil energy-driven economy, we are seeing strong drivers for utilization of renewable energy. With an off-take not only for exports on low levelized cost of hydrogen, but also for domestic consumption, for instance, in refineries. After India, our next ambition is to establish a foothold in the Middle East. Thermax is a very good fit for HydrogenPro when entering the Indian market.
We wanted to enter the Indian green hydrogen market through a mid-sized, asset-light partner, but also with an already strong project pipeline and short timelines for execution. We have targeted partners open to a fair deal, enabling viability, and also even under tough conditions, as we see in India. Also having shared that we share the same common values and compliance. We preferred one with the potential to evolve in a low-cost manufacturing hub outside China. Leveraging current restrictions on Chinese suppliers in public tenders, we can also use assembly in Europe, but private projects remain open also to Chinese importers. The main collaboration spectrum or the key highlights that we see together in our cooperation agreements is, number one, exclusive rights in India for the alkaline electrolyzer system, including after-sales and upgrade. That means that Thermax will now supply on an exclusive basis our electrolyzers that we are manufacturing.
On the after-sales, they will provide the service, but we will then provide the upgrade and the electrodes coming from Denmark. We are together with local manufacturers and co-development of our gas separation units. As some of you know, we are not producing the gas separator unit ourselves, it has been outsourced earlier in earlier deliveries. We are the technology owner. We design it and we develop it. Now we will, based on our technology, modify it to the Indian market. We also have a deep technical collaboration on engineering and localization of other subsystems and components. We also have a provision in the agreement to possibly set up a stack assembly facility in India. There is a lifecycle support with O&M and refurbishment facilities if needed.
Right now, Thermax is setting up what we call a short stack test station, and that will be established to jointly develop an advanced solution for India and also possibly other emerging markets. The LONGi equity investment was completed in July this year, which enabled us to fully engage in the cooperation process. We are now together with LONGi working on a comprehensive strategic partnership program, which will cover all complementary areas, from manufacturing footprint to optimize the supply chain, throughout the whole value chain. With this cooperation, HydrogenPro will now have gigawatt delivery capacity from an expanded manufacturing footprint. At the same time, we are able to reduce our fixed cost base and avoid more capacity into the market. LONGi has a broader scope of balance of plants delivered than HydrogenPro currently has, which offers an area we see the potential of an expanded product offering.
HydrogenPro, on the other side, offers high-performing electrodes in Aarhus and European local content solutions together with ANDRITZ. As presented in my initial slide, HydrogenPro is focusing on core deliveries, which is marked with a square number one in the picture. Through our partners, it puts us in a stronger position in addressing the market, but also developing the technology. When HydrogenPro is focusing on development and offering of its core technology and equipment, the partners provide the full project scope for hydrogen production and risk sharing at levels that HydrogenPro would not be able to alone. To illustrate the type of partnership we are developing, common for all partners is that they are committed to energy transition and to hydrogen. They represent a broader delivery scope and give bankability towards the customers and have strong technical and engineering resources.
We will continue to maintain and develop all of our partnerships, foremost by broadening market and customer reach, but also on a broadened project offering and technology development beyond what we could have done alone. The model we have with Mitsubishi, ANDRITZ, and LONGi is an objective for all partnerships we are entering. With this, I would like to invite Martin back on the stage and open for questions. Thank you.
Revenues from FEED studies are zero now. Is it just a temporary or part of the strategy that only partners are responsible for gaining projects and HydrogenPro delivers the electrolyzers? What is the strategic rationale for LONGi to take stake in HydrogenPro?
On the FEED study revenue, it's clearly our partners being in the forefront. They are addressing the customers, and they are also having a large staff of engineers and service functions for field studies. It's natural that we share parts of it, and we will see that coming in the future, but not going into specifics right now. There was some more to that question.
The strategic rationale for LONGi to take stake in HydrogenPro?
I think we have explained both at the time of announcing the whole equity transaction back in January this year, and further also in the previous quarterly presentations. The rationale is that we see that there are synergies, as I explained, that we can take out. We see that we can optimize on the manufacturing footprint. We see that LONGi, for instance, from our side, is strongly engaged in solar projects, which we also see some of them expanding into hydrogen projects downstream. For LONGi's part, they also see that HydrogenPro has a strong brand and a good foothold in Europe and good possibilities for cooperation in that aspect. In addition, they value the technology and the development we have at our coating factory, electrode factory in Denmark. This is probably not an exhaustive list of rationales for the cooperation and the equity injections, but some of the most important.
Next question. What do you consider a long-term reasonable gross margin for HydrogenPro?
Yeah, of course, as you know, we don't guide on financials, but to put it in perspective, in the second quarter, we had a gross margin of 22%, and that was negatively impacted by some additional costs, mainly on the SALCOS project that was mentioned in the presentation. If you had adjusted for those costs, the gross margin, which is calculated revenues minus raw material costs, then that would have ended at 62%. Of course, the numbers in the quarter with activity level, it's very low, but that tells you at least that we are aiming for a considerably higher gross margin level than what we delivered in the second quarter.
Can you talk a little bit about the impairment of DG Fuels convertible notes? Are there anything to recover?
Yeah, so of course, when we publish financials, we do a fair value assessment of that note. That was a convertible note that DG Fuels entered into back in late 2021 to be part of, call it, to fund their first project in Louisiana. That project has suffered some delays. We have now reviewed it one more time and concluded that there is now a need to do an impairment of NOK 18 million. There is a nominal value of that of NOK 3 million, which we invested, and we have then made an impairment. In our books today, it stands at $1.2 million. We believe that's a fair assessment of the current situation where they're at.
What is the latest status on the electrolyzer commissioning and the startup at the ACES project?
Thank you. As I mentioned in the presentation, we are now right at the startup. It's taking place actually these days as we speak.
What is the status on the potential 100 MW new order from ANDRITZ?
The potential is there. We believe that this project will materialize.
Could you also give a short update on the status of the 100 MW project where the FID was due in June this year?
That was the same we just answered.
Another question is related to Thermax. Could you talk a little bit more on the test station with Thermax? Will the electrodes be produced in India?
Yeah. Now, the test station that we mentioned, that's in a relatively smaller scale size where we will test basically materials that we could use for certain components in the electrolyzer and see if either obviously giving increased improvement. It's part of our 30 bar development project that we have commented on before and also on the cost position if we, you know, as a supply chain matter. However, there will be no electrodes produced in India. The electrodes will be produced in Aarhus, and we will never outsource that type of production. What could be in the future when we see the market growing and we see also orders being placed, that we could, as we have in Europe, possibly set up an assembly entity in India.
We have time for two more questions. One is related to what do you see for HydrogenPro's business model going forward?
What I see as the business model is that we have the technology, we develop the technology. Going to market, we are focusing on the strongest regions to get a foothold there, in strong collaboration with strong partners who can cover EPC, can cover some technology, giving us as well technology development support, as we have seen strongly and successfully with ANDRITZ. We also now see with other partners taking place and providing, call it, stronger bankability to the various projects. Those being the main factors. The core technology and the ownership of the technology will remain with HydrogenPro.
Last two questions. Could you also please give a short update on the development of a pipeline?
Martin, will you comment on that? I think we have said before, it's pretty stable. There are obviously projects which are canceled or delayed so long that we do not count them anymore. At the same time, as I mentioned in my presentation, there are projects now that we see coming in, requests for tenders, where we have given tenders and where we are in further discussions. Plus and minuses are remaining basically the same, which is the reason why we didn't show a pipeline figure this time. Anything more?
Yeah, and as Jarle said, which translates a bit into our business model as well. I think Jarle alluded a bit to it through the presentation today, but we are still sort of with a lean setup at HydrogenPro. We are still able to reach, to actually pursue projects on a global scale. That is why we see now some, call it, tailwind and increased activity on tenders in Europe. Our business model allows us also to go into new markets. Now we announced with Thermax. We believe that the Indian market could be very attractive during the next few years, maybe even shorter as well. Now also moving into the Middle East, we see significant opportunities in the Middle East. We believe with our, call it, partnership strategy, that we are in a very good position to also then move into that region to take a large position there.
Thank you. In case you have further questions or your questions are not directly answered in this sending, you are welcome to contact us.