Nel ASA
OSE:NEL
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Nel ASA
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Good morning, everyone. Welcome to Nel's Third Quarter 2022 Results Presentation. My name is Hakon Volldal, I am the CEO. With me today, I have Kjell Christian Bjornsen, our CFO; and Wilhelm Flinder, our IR -- Head of IR.
We have put our purple ties on. It's time to go through the quarterly results. We have the following agenda. Nel in brief, a bit boring for some of you, and hopefully interesting for those of you that are not familiar with Nel yet, then we will dive into the third quarter highlights. We will cover some important political events during the quarter, the main commercial developments, summary and outlook and then we get to the Q&A session.
We're doing this slightly different this time around. [Operator Instructions] When we get to the end, there's also an opportunity to ask questions orally. So then, you can raise your hand and Wilhelm will then get an overview of who is interested in enforcing questions direct to management.
Okay. So Nel, Nel is a global dedicated hydrogen technology company that delivers optimal solutions to produce, store and distribute hydrogen from renewable energy. And our mission is simple. We unlock the potential of renewables and we enable global decarbonization by doing that.
Nel in brief, we are a pure play hydrogen technology company with a global footprint. We are listed on the Oslo Stock Exchange. We've been there since 2014, although our roots actually trace back to 1927, when we installed the first electrolyzer. We are the largest electrolyzer manufacturer in the world, with more than 3,500 units delivered to more than 80 countries around the world. We have a production capacity of 500 megawatt currently for alkaline, expanding that to 1 gigawatt. We have a PEM production capacity of 50 megawatt to 100 megawatt, expanding up to 200 megawatt.
We are also a leading manufacturer of hydrogen fueling stations with more than 100 units installed in 14 countries around the world. We have large manufacturing facilities in Norway at Heroya, the U.S. in Connecticut, and Denmark in Herning. We have a global sales network. We have close to 600 employees now. We are a preferred partner with industry leaders, and we have a cash reserve of NOK 3.5 billion to fund our expansion and growth.
Next topic then is the third quarter highlights. In terms of the financial results, revenues came in at NOK 183 million, a bit of a mixed picture that I will add some color to later on, down 20% versus last year. EBITDA minus NOK 214 million, down versus NOK 113 million last year. Order backlog more than doubled since the third quarter in '21, so we're now at NOK 2.1 billion, and that does not include the latest large-scale order announced in October. Order intake increased by a factor of more than 5 to almost NOK 800 million in the quarter, and our cash balance is still solid, actually up 20% since the corresponding quarter last year and stands at NOK 3.5 billion.
The main developments in the third quarter were that we received our -- the first -- well, it's the first large-scale purchase order for alkaline stacks. 200 megawatts of alkaline stacks going to your U.S. clients with a value of roughly EUR 45 million. We also received small and mid-sized orders, one to Denmark for an alkaline system valued at EUR 4 million. We have 2 containerized PEM systems, one to Australia, one to the U.S., and we had also a nice contract win with a European client for fueling stations valued at EUR 8 million.
Based on the rapid growth in the order intake and the order backlog, we decided also to expand our capacity in Norway for alkaline systems to 1 gigawatt. So we will add a second line at Heroya, bringing the total capacity to 1 gigawatt by early 2024. Then also some nice events after the closing of the quarter. We received our second large-scale contract, and this is actually higher in NOK value compared to the one we signed in July. This one with a disclosed customer, Woodside Energy for stacks -- balance of stacks and is nearing services at NOK 600 million. And we also received funding from the U.S. Department of Defense for accelerating development of advanced PEM electrolyzer stacks. So that was 2 nice vents after the third quarter that we will, of course, take with us in the fourth quarter.
Now when we look at the numbers, I would like to clarify a couple of things because there were sometimes comments that based on the contracts that we have signed, we expect the numbers to improve quite a bit. And it's important to remind you that when we sign a contract, it's a large-scale project. It's not an electrolyzer system, for instance. It's not something you take off the shelf, put in a cardboard box and ship, and then we include it in our P&L. The revenue recognition period is quite long from we signed the contract. For instance, the one we signed in July, we will start to recognize revenues on that, where the bulk of the revenues will come in '23. The NOK 600 million contract we signed in October will basically hit the P&L in '24. So what you see on the top line in this quarter and so far this year is the result of contracts that were signed in '19, '20 and '21. And because order intake in that period was lower, we also have a lower revenue recognition in '22 and some of you might expect the impact of the large-scale orders will come in '23, '24 and subsequent years.
So NOK 183 million is down 20%. We will elaborate a little bit on why that is because in electrolyzer, it's actually stable. And within electrolyzer, alkaline is growing rapidly, whereas PEM had a decline. The main reason for why revenues are down is fueling. We had a low quarter in terms of revenues in fueling.
So I'll explain a little bit why it takes time to get the new contracts into the P&L. It's not going to change in the fourth quarter. The big contracts will not impact the fourth quarter either. But on the operational expense side, in terms of OpEx, we need to front load. We need to invest in production capacity ahead of contract signings. We need to hire people, educate them, train them on how to develop and deliver projects. We need to invest in R&D to make sure we have the best people. So whereas revenue recognition takes time, OpEx, of course, hits Nel immediately. And we need to front load. Unless you front load, you're not going to win. So this is the reason why EBITDA is negative.
And then you could argue, is that sustainable, of course not. But we're investing now in order to grow the company. And this is also the reason why we have raised a lot of equity. We have a cash balance of NOK 3.5 billion to fund exactly this period. This is the important thing. We have the fund to get through it. But of course, we will look for solid revenue growth and improving profitability. And the way to get there is to increase order intake and order backlog because that will help us in the coming periods.
When we also look at the total financials, I think it's important to differentiate between the 2 divisions. We haven't spent a lot of time on this previously, but actually, in this quarter, it makes a lot of sense because if we -- if you look at electrolyzer, in this quarter, revenues it's flat. Alkaline actually had a growth of the increased revenues by a factor of 10 compared to last year. So tremendous growth in alkaline even without the large-scale orders hitting the P&L.
In PEM, we had a large delivery to Iberdrola last year, so comparing -- so compared to that, we are down. We also have supply chain issues on some of the industrial products. So despite record high sales of these PEM electrolyzers, not able to ship the products from our factory to the customer.
The lead times on certain components is currently very high. We expect it to improve, but right now, it's a bit challenging. So the fact that we're down in PEM doesn't mean that the market for PEM electrolyzers is drying up or that we are not winning orders, it's a supply chain challenge. Also on the electrolyzer side, if you look at the year-to-date figures, I think that's a better gauge for how things are developing. Revenues are up 50% -- more than 50%. So despite the fact that we have not taken any of the big contracts to P&L, revenues are still up 50%.
If you look at profitability, it's negative and it's impacted by the fact that these smaller contracts that we are delivering on now that we signed in '19 and '20 and '21 had a different margin structure. The market was not as vibrant and dynamic as it is today. We had to fight hard to win the contracts, some of them were taken with a low margin. We have not been fantastic in project execution either, we need to learn. So some of these projects have been executed with higher than anticipated costs. But we learned and all these learnings and all these improvements that we are making in the project delivery model will, of course, help us going forward.
There's also inflationary pressure on the cost, which is difficult to pass on. So when you sign a contract and metal prices start to increase, it's hard to adjust for that. In recent contracts, we have hedging mechanisms, which means that we are less exposed to raw material increases. But we are now being hit by contracts that we signed with a different structure in the past. We've also hired a lot of people, as I said, so with increased personnel expenses, no wonder operating expenses go up. So this is a little bit the story on electrolyzers.
Revenues and margins are expected to improve or will improve when we take the newly-signed contracts to P&L in '23 and '24. So with increased revenues, we also get better margins and we also don't have to add as much on the OpEx side as we've done. So OpEx as a share of revenues will come down and this will positively impact EBITDA. So we are positive in our outlook for electrolyzers.
Then you have fueling, and the main reason we are down versus last year is of course that we are down 57% in fueling. It shouldn't come as a big surprise. We have commented on this in previous quarters that order intake has been low and it's basically a reflection of that. Also, the year-to-date figure as you can see is down 45% on the revenue line. And again, it's a consequence of weak order intake in previous quarters plus the fact that we have some supply chain issues that are delaying deliveries. Again, what these supply chain issues are vary from month to month. I think that goes for all companies that try to manufacture products that you're hit by certain shortcomings. We're working our way through that to get components, but in this quarter, sales of fueling stations has been extremely low. Also, fueling continues to contribute negatively to the overall results, and it's not only the market, it's also the fact that we have high-quality costs.
We have an installed base of products. Utilization has been low. As consumers start to use these stations more, of course, there's more wear and tear. And we've had some quality issues on the stations, which means we have to replace components. We need to send service technicians out. This also drives higher personnel expenses. So it's not only market-related. There are also a lot of things we can improve internally.
And we have to admit that in fueling, we are dissatisfied with the profitability. And we are intensifying actions to improve both the performance of the products in the field and therefore, also profitability, and look at other measures to improve profitability in particular on the fueling side.
This is a more positive story and this is why we are investing. This is why we are running with negative EBITDA because we need to see order intake growth and backlog growth. And on the order intake side, in the third quarter, almost NOK 800 million, that's very high. So far this year -- this quarter -- in the fourth quarter, we're already above NOK 600 million. So, of course, the fourth quarter will also be great.
And if you look at the order intake, this is the story. This is why we're doing it. We're building this order backlog. This will come to P&L in '23 and '24. And as we win more contracts, the order backlog will continue to grow. As we will comment on in the outlook section, we expect more large-scale orders that will fuel the backlog, the higher revenues and then also better performance over time. So I think on the order intake and the order backlog side, we are extremely pleased with recent developments. We see that Nel is competitive. We're able to win large-scale orders and we're building a healthy backlog, not only revenues, but contracts with reasonable and actually quite solid margins that we can translate into better figures in the P&L and the years to come.
Some political events that are important to understand the backdrop of Nel's business. First of all, IPCEI, which means Important Projects of Common European Interest, typical EU abbreviation. The second wave is likely to accelerate project final investment decisions across Europe. The EU has appointed 35 projects. Nel has its fair share of those projects, not directly, but we are working with customers that will receive potentially funding from the EU to drive these projects forward. And with support from the EU, of course, it's going to be easier to make a final investment decision.
The timing of these projects will vary, but we're in discussions with customers on a lot of different IPCEI projects. So we expect that some of them will come sooner rather than later and some might still be pushed out a little bit. Should also say that even though a lot of positive things are happening on the EU side, it's still a bit unclear exactly how the mechanisms will work. We are waiting for some clarifications in terms of the regulatory framework, both when it comes to the definition of what renewable energy is, which is important for project developers and also for the renewable energy directive to be finalized by end of 2022.
The EU is a bit stressed at the moment. They have put hydrogen high on the agenda. They want to be successful in hydrogen, and not only successful, but lead in hydrogen, and then this happened. So the EU is now worried that the U.S. will take the lead, and to be frank, the U.S. has taken the lead. Due to this Inflation Reduction Act passed by the Biden administration, it's possible as we said in the previous quarter to get up to $3 per kilogram of hydrogen produced in support and tax breaks -- tax credits.
So if you look at Nel and the direct implication to the 2 largest orders that have been placed with Nel are both U.S. based. And I think our client Woodside Energy commented that with the passage of the Inflation Reduction Act, the drive to accelerate the energy transition in the U.S. is underway, and of course, this impacts their investment decisions in the U.S. So clearly the IRA is helping our customers improve the business cases. It's easier to also then make purchase decisions and purchase orders with Nel. So this is clearly positive.
As a consequence of this, the number of high-quality projects increasing. We are accelerating our site selection process. We have previously communicated 4 gigawatt potential capacity in the U.S. We need to find the right location and then, of course, we also want the government to support Nel in establishing this facility. So we can see that a lot of electrolyzer manufacturers in Europe are getting grants. Norway is not so keen on giving grants, but in the U.S., it's possible. So we will find a suitable site from a logistics point of view, from a business point of view, but also try to get some grants for establishing capacity in the U.S. to serve the booming U.S. market.
We expect the U.S. to be a key market for Nel going forward, and it could be global hydrogen hub and also Nel's second home, so to say. We already have a sizable organization there. We have production capacity that we are expanding. But given the development in the U.S. market, we need even more capacity in the U.S. in the years to come.
Some comments on the commercial developments and we have to start with this, the record size purchase order received in July that represented the start of Nel's large-scale area. We spoke a lot about our pipeline and the big projects would eventually come and then it came in July. We have to be patient, but this is a high-quality project. It's a purchase order that includes 200 megawatt of stacks only.
So when analysts look at the announcements, I understand that they are sometimes confused because order sizes cannot be directly compared. It depends on the scope. This is just the stacks, just the tubes, the electrodes. And it means that it's a contract that over time might increase in value as we add peripheral equipment in what we call balance of stack and also services on top.
And the client actually chose Nel based on internal [ risk ]. This was a client that went through all the potential suppliers and came to Nel, and said, we have concluded, you have the best solution. We want to work with you. How do we do that? And it was a fairly quick process to sign the contract. This will be a very positive contract for Nel. It has a different margin structure than we've had on contracts signed when there was limited demand. So this is a contract that will have a considerable positive effect on both the P&L and for Nel in terms of learning and delivering large-scale projects.
Another interesting project, not similar in size, but it's with Skovgaard Energy in Denmark together with some high-quality partners like Vestas. The project is the world's first dynamic green ammonia plant. So renewable electricity from wind and solar connected directly to the electrolyzer. So it's a demo plant that will test how an ammonia reactor can fluctuate operations based on renewable power input. So interesting project together with Skovgaard in Denmark.
2 containerized systems sold in the third quarter, one to the U.S. for making sustainable aviation fuel to basically decarbonize the aviation sector, and one to Australia for making fuel-grade hydrogen directly to a fueling station. So these are compact systems that are quite sort of modular and easy to -- for the customer to install commission and get in operation.
We also received a nice purchase order finally for fueling stations from a European client. You can see from the past that the order intake on the fueling side has been limited, so this was a helpful contract. We will start to deliver on that in early '23. So the lead time on this is a bit shorter than normal, and it includes service and maintenance over time. So nice fueling contract.
Then, a subsequent event. We received close to $6 million from Department of Defense to improve our PEM technology or further develop our PEM technology. It includes development of new membranes, looking into high volume manufacturing methods, how we can reduce the use of -- usage of precious metals, and also some interesting testing opportunities at ERDC and CERL in the U.S.
Then we got -- then we broke another record. In October, we recently announced a NOK 600 million contract with Woodside Energy, very interesting project. They will produce liquid hydrogen for major transport companies. Deliveries will -- production and deliveries of stacks will start in '24. The contract includes both the stacks and what we call the balance of stack with the separation system. Again, this will have a substantial positive financial impact on Nel. Margin is healthy. Terms and conditions are good. It's similar in scope and size to the other contract that we signed in July. So we're moving from 10 megawatt, 20 megawatt projects to 150 megawatt, 200 megawatt, 250 megawatt projects, and over time even bigger projects. So it's a nice learning curve and it fits into our strategy of selecting customers -- high-quality customers that have a high potential of reaching FID and that they're willing to commit to placing orders early on.
So Woodside Energy is a very interesting client for Nel. It's a customer that we can also develop together with scale with. There are lots of opportunities for repeat business. They are building 5, 6 of these sites in the U.S. They also had large plants in Australia for major hydrogen export hubs out of Australia to Asia. And as this company has a lot of experience in LNG, it's one of the world's largest exporters of liquid natural gas, it's a high-quality customer for us, very interesting partner also to work with because they have the industrial background and experience that we're looking for.
Then to the summary and outlook. I think even though the results go a bit up and down and we still report on the backlog that was the result of contracts made in '19, '20 and '21, and then maybe not the best contracts, I think I would like to make the point that we do actually deliver on what we promised. We have been a bit conservative in terms of what we have communicated when it comes to these large-scale contracts and when it will happen. We have said that we have -- historically we've said that we are confident that they will come.
So in the first quarter presentation, we said the pipeline grows and projects are getting bigger, then we won the 200 megawatt order. After that, we said the 200 megawatt order is not a one-off. And I think you know it's nice then to report NOK 600 million contract a few months later. And now we are saying more large-scale orders are coming. We are confident that there will be more large-scale orders. And actually, the large-scale orders are the ones that we are going for. That's what makes this business interesting.
It's not the small pilot cases and demo plants. Now we're moving forward with large-scale orders. And I think we'd like to go back to the U.S. a little bit because what has been our main market, especially for alkaline products has been the European market. And Europeans take it step by step. They do a small demo plant and then they might consider a Phase 1 investment into a larger facility, whereas in the U.S., it's pedal to the metal and they go large immediately, especially now with the funding, they bypass all the testing stages. They go straight to the large-scale projects. And even the projects we are delivering on have Phase 2, 3, 4 and 5 over time. So it will not stop with these orders. They might develop into gigawatt projects. I think that's important. They have plans to expand from an initial phase of 200 megawatt maybe up to more than 1 gigawatt.
Why are we saying that more large-scale orders are coming and why we're so confident that this will happen? Well, first of all, the market outlook is extremely positive. We can see it in our pipeline. The pipeline continues to improve and mature. We're not talking to dreamers anymore. We're talking to people that have industrial backgrounds that have financing in place. They have secured land. They have secured electricity. They have all the pre-requisites in place and they have a solid business case. So it's more about finding the right timing to do it.
Customers realize that they are not the only ones looking into hydrogen. And even though there are 25, 30 providers of electrolyzer stacks, not all of them are experienced, not all of them have the scale to deliver. Actually, very few have the scale to deliver. So they are concerned that near term, it will be difficult to get sufficient electrolyzers.
I know external market research says that the capacity in 2025 will be 40 gigawatt to 50 gigawatt. I disagree. I think it will be a fraction of that. There's no way it will be 40 gigawatt to 50 gigawatt by -- in 2025. It will take much longer and customers realize that. So they come to Nel because we have installed production capacity. We take them to Heroya. They see that this is not just PowerPoint. It's a real factory with real output, automated equipment, trained operators. And they also know we have a track record of delivering on what we promise. So we continue to secure high-quality large-scale orders with attractive margins.
In a market where customers are concerned about supply, of course, you're able to increase prices. So even though the outlook is very positive, I should also caution and we shouldn't expect a large-scale order every single quarter. That's not what we're saying. We're saying in 1 quarter, it might be 0. In the next quarter, it could be 2 or 3 over time, right, but it will vary.
Also realizing that these large-scale contracts require commitment, and you're dealing with professional counterparties that need approvals from seasoned board members, and they have an authorization matrix and it's not just something they sign off on. Tens of millions of euros and hundreds of millions of euros require a thorough approval process. So the timing from we start discussions until the contract is ready for signing, it takes time, but that's a sign of quality. So our pipeline is extremely promising, some are fast tracking, some are spending in a bit more time. But again, we are extremely happy with the quality of the prospects that we are working with.
When it comes to how we select our projects, we start by looking at the business case and the application, and then we need to decide on do we have a suitable technology offering. And because we have a broad technology base, we can meet customer requirements by being a bit technology agnostic. We're not a one-trick pony. We don't only offer alkaline or only offer PEM. We have the luxury of actually choosing the right products for the application. And that also creates trust among customers that we're not just badmouthing competing technology and speaking highly of our own technology, but we are sort of neutral in a way. We can pick what is right for the project.
We're also looking for high-quality counterparties. A lot of people are trying to get through the door and book production capacity that we need to make sure that the products we actually sign are high-quality projects with customers that can actually take FID. And we need a high probability to win. We need to see that Nel is in a position to create value for the customer, but also get paid what we need in order to build a profitable business. So there has to be a good match between what we can offer and what the customer appreciates in terms of doing business with Nel. And that means we're looking for attractive margins, and acceptable risk profile.
I think I mentioned that earlier, prices are going up and they will continue to be attractive as long as capacity is limited. And as I said, my personal belief is that capacity will be limited for a much longer period than some analyst reports and market reports believe.
As a consequence of more large-scale orders coming, we have decided to increase the threshold for what we regard as insider information. So we will no longer disclose all orders above EUR 2 million. We will only disclose orders above EUR 5 million. Unless an order is seen as very strategic, it could be a EUR 3 million, EUR 4 million contract with a very reputable company, and we might disclose that. But as a general rule, a rule of thumb, we will now start to disclose contracts that are above EUR 5 million. And we think that sort of supports the equity story and also our strategy of pursuing large-scale projects over time. And as they are now coming, I think it's a meaningful shift so that when we communicate something from the company, it's aligned with what the investor community is actually looking for and finds material for the Nel share.
So to sum up, a bit of a mixed bag of results in the third quarter, again related to what happened several quarters ago. In terms of order intake, what pleases us is that the order intake and the backlog is increasing because it means that we will report higher revenues and better profitability in coming quarters. But it's not a quick turnaround. When we sign a contract, it doesn't hit the current quarter or the next quarter or the quarter after that, it takes usually 12 to 18 months for that to happen. So that's an important reminder.
Having said that, Nel is uniquely positioned to capitalize on the increasing market demand that we see is coming. It's now finally happening. It's not only Nel that is receiving large-scale orders, also competitors and that's good because we need to build the hydrogen industry. Now we will take our share of that and we will fight for 100%, but realistically speaking, we cannot win 100%. So it's good that all these orders are being placed because it proves that this is finally coming of age. And why are we in a position to claim sort of the leading position? Why do we say that we are #1 by nature?
Well it's because we have an unrivaled track record. We have decades of experience. We go back to the black and white pictures from '27 and actually the 2 largest electrolyzer systems that have ever been built and operated were delivered by Nel, 160 and 135 megawatts.
We have the largest installed base, which means we have gathered operational data for decades. Now if you buy electrolyzer systems for hundreds and millions of NOK , do you buy something that has never been tested from a supplier that has no track record, no experience? You're buying a product because you expect it to last for 8 to 10 years. Now, unless you have had a product in the field for 8 to 10 years, how can you trust that it actually will last for 8 to 10 years. We have done that. We have the operational data for lots of systems going back decades, and we have proven technology and we can offer performance guarantees, which means when you do business with Nel, you also end up with a bankable solution.
As I said, we have a broad product portfolio. We have high system efficiency and high durability, and we have world-class safety. So we have -- we claim that we have technology leadership and I'm proud to stand behind that. We also claim that we have cost and scale leadership, and I am also proud to stand behind that because we are a front-runner in cost reduction. We are the market-leading company when it comes to automating production processes. We have leading production capabilities, we have numerous initiatives to bring the cost down, and there to say that we offer the best total cost of ownership for the customer. And we're also supported in terms of strong financing because we need to front load. We need to take early investment decisions in order to grow.
If we try to sort of run this by optimizing the coming 2, 3 quarters, Nel will never be #1. You can't be #1 in this industry if you take that approach. You need to front load, both in terms of people and in terms of assets. And that's why we have the strong financing. So customers can actually rely on Nel to be around even though numbers in certain quarters maybe are not so good. We have the funding in place to secure that over time. We develop this into a profitable business and become a reliable and trusted partner as they scale their products.
That's it. We then move on to the Q&A session. I will be joined by Kjell Christian, our CFO, and Wilhelm, you will take the lead on the Q&A.
Yes. Thank you. So we have some questions coming in already. [Operator Instructions] Also, if we have time, we will also take written questions through the Q&A function. And if there are questions, we don't have time to answer, please reach out just on ir@nelhydrogen.com. And as a reminder, we will not comment on outlook-specific targets, detailed terms and conditions on contracts, as well as questions on specific markets. Multi-questions, we would also appreciate is taken offline directly with me.
So we're going to start with Christopher Leonard.
Yes. Can you hear me now?
Yes.
And just go with 2 questions, please. So you've spoken about the weak profitability for historic orders and obviously, your conviction here is that the rollout of giga-factories from your competitors will potentially be weaker than what the market is expecting. So just wondering what your conviction is around that, given that you also stated that they are winning orders. I mean do you think you've got some sort of differentiation on your pathway to increase your capacity?
And then the second question, sort of what are you doing on your current density for the alkaline electrodes that you have given that from the data we see, it looks like you are behind some of the peers. And where are you I guess in your sort of technology pathway for your alkaline technology? How much further do you have to go on that? And that's my 2.
Yes. So I think when it comes to production capacity expansion, we have made a final investment decision on Line 2, which will be up and running early '24. And then if we get additional orders, I think it's a natural pathway to expand Heroya, the Norwegian facility to full capacity, 2-gigawatt.
We are expanding our PEM production capacity in the U.S. towards 200 megawatt initially and probably double of that for 500 megawatt over time in the existing location. But we're also looking to establish a new gigawatt facility in North America given the high demand from North America. The exact timing will, of course, depend on site selection and funding processes. But I think we have a pathway towards during this decade, 8 gigawatt to 10 gigawatt of production capacity is what we have communicated as an ambition, and Heroya will deliver 2, maybe U.S. will deliver an additional 4 on top of the 500, so then you are at 6.5, and then you need another facility. And whether that's in the European Union or in Australia or somewhere else, we have to come back to.
But the reason I'm saying that I think capacity, I don't trust the capacity expansion plans is that well, if you look at what is actually installed, it's limited, then you look at what is actually under construction, then it's a bit more. But a lot of people just take what has been communicated as an ambition. So they put in all, Nel is going to have 10 gigawatt and it will probably be by 2025 and they do the same for our competitors. And that's not the fact. That's an ambition. So what is actually under construction is maybe 40% or 30% of that number. And then knowing the lead times on getting equipment, I don't understand how all this capacity will be available. It takes time to get the equipment. It takes time to train the operators.
We have the production concept ready, we're just copy pasting that and that takes more than a year. So how can competition just add something that is brand new and do that with a factor of 5, I don't believe in that. I think it's grossly overstated some of these ambitions. And you can see also that some companies have gone out and said that we're not going to pursue the same aggressive expansion. We're going to settle with something less.
So do the analysis, what is installed, what is actually being built and then what is the ambition. And then I think what is actually being built is what we need to base it on because that is what will be available to customers in the coming few years.
As regards to the current density question, a second bench question on technology. It's not a problem to increase current density by throwing in more expensive components. You can throw in a lot of platinum and then you can just [ up our current density ] quite easily. What we have done through several years is to optimize on total cost of ownership for the client.
So, of course, then we will be higher on some parameters and lower on other parameters when it comes to how the technical specification of the electrolyzer works, but you optimize the current and the total cost of producing hydrogen over time. We are, of course, working to increase the current density and also increase the active area, but you know that are steps that will take us down to the cost targets we need to go through, and that being said, all technology platforms will not end up at the same current density.
I think it's also fair to say that what is written in the product fact sheet cannot always be trusted. It's like when you buy a car and you buy -- what is the range on an electric vehicle is 500 kilometers, oh yes, there are these conditions. But under normal conditions, it might be 420 kilometers. During winter, it's 380 kilometers. So I think, don't always look at the fact sheets and compare directly. I know it's tempting to do that, but it doesn't tell the full story. Some of these products that there are fact sheets about are only lab-tested products. They haven't been tested out in the field over time. So what you see in the factory, it is an ideal condition at SAT measured after 2 years or 1 year, do you have the same performance, probably not.
So the next question comes from the line of Erwan from RBC.
So another question on profitability, please, and a forward-looking one. So you guide to electrolyzer revenues and margins improving when the recently signed contracts reached revenue recognition in '23, '24. The key question for me is, when should we expect this to be reflected? Is it more like the first half 2023 story, second half? Can you give a little bit more color on that? And then what kind of gross margins should we expect?
I think when it comes to gross margin, we will not disclose that because as we already disclosed capacity and revenues. Say, if we also then disclose margins, it's quite easy to figure out our cost structure, and I think we would like to keep that a secret for now given all the contracts we are working to sign, don't want to have pressure on this in the negotiations. So we don't want to comment on gross margins. I understand the question. It will probably be easier to gauge that when we get more revenues and these orders come in, then you can also see it from the P&L a bit better. So I think I'll let Kjell Christian handle the other part of that question. Sorry for not answering directly.
When it comes to the revenue recognition part, we can't be more precise at this point in time. Our experience to date is that when you do the detailed planning with the client, then there will be adjustments in the timeline and more often than not that is a delay. So the historical projects that we have signed have all taken longer from signing to revenue recognition than the shared ambition between the customer and ourselves at the time.
Next question comes from the line of Zoe Clarke.
Can you hear me?
Yes.
This is Zoe from Goldman Sachs. I have 2 questions, if I may. The first one is regarding the very challenged fueling division. Clearly, it's been a drag this year and a little bit more volatile if that's even possible on revenues and profitability. What is the strategic outlook here? What can you do to make this better? Or will it perhaps be the right time to look to monetize this? I'm just wondering strategically wise, how does the fueling division fit into your strengths, and whether it is part of your long-term ambition?
And then the second question is regarding your site selection in the U.S. It's been ongoing for some time. Can I just confirm that here the plan is to actually expand both in PEM and alkaline, which I believe was mentioned previously? And what are the key factors let's say that you consider when you're choosing the state? Where do you see currently the biggest opportunity for to shortlist locations?
Yes. So maybe to start with the second question regarding site selection. We can confirm that we are looking for a facility where we have the opportunity to build both PEM and alkaline capacity. North America has historically been PEM with our 2 recent contracts. Both of them large-scale contracts that have been alkaline equipment. So I think the North American market will demand both technologies. So we will look for a facility where we can do both.
The exact location will -- we're not doing this on our own. We have some external professional help in terms of selecting the right sites. And what we're looking for is, of course, a site that from a business perspective makes sense. And what does that mean? Well, you need qualified labor. You need people that are willing to work shifts. You would like to have co-operations with universities that have some experience in what we're doing or similar industries. You would like to have an okay starting point when it comes to logistics and shipping all these products out in the field. You would like to, of course, then also add the dimension of receiving grants.
So when you looked at all the -- we have a range of selection criteria from a business perspective and then you need to overlay that with okay, where can you get states support, where do you get additional support from, let's say, hydrogen hub initiatives. So we will try to maximize what we can receive in terms of support and grants. But at the core of it, it's the business, of course, that drives it.
So we have said that we will conclude that selection process in first half 2023, of course, aiming to close it as soon as possible. So we're not going to spend 6 months just to spend it. But I think there's a lot of changes happening on the political side, and not on the political side, but the support side in terms of available schemes and grants. So it might be that it's wise to call options on a few different sites and then make the absolute final decision when there is more clarity on how much money you can get in support, but at least then start the purchasing of long lead items for that site.
Wil, you take the first one.
Yes. On the fueling side, we do see then -- and as we have talked about that revenues have been poor for a few quarters now because we have had a lag in signing large new contracts. And fueling came into the company at a point in time where the belief was that there will be a lot of cross-selling between the divisions. So you would typically buy a package with electrolyzers for making the hydrogen and fueling for fueling it. That synergy has been much less than expected. So the businesses are to a large extent operating individually, of course, with the shared back office and shared hydrogen competence. And then a few limited cases, there is that cross-selling still. And we are continuing to develop them more like independent businesses and we'll be looking at options how we can improve the total position of Nel and the fueling division.
And there's a few from my -- may add. We're not -- as we clearly expressed in the report, we are not happy with the current performance of the fueling business. So we will be looking into ways to improve profitability or address the losses and intensify that work going forward. So it's a valid question.
Okay. Next question comes from the line of Arthur Sitbon.
Yes. First one is on fueling -- the fueling business. I mean, I was wondering if basically you could consider sell the business or at least look for a partner. Would that be one of the options to try to improve the profitability there?
My second question is, you talked about the gap in profitability between old orders and more recent ones. I understand that you can't comment on what you're targeting exactly, but maybe you could give us some more details on that gap that you're trying to close on how much of an improvement you would like to see?
And my last question is, I was wondering if you could provide a bit more detail on your involvement in projects that got approvals through the IPCEI in Europe. And if you expect orders coming from that and under which time horizon?
I think the second question we answered during the presentation that 35 projects are now being notified and we have our fair share of those projects. We're involved in 40%, 50% of those projects, meaning we have discussions. It doesn't mean that the customers will always select Nel, but we are working on 40%, 50% of that backlog.
The first question regarding fueling, I think, we have alluded to that. I understand the questions and it's -- I would probably also ask the same question. But if you were me, you wouldn't answer that question because if you say, yes, we're going to sell this business or that business or we will close it down, then you don't put yourself in a very favorable strategic position.
So when it comes to portfolio adjustments and divestments and strategic partnerships, and how we think about the business strategically, I think we have to come back to you on that. I think what we're saying today is that we recognize that we have a challenge when it comes to profitability in fueling and we will address that. And then you say we will address that, I think that includes a lot of different opportunities to address it.
There was a question in between there on the gross margin improvement. And we are not giving exact gross margins, but it's a significant improvement. And of course, when we are looking at the future, we need to see a mix of gross margin and overall cost structure that gives a reasonable return on the capital investment. So it is a massive step up from the currently realized margin picture.
Yes. And the realized margin picture is a result of lower prices than we have today, but also a higher cost on Nel side and execution that definitely can be improved. So it's not only linked to the margin on the contracts. It's also Nel's ability to deliver these contracts in a profitable and good way where we will learn and improve. So the improvement potential is somewhat externally driven, but also internally driven.
All right. Next question is from an anonymous user, but I understand it's Alexander Jones from Bank of America. Okay. Then we're going to do the next question from Deepa Venkateswaran.
This is Deepa Venkateswaran from Bernstein. So my 2 questions, one is just on the recent Woodside order. Could you comment on the order size or at least confirm that it's largely similar to the previous large order or in that ballpark?
And second question is on European customers taking FIDs. Do you see that the slowdown there is driven by, I don't know firefighting because of the energy crisis because maybe some of these industrial customers are also facing some problems over there? Or is it related to the bureaucracy with IPCEI -- the IPCEI approvals coming later or even delays to the definition of green hydrogen? Could you maybe talk about what you're seeing on the FIDs on the European side?
Yes. So on the Woodside contract, it's -- again I understand the question, it would be preferable to give both megawatts and contract value so you can calculate it. But again we have to in the interest of protecting a little bit our pricing and how we -- if we want terms and conditions to be good on future contracts, we cannot disclose all details. But I can say this, it's a ballpark similar to the contract announced in July, but it's smaller in megawatt.
But then with a wider scope.
With a wider scope, yes.
So if you compare the 2 stock exchange announcements, there is some hints to them in terms of scope and what is delivered and what is not included. So that is what is really driving the difference there.
Yes. And when it comes to the European FIDs, I think a lot of projects will go ahead irrespective of IPCEI funding, but it doesn't help that the IPCEI funding process is delayed and it doesn't help that we have regulations that are not clear to companies. And I think that is also our message to the European Commission that businesses prefer schemes like IRA in the U.S. because then the market actually dictates which projects that will be run. In the EU, bureaucrats are selecting which projects that will be run. So I think it doesn't help FID that it's dragging out, but I think some of these larger energy companies and companies that are properly financed will still move ahead with hydrogen because there is a need to do it.
So as time is running out now, we have to end the presentation. I will give it back -- word back over to management for any final remarks.
That wasn't in the script, Wil. You caught us off-guard.
No, I think not totally thrilled with the numbers, but again, we're not -- we have to impact and influence what we can and that is the future. And I think we're doing everything we can and the order intake is increasing, the backlog is increasing, and I know that we will be able to convert that increasing backlog into good or better numbers -- far better numbers going forward.
So we're not too concerned about that. We're looking at the business right now. I think the outlook has never been better for electrolyzers, I have to say. So it's a very interesting time, and I think we are well positioned to capture our fair share of that market, but now it's happening. Now it's not only PowerPoint and graphs, it's real orders coming. And remember that that is the key takeaway from this presentation, more large-scale orders are coming.
Thank you.