thyssenkrupp nucera AG & Co KgaA

XETRA:NCH2

Earnings Call Transcript 2024-Q1

[Hendrik Finger, executive]

Good morning, everyone. Welcome to our Q1 earnings call. Thanks for dialing in and for your interest in our company. With me today are our CEO, Werner Ponikwar; and our CFO, Arno Pfannschmidt. They will guide you through today's presentation.

Now before we start, let me briefly address the usual formalities. Firstly, this call is being recorded. The replay will be made available on our site later today. Secondly, don't forget that today's presentation and potentially some answers to your questions may contain forward-looking statements. For additional information in this regard, please refer to the disclaimer.

And with that, let me hand over to our CEO, Werner Ponikwar.

[Werner Ponikwar, executive]

Yes. Thank you, Hendrik, and good morning, ladies and gentlemen, and a warm welcome also from my side. We are pleased to have you with us today and share results and insights for the first quarter '23, '24 of thyssenkrupp nucera.

Before we get into the specifics, I would like to start with a few key messages about our performance in the last month. We had a good start into the new fiscal year '23, '24, and we have seen the opportunities offered by the dynamically developing markets for green hydrogen. That is demonstrated by our ability to grow order intake, to attract talent and to progress the execution of our projects. The figures on this slide speak for themselves.

Total sales grew by 35% and reached EUR 208 million which is the highest ever quarterly sales figure for thyssenkrupp nucera. The good progress in executing our projects has led to a 73% increase in alkaline water electrolysis sales. The total order backlog of EUR 1.3 billion for chlor alkali and alkaline water electrolysis remains on a very high level and is unmatched in our industry. Based on the development in the first quarter, we can very confidently confirm our guidance for the financial year '23, '24.

Now let me walk you through a few more details on our performance. On Page 6, you see an update on some of our ongoing projects. The erection of the single AWE 20-megawatt module in Saudi Arabia, also known as Element One is completed. We expect the electrolyzer to become operational within the next months. The first 8 electrolyzer modules for the NEOM projects were handed over for shipment in accordance with the agreed incur term free on board in Vietnam. Also this, of course, means that the transport of -- to the port of NEOM will be borne by our customer [ Air ] Products. I am pleased to inform you that deliveries are continuing despite the severe tensions in the Red Sea. The execution of the H2 Green Steel project is also in full swing after signing the second limited notice to proceed as our customer was reaching another financing milestone. As a consequence, we were able to book EUR 100 million portion in order intake in the first quarter.

As far as the Shell project is concerned, module publication in Spain is well underway. In fact, 6 out of 10 modules are finished and first call elements were also handed over. And lastly, on the Unigel project, here, all modules are fabricated waiting to be delivered. As you can see, project execution is well underway and progressing according to the customer schedules.

Let's now take a look at the global market dynamics. As per the Hydrogen Council, over 300 gigawatts of electrolysis capacity is set to be operational by 2030. And this is up from 232 gigawatts just a couple of months ago. Notably, half of this capacity is already beyond the announced only stage and is either already in feasibility or FEED study or even having passed FID. Bringing more than 300 gigawatts into operation will require significant scaling up of supply chains and manufacturing capacities by electrolyzer OEMs as this remarkable acceleration represents growth by a factor of more than 250 compared to today's 1.1 gigawatt installed electrolysis capacity. These developments point to a favorable and supplier-driven markets for electrolyzer manufacturers.

And this is further evidenced by our substantial project pipeline, which is elaborated on Slide 8. Ladies and gentlemen, we continue to see high demand for green hydrogen electrolysis systems and are very confident of winning further orders. As of February '24, we are actively pursuing 35 projects with an average project size of approximately 550 megawatts, up from 360 megawatts just 6 months ago. We can also report a further increase in potential contract value on aggregated size, which is driven by additional projects passing our maturity gains. We clearly benefit from the growing demand for large-scale hydrogen plants through our modular 20-megawatt electrolyzer technology most suitable for industrial scale hydrogen production.

I'm optimistic that we will convert this extensive pipeline into further project wins for us in the future, whereby the 2 capacity reservation agreements you know about, otherwise likely ones in the short term. I would like to provide you a bit more color on the regional distribution of our pipeline because we had some discussions on the dynamics of different markets just lately. Looking at the actively pursued projects with an aggregated size of more than 19 gigawatts, around 70% stem from Europe and North America, which is, of course, in line with our strategic focus.

The graph also shows that we get involved in a significant market potential in the Middle East and Australia in the mid to longer term. Around 11 gigawatts of the actively pursued projects in our pipeline should we reach effective contract date by the end of our financial year '24, '25. So it is roughly an 18-month horizon from today's perspective with some projects reaching contract signature earlier and some later.

To avoid any misunderstandings on the last point, let me be very clear. Those 11 gigawatts will not all end up in our books, unfortunately. But for the overall green hydrogen market, it will be a huge uplift. And I'm certain that thyssenkrupp nucera will benefit from that and win a fair share of these projects.

With that, I will hand over to our CFO, Arno Pfannschmidt, to provide you with an update on our first quarter financials. Arno, over to you.

[Arno Pfannschmidt, executive]

Thank you very much, Werner. A warm welcome also from my side. I'm pleased to present you the financial performance of thyssenkrupp nucera for the first quarter of the fiscal year and share some key highlights with you.

Ladies and gentlemen, we had a good start into the new financial year and showed further progress to deliver on our growth strategy, which is also well reflected in the financial figures. In the first quarter, order intake increased by 9% year-on-year, mainly driven by the booking of the next H2 Green Steel tranche. Group sales grew by 35% in the first quarter compared to the previous year, driven by the ongoing execution of our substantial AWE order backlog. In EBIT, we recorded a year-on-year decline of EUR 12 million to minus EUR 1 million, driven by a lower gross margin and higher OpEx as planned. Let me also reiterate once more our strong cash position, which is sufficient to finance our growth ambition. In the first quarter, net financial assets stood at EUR 761 million.

On Page 12, we have a more detailed look on order intake. In the first quarter, order intake reached EUR 176 million, 9% above the corresponding prior year figure. Alkaline water electrolysis accounted for EUR 109 million and chlor-alkali for EUR 66 million. The increase in order intake was driven primarily by the EUR 100 million tranche from H2 Green Steel. The remaining part of the H2 Greens Steel project, around 60% of the contractually agreed total volume is expected to be recognized in order intake in the coming months, so still in the current financial year.

New orders were also recognized in chlor-alkali segment. Noteworthy here is the project with CAPE IGARASSU. The existing electrolysis plant with mercury electrodes in Brazil will be replaced by electrolyzers with our highly efficient BM2.7 technology. The contract also includes engineering, equipment and consulting services for the construction and commissioning of the chlor-alkali plant. The order backlog at the end of December 2023 stood at around EUR 1.3 billion, with the alkaline water electrolysis business contributing around EUR 0.9 billion.

Now diving into our sales development on Page 13. In the first quarter, sales increased by 35% to EUR 208 million, driven by the ongoing execution of our AWE order backlog. AWE sales increased by 73% to EUR 121 million and thereby reached the highest ever quarterly sales amount. This strong increase was mainly driven by the NEOM project.

The Unigel project also had a positive contribution. In chlor-alkali, sales came in just slightly above prior year's level at EUR 88 million. Here, the growing new build business was largely offset by an expected decline in the service business, which needs to be viewed in light of prior year's high level. Overall, I'm pleased with the dynamic sales growth which is also in line with the communicated sales target for this financial year.

Moving on to the EBIT development on Page 14. In the first quarter, EBIT declined by EUR 12 million to minus EUR 1 million. This decline was as expected, mainly driven by a lower gross margin in percentage terms due to both volume and mix effects, meaning a higher sales share of the NEOM project which comes with a lower gross margin and the lower share of service business in chlor-alkali. We have also seen additional start-up costs for the planned and ongoing capacity increase.

In addition, we saw a strong increase in G&A expenses, driven by the planned ramp-up of the organization. We also had higher R&D expenses related to cell and module development in the AWE business. As we have communicated before, with the organization continuously growing we expect ramp-up costs to accelerate in the upcoming quarters, which will temporarily impact profitability in this financial year.

Let's now take a quick look on the performance of the geographical segments. Key highlights to note include the performance of the segments, Germany and Italy. The sales increase in segment Germany was mainly driven by progress in the execution of the NEOM project. On the earnings side and similar to the development on group level, segment Germany was negatively impacted by the planned increase in structural and development costs as well as volume and mix effects in the gross margin.

n segment Italy, the main driver for the strong sales performance was chlor-alkali segment, but AWE sales were also up compared to prior year. EBIT rose as a result of the higher revenue. Net financial assets stood at EUR 761 million at the end of December 2023. Our financial position is thus strong and gives us sufficient stability and room to maneuver. We will not need any additional capital for our current growth plans in the coming years. We are committed to deploying these funds in a manner that will drive long-term value creation and sustainable growth for our organization.

Let me briefly recap the key areas where we intend to allocate these proceeds. Automation and serial fabrication, strengthening and widening of our supply chain, the technology development and organizational growth. Moreover, we intend to maintain a strong cash balance to demonstrate financial resilience. And with that, we meet the requirements of our business partners for industrial scale projects. As previously disclosed for the 4-year period until 2025, '26, we have planned with EUR 150 million to EUR 250 million each for CapEx and R&D.

Moving on to the outlook. Based on the first quarter performance and unchanged assumptions for the remainder of the year, we confirm the outlook for 2023, '24. We continue to expect a significant increase in group sales in the mid-double-digit percentage range compared to previous years. The execution of already contractually agreed AWE projects will be the major driver. For group EBIT, we continue to expect a negative figure in the mid-double-digit million euro range. As I said before, we expect ramp-up costs to accelerate in the upcoming quarters.

With that, I hand back to Werner, who will summarize today's earnings call.

[Werner Ponikwar, executive]

Thank you, Arno. While wrapping up today's earnings call, I would like to reiterate some of our key messages. We had a good start to the new fiscal year '23, '24.

The first quarter results once again demonstrates our consistent focus on project execution and our potential. Sales grew dynamically, especially in the alkaline water electrolysis business to a new record level. The EBIT development was in line with our expectations. Project execution is well on track progressing in line with customer schedules. We have made considerably strides in advancing our projects also on the back of increased capacity. Further to that, the outlook is very promising. We are well positioned and sufficiently financed for continued success and growth in the future.

Overall, I'm confident that we are well on track and keep strengthening our position as a leading global player in the alkaline water electrolysis market. And I'm excited about the journey ahead.

Thank you for your attention, and we look forward now to receiving your questions.

[Operator]

[Operator Instructions] The first question is coming from Martin Wilkie from Citi.

[Martin Wilkie, analyst]

It's Martin from Citi. I just had a couple of questions. The first one was on the progress on NEOM. So it's at that you've had good progress with shipping the units towards the project. Can you remind us over the course of the year, what the key gates are in terms of sign off by the customer and so forth? Just as we think of that project, obviously booking more revenue. But in terms of when the risk is largely transferred to the customer when they've made technological sign off, just to understand how that works in terms of the transfer to the customer.

[Werner Ponikwar, executive]

Martin, this is Werner. Happy to do so. I think I mentioned also in the presentation that we are working here on incoterms, FOB free on board. That means that also risk is transferred over to our customer [ Air ] products at the point where actually the modules arrive on the ship in the harbor in Vietnam. So we are transporting the modules actually to the harbor, and we are still responsible for loading on the ship as soon as the modules are on the ship, risk is transferred over to [ their ] products, and they are responsible for all the logistics, shipping, unloading, et cetera, and bringing to site at NEOM. That is actually -- has happened on as I was mentioning, for 8 of our modules right now. The rest is, of course, coming as we plan for within the next couple of months and even a year. Does that answer your question?

[Martin Wilkie, analyst]

Yes, it does. I think you're just seeing that encouraging progress of risk transfer is obviously very encouraging to see. The second question I had was on your pipeline and your geographic split, it interesting to see you've got Europe there as a meaningful chunk, 36% of that 19-gigawatt aggregated side. There's a lot of industry commentary that hydrogen in Europe is simply becoming less competitive. The takeoff of hydrogen will have a much higher dollar cost per kilogram that it would do in the U.S., for example. But it's obviously a big chunk of this -- of this pie chart.

Just to understand how we look at that pie chart, I mean, you did comment about some of this coming to contract date potentially by the end of fiscal '25. But when you look at that pie chart, where you see the highest probability where you see perhaps being less likely. That would be very helpful.

[Werner Ponikwar, executive]

Yes. Okay. I believe, and we also here are very much in line with external studies. As you can find with the Hydrogen Council and McKinsey and others. Europe is still to be seen as one of the largest markets for green hydrogen going forward. Of course, Europe might not be able to fully be self-sustained when it comes to producing and consuming green hydrogen, it may remain and it will be a net importer of green hydrogen in the future, still the potential to build own capacities is quite significant. Don't forget, in the northern part of Europe. There's a lot of wind in the southern part of Europe, there's a lot of sun. All of that can be certainly converted into I would say, at least rather cheap green electrons. And with that, actually also the hydrogen, which would be produced with that can be quite competitive.

In particular, when you compare that actually with hydrogen, that is maybe produced at a cheaper level, let's say, in the Middle East, but that needs to be shipped as well and probably even reconverted from ammonia into hydrogen to be then consumed within Europe. So we believe the balance still works out for Europe, and we see that actually also in our project pipeline in Europe and of course, being a European player, one of our key areas, certainly is Europe. We see also in our, I would say, short-term pipeline quite a number of 3-digit megawatt projects now being developed and maturing, and we hope to be able also to announce a couple of wins within the next couple of months in that area as well.

[Operator]

And the next question is coming from Yoann Charenton.

[Yoann Charenton, analyst]

Yoann Charenton from Societe Generale. I have a few questions, if you don't mind. The first one will be on the U.S. hydrogen production tax credit guidelines. Are you able to share some feedback you have received from customers and prospects on this proposal by the U.S. treasuries? That would be my first question.

[Werner Ponikwar, executive]

Yes. Let me quickly comment on that. Of course, we are intensively discussing with our U.S. client based on the development here and the cession which is out there from the U.S. Treasury. Of course, the, I would say, very strict rules that are suggested right now would certainly have an impact also on the levelized cost of hydrogen as it can be produced in U.S. because if you have to follow also the timely correlation and additionality, et cetera, it certainly means that you cannot run your electrolyte 24/7, if you want. So you are working actually and operating on a rather limited number of operating hours, and that certainly makes the cost per kilogram or the specific cost of green hydrogen more expensive than if we would do that actually 24/7.

Still, we also hear that even considering that the general sentiment is that even on those rules in the U.S., green hydrogen will become a very attractive and competitive alternative to other energy carriers also in particular actually compared to gray hydrogen. So as such, we don't see that our clients and potential clients are very concerned about those developments. We believe they -- most of them can live very well with that. And we're also seeing now that projects are progressing in their development very much. And also here, we hope to be able to announce in a few months, one or the other win in this market.

[Yoann Charenton, analyst]

I would like to ask a second question, if you don't mind, which will be about the order intake. Can you please tell us what is the number of order intake recognition milestones for typical AWE projects? Do potential delays in securing access to the Power Grid may impact the order intake related gates? Do you still expect to convert the contract with H2 Green Steel into orders in the financial year '23, '24?

[Arno Pfannschmidt, executive]

This is Arno Pfannschmidt speaking. So I would like to take this over. Regarding order intake recognition here in the financial reporting, we have here a couple of rules. First of all, we need a binding contract with a customer, which is particularly the result of a longer process. Still, then we look for further conditions to be met like here in the H2 Green Steel project, and these are mainly financial securities for us, that's usually connected with an FID decision on the customer side, which that -- which is also connected then, of course, with a respective financing provisions by banks, but also by equity.

And as we have made here significant progress in the month of December, we were able to make effective the so-called limited notice to proceed #2 with a value of around EUR 100 million. And as you may have seen also in the news the financial closing has made significant progress for the H2 Green Steel project. So we are very confident that within the next few months, also the rest of the project will fulfill our conditions for order intake recognition in the financial reporting. So yes, in this fiscal year, we are confident to report the rest of that.

[Yoann Charenton, analyst]

And last question for me will be on the capital spending. When do you expect an inflection point on capital spend this year?

[Arno Pfannschmidt, executive]

We have given the guidance here of EUR 150 million to EUR 250 million for a 4-year period, '22, '23 until '25 '26. As you have seen, we have not spent a lot in '22, '23. And we also think that in this fiscal year, we will do a significant portion of CapEx, but there will be remainders also for the last 2 fiscal years. So in the first quarter, as you have seen, there has not been a lot, but we expect further CapEx to come in this fiscal year.

[Operator]

And the next question is coming from Michael Kuhn from Deutsche Bank.

[Michael Kuhn, analyst]

Few remaining questions from my side. Firstly, on the 11 gigawatt that you mentioned, to be awarded over the next 18 months, I think. And also mentioned not everything obviously will end up in your books. But let's say, theoretically thinking and looking at your current capacities how much of those 11 gigawatt could you theoretically handle from today's point of view?

[Werner Ponikwar, executive]

Michael, this is Werner. I try to answer that. Of course, we will not be -- as I mentioned, we will not be actually able to win all of that 11 gigawatts. And I don't want to disclose here our target win rate right now. But let it put me that way. We believe that we will be able to win out of those 11 gigawatts with a win rate that would lie above our today's market share. Is that helpful?

[Michael Kuhn, analyst]

It is. The question is, let's say, I think, opinions of market share somewhat differ. So where roughly do you see your current market share?

[Werner Ponikwar, executive]

Around 30%, I would say.

[Michael Kuhn, analyst]

All right. That is -- that is a very good indication. Then one more also on the pipeline and the much discussed major reservation agreement in the U.S. Any update here or any, let's say, rough indication on the time line when we might hear from that project again?

[Werner Ponikwar, executive]

So we currently are progressing well on the negotiations on the firm contract right now. I would even go so far saying that we are sort of more like in the final stage of the negotiation. So we would expect that within the next months, we are hopefully able to close the deal. And with that would also then be very quickly able to recognize order intake.

[Michael Kuhn, analyst]

And next month would be in the current financial year?

[Werner Ponikwar, executive]

Definitely I mean in the current financial year. We're still having 9 months to go or a little bit less than that because we're already in the second quarter, but we definitely expected to realize and materialize into the financial year.

[Michael Kuhn, analyst]

Excellent. And then one last question on the gross margin development. Gross margin down year-over-year, with 2 effects, lower services share in CA and let's say, a different project mix in AWE. Can you give us a rough indication on gross margin by segment or on, let's say, the 2 factors weighing on gross margin and probably the dynamics for that KPI over the next quarters to come.

[Arno Pfannschmidt, executive]

This is Arno Pfannschmidt speaking here. So actually, well understood from your side, we have here a mix of various projects recognizing revenues. And what we see here is, first of all, a significant shift from local to green hydrogen. As you may have seen, it's second quarter now where we have more sales in the green hydrogen business than in the traditional chlor-alkali business, and that will even accelerate now in this fiscal year.

So we will have a higher share of green hydrogen, which has initially, as we, I think, consistently communicated a lower gross margin than the traditional chlor-alkali business, particularly with the big NEOM order, having its peak revenues in this fiscal year, so a huge share of the EUR 600 million to EUR 700 million expected for green hydrogen sales in this fiscal year comes from the NEOM project. And we also have said that this was the first lighthouse project where we compromise also on the gross margin.

So it has an under proportional gross margin, which is now getting over proportional in the current fiscal year. So we would expect that gross margin would go down as a total here over the quarters as the share of green hydrogen will become bigger. And the other effect that you have mentioned, of course, is that within chlor-alkali, we have a shift here from service business to new build business, which has a lower gross margin. This will be over the full fiscal year. So it will remain like that.

[Michael Kuhn, analyst]

Perfect. And then one last follow-up. As you just mentioned, NEOM, 8 modules brought to the port in the -- in the recent quarter. What production run rate for NEOM in Vietnam, would you expect for the for the upcoming quarters looking at modules per quarter?

[Arno Pfannschmidt, executive]

We would say that the NEOM revenues will be approximately the same as in the first quarter and the other quarters.

[Operator]

And the next question is coming from Alexander Jones from BofA.

[Alexander Jones, analyst]

The first one, maybe following up on the question around U.S. subsidies. Clearly, Europe is a slightly bigger proportion of your project pipeline. I'd be interested in how reliant do you think some of those projects are on subsidies and whether there are particular milestones we should look out for, whether that's the EU hydrogen bank or particular national government funding schemes that they are important for us to watch.

[Werner Ponikwar, executive]

Okay. So in general, of course, all projects are eyeing funding, as you can imagine. However, and I'm talking here about our particular pipeline. The larger scale projects that we are typically seeing progressing right now are not so much depending on funding because typically, they are driven by customers and potential customers who are developing, I would say, the whole ecosystem of green hydrogen. So they basically have the electrons, they also, of course, developing the electrolysis part. But typically, we also have already offtake to that. And it certainly makes it way easier to get a bankable project than actually, if you are lacking one or the other of those elements, as you can imagine.

And then if you, on top of that, basically, are very much relying on funding, that certainly leads to delays, as you can imagine. We see those delays very typically right now with projects which are driven by, I would say, typical project developers we see way more progress actually currently with projects that are more strategically driven by industry players. And that's actually what we see in our pipeline being reflected as the larger portion compared to the classical project developers. And that holds true for the U.S. as well as for Europe, and this is also why we are quite confident that also within our European project pipeline, we will see also in the short term, a couple of significant project wins.

[Alexander Jones, analyst]

And one more, if I may. I think you disclosed the average size of that actively busy pipeline is 550 megawatts. I'm interested if there's any sort of material difference in the average size between the different regions, whether some regions have particularly big projects compared to others?

[Werner Ponikwar, executive]

Yes, I would still say that the average size in the U.S. is currently larger than in Europe. Europe is coming from a history of, I would say, rather small projects. And also if you look at the funding schemes in Europe, they are very much still supporting also a very small-scale units, which essentially, I believe, needs to change definitely because the smaller scale systems, you will never be able to produce hydrogen at competitive costs and that we definitely need to go for larger scale systems here in Europe as well.

We see quite promising developments in Europe, but still the basis is, I would say, on average, smaller than, for example, in the U.S. The U.S. had a late start, if you went into green hydrogen, but they are way more bold when it comes to developing larger scale industrial scale projects. In addition to that, we see, I would say, a number of super large-scale projects in the Middle East, predominantly, of course, in Saudi Arabia, where we have the NEOM project, but also in other areas like in Oman, but also in the Emirates. There are very large [ kill ] projects that are currently under development. I would still say in a rather earlier stage compared to other regions, but once they are maturing, they will be very significant in terms of size.

[Operator]

[Operator Instructions] And the next question is coming from Skye Landon from Redburn Atlantic.

[Skye Landon, analyst]

My question is around the cash flow in 2024, CapEx first quarter was fairly limited. Perhaps you could elaborate on how that's going to change throughout the year as potentially ramp up on CapEx spend? And also if you could provide some comments on how you expect cash flow for your project to flow in and generally how the net cash position is not throughout the year?

My second question is on the pipeline, and you've been fairly clear about the 11 gigawatts of potential projects both 2024 and 2025, and the timing of those contract wins. But are you able to elaborate a little bit on when the likely revenue recognition timing for those pipeline projects would be and how it can potentially impact yourselves?

[Werner Ponikwar, executive]

You want to take the cash first should I answer the second part?

[Arno Pfannschmidt, executive]

Let me start here, honest speaking, with the cash flow. Indeed, we had a pretty good growth in quarter 1, low CapEx. And as I mentioned before, we expect higher CapEx for the rest of the year, which will have a negative impact, of course. And also, if you look on our EBIT guidance for the full fiscal year with the acceleration of the cost. This is, of course, also cash relevant. And if you translate that, although we haven't given a guidance here on cash flow for the current fiscal year would mean that we will accelerate cash out, and that's practically what I can say to that topic.

The other question on the revenue recognition of the pipeline, maybe I'll take this as well. We have indeed here an expectation of those projects, which might be effective and reported as order intake in the short term that they will contribute already in this fiscal year to a small extent to the revenues, but to a bigger extent also in '24, '25 already, particularly for those projects, which we expect to win still in this fiscal year.

[Operator]

At the moment, there seems to be no further questions. And -- so Mr. Werner Ponikwar, there are no further questions left.

[Werner Ponikwar, executive]

Very good. Then, yes, we are here then, I would say, at the end of our earnings call. Thank you very much for being with us today. I really appreciated also the discussion and the questions that we received from you. Yes, wish you a wonderful remaining day, and we hear us next time when we report on our next quarter. Thank you very much.