Nel ASA
OSE:NEL
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Nel ASA
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[Call Starts Abruptly] I am the CEO. With me today, I have our CFO, Kjell Christian Bjornsen; and Head of Investor Relations, Wilhelm Flinder.
As I know, many of you are on vacation or having a summer break. I will skip the Wilhelm brief part this time and jump directly to the second quarter highlights.
In the quarter, we had NOK475 million in revenues. That's more than double of what we generated in the same quarter last year. EBITDA improved to minus NOK138 million, still has the wrong sign in front of it, so we have a job to do, but it's an improvement year-on-year. Order intake, NOK428 million, bringing the order backlog to close to NOK3 billion at the end of June. And our cash balance was NOK4.1 billion. In the second quarter, a couple of key developments. First of all, we concluded the site selection process, where we selected Michigan as the location for our next Gigafactory.
And we also received a record-sized contract for 16 fueling stations in California worth $24 million. And then we've had a couple of eventful weeks following the closing of the second quarter. First of all, we were granted $5.6 million in funding from the U.S. Department of Defense for accelerating our PEM stack development. Then Friday last week, we announced a EUR9 million contract for alkaline stacks and balance of stacks with Haydock in France. And yesterday, we received an order for EUR11 million for alkaline stacks to Bondalti in Portugal.
If we look at the financial highlights, revenue and income up 160% versus last year. EBITDA improved from almost NOK200 million negative to negative NOK138 million. EBIT is also improved, and then the pretax loss increased due to a reduction in the value of some of the securities that we hold in other companies. So, the fair value adjustment to those holdings brings the results down, and this will fluctuate from quarter-to-quarter. But if you look at the operational performance, it's definitely a step in the right direction.
Also, if we look at the year-to-date results, we see the strong momentum, more than a doubling of revenues, up 110% versus the first six months of 2022. EBITDA improved by almost NOK100 million, and EBIT also improved by NOK60 million. To add some color to that, maybe let's look at -- let's look at the segment financials. If we start with the electrolyser division, we are up 200% on the revenue side in the quarter. EBITDA is significantly improved, also the margin from minus 64% to minus 12% so we're getting closer to where we want to be.
Order intake, despite having very few or actually no announced orders in the quarter amounted to NOK229 million. And bear in mind that we increased the threshold for announcing contracts, which means that some of the contracts we received for smaller electrolysers and industrial products are not reported. Still it's good to see that we're up 25% despite receiving no large orders in the quarter.
The order backlog in electrolyser is strong at NOK2.5 billion. And also, if you look at the year-to-date results, revenues are up 132%. EBITDA, again, improvement of NOK60 million and a good improvement in margin, and also the order intake is more than doubled compared to the first six months of '22.
Fueling up on the revenue side compared to a weak second quarter 2022, EBITDA somewhat improved in the quarter, but still big losses. Order intake driven by the contract in California increased to NOK200 million. And the order backlog also then improved to close to NOK500 million.
Year-to-date, we're up 50% on the revenue side. EBITDA has improved as a consequence of cost reduction measures and other initiatives we are working on to improve the underlying performance Order intake strengthened on the basis of the California contract, but we continue to be negatively impacted by high warranty costs and increased utilization of stations on fixed rate service contracts. Some of these contracts will be terminated and improved, but it will take time for the performance to further improve.
What's good, though, is that this contract that we received proves that there is a market for fueling equipment. And despite some of the challenges Nel has and the industry has on the fueling side, there are customers out there that still want to do hydrogen fueling stations and are betting on the future of hydrogen as a fuel, not only for personal vehicles but maybe, more importantly, long term for the heavy-duty vehicles.
And then I forgot to mention one thing. If you look at the electrolyser side, and given the high increase in revenues, one might have thought that the EBITDA actually would have been even better. The reason that we are at minus 47% and not more of the top line is flowing through to the bottom line is that we do have still a lot of the contracts signed in 2021 that we are working on, and they impact the margin negatively.
Some of these contracts did not have pass-through clauses on materials, which we now have. Some of the contracts were not currency hedged, which we now do. And as raw material prices have increased significantly compared to when these contracts were signed, and also currency has fluctuated quite a bit and we continue to see postponements and delays on the execution of the projects, we're not making a lot of money on those projects. On the contrary, we are losing money.
The impact you see, the improvement versus last year is, of course, related to some of the newer contracts where we have solid margins and also hedging mechanisms. And that means the revenue on the larger, newer contract flow through to the bottom line and impacts EBITDA positively. We expect that these, let's call them, all legacy contracts will be with us also in the second half of '23. We were hoping that we could finalize most of them in the first half, but we do see that it will take more time to complete them, and we will have them in also the second half of '23.
Important, though, they will become less important over time as more of the, let's call them newer profitable contracts start to hit both the top line and the bottom line.
The order intake and backlog. I think we've commented on that. But it's important to note that order intake will fluctuate from quarter-to-quarter. Second quarter was, besides the contract with the U.S. energy company for 16 fueling stations in California, uneventful. We had few contracts. If you look at the third quarter, we've already started with two nice contract wins in the first couple of weeks. So, order intake will fluctuate from quarter-to-quarter. It's not going to be a steady linear trend. And that, of course, also means that the order backlog, which we do think will continue to grow quite consistently, but the magnitude of the growth will vary from quarter-to-quarter.
Let's talk about the commercial developments in the second quarter. First of all, we are on track with our capacity expansion plans. The second line at Heroya is on track to be completed in April 2024, meaning we will start to produce commercial volumes in April 2024. We will then have roughly 1 gigawatts of capacity available, and we can double that again to 2 gigawatts if we get additional large-scale orders that require more production capacity.
We are also on track with the expansion and automation in Wallingford. It's not only about increasing the size of the plant, but it's also about improving the manufacturing process for production of PEM stacks. We are on track to increase that to 500 megawatts by 2025.
Also, the process to select a site for a new Gigafactory has been concluded. We chose Michigan. Has attracted a lot of interest in the U.S. and also in Europe why Nel decided to build that factory in the U.S. And as we've said, it's not only because of IRA and support mechanisms, but we go where we see demand. We expect a lot of demand from the U.S. We want to be close to DM as an important production and development partner for Nel.
And we also received quiet, let's call them, nice subsidies from the state of Michigan to help us build this factory at a cost competitive price.
We will also continuously evaluate the need for additional Gigafactorys, be it in Europe, be it in Asia, be it in North America. And as we have our production concepts ready. Bear in mind that we have now run our production line at Heroya for more than a year, almost two years, we've tested this technology and the production setup, we brief down [ph] the tiering issues. This runs nicely, we can copy-paste that production concept. It's the same thing we're doing regardless of where we built the next Gigafactory. We have the production concept, the package, and the know-how to construct it. So, I think that Nel is among the companies in the world that can build new capacity with the shortest timeline.
On the PEM side, we're doing the same thing. We're installing a new -- or building a new production line in Wallingford, Connecticut, close to our R&D environment. And then we have a production concept that we can bring to the new Gigafactory or anywhere else in the world. This derisks the expansion plans and also, of course, gets the cost down on further expansions.
When it comes to the fueling contract, we disclosed I think some months ago that an undisclosed U.S. energy company, it's a bit unfortunate that we cannot name the company, but I guess we can disclose it a bit later. But it's a sizable U.S. energy company that has placed an order for 16 station modules with a value of close to USD24 million. We announced that a few months ago when this client placed a capacity reservation contract.
And what you can see as addition to our backlog then is the difference between the $24 million and the previously announced $7 million. The order intake then booked in this quarter is $17 million. These fueling stations will be deployed in California, which has the highest density of hydrogen fueling stations. In the U.S., it's expected to have positive financial impact for fueling. The contract itself is solid. The performance metrics and the service and maintenance aspects around two contracts are significantly improved for Nel compared to what we signed earlier. So, we've learned from some of the mistakes we did in the past.
And it's also aligned with our new strategy to focus on large committed clients in specific regions. We're not going to be all over the world. We're not going to sell single stations here and there. We will focus on larger batches and orders with clients that can grow and expand with Nel. We estimate to start deliveries in the fourth quarter this year, and then it will continue into '24 and potentially the final installations will be done in '25.
We have not disclosed this during the quarter. Again, as we increased the threshold for announcing contracts, this didn't pass the bar. But if you add them up, we had a total order intake in the second quarter for containerized PEM products of $7 million, two contracts. And we see that we have now a lot of these contracts and requests coming in for smaller units, the containerized PEM solutions, and it's a full scope setup where it's a modular setup, quick to market, easy installation. We see that the demand is increasing and that the time from the first discussion until we sign the contract is significantly shorter than it used to be.
So, this is a product that sits well with the market. It comes in two sizes, a 1.25-megawatt solution, and the 2.5-megawatt solution. This is a nice package for smaller applications, for example, generating hydrogen for mobility applications. We expect this product to grow in importance going forward.
Then subsequent to the second quarter, we got some nice contract wins Friday last week, we signed a contract Hyd’Occ for a 20-megawatt project in France, worth EUR9 million. Scope on this contract includes stacks and balance of stack the gas separation system. Hyd’Occ is a French renewable energy producer -- or actually the French renewable energy producer, Qair, is the main shareholder in Hyd’Occ and the local government is also an owner in the project.
The project will supply hydrogen to local industry and also mobility applications in the south of France. It's a firm purchase order, as I said, for stacks and balance of stacks, and we plan to deliver the stacks to the client around the end of 2023.
Then yesterday, we received a 40-megawatt contract from Bondalti, a large chemical, or actually the largest chemical company in Portugal. Order value is EUR11 million. If you compare this to the previous one, this is for stacks only. The electrolysers will be used to increase Bondaltis' hydrogen or green hydrogen production to further decarbonize their operations as well as cater to other applications such as long-haul transportation and injection into the gas grid.
The facility is expected to commence production in the beginning of '26. The client has also contracted Wood as the provider of the FEED study, which we have worked closely with in the past as one of our EPC partners. And we expect this to then impact our 2020 for results, meaning we will do the production of the needed equipment in '24.
We also got a nice funding from the Department of Defense, close to $6 million, for further developing the PEM stack, reducing, operating, and capital cost of PEM electrolyser. It's an option linked to a previous contract we received, meaning in total, we have received $11 million from the DoD to develop our PEM stacks.
On the public affairs side, we have been elected into the Board of renewable hydrogen coalition. Olivia Breese from Orsted. She's the CEO Power-2-X Orsted. She will take the position as Chair, and then I will represent Nel and be the Vice Chair of the Renewable Hydrogen Coalition. The renewable hydrogen coalition tries to promote green hydrogen is working to promote green hydrogen in Europe. And while the EU has made significant progress in establishing a legislative framework, we still have a way to go until we have a level playing field with, for instance, China and North America.
The Renewable Hydrogen Coalition will then work to effectively nurture European interest, secure funding for pioneering projects secure stable working conditions for European companies, a fair value chain setup, and mitigate early-stage risks for project developers.
Going towards the conclusion then, or a summary, I would like to say that we commented on the fact that smaller products are becoming more standardized and we can go faster to market with some of these projects. On the other hand, the bulk of what we are working on are now large-scale projects. They are not 20- megawatt, 40-megawatt contracts, they are in the hundreds of megawatts, even gigawatts that we are looking into.
These large-scale projects obviously have higher complexity than small-scale projects. It has to do with the infrastructure around it. It's not just the hydrogen plant, it's also the end-use application, be it for green steel, be it for ammonia for methanol for refinery. Interestingly enough, some of the customers we are working with are also exploring a mix of different technologies. They want to use the alkaline technology for the baseload, where they can really piggyback on the low CapEx and OpEx of the alkaline technology in combination with PEM for the peak periods where you have excess solar and wind capacity, and you can easily ramp up and down hydrogen production capacity.
Nel is in the fortunate position that we can offer both technologies. We have the opportunity to offer a hybrid solution, but to work out exactly the split between the different technologies and how these technologies should be combined in the optimal way and also for the customers to secure offtake agreements on, not small quantities of hydrogen, but really high quantities of hydrogen, game-changing quantities of hydrogen, takes time.
And add to that, the need for financing billions and billions of euros for the total project and also the uncertainty around funding, at least in Europe, how much of the investment will you be able to get funded. It means that it takes time from you start initial discussion until you have a contract signed. It increases the overall risk for the project developers as well as the technology provider. We need to know that we're committing to a project that has legs that will actually happen. The customer places a large order with one company, and Nel’s in over that company can deliver.
So, time lines are affected as project developers are working to increase project quality and derisk the projects and also on our side to plan the delivery schedules and make sure we can ramp up fast enough. All in all, this is good news. I mean this is what we're after. We're not after the small projects. We're after the really big ones. And we can see that our pipeline is now being filled with large-scale projects.
We expect these projects to come Nel’s way because we are positioned for large-scale market leadership. With the increased size, complexity, and risk, there is a need for competence and experience because it increases exponentially with the size of the project. What makes Nel unique is that we have an unrivaled track record. We have decades of experience providing hydrogen equipment. We have a large installed base of 3,500 electrolyser.
So, we have been around, we have products out in the field. They work. They do produce hydrogen. We're not selling paper electrolysers, we're selling real electrolysers. We have technology leadership. We are in multiple technology platforms. We can combine alkaline with PEM. We have proven solutions, again, not paper electrolysers, real electrolysers that have been out in the field for many, many years, where you can actually trust that the warranties and the performance guarantees that we offer are real. And then, of course, it comes down to cost of ownership. And I think it's fair to say that Nel also has cost and scale leadership. We are a front runner in cost reductions. The alkaline electrolysers coming out of our Heroya facility or second to none when it comes to cost.
And also, we have market-leading production capabilities. We have produced high quantities. We have an existing line. We're building the second one. The risk of placing a high order with -- or a large order with Nel is limited compared to many others because we know how to make high quantities of electrolysers, and we're able to expand fast.
So, we are quite comfortable with our industrial position at the moment. We're also confident that some of these large-scale projects will come our way. And if we then summarize the second quarter, maybe a bit uneventful in terms of new contracts. We're off to a good start now in the third quarter. But please notice that we have made significant improvements in terms of revenue growth and positive margin development.
We did sign a fueling contract, which is the largest contract we've ever signed for fueling, and it's a testament to the fact that people believe in Nel also on the fueling side. They have the trust to place an order, a significant order for hydrogen fueling equipment with Nel. And we are on track with our expansion efforts at Heroya in Wallingford and also for the new Gigafactory in the U.S.
And then I think I will stop there, Wilhelm, and ask Christian to join me so we can answer questions from the audience.
Thank you. I have some questions coming in already. [Operator Instructions] 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@nelhydrogen.com. And 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 would also appreciate is taken off-line directly with me. The first question coming in here is from Arthur Sitbon. And now activated your microphone and please go ahead.
Can you hear me?
Yes.
Thank you, very much for taking my question. So actually, I was wondering if, at this stage, you consider you still have the capability to receive -- in the short term to receive new large orders in the 100-megawatt to 200-megawatt range like you did last summer? Or do you need to wait for new manufacturing lines to come online to get such orders? Because I would suspect at this stage, your current manufacturing capacity is quite well booked for the months to come. Any thoughts on that would be quite helpful. Thank you.
You are right that the 2023 capacity is being fully utilized. But if you start -- if you start a big project now for several hundred megawatts, you're not going to go operational in 2024 anyway. You will be into '25, '26, which means we can then produce it in '24, '25. And as we now double our capacity from April '24, we will have ample room to take larger contracts. I'm not worried about production cost rates from Nel's perspective.
Thank you, very much.
Thank you. Next question comes from Erwan Kerouredan. Please go ahead.
All right. We will try the next one. Yoann Charenton, you're next in line. Please go ahead.
Good morning, gentlemen. Quick question thinking about the broader market environment. We have seen a marked deterioration in the order momentum in the second quarter. Can you please provide a bit more color on the factors behind this deceleration? And when will you expect to see a rebound in activity around the multi-100 mega-scale orders? Of course, my question is all about electrolyser.
Yes, I think we -- in terms of the order intake, it's a matter of a couple of weeks. If we had the French and the Portuguese contracts into the second quarter, it would be on par with the previous quarters, so even on the electrolysers. But that aside, we have high hopes that we can sign the multi-100-megawatt contracts in the second half of 2023. Again, the visibility on exactly when we can sign the contracts is a bit limited. It's not due to a lack of large-scale projects.
There are -- we are working on plenty of opportunities that are really large. But that, as I said, also means that the time line of when you actually -- when the customer decides to jump in and place a purchase order on the equipment is a bit more challenging to know than when you're placing an order for EUR10 million.
Now we're talking potentially hundreds of millions of euros. And I would say we are comfortable with what we see in the market. The market is there. The orders are getting -- or the projects are getting bigger. We are in a good position and then already in discussions, advanced discussions with many of these large-scale customers. But exactly when if it will happen in the third quarter or the fourth quarter, it's very hard to say.
Okay, thank you.
Thank you. Next question comes from Sean -- I'm guessing Sean McLoughlin. Please go ahead.
Good morning. Can you hear me?
Yes.
Super. Thank you. Just a question around profitability. It looks like the journey to positive EBITDA took a bit of a breather in Q2. You talk about a mix of scale, more efficient execution and better price contracts being the drivers to get to profitability. I mean as you look through your backlog now, I mean, how do you expect that EBITDA to be shaping up, particularly because of the increased costs that are coming into your business as you scale capacity? Just any commentary around that would be helpful. Thank you.
I think we are quite happy with the contracts that we have signed since summer of '22. All the contracts we have announced during the past 12 months have an intrinsic margin structure that should allow Nel to have a decent EBITDA. And then we do carry some fixed costs that we need to spread over a bigger volume. We were 540 employees, I think 12 months ago. Today, we're 622. So, we've added 80 employees. We have increased our cost base, but we need higher volumes for that cost absorption.
I think once we're done with the legacy projects and we start to add some of the contracts we have already announced to the revenue mix on top of the one or two projects we're already taking to P&L, you will see a different margin structure in Nel. So, I think the road towards profitability is not that on the electrolyser side, it's not that long and winding. It's possible to achieve it, but we do need to get rid of the legacy projects, and we do need to monetize the large orders we have announced.
Thank you. If I could just a quick follow-up, just to understand a little bit better. So, the legacy contracts we should take as the contracts signed up until kind of Q1, Q2 last year yes?
Yes. That would be all the small 2-megawatt, 5-megawatt, 4-megawatt, 10-megawatt, 20-megawatt projects that we are that we have announced. I think that we did announce in '20 and '21 and the first part of '22 that we're now executing on. And, to be fair, as a portfolio, these contracts have a negative gross contribution and of course, then the negative EBITDA contribution.
It's also a contract where the white scope. So, let's keep that in mind. So, it's less of what we produce in-house, it requires more source material. So, it's lots of revenue with limited margin and also puts, since the wider scope, we use too much of our best engineers on these projects rather than on driving cost reduction on larger projects.
Thank you.
Okay. Next question, we're going to try Erwan from RBC again. Please activate the microphone on your end as well, Erwan, if you're with us.
Okay. Then we're going to jump to the next question from Alex Jones.
Great, thank you. And more of a follow-up, I guess, on the last question on margins. When I look at the sequential development, revenue was up, I think, 40% in the electrolyser division, but profits were down slightly, I guess, from minus 19% to minus 47%. Can you talk about what drove that? Was it a mix within contracts to more of the older ones? Was it bigger losses on those because of FX? Was it costs? Or how should we think about that sequential move? Thank you.
Yes, it is a mix of the individual projects that were recognized in the quarter. So, we currently have, and this is one of the things we come back to. We currently don't give guidance because we have too few large projects to talk about portfolio base, and therefore, both on these small to midsized ones and also on the large ones, we're very dependent on the milestones we achieve in a given quarter and the progress we have in a given quarter.
And Also, as Hakon was saying, when we have some of these being loss-making. If we then make updated estimates on the time it takes us to complete. And we see that we will have additional costs do you need to book that negative margin immediately recognizing that it's a loss-making contract. So, it's down to the individual contracts that we delivered on partly in this quarter.
Thank you.
Next question comes from Deepa Venkateswaran. Now activate your microphone. Please go ahead.
Hi, can you hear me now?
Yes.
Yes. Sorry. I think I will come back to the question on order intake. Obviously, that's the most keenly weighted metric that everyone tracks for you. So, I was just wondering whether you're able to give us any visibility on these -- the pipeline that you were talking about, which presumably is your advanced negotiations. So, are you still competing with other technology providers, or it's more about your end client needing to take FID? I mean at what stage -- how advanced are these? And should we be hoping for some conversion in the second half? Or could this -- so just to get some view on how likely these are to convert into an order intake this year?
Okay. So, let's take a top-down perspective on this and say that if you look at the value of all the projects in our CRM system, you get to these ridiculous numbers like $30 billion, right? And they have -- they are in different stages of the development cycle and then they have different maturities. What we do is that we have the top 10 or top 20 list of hot projects or leads that we are working on. These opportunities we might have tracked for up to two years. They might all of a sudden appear and require a significant effort. And I would say some of them are competitive situations where the customer is looking into different technologies, different suppliers, different OEMs and then they want to make a selection.
And other situations are actually situations where Nel is the sole OEM, and it's all about getting project financing. And offtake agreements in place for the customer because remember that we do ask for a lot. We ask them to place a firm order for equipment worth a lot of money. And for the customer, they don't have full visibility on the project. They might not have all the offtake agreements in place. They might not have financing. They might not have received the grants that they have applied for. And so, we ask them to commit because the lead time on the electrolysers is quite long. They know it's on a critical path or critical line in terms of start of the project. So, they can't wait forever before they commit to Nel or somebody else.
But to get to that point, especially for the larger projects, it takes more time than for 20-megawatt, 40-megawatt, 60-megawatt projects. So, I would say, yes, we have multiple large opportunities we're working on. They fall into two categories, Nel as the sole OEM and competitive bids or situations with other OEMs. And I have to say and speak on my behalf, I do hope that we can convert some of these opportunities in the second half of '23. I would be disappointed if we did not.
Thank you.
Next question comes from Christopher Leonard. Please go ahead.
Hi guys. Can you hear me?
Yes.
Thanks for taking my question. And sorry to bang on again about order intake. But just looking at the backlog and maybe comparing average project sizes to what we've seen with is and [indiscernible] they're looking to hit around 300 megawatts on average project size. You guys where you currently sit? Do you think maybe there's an expansion that needs to happen on the stack side for you to be increasingly relevant in the larger 100-megawatt range is? Or maybe is there something perhaps on warranties? Just trying to look for anything in your perspective that might explain why you're not yet booking same quantities as you did last year on the very large-scale side? Thanks.
Yes, for a deal to happen, you have to be wanted, and you also need to want the project. There are some of the larger opportunities out there that I believe we could have one, but not at conditions that would be good for Nel. What's important to us is not necessarily to book the largest contracts out there. We also need to match the contracts with our ability to execute and make these contracts profitable.
The last thing we want to do now is to commit to, let's say, a 500-megawatt, 600-megawatt project, and then that contract is not a good one because the alternative cost is very high. If you commit to that project, you have limited capacity, organizational capacity and production capacity to take all the projects.
So, we try to balance the need for showing momentum on the order intake side with the need to improve financial performance. And honestly, a year ago, maybe we were not mature enough to take 500, 600, 700 or even a gigawatt project. I think we have matured a lot over the past 12 months. We feel definitely qualified and also sought after for these larger projects.
So, I'm not worried about sort of the ups and downs in the order intake and exactly when it materializes. As I said, we have a short list, a hot list of very large interesting project opportunities that we are working on with, I would say, very reputable companies and clients. So, there's nothing wrong with Nel's attractiveness in the market, but it's -- it has to be right for the customer and it has to be right for Nel.
And as I said, I'm confident it will happen in '23 that we will book a contract. Maybe that contract will dwarf the contracts signed in 2022. Maybe it will take a bit more time before the gigawatt contracts materialize, but they will come.
Sure. So just to clarify, from your perspective, it was competition on price and maybe not actually quality of production or quality of the product from your side. It was the fact that you didn't want to compete at those levels.
I would say, we have the most advanced manufacturing setup in the world across platforms with the most proven technology. I think we were second to none on the quality of the equipment. Then it's about pricing, what kind of margins are you willing to live with. We're not interested in buying market share. We just don't want to take a contract and say, "Hey, we got 600-megawatt contract here," and then not make money on it.
We have to be responsible and then set a price that is fair for the customer and also for the OEM. And then it's about performance guarantees. What are you willing to accept? And again, it's not fair to ask the customer to bear all the risk because these are pioneering projects, but it's not fair to ask the OEM to take all the risk either. There has to be a balance. And we try to work with customers that see that where there's a win-win and where we have a good dialogue, and I can share the risk and the upside of doing business together.
So, I'm not sitting in my office fuming when I see large contracts being awarded to competition. I think that's all good. It's not about market share at the moment. The cake is going to be extremely big, and we need this market to grow and develop. Every big project that happens at the moment is good for the overall industry development. So, if we win a large-scale contract, competition should be happy. If they win it, we should be happy. It's not about the infighting between the OEMs. It's about creating this industry. And for that, we need the large-scale projects to happen.
Next question comes from Kulwinder Rajpal. Please go ahead.
Thank you, everyone. Can you hear me?
Yes.
Yes. So, I would just like to peel a little bit into the orders for fueling. Obviously, it's nice to see that the capacity reserve agreement on into a purchase order in the U.S. So, I just wanted to get a sense of what you are seeing in your negotiations with customers on the fueling side? For Nel, does U.S. continue to be the main geography driving the fueling division? Or are you also seeing some increased traction in Europe?
So, on the fueling order intake, what we have said for some time now is that, that market is maturing. We've moved from small pilots here and there where maybe the municipality wanted a gas station to increasingly network operating is looking at it. Currently, the most mature market where there's most need for hydrogen refueling because there are vehicles on the road is in Korea and in California in the U.S. We do note that there is European legislation coming through that will give good support mechanisms also for Europe.
So, we are hopeful that there will be a similar development in the European market also for passenger vehicles. Really the longer-term perspective, the thing that really undermines the business case is the heavy-duty applications. So, things with a high load that needs to drive for a large part of the 24-hour cycle. And that market is still some way away from maturing. It's not a distant future, but it needs a step up in the capacity on each station and also the performance on each station on an ongoing basis to make that business case fly. We're working diligently in that direction as well.
So, we have gotten a question from urban, Erwan Kerouredan, who had some technical issues. European Hydrogen Bank auction, we hear that it may now take place towards the end of the year versus the autumn initially anticipated. Can you confirm this is what you expect to? And I guess the question is when is the next real policy catalyst for Nel in Europe?
I think really, the EU has piece together a legislative framework that is quite solid. They have set demand side targets. They have worked on the definitions of the different carbon intensities or the carbon intensity or different forms of hydrogen. They have looked at all these loopholes like the additionality principle and all the technicalities around that. But in some -- they have a pretty robust legislative framework. What is lacking, in my opinion, in the EU is the money, the carrot. The Hydrogen Bank first auction around EUR 800 million, the EUR 0.8 billion.
Then you compare that to what is happening in the U.S. You have the IRA with tens of billions, if not hundreds of billions of euros earmarked for hydrogen. You have the hydrogen hub initiatives where they will hand out $8 billion to $10 billion for project-specific initiatives. You can go on and on.
If you compare to U.S., if you compare the spending in China with the spending in Europe, Europe is dwarfed by these numbers. There's nothing wrong with the setup. It's just the magnitude of what they hand out. It doesn't make a difference. The Hydrogen Bank, again, EUR800 million, yes, nice. But one large project is EUR800 million. So, it doesn't really help.
What I expect is that the hydrogen auction would be a test bed for how well this auction system will work, and they can use that as a platform also in the different member states to subsidize hydrogen, green hydrogen initiatives. The Hydrogen Bank could be a good instrument, but it needs to be beefed up. With EUR10 billion to EUR15 billion, you will be able to fund a lot of the projects that are waiting to happen.
And if we could get these projects approved, then you get over that initial speed bump. You get the learning effects. You get the scale impact. Then we get the cost down, we can move faster and that we don't rely on subsidies anymore. And that's what I've been telling the European Commission for quite some time now that don't spread this subsidies over many years. There's no need to subsidize this industry for decades. Make it big, but do it fast. It's over the next 2 years, 3 years where we need it.
So, to me, the next key policy thing in the EU, Hydrogen Bank, beef it up. If that will happen, that would be fantastic for demand in Europe.
Then it seems like we have a follow-up question from Christopher Leonard.
Sorry, I meant to put my hand down, apologize.
Sean had a follow-up question. Please go ahead.
Thank you. I just wanted to ask about the -- just a little bit more about the competitive environment on the larger orders. You talk about alkaline and PEM let's say, as being a competitive advantage against peers. I mean it would strike me simplistically that this sounds like you're just adding greater complexity to projects that are already complex. I mean how much of your pipeline is looking at both alkaline and PEM? And what kind of advantages would that actually bring in terms of monetization?
Okay. So, let's start with PEM. PEM has not been proven at scale. Nobody has built a large PEM facility at the moment. The largest PEM facility in operation is Nel's 20 megawatts. PEM is expensive, both in terms of CapEx and in terms of OpEx, the efficiency at the moment, but it requires less footprint, and it's responsive. It means you can run production up and down really fast and then it fits well with renewable energy generation coming from wind and solar where you have big shifts, sudden shifts in the production loads and curves. What about alkaline? Alkaline has -- is cheaper on the CapEx side, is cheaper on the OpEx side, but it requires space, and it's not so easy to ramp it up and down by the second or by the minute.
You need some time to bring the load down. When you look at these large-scale facilities with hundreds and hundreds of megawatts or even gigawatts, then if you say that we're going to use alkaline because that's cheaper for the baseload, and we're going to use PEM to take the peak production periods when you have strong winds or lots of sun coming in, that definitely helps your business case. You're looking at a few percentage points improvements here and there that could turn into hundreds of millions of dollars or euros over the lifetime of the equipment. Of course, they're looking into it.
Now could you achieve that by sourcing equipment from one alkaline provider and one PEM provider, Sure. But to have that one-stop-shop opportunity to get it from one supplier to get the production and delivery schedules matched to know that the integration could work, that you can sit there and simulate big sac split and how the technologies will work together, the control logic, the control systems, that is a competitive advantage.
Thank you. Very good. It seems like one more question here from Damian Sparaga [ph]. Please go ahead.
I hope you can hear me now.
Yes.
Thanks for taking my question. I have a question regarding profitability. When I look at your numbers, I mean gross profit margin in 2022 was 36%. In the first half, it was -- it is 49%. Do you think there is still a room to improve it, and to what extent? And what would be your desirable profitability level in terms of gross profit margin?
So that measure is, to a large extent, driven by mix. So, if we have the legacy project with a wide scope, where we have lots of other components where we don't really make any money, we have a lower measure there. So, I would say that we are moving in the right direction. What will drag it down a bit again is that for these large numbers, we first sign on the stack contract, and then we get a balance of stack later where there's a smaller markup. But yes, there's room to continue to look at how we can improve that one.
I think margins. Gross margins and EBITDA will go up, we're quite confident saying that. Why? Because the new contracts have a higher intrinsic margin structure. We don't take projects, as I said, just to win market share. We take projects because we have a healthy margin. So, the gross margin on new contracts is much higher than on past contracts, the legacy contracts because of new market dynamics, we now have an order backlog. We have a top line that it allows us to be more selective. We don't need to take any project just to have something to do. We have to carefully select which projects we go after. And then we can be tougher on the margin requirements for Nel.
So, we have higher margins when we start the contract. Then we have commodity pass-through clauses. So, we don't -- we're not being hit by sudden price increases in steel and nickel like we have been on the legacy contracts. We do hedge. So, when the currencies change quite dramatically as they've done in parts of '23 and '22, then it doesn't hit our margin.
Scope, we don't do all the third-party sourcing with 3%, 4%, 5% markup. We focus on what we make, and that will drive margin up, and we become better at execution. So, we have to spend less hours implementing the solutions. We don't have the same cost overruns as we had in the first days when everything was new and we made mistakes, and we had to go back and redo things. We are getting better. We're getting better processes, better procedures, better documentation, better quality. So, all of this will drive margin in a positive direction.
Great. We're now closing in on the top of the hour. No further questions, so I think that concludes this presentation. So, I'll give the word back to the management for any final remarks.
So, I think we said it in terms of the commercial developments, maybe a little bit of an eventful quarter, but look behind that. If we go one year back, this would have been a very eventful quarter. So, we have a higher order intake. We have 160% higher revenues. We have improved EBITDA margin compared to one year ago. we are on the right track. And then our ambition is, of course, much higher than what we saw in the second quarter, and we have reasons to believe that we will also be able to deliver on those ambitions.
We will continue to see revenue increases year-on-year. We will continue to see margin improvements. We will continue to see large order intake, but it will vary or fluctuate from quarter-to-quarter. You cannot, in this industry, just put your [indiscernible] on top of the last quarter and have this sequential approach where everything is linear. It will go up and down like a roller coster ride, but the trend curve is definitely positive.
And we conclude the presentation. Thank you very much for attending.
Thank you.