Operator: Welcome to the PowerCell Group Q3 2024 Report Presentation. For the first part of the presentation, participants will be in listen-only mode. [Operator Instructions]. Now I will hand the conference over to the CEO, Richard Berkling and CFO Torbjorn Gustafsson. Please go ahead.

Richard Berkling: Good morning everybody, and a warm welcome to our Interim report, live from [indiscernible] Gothenburg this morning. I'm joining you today with Torbjorn for the last time, actually reporting on quarter three, which was a very intense quarter, with a lot of activity. We are happy to report that we have strong market activity. Previously in the year we have communicated that we are operating in rather soft market conditions. We now see a significant improvement, not necessarily all the way into the books of '23, where we report a 3% growth in the quarter, 12% growth for the last twelve months at only twelve, but especially in market activity and income order.

So we now, with the large order that we reported in September, SEK165 million of two subsystems sold leading Italian OEM manufacturers, that establish us in a position where we now have serial production for customers, going up. So we have a roadmap of more than 100 systems to be produced. And that is for the first time in PowerCell history, where we have an ongoing scale production, which is really positive, good trigger for what we see going forward. We also reported that we received approval in principle from Den Norske Veritas for the [indiscernible], that combined methanol reformer and fuel cell system, which in essence is a fragmentation solution, where you have methanol-to-fuel and then you have electricity out. Something that is, we believe is going to create massive value for the customers in the marine market.

And we will elaborate a bit more on that. Besides that, we had a good order in July also from the European OEM manufacturer, which was important to get season started and we have seen a lot of activity from that. What is interesting to see in the market fundamentals is the fact that we see a rapid acceleration. And when we talk about that, it is from start of negotiation to when we see a completed delivery, where we see the invoice going to the interfering money into our account. So previously, with the large orders to marine and also aviation, typically it was a five year period from initial negotiation to complete the delivery.

Now we see that that time is limited to 18 months. And that is a very significant indication for us, because that also gives us an opportunity to go faster, but also that we have more mature customers because we have a good understanding of what to do with the product and how to put them into implementation. And it's also driven by the fact that we now have commercial customers that need to get product out there making money. A significant change in the underlying characteristics of the business, which comes from the focus we have had on OEM business, where we now see marine and power generation driving demand growth. As communicated, the order from a leading Italian marine OEM manufacturer is milestone order for us.

We have talked about finding the first really strong OEM manufacturers, designing in our solutions into their product offering and bringing it to market, gives us a rather sticky business model, but also strong value and large order numbers. So for PowerCell, this was something that we have been working quite hard on and we're very happy to be able to do this. So it is a milestone, not just for PowerCell, but for full industry, on the path towards de-carbonization and transition. In one of the orders also that we will have this report was agreement for the countless product for vertical take-off and landing aircraft confirms our very strong position in the aviation sector, where we have, as reported before, more than 20 some of the customers, where of course Australia is the leading entity, pushing our technology and their point offering into aviation certification, which is always very good and according to plan. So aviation continues a strong segment for PowerCell, so you will see continued growth and hopefully we can open more progress.

You could dig slightly deeper into the numbers of sector three. I hand over to Torbjorn for explanation in detail.

Torbjorn Gustafsson: Thank you, Richard. And yes, regarding net sales development, we have previously in protocols also explained that we've been in a softer market situation. But with that said, we are then growing quarter-over-quarter, but also year-over-year, now with twelve months rolling, growing with 12%.

And given the fact that we've been in a softer market situation, where the dialogues have been more towards bigger OEM sales that have taken a longer time, I think that performance is good. And like Richard mentioned before, the order intake coming in, supporting spend going forward. Gross margin development, we have seen right now a downward going trend on the gross margin side, but that is for power. So something that will happen quarter-over-quarter and not the trend that we can see going forward. So it's related to the product mix and how it works out.

And at the moment the product mix has been towards a gross margin of still healthy, above 30% gross margin. But we also see that this product mix will change over time and will also vary then on the gross market side.

Richard Berkling: And if I can elaborate, we see an improvement from 42, which is the result of very close focus on this one, because we want to have a healthy gross margin over time. We can also conclude that equity was affected by exchange rates, which is the case for pause. But as to the third quarter-over-quarter, we will see some shifts going up and down because of margins.

But we have a strong focus on bringing thermal up to an average where we feel comfortable. And we think that we will be able to report stronger numbers into for annual.

Torbjorn Gustafsson: And on the operating leverage side, which is one side that we've been using before, and now again. And we can still see on the long run a downward long trend. And although we haven't had the net sales growth in the last quarters, we still are keeping the leverage.

And we also are doing this with continuous building capabilities in both our industrial offering and commercial offering, together with keeping a high pace on developing the technology. So we are safeguarding operating leverage, but at the same time still keeping the development of the company towards future growth.

Richard Berkling: And just for clarity, this is one trend where you want to see downward trend.

Torbjorn Gustafsson: That's right, that's right. And cash flow impacted by working capital and then having an operating cash flow of SEK-7.4 million in the quarter, so an upward trend from last quarter.

But then again that we highlight also in the quarterly report that it had significant catalyst in the third quarter. And customer payments from increased OEM sales will increase the cash position beginning of the fourth quarter. And a lot of it has already happened today. So a good situation and good momentum in the cash flow situation. And also here worth noticing the improvement from last quarter, the improvement to the year, so once again, strong focus on this one.

And we're happy to be able to report a new situation, still having the customer set up. So if we then go back and look to what we have communicated previously, what has been in focus for 2024, for PowerCell, of course, the OEM customer orders, because we want to build a more solid order portfolios, get competitive business, but also getting OEM customers that are actually using the product in commercial applications, because that is the trigger. That is indicating that this is now entering into a more of a normal market driven growth. So the order that we reported in was a step in that direction. And the fact that we see with ongoing dialogue is not in the same direction.

We also have continued to grow and expand in the US with customers and opportunities, US continuously a strong market for us and will be even more important. The position we have at the moment is to scale the current cost generation and driving parcel towards breakeven and balance the cash flow. We see that we are doing that in a very good way. As we pointed out, we think that we have managed the situation on the market in a very good way of making sure that we are gaining market share. Growing despite the market especially puts ourselves in a position, or when we now see markets accelerating, that we are in full position for that with really strong product offering, a really strong also industrial setup for production and also that we have continued to be innovative presenting new product launches.

In Q2, the Marine System 225, where we improved the performance on the 16 Marine System with 12.5%, which is really valuable and then in quarter three, the improvement principle for the methanol. Two, hydrogen power plants, which will give us a very strong position for marine application where you want to have complementary fuels compared to hydrogen in the form of methane, and slightly more of that. With all that said, we have been able to also industrialize and accelerate industrialization of the next generation, which is extremely important. We are market leading when it comes to performance on our portfolio, which uses that technology that we have together with fasting production. We are not resting with that leadership.

We continue to build on that. So accelerating the development of our next generation heavy platform is important. So the balance between performing short term, having a clear path towards breakeven while still investing into more capabilities, that is the balance point that is so important, for example, to manage. And we are quite happy with the position we have. We also indicate that it is a new phase in the market.

We see commercial growth from the OEM business that comes with new requirements and also new opportunities. As indicated before, the negotiation cycle is slightly longer when we are trying to negotiate an OEM contract because it's more complex and it becomes designed into the industrial system. So the technical and commercial due diligence from the customer is more expensive. With that said, we also have a stronger position when we widen into the office because then you are designed into their offspring. So a really good opportunity that comes with rather strong requirements on performance on top of parcels.

And we have developed abilities and capabilities to be able to support that with everything from the quality internal quality process to the manufacturing process and also optimize for capabilities. So the order that we received in September was an important tool point on that because it's not just the order value. The fact that we are qualified to boom those customers is extremely quick and we have prepared for this by investing heavily into our product offering, not just having superior technology, but package in products that are relevant for the customers. In the presentation, we have also invested time and effort into the slightly boring concept of productivity and internal efficiency. Quite often in the early stages of technology shift, companies focus very strong on their products and forget the really really important traditional competitive advantages like productivity like uptime on your product and efficiency.

So the industrial stability and the capacity we have is something that we're quite happy for. And we see that we have a structure that will lead us towards breakeven even in a low volume market. So in this growth journey that we have started and now accelerating on, we have a very strong industrial footprint. We have our offering industrialized innovation that's serving as a bridge between our industrial support components and the end customers need for adaptation. We have a strong first mover advantage from the fact that we are active in different applications, building knowledge from the aviation industry where we have really strong requirements for performance, safety buster that we then apply in marine sector, in power generation, et cetera.

So the mix we have is making our application or this really strong and that is a competitive advantage in the market as we did today. We're happy that the growth is coming in the shape of commercial orders and not just the tech exploration early stages of project orders. And we are now ramping up production for serial revenue to customer order, which is a first for power plant. We have had strong growth previously, but it's been a bit of a up and down when it comes to production volumes. Now we can see that we have stable pipelines where we can have serious synergies.

The fact that we have Bosch as our key partner tires of course gives us both massive stability but also credibility to customers when it comes to the OEM customers with strong request for industrial stability and credit. So if we look at the market drivers and we attended the UN Climate Week in Europe three weeks ago, we left there with a sense of a strong acceleration in the markets and a very positive sign. Some of my colleagues went back feeling a bit discouraged because they felt that focus on decolonization is not as strong as it's been previously. To me that is a positive thing because de-carbonization is no longer required only driver in this energy transition. It's still extremely important.

We see massive commitment and investment going in to making sure that we are in alignment with the Paris agreements, trying to keep global warming without. But at the same time we now have pretty strength also from focus on air pollution from combustion engines. And this is something that is important today. The climate issue is a big concern, but it has a 20 year perhaps perspective where air pollution today is causing massive health issues and cost for society already today. So in urban areas we see now legislation, trying to cut up especially emissions of lots and lots, and there the fuel cells and electrification in general is viewed as something that will create value immediately.

And this is also one of the drivers we see in the marine sector, where especially cruise ships will not be allowed to enter ports in urban areas. And people tried idling the combustion, so either they will have to have an electric charger from the port, which is not available everywhere, or they need to have an electrification system on board for local it. And this is the driver behind the OEM business that we now see in the time to market on those products is also shorter because they are not safety critical, because they're not concerned with options. So it's a really interesting acceleration into the market, but then the overall increased demand for electricity in society. We saw a report from International Energy Agency, where growth in demand electricity is at the highest ever, growing 4% year-over-year.

And you would think that 4% is not necessarily that high, but if you compound that year-over-year, you quite rapidly see that numbers are adding up. So society, we need to have solutions. And while we see the green sources of solar and wind road in contribution to the energy system, they are in their characteristics qualified. So you need to have an energy system where you can store energy to be able to load and not cause stress into the grid of our society. So the energy mix going forward will require different solutions, where of course hydrogen and futures are viewed as one solution into that Asia we can also see that the slowdown in battery electrification deployment is opening up a window of opportunity for hygiene dissipation in certain markets, so interesting opportunity to be able to act on.

And then we see continued strong initiatives when it comes to governments trying to accelerate the energy transition for of course purpose of climate change, or the purpose that we communicated now to the evolution and the hazardous particles in the area, in urban areas, but also to be able to build a new industry and make sure that we don't have dependencies to certain markets or certain suppliers of technology. So hydrogen as a central role in the upcoming energy system is recognized. And, and we see now the hydrogen industry shoring at a rapid pace, where we see availability of hydrogen, both green and other sources of hydrogen, improving and also being deployed in. So, to summarize, we continue to see strong market drivers. We see that the energy transition is accelerating and it is supported by both the governmental initiatives, but especially OEMs, taking on new positions, really investing into their transition towards what is sustainable energy solutions, but also sustainable business models.

We do that with the leading technology and leading proposal, where we have what we claim is that future tech, technology and industry best performance and best validated together with that. It gives really a reliable high and a compact format, which is important because size, weight and cost will always be a competitive mortgage in any application that we're active. The fact that we are starting serial deliveries with commercial applications is an important tool point and an important shift in the industry. And we also see scalable production within our existing industrial systems that we carry out rate even already in the early stages in this, looking into where we will meet again, we will have our quarter fourth report and year-end report on February 13 and then subsequently following schedule. So with this we open up for questions and comments from the forum.

Operator: [Operator instructions]. The next question comes from Sofia Sorling from Carnegie. Please go ahead.

Sofia Sorling: Thank you. Sophia here from Carnegie, can you hear me? Great.

Hi. So a couple of questions from my side. So if we start with questions on market, you mentioned quite soft market activity, but could you elaborate on, elaborate a little bit on that and which end market segments. But you also mentioned that you see progressing activity on your own. So could you also elaborate a little more on that as well? And also if you refer to discussions regarding add on orders on current or existing customers, or if you see like a higher activity level related to more new customers.

Richard Berkling: I think I start. Yep, I'll try to remember all questions I thought of the last one. We actually see follow up orders and incoming new customers, which to us is equally important. The fact that customers who have been working with us for a number of years continues to put trust in us and continues to invest in us is an important tool. So having customers that are satisfied and returning is of course really, really important.

But equally important if the fact is really the customer pipeline, new additions. So it is a good mixture of both commenting on the soft market that is something that we have described in 2024 as a software market. Productivity was slightly lower. And it's not necessarily just because of lower activity, but also the transition away from the early stages where you have project sales, where you might be selling to a customer that is a one off, which has one budget that will be just for a single purpose. That decision process is faster than when you negotiate an OEM contract.

So perhaps soft market is a bit exaggerated. But at the same time, for us, the result is the same regardless of what is the driver behind it. After summertime, we see a complete shift in that where we have more market activity, more orders coming in at a higher average value. And as I also pointed out previously in the talk, the fact that you go from negotiation to complete the delivery and invoice in 18 months compared to five years previously, it means that we are accelerating through the order book in a faster way, turning prospects into revenue in a much faster way. And that is not just one customer.

That is actually throughout the whole scale of segments. And then I think your question was also related to how it is distributed in the different segments. Of course, with this marine order, that was a milestone order. The value in marine is very high, but we see activity actually in four different segments, both per generation, where we now have interest in dialogues, but also aviation. So I think it's even distributed and it will be interesting to see how we can report progress.

Sofia Sorling: All right. No, I think that's fine. Okay, so I thought there was some new information about this marine order that you actually will have some recognized revenue of this order already in Q4, but delivery through will not be until 2025. Can you give some more details on why is that the case? And also should be interpreted that the deliveries will be earlier than previously expected? Or is it still as according to the press release?

Richard Berkling: Deliveries will be according to expectations. When we sign the order and then on how this is reported, I will hand over to very qualified people.

Torbjorn Gustafsson: Yeah, so exactly the delivery date hasn't changed. What is the case with this marine order and will be the case without exactly knowing potentially the future marine orders. Another big project. It will be revenue recognition according to percentage or condition. And then since, and I think Richard talked about it also previously in the call that from order to delivery, the time spent there is much quicker now or less than what it used to be.

So from now on, or from signing the order and then starting the work within this project, it's very quick and we will be working with this. And that's what we also wrote in the quarterly report, that there will be work being done already in the fourth quarter to be able to deliver according to plan and deliver on.

Sofia Sorling: Yeah, okay, that's clear. And then maybe a final question on profitability. So you mentioned that the gross margin is still were at quite decent level with this 32%.

But what would you say is the main reason for still this is a lower margin compared to your historical margin of at least around or above 45%. And would you expect, or should we interpret that we should expect and extrapolate this type of gross margin level? Why not? If you can elaborate a little bit on that. And also what you expect is normalized gross margin level for power cells in the mid-term?

Torbjorn Gustafsson: Yeah. And unfortunately you will receive the answer that you don't appreciate that we are not commenting on forecasts or. But the variation is related to the fact that we have a number of revenue forces.

I mean, we have the sales, we have engineering sales, we have the loyalty sales. So we have a number of those that will vary over time. Unfortunately, in quarter three, it is affected by currency change. That is our disadvantage. The royalty development with Bosch is as always, stronger in the end of the year.

So hopefully we will see some improvement, but there are some delays. Q3 last year had a very strong report on royalty, so comparing it here, over here, we always give some variances. We are happy to see the improvement from hedgehog two with a better policy. In quarter four, hopefully we can see the continued improvement. But it's been very, but it's been a priority for power over the last three years to have a strong and solid gross margin where the level will be just on alternative going forward.

That will be for us to prove to you and follow. We are not making any comments on how it will be developing, but it is the main focus of Carson because you cannot have a healthy, long-term sustainable business without the strong growth margin. So that is a number one priority. Especially you want to be able to continue to invest into new innovations that we're doing. Being able to present forest updates about news every quarter, not necessarily having that activity in every quarter with new innovations, but this is the only way to kind of control your investment.

Sofia Sorling: Okay, that was all from me. Thank you so much.

Operator: Thank you. [Operator instructions]. The next question comes from Henrik Alveskog from Redeye AB.

Please go ahead.

Henrik Alveskog: Hello, gentlemen. Do you hear me? Good morning, Henry. Good morning. Okay, my first question relates to the Siam order and the deliveries to the Norwegian ferries.

Will you. As far as I can recall, you said before that they will. That delivery will be finalized in '24. Is that still the case? And also, when we are trying to figure out how much is remains to be invoiced from that order, is it fair to assume that the sales that you are reporting in the notes to Norway is mainly related to this order and that what you have invoiced since Q4 last year to Norway is regard is regarding to this Siam order. I hope you understand my question.

Richard Berkling: Yeah, yeah. First and foremost, I don't think that we have said that it will be completed by 2024. On the contrary, the shipyard was selected later than expected. Still, we have been able to develop our business in a very good way. So we have not been affected in that way.

We don't have any effects on cash, but we are building up the value as we go along. And the absolute majority of the revenues from Norway is related to that, customer. But we are not giving any more details or breaking down the Norwegian sales into customers. But you're right in your confusion that it's the absolute majority. But we will continue to have revenues also.

Henrik Alveskog: Okay, thanks. And then, well, relating to the stationary segment and power generation and then your partnership with Hitachi. First, I'm wondering, are you also working in parallel in this segment on your own, so to speak, or are you focusing entirely to the partnership?

Richard Berkling: No, the partnership with Hitachi is important to parasite. They represent an OEM customer who have designed in our technology into their product offering. With that said, as many OEM customers, they have long internal processes, which means that they sometimes have a long time to market.

But on the other hand, when they go to market, they have a massive organization to push out products globally and to be able to manufacture in substantial volumes. So we still value the collaboration with Hitachi really, really high. We hope to see it materializes into actual orders and delivery rather soon. So we have a good dialogue with them. But we have not just been waiting for them.

We have a number of other applications out there in the cloud generation segment. It's been reported previously with the customer Tyson, who has been for in the world with formula extreme e, where they have actually the methanol reform to the fuel cell to generate power to charge the cars. So they have also massive market and application knowledge and expertise from this. So we have parts deployed in that segment. We have reported also that this is one of the segments where we expect to see the highest volume, but it's been slow in transition.

So hopefully we can report on progress in this area because we don't see that this segment as reach is potential in any way. So let's keep an eye on.

Henrik Alveskog: Okay, thanks. Just finally a question on OpEx. Maybe you already explained this in the presentation.

Sorry if I'm didn't catch it, but selling and admin expenses were a bit lower here, quite significantly lower in q three compared to what we've seen lately. Is it something temporary or more of a is this more of the run rate going forward?

Torbjorn Gustafsson: I think also on selling an admin, there will be some variances depending on what kind of projects or what we are doing. That looking at an overall trend, going back a couple of quarters, and then releasing it to net sales development, and knowing that we are focusing on operating leverage, you will find sort of a way forward on putting that in the trend. And then we have a question here on screen on elaborating on the approving principles for methanol reformers and how that fits into the growth strategy of power zone. Our growth strategy is quite simple and in any technology ship in the early stages, you need to focus on building more installations, a larger population, and you also need to focus on increasing your value for that installation.

And value is not just sales value, but you also need to contribute, you need to create value in every installation. So the methanol reformer to Hydriac is a very important plug and play solution. So PowerCell will be integrating a methanol reformer from BRICS Industries, very strong supplier from the US with experience to both naval applications and military applications, where they have really good knowledge on safety, crispy applications. But the fact that we do the integration is short in time to market for our customers. It's also complementing customers that are not either comfortable with using hydrogen or they cannot get availability.

So methanol as a fuel carrier is something that will also open up more markets. So that will drive a number of information. And then for PowerCell, by doing this integration, we actually double sales value. So per installation we will have twice as much revenue, which is then fully according to our growth strategy. So that is perfectly in line.

And we were really happy to be able to report a proven principle which indicates that we have a safety system and a solution that is according to marine industry standards. Hopefully we can report even more progress in the following quarters on this one. But this is a very important step forward to accelerate the growth strategy. For we also have a question here. With the order that you have already signed, do you have capacity to take all orders from new customers? Yes, we do.

Tell me how much you want and do you deliver? No, but we have, as we said before, we have an industrial system where we can scale up production both rapidly and in great numbers. The collaboration with Bosch is of course a very important contributor in that itself, because the fuel cell stack manufacturing is the most complex part of the manufacturing and assembly process. And having a solid industrial partner like Bosch in your corner is strength. And then the assembly of different systems towards either marine or aviation or cogeneration applications is something we do in house of power cell. And then we can scale up numbers quite rapidly and in a good way.

We also have this asset like business model where we can set up production close to the customer. So would we have a breakthrough order from the US market. Which is another question here on the screen. We could have a assembly of systems in the US market in a very short lead time without any substantial investment. So the setup for PowerCell to be able to supply greater volumes and also in different locations geographically, we're quite happy with that positioning and that.

So yes, we can deliver. Do you see that there will be service and automotive sales for you in the future? Yes. We have reported previously that especially with the Norwegian Feuerson deal, there will be an optimized contract where we have a performance guarantee over 50 years. So that will be like a subscription based fee annually, which is a solid revenue. Both is commissioned and deployed and we see the same for a number of customers, both in marine but also in other segments.

As soon as you have your product in a commercial application, the customer is requesting what is called an SLA service line agreement. So yes, we will see recurring revenues. We don't have any guidance on to what extent that will match the product sales, but in more mature industrial markets, the Automarket sale is a very important contributor to top line growth and then even greatly contributors to gross margin and bottom line profits. So yes, this is something that we are exploring and developing going forward. We have two questions about collaboration with [ph]ZeroAvia on the progress there, and also whether or not we are part of their continued growth.

We have a commercial order for the driveline three, Radio 600 its name which we sign in 2022. This is the drive down that we are now certifying according. It's a certification of the action technology, but also certification of power. So where we will have an audit in our facility couple of weeks from now to be able to as 9100, which is a very demanding quality process control. So that is progressing well in its initial business.

And then of course we have a good dialogue with ZeroAvia. They are exploring other alternatives as well for their larger installations. But with this good collaboration we hope to be able to. But nothing is decided and we fully focused on providing value on the existing business. That is the best way to do this stuff following business as well.

So, good question, but nothing really. Let's see if we have something else that we want to. One question, and this might be the final one, because we're running out of time. It seems like the marine segment is growing. How do you see opportunities in this industry? Well, marine is really important because we now see high market activity from OEM customers that designing in our solution into their industrial offerings.

And we see also the market drivers. Why? Because the marine industry both needs to be carbonized and electrified of their operation and they can do it. It's quite easy for them and a rather short lead time to market because you can have hybrid installation, for example, in cruise ships. You don't need to electrify the full propulsion. When you do that, that is something that will have a long time to market.

It will have more effect on how you operate your vessels. So if you instead electrify part of the installation, it could be that you use fuel cell for electrification on what they call hotel load, which is in id, or the internal energy supply of the system of the vessel for air conditioning, elevators, etcetera. And then you can also use it for going in and out of work, taking out the emissions, which we talked about before. The air pollution in urban areas is becoming a focus. So if you could have that type of installation, then you can start your electrification journey or your energy transition without taking too much risk as a vessel operator.

So Marine? Yes, it is a very interesting segment because they have the perfect application for it, but they also have the logistics in Harvard, where they are used to having different types of fuel from gaseous energy to liquid or pressure identity. So it is a really interesting market development that we see, and we see the right activity from the right actors in the value chain with it. We would like to thank you as always. Reach out if you want to have a dialogue. You're always more than welcome to come to the Ferris doctor in the in Gothenburg to visit us.

Otherwise, I would like to extend my gratitude to Sylvia for serving along me for a number of years, and we still have some months to continue together, but this will be his last quarter performance with you. So big. Thank you and good luck going forward, but you still have some months to join me here. So thank you very much. Enjoy the rest of this report period.

And as we said, reach out if you have any questions.