Earnings Call: Q4 2019

Mar 5, 2020

The content of this presentation follows the normal order. We'll go through the highlights of the quarter, and we'll talk a bit about Nel in brief. We'll talk about key developments within the company, but also key developments in general in the industry. We have introduced a section where we would like to give you an update on our investment program. We recently raised some money, so we would like to talk a bit about that, and also give you a status on the expansion, which we are currently working on at Herøya. We will obviously finish off with a summary outlook and questions. Let's start with the Q4 highlights. When we did an equity raise earlier in this year, in January, we issued a trading update, and we are reporting exactly accordance to the trading update, maybe with the exception of the top line, which is a bit better. The pipeline that we have now and other activities are all-time high, and we have a backlog of NOK 500 million, which is actually more than 50% up from the same period last year. We had another busy quarter, especially within the fueling part of our business. We got two station orders from Korea. We got multiple orders from Netherlands, two from Europe. We sold a fueling station solution for taxis in Copenhagen and Denmark. We also received a purchase order for a 3.5-megawatt electrolyzer from ENGIE. We established a JV together with some good partners here in Norway to fuel or to produce renewable hydrogen, green hydrogen, to fuel my trucks. After the quarter end, we raised some capital. We have done some changes to our management. The 1st of March, Helge Sandbjørnsen, which is here, took over as CFO. We also hired Philip Schmitz. Philip Schmitz is taking over the electrolyzer division. Philip Schmitz has an interesting background because he's been within the industry for many years and has actually headed up the electrolyzer piece in Hydrogenics. He brings a lot of industry knowledge into the company, which is good. Finally, we received the purchase order for the MC200 containerized. I'll talk about most of these topics through the presentation. If we move over to the financials, as we communicated last year, if you remember back, we said that the revenue growth would be more stronger in the second half of the year, and that's basically also what we are showing. We are happy with the year-over-year growth of more than 40%. With the NOK 176 million top line, we are posting an all-time high for a quarter, which we're quite happy with. In terms of moving into next year and the first quarter, you should expect that this is maybe more for the analysts in the room. You should expect that we typically have a back-end loaded year, so a slower start in any typical year. EBITDA will still be negatively impacted by ramp-up and other related costs. This quarter, it was about NOK 16 million. We will continue to see that, especially since we will continue to support our expansions. Now it's Herøya that we're focusing on and carrying costs in relation to. On January 21st, we raised gross proceeds in the private placement of NOK 845 million. It is increasingly important for us to have a strong financial position, and there was an overwhelming interest for the transaction. I believe we were approximately 2.5 times oversubscribed, so we are happy about that. These funds, I'll talk a bit more about that later, but these funds will be used to accelerate both developments of the organization, but also developments of our technology. We do plan a repair issue if everything goes according to plan, and you will receive more information about that in the coming weeks. In total, this should give us a good cash position, a financial position, going forward for the plans that we have. We continue to receive new listeners. We now have more than 24,000 shareholders. I think it increased by more than 7,000 last year. Just since New Year, we have another 1,000 shareholders. I will need to keep repeating some of these messages, even though many of you in the room here have heard this before. Nel is a pure-play hydrogen technology company. What makes us unique is that we have an integrated model where we have production equipment for hydrogen. We also have fueling station equipment. In some cases, we put these together and service the customers with a combined solution. We have both PEM and alkaline on the electrolyzer side. We have a good coverage over the different technology portfolios there. We have fueling station solutions for cars, buses, trucks, and other applications. That is a unique position. We do develop our technology in-house and we do take continuously steps on those elements. We have an increasing global position. We have production facilities in the U.S., in Denmark, and in Norway, and we now have people in the relevant markets. I would say we have people in California, in Korea, in Japan, even in China, and other relevant countries. We are the largest electrolyzer manufacturer, and we have sold 3,500 systems over the years. We also are one of the leading in fueling stations. We now have, it says 50 stations, but I think we need to update that figure, in nine countries. We have deployed stations in nine different countries. As mentioned, we have three main production facilities. We have our PEM facility in Wallingford, Connecticut, in the United States, approximately 40 megawatt plus. We have our alkaline facility in Notodden/Herøya, because we are now present in both locations, where we are currently expanding to 360 megawatts as the first step. We have our fueling station facility in Denmark, where we are capable of producing 300 stations per year. We also have a unique element that we have a various long history in these areas, and that is a benefit to us, when we're now accelerating and moving into new markets and advancing our technology. We have 20, 30 years experience in PEM. We have more than 90 years experience in alkaline, and we have more than 15 years experience in fueling stations. We do have equipment deployed in most places in the world. When you talk to a new customer, you can always tell him to go and visit an existing customer, and they can come and see the equipment up and running and talk to the user of the equipment and become familiar that way. That is also quite unique, and we see that is increasingly important, because many of the companies that are really working on the big-scale projects, they would like to see some experience. They would like to see equipment that has been sitting in the field for many years, so that they know that the equipment will work, not only after it's installed, but also after 10 years and 15 years and 20 years. Let's move to some of the key developments. We start with Nel-relevant developments. In terms of purchase order, as I mentioned, for fueling stations, this was a very solid quarter. We got a lot of station orders. We received a couple of station orders from OrangeGas, which is a Danish-Dutch alternative fuel company, which are now developing and opening several stations around in the Netherlands, EUR 3 million. We got two station orders in Europe from an undisclosed customer for the time being, EUR 2 million. We got a PO for a fueling station solution for taxis in Copenhagen from our partner Everfuel. We also received an additional two purchase orders from Korea. For this part of the business, this was a very strong quarter and if we then finish with Korea, last year, summarizing that, Korea or 2019 was really a breakthrough year for Nel in Korea. We got two stations in the first quarter from Gangwon Techno Park, followed by six stations from KOGAS-Tech, followed by another four stations from HyNet in Q3 and Q4 respectively. That was a very strong quarter. As you know, the Korean government has 310 stations as their target by the end of 2022. HyNet has said that they would like to be responsible for 100 of these 310 stations. As you know, we are a minority shareholder in HyNet. It's important to note that we are selling both inside and outside, and that I think is very encouraging. Here you see some picture from our office in Korea. We signed an interesting contract for three and a half MW alkaline system with ENGIE, a big energy company that are also working on multiple other projects. This one is supporting the collaboration that ENGIE has together with Anglo American that would like to introduce CO2-free mining dumper trucks. This particular mine is located in South Africa, and it's extracting platinum. Platinum is a key ingredient also in fuel cells. It's a kind of a bit of a symbolic effect here also. We believe that this could be a very important segment, and this clearly represents a new segment with heavy-duty application. This is truly an heavy-duty application. The dumper truck is already diesel-electric. It means that the wheels are already powered by electric motors, but it has a diesel generator inside. What they're doing here is that they're basically removing the diesel generator, and they're implementing a 1 megawatt fuel cell instead with the associated tanks. The other interesting part is that this dumper truck is obviously running 24 hours, and it can consume up to 900 kilos of hydrogen per day, which is quite incredible. It's like a small ferry, basically. That's the amount. A bus consumes 25 kilos a day, this consumes 900 kilos. If you were to cover this with batteries, you would have to load it with 15 tons, up to 15 tons with batteries. Obviously batteries is out of the question. You need hydrogen to be able to do this. Globally, there is about 50,000 mining dumper trucks. Many of the mining companies have expressed clearly that they have targets to contribute to the CO2 reduction. We will keep our eyes on this market and see whether we can do more when this moves on. Just a few days ago, we got an order for an MC250 containerized PEM electrolyzer. This, if you remember from last year, this was a product that we officially launched last year. And we received quite a lot of interest for it. This is the first order. I don't think it will be the last. In this particular case, it's a company called Trillium, which is located in Illinois, that is going to use this, and they will fuel a fleet of 12 buses. That's their target. This particular project has also been supported by DOE, Department of Energy in the United States, and has a contract value for us for approximately $2.2 million. We also signed a collaboration agreement yesterday with Kværner, and this is to support very large projects. Kværner is obviously an EPC and project management company. They have a lot of competence, both with offshore and onshore. We are a technology supplier, but together we can focus on very large projects and make it easy for the end customer to really install a credible, very large project. That is good. We can also tap into, potentially, the supply chain that Kværner has pre-qualified, which is a global one, in terms of selected balance of plant elements like skids and steel frames and pipes and vessels. That is something that we will keep exploring. It will help to accelerate and reduce the cost of these projects and also de-risk larger projects. I think this is going to be an important partnership. We have already started the work. We started in January. The first step is to standardize the building blocks. We're standardizing a 20-megawatt building block, not only the design of the electrolyzer solution, but also the way that we install it. This has not been done before, so we are prefabricating the bits and pieces surrounding the electrolyzer together with Kværner, and we are thinking, how should we design these prefabricated pieces so we can install it quickly and safely at a new site. We start with the 20 megawatt, then we move to 100 megawatt and 200 megawatt building blocks. That is quite an interesting journey that we have. We are establishing a common team together that are working on these solutions together. Then there is a long list of projects that we need to start to look into when this moves forward. We will talk a bit about industry developments also. There is a lot of news. First of all, we do see more and more evidence that confirms that renewable hydrogen is going to outcompete fossil hydrogen. The cost of renewables is going down, and as the cost of electricity represents 70%-80% of the cost of renewable hydrogen, it is clear that also cost of renewable hydrogen is going down. On top of that, equipment is going to be cheaper and cheaper, as we have talked about, and that means that we are eating our way into the fossil hydrogen market at the same time as the total market is growing. All of that is good. We see it both within mobility, especially in heavy duty, but we also see it in industrial applications. This is further evidenced by a number of announcements that you also pick up every second day. The initiatives that we wanted to highlight here, in particular related to mobility, is the Hyundai initiative into Switzerland and also into Norway. We have the Anglo American that we saw and talked about a bit earlier on the dumper trucks. We have the collaboration between Nikola and Iveco that are moving into the European market. On the industrial side, we also see a lot of news from big players. Ørsted has announced initiatives in this space. Nouryon has announced big initiatives. The last one was Shell and Gasunie, probably the biggest initiative we've heard about so far. Then obviously Yara and SSAB, et cetera. There are more and more evidence that this is gaining speed and momentum. We also see large industrial gas companies and large industrial companies taking a position in the industry, which is another evidence that things are moving. We saw Linde taking a position in ITM and in Hydrospider. We saw Air Liquide take a position in Hydrogenics and FirstElement Fuel. Previously, EDF has taken a position in McPhy. Weichai has taken a position in Ballard, and Cummins has taken a position in Hydrogenics. The big players are trying to position themselves in this industry, and Nel is now one of the few companies which are truly independent. We try to do this stuff ourselves, and that's also one of the reasons why we raised capital earlier this year. During the fourth quarter 2019, we also got a strong signal from the European Union when the European Commission announced the European Green Deal, net zero global warming emission by 2050. We saw that only yesterday. They are stepping up their targets to even accelerate this more. We saw the commissioner, Frans Timmermans. Frans Timmermans was talking about how is Europe going to execute and achieve these targets? He said one very important thing, which we completely agree with. He said that this is not possible without renewable hydrogen. Hydrogen has to play a role if Europe is going to achieve these things. Simultaneously, the European Investment Bank agreed to phase out fossils within the next two years. The European Investment Bank wants to be the first climate bank. We clearly see that the capital market is running fast. The capital market is running faster than the politicians, and I think there is enough evidence to say that we believe that this is going to be big. I remember, for comparison, three, maybe four years ago, we were talking about if hydrogen cars in Norway would create ice on the road. That is how much this has changed over the last three years. It is quite interesting to think, look back at. We have to also mention the achievement from ASKO and congratulate them on launching their fuel cell delivery truck in a collaboration with Scania. This truck has 500 km range and can do all the routes that is necessary in the distribution of goods. It can refuel in five minutes, and it is the first of its kind to be launched in Europe. So that is good. As you know, we have supported ASKO with all of the fuel hydrogen-related equipment. There is a lot of news to pick from, but we decided to highlight this one, which I think is also interesting. It's Kawasaki Heavy Industries that launched their ship on the 11th of December last year in a big celebration. It's a liquid hydrogen ship that is going to hold about 100 tons of liquid hydrogen in each load. 100 tons is not that much, so it's only a start. They're obviously already developing the next ship. This will be used to import energy to Japan. Japan wants to have not only energy coming from the Middle East, but they also want to have other energy sources, and they target to import liquid hydrogen. Initially, they will start to import from Australia, but other companies may come over time. If you remember back and has followed us closely, you may remember the HYPER Project. The HYPER Project was concluded in December last year. The HYPER Project, Nel was participating together with a number of other big players, also SINTEF and Equinor and Kawasaki and Mitsubishi Heavy Industries. We were, in this project, looking at the possibilities for delivering renewable liquid hydrogen from Norway to Japan and generating liquid hydrogen here in Norway based on renewable energy and exporting it to Japan. Obviously, these type of projects will take a lot of time, and they may not even ever happen. It just goes to show some of the perspectives that some of these big players have related to the topic of hydrogen. Obviously, we need to congratulate our partner, Nikola, for yet another great milestone. We are very happy to see that they have secured more than $500 million from an impressive group of institutional investors. That is really strong, and it obviously further de-risks and validates the business case. As you know, we are big fans of Nikola, and we will do whatever we can to make sure that they are successful. It also shows that there is an increasing appetite for investing in this sector, so to speak. We also want to share some more information related to our investment program with you and the Herøya expansion, in particular now when we have raised capital recently. One of the reasons why we raised capital in January is that it is increasingly important to be financially strong counterparty. Why is that the case? Well, because the projects are getting bigger, and the counterparties are getting bigger. It's not only someone off the street. It's big international companies. We need to show our ability to deliver technology and solutions and equipment. We need to be able to show our ability to deliver on these large projects. We are also trying to make the projects bankable. As you saw in the solar industry, it's pretty much the same development. You start with ad hoc projects, but over time, you want to try to make them bankable. You want to try to make your customer make the project easy to finance. You need to be able to prove that the execution of these projects are going to be smooth and low risk. You need to prove that equipment can run for many, many years. Since we have a lot of equipment sitting out in the field, we can also provide a lot of security on that and potentially also guarantee uptime, et cetera. That is basically what we are working on. We are preparing that these larger projects are going to come. We also further need to accelerate our investments in both technology and organization. We fundamentally believe that the market for renewable hydrogen is going to become massive, both within industry and within mobility, as we talked about today, and we are preparing for this scenario. Accelerating these developments will hopefully ensure that we will not only maintain but also maybe accelerate our competitive advances. We will accelerate developments both within electrolyzers but also within fueling equipment. We talked about some of the developments within electrolyzers, the standard building blocks, 2,100, 200 megawatt, but we also need to accelerate our developments in terms of fueling capabilities, fueling faster, developing our compressor technology, developing our cooling technology, and all the relevant building blocks. These building blocks will be relevant in many markets. We are standardizing making building blocks that we can put together and which will be relevant in more and more markets. Then we need to develop our organizations to be able to execute on these large projects, also together with EPC companies like Kværner. As an example, when it comes to the Norwegian electrolyzer organization, if I look back one and a half year, we have now tripled the number of people in that organization. They are continuing to develop and move and work on and preparing for the expansion, which is going to happen in that area. On that topic, if you were to talk a bit about our Herøya expansion, when you put good people together and you ask them to work systematically on a topic, you sometimes can expect that you find improvements that you had not predicted. That is also what happened and is happening with our expansion project at Herøya. The team has now analyzed the production process down to every nitty-gritty production step and basically set production parameters and defined these, and some of the production steps have been combined, some of them has been removed. This we do before we automate. If you understand the difference, the easiest you can do, which is still difficult, is to just automate what you have. You take the exact production process that you have, then you automate it. You get a lot of improvements. If you can first reevaluate your total production process and then follow that up with automation, you get the extra step up of improvements. This type of fully automated production line for electrolyzers has never been seen before, that what we are doing here. It's a fully automated chemical line with robot cells that is supporting the rest. We do expect that we are able to cut cost further than we initially had thought to make our business case even more robust. Given that this is completely new and it hasn't been done before, we are also seeking Enova for support for this full-scale pilot production line, the first line. They have indicated that they are positive, but we obviously need to talk and come back to you later when and if that is concluded. Where we initially thought that we had 360 MW capacity per line, we think that we can get significantly more out of each line now. We also have a facility at Herøya which can facilitate at least three lines. Maybe we can squeeze in a fourth line, and that means that we have capabilities to support or to produce more than 1 GW, significantly more than 1 GW from this facility. In terms of cost reductions, we have said that we will approximately cut the cost in half in the beginning, but we do think that we can significantly cut the cost beyond that when we continue to develop and continue to expand. That is good news because it will help us to ensure that renewable hydrogen will outcompete fossil hydrogen. With that, I will move into the summary and outlook before we open up for some questions. We continue to focus on our six core points. We have made, I think, quite some progress on four of them, and I would like to highlight that. First of all, safety is the most important. We continue to focus on world-class safety. In terms of cost leadership, we have taken steps, and we continue to take steps to identify further potential, and I gave you some examples just now. In terms of being a technology frontrunner, we do think that by accelerating development in technology and individuals, we will strengthen that position. Through our partnership and the way we work with EPC and with Kværner, we think that we will strengthen our ability to be the preferred partner in large projects. Obviously, through the private placement, we secured more financing and do now think that we have a strong financial position. We are happy with the progress that we have made in these areas over the recent months. In terms of outlook, overall, we do expect that the market will grow significantly for renewable hydrogen. As I said, renewable hydrogen is on a trajectory to outcompete fossil hydrogen in industry applications and mobility application. To maintain and increase our position in this growing market, we want to increase our investments in both organization and in technology, and we continue to develop both PEM and alkaline, as well as fueling into standard building blocks. In terms of EBITDA, we will continue to be negatively affected by ramp-up activities. In this case now, particularly Herøya is contributing to that. For the analysts, when you look into 2020, remember the way that is typically loaded, first half versus second half. Before we open up to questions, we have decided to have our first capital markets day during the second quarter of this year. We have found a location, but we haven't exactly decided on the date. We will come back to that, but it will be in June. We will give you a technology deep dive. It's time that we do that. We will talk about some of the strategic elements that we see. We will also talk some business development elements, and we hope to also have some guest speakers that we are working on. Follow this space, and we'll come back to you with the exact date a bit later. With that, I think that concludes the presentation for now. With that, we can open up for some questions. We have Bjørn sitting in the front here, as usual, taking questions both from the room but also from the web. Maybe we need to warm up with a question from the web. I don't know, Bjørn, what do you think? Yeah, we can do that. There is a question here from Bob Lawson. Are you expecting COVID-19 to affect short-term strategies and overall Nel-related business? That's a good question. We have thought about that quite a lot. There is a risk that we will be affected, not in the sense that we are relying on a lot of imports from China. We are obviously located in markets in different parts of the world where they can have a slowdown in some of the projects. We haven't seen it yet, but I don't think that we can rule that completely out at the moment because we don't know which direction this is moving. Do we have any- Any questions in the room? Should we. Let's go for another one on the web. There is one from Lars Paulsson. Do you work closely with any research communities, i.e., universities, to develop your technology further, or is all R&D done in-house? We certainly do work together with institutes, universities, not only in Norway, where we use both SINTEF and IFE, but also in other parts of the world, in Denmark and in the U.S. We cannot have all the resources internally. That doesn't make any sense. There are many elements which are so specialized. Certain materials, for example. You can have a development package, and you can externalize that, and you can use a local institute to dig into a particular topic. We obviously need to integrate it into our solution. The answer is yes. Let's go for another one on the web from Mickey Newalt. Thinking about prices per kilowatt for electrolyzers, how have these developed in the past five years, and how are pricing discussed in current and future contracts? It's clear that the prices have gone down and will continue to go down. I think for us, what we do now is that we have quite a concrete roadmap for where the cost is going to go. We also have a roadmap for where the capacity is going to go. Then you can start to think about how do I position myself forward? I can in principle, in theory, I could sell forward. I can sell 500 MW delivered in 2024 at a completely different price than I could last year. That's the way that we think about it, at least. We do know where the cost is going to move, and we do already now try to load the factory by talking to customers about thinking forward. If Mickey wants to have more details on exactly the price developments in different parts of the world, I'm sure that we can talk about that, but I don't think it makes any sense in this forum. Jackie Holman, E24. Can you say something about the finances in the long run? Could it be necessary to bring in more money in the long term as you invest more in the business? We don't see the need for that now. We have a very strong financing position. As we say, you never know what kind of opportunities you will see in the future. To be able to execute on what we have as plans now, we are very comfortable. Okay, do you want to take another one, or should we conclude? There is one here. There is another one here. Scott Pagel from Gradient. Given the fall in the levelized price of electricity, when do you see that inflection point where production from green hydrogen starts to outperform fossil fuel-based production? To simplify this, we introduced two key points. We've said that if you can get renewable electricity for NOK 0.05 or less, you outcompete petrol and diesel and mobility applications. NOK 0.05 or less is the key trigger for mobility. When it comes to industry applications, it's a bit tougher. The electricity price needs to be NOK 0.03 or less. When you have NOK 0.03 or less on access to renewable electricity, you can outcompete fossil in industrial applications. That obviously assumes that you follow up with the plans that we are doing in terms of cutting costs of the equipment. If you combine those two, you will see that you get to a price of renewable hydrogen between NOK 1 and NOK 2, and that is extremely competitive in many areas. The question is more, where can I find renewable power at these levels? That's why many of the big industrial companies now are looking at the globe, and they are looking at, okay, where can I find a lot of wind and solar, especially in combination? They're looking at the wind and solar map, and they're looking at the globe, and you may have heard a lot of news from Chile, for example. There are a lot of initiatives on renewable industrial hydrogen in Chile. Ideal conditions for wind and solar in combination. It's just one example. NOK 0.05 and NOK 0.03. Okay, I think we will then wrap up. Thank you very much for everyone here. Thank you very much to everyone that is following this over the web. We welcome you back in the beginning of May and then in June for our Capital Markets Day. Thank you.