thyssenkrupp nucera AG & Co. KGaA (NCH2) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the thyssenkrupp nucera Q4 Fiscal Year 2023-'24 Earnings Call. [Operator Instructions] Let me now turn the floor over to your host, Dr. Hendrik Finger.

Thank you, and good morning, everyone. Welcome to our Q4 full year earnings call. We are delighted that so many of you have dialed in so close to Christmas. We appreciate 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. A replay will be made available on our website 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.

Thank you, Hendrik. Good morning, ladies and gentlemen, and a warm welcome also from my side. I'm very pleased that you dialed in for our presentation of the full year results. Let's first turn to the most important events and developments as well as the business figures for the full year '23/'24, thyssenkrupp nucera has demonstrated strength and resilience under challenging market conditions and continue to implement its growth strategy. How do I get to this conclusion? I will start by mentioning a number of key developments. First, project execution is proceeding as planned. On the upper left, you can see a shot of Stegra's construction site in Boden in Sweden, where Europe's first large-scale green hydrogen mill is being built and where we supply electrolyzers with a capacity of more than 700 megawatts. In fact, the module displayed on the upper right is one of those that will go to Stegra. The ongoing project progress led to a very strong sales growth of 60% in the area of alkaline water electrolysis to EUR 524 million, almost EUR 200 million above previous year. In addition, we have achieved other important milestones in the implementation of our growth strategy. One example is the strategic partnership launched with the Fraunhofer IKTS, to commercialize the innovative and efficient high-temperature electrolysis technology, SOEC. With this, thyssenkrupp nucera is laying the foundation for expanding its technology portfolio in the direction of an additional growth area. The importance of SOEC for the development of the hydrogen industry is also shown by the fact that we have received significant EU funding for our efforts to industrialize this technology. Last but not least, I would like to highlight the very good performance of our chlor-alkaline business unit. In the last fiscal year, our different technologies in the field of chlor-alkaline again proved convincing for new plants, conversion projects and our wide service offerings. Our strong operational performance is also confirmed by our results in the fiscal year '23-'24. We met our guidance for sales and even exceeded it in terms of EBIT. On group level, we had expected total sales of EUR 820 million to EUR 900 million, and we have achieved sales of EUR 862 million, representing the highest amount in our company's history. For the AWE business, we targeted sales of between EUR 500 million and EUR 550 million, and the business contributed EUR 524 million to total sales. As expected, EBIT was negative, but at a minus EUR 14 million it developed better than we have expected. Arno will get to the details behind the business figures in a couple of minutes. But before that, let me turn to other significant achievements of our fiscal year '23-'24. Starting with our ESG commitments on Page 7, which we vigorously pursued in the last year. Today, we published our first sustainability and EU Taxonomy Report. This report provides a transparent and detailed account of our status and progress in the area of sustainability. However, we are not just concerned about reporting, but also with acting. Against this background, we have substantiated our internal strategy and defined global medium- and long-term targets like net zero for Scope 1 and 2 by 2030 and for Scope 3 by 2050. Our commitment and our initiatives are also widely recognized by an external audience. Among others, we won the German Sustainability Award and the Hydrogen Impact Investment Award and our U.S. organization has been recognized as one of the best places to work in Houston, Texas. Besides that, many of our processes have received ISO certification, which is important as an external proof point and which increases trust in our operations. In November, we moved to our new energy-efficient headquarters in Germany, our so-called new house. And I'm very happy that we are able to host this call and later also our annual press conference from our new home base for the first time. I won't read out now all the initiatives on this slide, but I would like to highlight the 3 million working hours without a lost time incident at our Vietnamese module yard, which is run by Lilama. I'm very proud of this, and it is a perfect example of how we work with our partners to ensure the highest safety standards in our supply chain. Ladies and gentlemen, in order to implement our growth strategy and to scale the business we need also a strong team. We, therefore, significantly increased the number of employees worldwide from 675 to 1,012 by the end of the fiscal year on September 30. I would like to take this opportunity to thank all colleagues for their commitment over the past year. Without them, we would not have been able to increase sales so significantly to work in such a close collaboration with our customers or to really progress in the field of R&D. To provide some more color here, over 60% of our people work in areas such as engineering, innovation, commissioning and service and with 1/10 of every 10 employees working in R&D and product development. We have also strengthened our global presence in order to be close to the market and our customers and to exploit the full growth potential. Going forward, we will closely align our organizational development with the market growth. Ladies and gentlemen, let's move on to our business development on Page 10 and start with the highlights of the fourth quarter of the '23-'24 reported here. Sales growth was very strong with sales of EUR 250 million, we reached a new record high. As in the 12-month figures, the good progress made in our major projects was the main growth driver. AWE sales even doubled compared to the corresponding quarter of the previous year. The chlor-alkaline service business shines with good order dynamics. And chlor-alkaline as a whole support the development of thyssenkrupp nucera with high profit margins. Now what about winning new orders in the field of green hydrogen. In Q4, we signed a basic engineering and design package for a 500-megawatt electrolysis project in Spain. Additionally, in October, an engineering service agreement for a 100-megawatt project in France was agreed upon. We are also increasing our activities in the Middle East as it emerges as a key region for green hydrogen. And as a recent example, I would like to highlight our press release just last week. Hydrom, the state-owned developer and coordinator of green hydrogen projects in Oman and thyssenkrupp nucera have signed an MOU to jointly leverage the growth potential of green hydrogen in Oman, through the use of our AWE technology. You can see that there is growth momentum in green hydrogen, and we want and we also will successfully use this for our company. On the other hand, a customer of ours had to revise its hydrogen plants. The Finnish company, Neste has withdrawn from the planned investment in 120-megawatt electrolyzer project due to company-specific factors and difficult local market conditions. In particular, a very strict and complex rules for producing green hydrogen and its application and refinery made the project unprofitable. Perhaps this is a good example of how overregulation in the development phase of a new industry is not always helpful. Overall, it is clear that the initial euphoria has given way to a more realistic view of the actual pace of growth. And frankly speaking, this is very much in line with the famous Gartner hyper cycle. However, we should not forget that building a new market, such as the green hydrogen market is always an immense challenge and that it takes time. Still, we remain very optimistic about the medium and long-term growth potential. And I will dive into this in more details in a few more minutes. Before that, we come to our traditional chlor-alkali business, which remains to be on track and showed a strong performance while building the base for further growth. We expect production capacity in the chlor-alkaline market to expand moderately over the next years, opening up potential for new build and large conversion projects. In that regard, relevant orders were awarded to us in fiscal year '23, '24, for example, in China, but also in Brazil. In the fiscal year '24, '25, we have already won first projects with Chlorum Solutions in USA, we agreed on a contract for engineering procurement and supply of a skid-mounted chlor-alkali plant for a project site in Arizona. Also, we completed a basic engineering and design package in the Emirate, 4 projects with the potential to become one of the largest chlor-alkaline plants in the world. FID for this project is expected to be taken in '25. We were able to acquire important new orders in service business as well especially in the quarter 4. Fortunately, this positive developed continues at the beginning of the current financial year as well. Customers in Saudi Arabia, in China and in Germany, in particular, have opted for our high-performance HCL, ODC and chlor-alkali technology. Those new orders include a wide range of solutions such as the supply of new cell elements and spare parts, overall refurbishments and full service activities. We are also on plan in terms of executing our order backlog. The production of electrolysis sales for the OxyChem project is progressing according to schedule, and first deliveries have already arrived in the U.S. And we have reached another important project milestone in our cooperation with SEEC in China, where our latest generation of e-BiTAC is in operational now. So you can see that our chlor-alkali business is performing well and has more than just a good basis for further growth in the coming years. Dear ladies and gentlemen, we continue with an update on our project execution for alkaline water electrolysis. First, the NEOM project, the world's first gigawatt water electrolysis plant under construction. We are making great progress here. Production, delivery and cell assembly are fully on schedule. We already handed over more than 50 standardized 20-megawatt modules with a total capacity of more than 1 gigawatt to our customer. Of those modules, more than 40 have been installed on site. For Shell's large-scale project in the Port of Rotterdam, the production of the individual electrolyzer components have already been completed and the construction of the plant has begun. In addition, our first service contract has already been signed. At HIDC, the so-called Hydrogen Innovation and Development Center near NEOM in Saudi Arabia, our 20-megawatt module has been erected and preparations for commissioning are currently underway. Finally, Stegra, formerly known as H2 Green Steel where the fabrication of electrolyzer equipment with a capacity of over 700 megawatts is also in full swing. The first module trial assembly was carried out in our Spanish module yard and a picture of that was one in the earlier in the earlier slides. So you can see that we are making excellent progress in project execution, which is also reflected in our revenue growth. All of this is achieved in line with the schedules of our customers and based on a responsible sourcing and supplier management. Next, we have our project pipeline slide. The market opportunities, especially in Europe, in the U.S. and in the Middle East continue to be substantial despite the persisting uncertainties in the market. Also, India and Australia are picking up in terms of announcements for green hydrogen projects. Overall, we are currently pursuing projects with a capacity of 93 gigawatts or a potential contract value of around EUR 44 billion. In principle, I think it's fair to say that the mood in the market remains optimistic and the hydrogen industry is actually ramping up. Of the projects mentioned, we are currently pursuing 40 very actively. While on average, still being in early stage, we think that they have a high likelihood of realization in the next few years. These products combine a potential contract value of an estimate at EUR 11 billion. As already indicated, it is clear that the existing challenges in the market will not disappear overnight. For that reason, we are likely to see further postponements in FIDs. More needs to be done to provide the certainty for investors to make decisions, and I would like to mention 3 points as examples. With the Inflation Reduction Act, U.S. has taken a bold and forward-looking step to advance the hydrogen industry through rapid and efficient funding. But 2 years later, the hydrogen industry is still waiting for the details of the funding rules. Secondly, there is currently still a lack of hydrogen transport infrastructure, which hampers the production ramp-up. It is that kind of chicken and egg problem we need to overcome now quickly as pipelines, in particular, could serve as a strong catalyst for the upswing of the hydrogen industry. Later studies even suggest to build them completely unconditionally is even under the most conservative ramp-up scenarios, they would be well utilized. This is one of the reasons why the H2med alliance, which was publicly announced last week is so important. In order to be able to supply Europe with green hydrogen at affordable prices by 2030, the hydrogen networks of the Iberian Peninsula are to be connected to those in Northwest Europe via a Southwestern hydrogen corridor and create a European single market. 16 companies are part of that alliance. Thirdly, we need to speed up the implementation of RED III into national law. And we need to do that without the overly complex criteria like additionality and timely correlation that are currently increasing the price of green hydrogen artificially and thereby slowing down the ramp-up of the green hydrogen industry. Nevertheless, we continue to see a promising outlook. The mid- to long-term growth potential remains very significant. The need for decarbonization in the hard to abate industries is undisputed and key milestones are starting to take shape. And that is also confirmed by different recent published studies. Around 100 gigawatts of electrolyzer capacity are expected to be operational by 2030. To put this into perspective, this is 50x more than today's capacity of not even 2 gigawatts. And despite all the criticism, it must also be noted that the announced public funding for the ramp-up of the green hydrogen economy is already quite enormous. The criteria only has to be designed in such a way that the companies can also access these funds more easily. Let me elaborate a little more on why we are well positioned to manage current sector challenges and seize the growth opportunities. We master the execution of our order backlog, defined our organizational target picture and take measures accordingly. What does that mean? We will carry out our further organizational ramp-up in line with the market developments and by drawing on the advantages of our asset-light business model. Our global organization structure allows us to be close to our customers and utilize our resources flexibly. We are not dependent on specific regions, and we are not sitting on our own manufacturing capacity. We focus on profitable project execution to ensure solid contribution margins. And we are also taking cost containment measures in the face of market headwinds and delays in project FIDs. At the same time, we also actively improve our competitive positions in a maturing market, and we capitalize on the potential of our huge project pipeline. To achieve that, we will continue to strengthen our research and development initiatives. We believe innovation is key to remain competitive in our industry. We did develop processes and technologies for automation and serial production in order to reduce cost in the manufacturing of electrolyzer stacks and in operation. And we use a resilient supply chain to maximize flexibility and minimize dependencies on other risks. We are committed to excellence and innovative strength of our water electrolysis technology. And we see that as one of the main competitive advantages of thyssenkrupp nucera. In order to keep and strengthen the competitive edge, we follow a clear development road map. On Page 16, you will find a selection of current work streams in that regard. We are optimizing our 20-megawatt module to reduce CapEx and to ensure best-in-class levelized cost of hydrogen. Our initiatives include further standardization, potentially larger scale modules and a diversified product offering for different regions and customer segments. On that slide here, you can see a conceptual design study, which would link 16 stacks to one process unit compared to the 4 stacks per process unit, we are using an existing scale of module. Although this larger module is only a study by now, it is a good example of what we are working on to offer the best products to our customers. We said in the past, and it holds still true, automated fabrication and assembly processes are essential for the ramp-up of the green hydrogen sector for various reasons. We made significant progress, and we will use many of the processes and concepts which are currently being developed and qualified once demand picks up again. Last but not least, a few words on SOEC. We will take further steps towards serial fabrication here. For example, with our pilot production plant, which will be operational in spring 2025. With this plan, we will optimize stack design and manufacturing and take a big step towards our marketable product. With that, I hand over now to our CFO, Arno Pfannschmidt, to walk you through the financial figures in detail.

Thank you very much, Werner. A warm welcome also from my side. I would like to outline the key developments in our financial figures looking at the fourth quarter and the full year 2023, '24. Afterwards, I will provide an outlook for the new fiscal year. Before we start, please be aware that the comparative figures for the fiscal year 2022-'23 have been adjusted retrospectively in accordance with IAS 8.41. This is why you will see minor positive deviations for sales and EBIT figures for the fiscal year 2022-'23 in the following. Ladies and gentlemen, in a nutshell, thyssenkrupp nucera posted a strong performance in the last quarter of the financial year 2023-'24. Order intake grew by 44% year-on-year on the back of chlor-alkali and here, a particular good service business in Germany and China. You can see on that chart that order intake is rather volatile in the quarterly comparison due to the nature of our project business. Group sales developed strongly and peaked at EUR 250 million, while AWE sales doubled in Q4. Our EBIT performance was once again resilient and came in better than expected. EBIT fell by just EUR 8 million year-on-year, to minus EUR 3 million, driven by a lower gross margin and higher ramp-up costs as planned. The decline was partially offset by a higher earnings contribution from our CA business, cost containment and positive onetime effects. On Page 19, we have a more detailed look on order intake. In the fourth quarter, order intake reached EUR 114 million, 44% above the corresponding prior year figure. On a full year basis, order intake grew by 4% to EUR 636 million. Of this, EUR 356 million were attributable to the AWE business and EUR 279 million to the chlor-alkali business. The strong development of order intake in the AWE business is largely due to the Stegra, which is included in the reporting period with a volume of more than EUR 300 million. We also won new orders in the chlor-alkali business, particularly noteworthy in this regard is the project with CAPE IGARASSU in Brazil. Nevertheless, CA order intake was down year-on-year driven by the new build business, which benefited in the previous year from a large order from OxyChem in the U.S. In contrast, the value of new orders in the CA service business was slightly higher than in the previous year. The order backlog at the end of September 2024 stood at around EUR 1.1 billion, compared to EUR 1.3 billion at the end of June 2024. The alkaline water electrolysis business accounted for around EUR 0.7 billion. The decline in order backlog is due to the progress made in project execution which is reflected in the significant revenue growth. Now diving into our sales development on Page 20. In the fourth quarter, sales rose by 50% to EUR 250 million, the highest ever quarterly sales amount of the group. AWE sales increased significantly, almost 100% to EUR 175 million. This increase is mainly due to the ongoing implementation of the NEOM project in Saudi Arabia and revenue recognition from Stegra's Green Steel project in Sweden. Sales in the CA business amounted to EUR 76 million, roughly on par with the previous year. Looking at the full financial year 2023-'24, group sales increased strongly by 30% to EUR 862 million. The green hydrogen business grew dynamically by 60% with sales in the alkaline water electrolysis business accounting for EUR 524 million. The chlor-alkali sector, sales stood at EUR 338 million, slightly up against the prior year. Overall, I'm very pleased with our sales development on the back of the continuous successful execution of our order backlog. With this, we have met our group sales targets for the past financial year. Moving on to the EBIT development on Page 21. In the fourth quarter, we managed to contain the EBIT loss. EBIT declined by just EUR 8 million to minus EUR 3 million. This decline was largely driven by an increase in other cost of sales for the planned and ongoing AWE ramp-up and capacity buildup. It was partially offset by our higher-margin CA business and positive onetime effects besides others coming from valuation of inventories at year-end closing and an insurance settlement. On a full year basis, EBIT was minus EUR 14 million and thereby EUR 39 million lower than the corresponding figure for the previous year. With that, we eventually exceeded our target of a negative EBIT figure in the mid double-digit million euro range. The decline in EBIT is mainly due to the planned increase in R&D expenses and higher administrative costs for implementing the growth strategy and organizational ramp-up. The increased share of AWE sales, which currently involves lower gross margins has also contributed to the expected decline in earnings. On Page 22, we have a more detailed look on our cost development. Cost of goods sold increased in absolute terms, in line with higher sales and temporarily also in percent of sales in line with a lower margin of our first AWE reference project. Going forward, with the decreasing revenue recognition from the NEOM project in light of the already high percentage of completion, we expect an improved gross margin in the AWE business which should have a positive impact here. SG&A increased by 38% year-on-year, driven by the planned ramp-up of the organization and in line with the growing sales. Furthermore, R&D expenses increased in absolute terms by 85% year-on-year or by 1 percentage points in terms of percent of sales driven by costs for our AWE stack, AWE module development and our test center but also R&D activities related to the SOEC technology. In the new financial year, looking at technology and R&D, which is at the heart of our company. We are further increasing our R&D efforts particularly in AWE and in SOEC. We do that to maintain and strengthen our leading competitive position. Overall, we will continue to press ahead with our organizational and operational expansion but very much synchronized with the market developments. To this end, we are utilizing our asset-light model and its inherent flexibility. Moving on from EBIT to earnings per share on Page 23. Ladies and gentlemen, looking at the full financial year 2023-'24, we recorded a positive EPS of EUR 0.09 despite the EBIT loss. That is mainly due to a strong financial result which was driven by higher interest income earned on our high net cash position. I think it is fair to emphasize at this point that we are very pleased with our positive net income, especially because such a result cannot be taken for granted in our industry. Let's have a closer look on our cash position on the next page. Net financial assets totaled EUR 673 million at the end of September. That substantial amount is sufficient to withstand current market headwinds and to finance future growth. Year-on-year, we have seen a cash out driven by rising stock levels to increase resilience in the supply chain as well as increased contract assets in line with the execution of our order backlog. Going forward, we expect CapEx levels to increase and cash flows to be negative again in the fiscal year 2024-'25. Main drivers for the CapEx increase will be R&D initiatives linked to our scalum AWE module, additional test facilities and as already mentioned by Werner, a pilot manufacturing plan for SOEC stacks. Next is the outlook on Page 25. As of October 1, 2024, the segment structure has changed and is aligned with our 2 technologies. Accordingly, we now have 2 new reporting segments, namely chlor-alkali and green hydrogen or gH2 whereby the latter includes alkaline water electrolysis and high-temperature electrolysis, so SOEC. From now on, we will provide you with the financial outlook for sales and EBIT for the group, as well as for the 2 segments, CA and gH2 individually and obviously report on these KPIs on a quarterly basis. In light of the economic conditions expected at the time of the forecast and the underlying assumptions. Let me now present to you the outlook for the new fiscal year 2024-'25. For the group, we expect sales between EUR 850 million and EUR 950 million, compared to EUR 862 million in the past financial year. Already contractually agreed projects are expected to largely contribute to this development. On segment level, we expect green hydrogen sales to come in between EUR 450 million and EUR 550 million. The lower limit of the guidance range can be achieved by processing the existing order backlog, while the upper end requires the acquisition of further projects. In the chlor-alkali segment, sales are expected to increase to between EUR 380 million and EUR 420 million. Both the new build and service business are expected to contribute to this increase. The revenue development is based primarily on the existing order backlog but particularly in the service business, new orders are also included. We expect group EBIT to be between minus EUR 30 million and plus EUR 5 million. The EBIT development depends to a large extent on the execution and revenue recognition of the existing order backlog. The upper end of the EBIT range represents an optimal delivery of our plans and sales at the upper end of our sales outlook, while the lower end takes into account a stronger materialization of the risks existing in the project business and lower sales. In the green hydrogen segment, we expect EBIT to improve to a negative mid-double-digit million euro amount compared to minus EUR 76 million in fiscal year 2023-'24, an improved gross margin in the AWE business as a result of a more profitable project mix will contribute significantly to this increase. This shall more than offset the increase in R&D expenses in the field of SOEC, which is also included in this segment. In the CA segment, we expect EBIT to be in positive territory in the mid-double-digit million euro range, yet most likely below the figure for the past financial year, mainly due to lower gross margins in the execution of existing projects. In addition, please have in mind that the EBIT development in 2023-'24 was impacted by positive onetime effects. With that, I hand back to Werner, who will summarize today's earnings call.

Thank you, Arno. Wrapping up this full year's earnings call, I would like to reiterate some of our key messages for you, thyssenkrupp nucera has demonstrated strength and resilience in a difficult market environment for green hydrogen. The noticeable progress in our major projects has led to a very strong increase in our AWE sales. And in chlor-alkali, we have delivered a solid sales trend, while generating high profit margins. Looking ahead, we will continue to focus our business activities on consistently executing our order backlog in implementing our growth strategy. Our asset-light business model and our global presence allow us to quickly adapt to changing market conditions and attractiveness. This is one of our company's strengths and one that should not be underestimated. In addition, we will continue to strengthen customer relationships and partnerships in key regions and intensify our market development activities in order to achieve a continued flow of incoming orders based on major projects. Our long-term growth perspectives remain intact. We have the right product offering and a strong financial backbone. And with that, we are well positioned for the market upturn. Thank you for your attention. and we look very much forward now for receiving your questions.

[Operator Instructions] And the first question comes from Michael Kuhn, Deutsche Bank.

I'll ask them one by one. Firstly, on cash flow, you don't guide a specific number here. But obviously, guide for CapEx moving up. Could you roughly quantify maybe what net cash position you expect the upcoming year to end with? Will it still be north of EUR 600 million net cash or maybe any additional detail would be helpful in that context.

I think I can take that question. So indeed, in the project business, cash flows are very volatile and difficult to predict. However, as mentioned, we, first of all, expect a negative cash flow in '24-'25, driven by higher CapEx. As mentioned, we have here, for example, the first SOEC manufacturing pilot plant further R&D test facilities, which are higher. The CapEx will be higher than this year. We had this year a negative operating cash flow. We expect that also in the next fiscal year, this is related to the effect that we have here received in the past down payments for our projects, which are now used to execute them. That's the main effect. So a further increase of the net working capital. We are not guiding a specific range, but I think it could be in total around the figure of the current fiscal year.

All right. And then on the green H2 business and the sales guidance. You mentioned there that the lower end is basically entirely covered by existing projects. What would you say how many projects are, let's say, that close to potential signing that they could still contribute in the current year and, let's say, by when would you say you have to sign the contract the latest so that a new project can still contribute to sales in the current year?

Yes, Michael, this is Werner. Thank you for the question. It's certainly a good one. I mean, as mentioned, we have already seen a couple of positive developments now actually also in terms of our project pipelines, in particular, basic engineering and reservation agreements that we were able to secure in the course of last fiscal year and also in the first quarter of this year. Of course, the earlier -- actually, they get converted into contracts, actually, the earlier we would also be able to recognize sales with that. But also, I think it's important to understand there's 2, I would say, different events actually that needs to happen. First of all is, we need to sign a full EP contract actually, which doesn't mean automatically that this will convert into order intake. The second event actually that needs to happen is the so-called commencement dates. So when really -- actually, we have the -- we get notice to proceed actually with spending money, if you want. And that can be very different. We have projects actually where this is nearly at the same time, and there's projects actually where this is a half year between the signing of the contract and the commencement date. So, it's actually difficult to say, but that these are the 2 events actually this is depending on. We would believe that in particular, potentially the reservation agreement that we have already in place, they will be certainly the first candidates that we would believe would convert into full contracts still within this fiscal year. However, we don't believe that actually in the first 2 quarters of this fiscal year, this will happen. It is rather more likely that this will happen actually in the second half of this fiscal year. And again, the earlier, it happened actually in the second half, the early we could be able to recognize some sales out of that. Will that be very significant? Difficult to say, but not very likely, I would say.

And then as you just mentioned reservation agreement, what is the current status of your U.S. reservation agreement?

The reservation agreement in the U.S. is still in place.

All right. 2 more, on CA, quite a bit of top line growth here for the upcoming year. Is that kind of an outlier and that could come down again? Or does CA, let's say, represent a bigger growth opportunity over more years to come than maybe anticipated at the time of the IPO?

Yes, we believe that actually there's, I would say, continuous growth for the next couple of years, in particular, driven due to regulations in particular in the U.S., but also in South America, where old and environmentally harmful technologies that still use, for example, Mercury or asbestos, they are banned and those plants need to be now converted into new membrane technologies. And the OxyChem project is one of these examples actually of a conversion project, where old technology is now refurbished into modern membrane technology. And we see that there are a number of other existing plants already in the U.S. and also in South America, which would be subject to these regulations and will have to convert in the next years to come. And that will certainly to a large extent, also drive the growth in the chlor-alkaline field.

And then on the product side, in green hydrogen. You mentioned diversified products for different end markets, which is kind of the change was the initial strategy where, let's say, it was all about one standardized module. Could you explain a little more, let's say, what led to that strategy change? And let's say, how many different products you plan to offer for your clients going forward?

Yes. Maybe I need to be here a bit more specific because we are certainly not moving away from our standardized project product. We still believe that this is the only way forward to bring down the cost significantly. But what we are considering right now is for different applications fields actually to maybe broaden our scope to include, for example, upstream and downstream elements that are required when we talk about proper system, rectifier systems or downstream compressor systems, for example. And we're also considering actually a, I would say, better integration with potential downstream applications. If you just look at ammonia, for example, as being as one of the relevant applications, you could potentially imagine that an integration with an ammonia technology could add some value also to our clients. And these would be the differentiated offers that we would like to bring to the market going forward.

Sorry, one very last one.

Michael I mean we have -- we need to move on to the next one. Sorry, Mike.

The next question then comes from Alexander Jones, Bank of America.

Let me take my questions one by one. I've got 2. Can I follow up first on the capacity reservation agreement in the U.S. that you just said was still in place. Then the customer that is widely believed to be behind that has canceled the underlying project in the U.S. So could you help reconcile that for us, whether you're discussing selling those modules to a different project for the same customer, whether there's some sort of negotiation going all about cancellation or anything else that helps sort of reconcile those 2 facts?

Alex, I think we have not and we will not disclose the customer also for legal requirements and for nondisclosure agreements, so I cannot really talk about that, unfortunately.

Okay. Understood. And then second question on the chlor-alkali margin. I think previously, you've talked about a long-term target range of high single digit, which clearly you're well above this year and the guidance would imply you're probably still above next year. So could you talk about sort of the longevity of that and whether you're now more optimistic that, that margin could be in the double-digit range in the medium term as well?

Yes, indeed, we have guided in the past, a high single-digit EBIT margin for the chlor-alkali business. As you can see, we are, this year, significantly above that. And we would also guide then for the future, not such a high level as we have achieved in '23-'24, as we had included some one-timers which we cannot repeat, but we would indeed move here to a low double-digit EBIT margin guidance.

The next question comes from [indiscernible], RBC.

Most have been answered. I've got one, please, on Neste. So I appreciate there's been company-specific issues. There's also been issues in the renewable diesel space. But you rightly refer to issues related to the adoption of green hydrogen for refining use case, which is one of the main use cases for green hydrogen. Can you just clarify that there's no potential read through for other projects within your pipeline, please?

This is Werner. I think it's, of course, it's very much depending actually on how the EU Directive 1 to 3 is implemented actually in National Law, which has happened in Finland for Neste actually and which made it very difficult actually to move that project forward as you see. Without getting too emotional about that, because I think it's really a topic actually, which is, for me, is still difficult to understand. If you imply actually rules and regulations as laws that do not allow any longer actually to, I would say, run an electrolyzer on a high load factor. By nature of the equipment actually, green hydrogen is becoming quite significantly more expensive than it should be. And I think this is a general, I would say, a general observation that would also hold true, of course, for other regions and countries of the world. I mean, and if you basically look at other industries, it still holds true. I mean, if you are running a machine at low utilization factor, it will always be more expensive in terms of specific costs for what you're producing. And that is actually something that I believe we need to quickly overcome and to change, to ensure that actually that the cost of hydrogen is not so over-proportional.

Next question comes from Kevin Roger, Kepler Cheuvreux.

I will limit to 2. The first one, can you give us some color on the performance of your electrolyzer that have started the operation for CF Industries. Because at the Q3 earnings, you told us that you were nearing completion, you're commissioning, et cetera. So any comment on the operating performance of your electrolyzer, please, that would be the first one. And the second one, maybe to be a bit provocative, sorry for that. But, in the hydrogen business, your top line will be flattish next year. You will have used quite a lot of NEOM contract value. So how confident are you based on all the comments that you made this morning to be able to keep at least a flattish top line the year after with some contract renewal or whatever? That would be the 2 questions for me, please.

Yes, Kevin, thank you very much. I'll take the first one. I think Arno will answer the second one. First question around CFI, here the work with our customers is still, of course, in full swing. The commissioning is still ongoing actually, which is also not very uncommon actually for a setup, which is considered, if you want, first of its kind in terms of the overall setup of the facility. So certainly wants to make sure that actually, there's enough testing and adjustments in place that this plant can basically be startup in a safely and reliable manner, and that is currently ongoing. As you can imagine, actually, this is something where we typically depend on the schedules of our customers as they are basically, if you want running the show, and we are consulting them actually on the start-up of our systems. So as I said, as of today, we are still in the commissioning of the system.

Regarding your second question, we try to be precise in our guidance of EUR 450 million to EUR 550 million sales next year that the lower end of the range is covered by existing order backlog. And that means the NEOM project is there, Stegra and also the other smaller ones, we're still -- things are outstanding and will generate sales in '24, '25. So including even a small risk margin of potential delays here, whereas the upper end would include your additional projects.

Sorry, if I did not express well myself, it was more for the year after '25, '26 in a sense to how confident you are in a way to be able to keep a flattish top line when NEOM will be largely out of the backlog?

So we particularly limited here our guidance on '24, '25 due to uncertainty in the market here. We have seen recently that we had to revise some of our assumptions. However, as Werner has outlined here, we have a very strong pipeline. We have actively pursued projects of significant size. And it's still a long time to go until '25, '26. So please understand that we don't want to be too specific here. But of course, we have here this midterm outlook of a further significant growth of the company.

The next question comes from [ John Cherrington ], Bernstein.

Werner and Arno, I would like to ask 3 questions, if you don't mind. The first one will be on cash flow. Is that possible to spell out the CapEx and the R&D phasing throughout the year? And also any color on your expectations for working capital change this year? The second question will be on the Middle East. Is that possible to get a sense of the time line in relation to the MOU you have signed in Oman? And more broadly, how does the sales pitch for scalum go with prospects in the Middle East? Last question will be, again, on the North American CRA. Can you please advise whether this CRA is linked to a very specific project? And are you able to discuss all payments milestones have been set, broadly speaking?

Yes. Maybe I'll start with the first one. So your question to give more split by quarters, so to say. So first of all, research and development expenses, as you may have observed in the past fiscal years, we always have a kind of a hockey stick. So starting rather with low amounts in the first quarters. So the first half year definitely is lower than the second half year, regarding R&D expenses. And for CapEx, we have here as part of our CapEx, for example, the new office building here in Dortmund, that's a Q1 event of a significant amount. And the pilot plant for SOEC is expected at the end of the second quarter, beginning of the third quarter, roughly. So we have here expenses, CapEx maybe in the similar size in the first half year and the second half year.

Okay. Then the MOU in Oman and timing around actually how that would materialize in potential real projects. I've been in the Oman actually for green hydrogen projects, I think almost 2 years ago for the first time, actually, when this were really starting to become more material. This has moved in the meantime, quite nicely, I have to say. Projects are super big, actually, I have to say. And they are moving now closer really to concrete projects. That is also the reason why we have -- why we have signed a MOU in Oman to be also at the heart and center of that development. How this will turn out in terms of project FIDs and contracts for us over the next years? Again, I don't -- I think the likelihood actually that this will happen in the next half year is limited, towards mid to end of next year, we could potentially see here first attractive movements. But again, it's all, again, very much depending actually on the general development that we see in the market and is also still based off a number of uncertainties. But that would be, from today's perspective, actually, what I believe could happen. For the U.S. reservation agreement, is it linked to a specific project? Yes, of course, it is linked to a specific project. All payments that were due from the reservation agreements have been made and are incurred, so far. And it expires, I believe, but I cannot tell you an exact date, of course, as you can imagine, it expired, I think next calendar year, of course, depending on our discussions with the customer, we will also be able and willing to further extend the reservation agreement. If for the unlikely or, let's say, for the case, actually, that it would not be renewed or extended then certainly, the reservation fee would stay with us basically, and that would be that now.

Next question comes from Skye Landon, Redburn Atlantic.

Firstly, on alkaline water electrolysis project margins. Given the whole markets kind of suffering from a lack of new firm orders, can you provide some context as to how this perhaps changes the potential to achieve margin for new projects? And what can you tell us about how competitive you're needing to be within the bidding process? And then secondly, on service margins or service intake. It's good to see healthy service intake within chlor-alkali. I'm wondering what you can tell us about progress in the alkaline water division and signing service contracts with your large projects or customers within the AWE division, such as NEOM, Stegra, Shell, et cetera. That would be great.

Thanks, Skye, this is Werner. Thanks for the questions. First, on the AWE margins. I have to say we don't see a significant impact right now actually on the margins for our AWE project. And we would also not consider that, that would have a significant impact going forward. Yes, certainly, actually, the competitive intensity has increased with the lower projects being offered in the market, if you want. But on the other hand, don't forget actually that we have also made significant progress actually in also reducing the costs for our systems, which is compensating for a potential, I would say, higher competitiveness that is required in the market. So as such, I think we are very positive that we can maintain the margins that we're seeing and that we are -- would like to see actually in the market. On the service contract, in AWE, I'm not sure whether I have forgot to mention it, but I thought I had mentioned that we've just signed a first service contract for the project in Rotterdam. Which is actually the first now fully signed service contract actually for an AWE project right now, very positive signal, of course. And as we have mentioned already in the past, we are also certainly working on additional service agreements for also the large-scale project in NEOM, here, still the contract negotiations are not finalized, but it would be -- this is maybe something I can indicate. It would be a multiple decade service contract that we are currently negotiating in that respect. In general, certainly, as you were saying, service is typically coming as a way more attractive margin. You see that in the chlor-alkaline field, and it is certainly something that we also want to roll over in the alkaline water electrolysis field as an important pillar going forward of our business.

I'm sorry if I missed on the Rotterdam one. On the Rotterdam one, can you give us an indication of contract length, i.e., like does this cover 8 years, 10 years, that would be useful.

Unfortunately, we are here also on the nondisclosure and I hope for your understanding, I cannot give you the further details on that.

So thank you, everyone. As there are no further questions at this point, I'd like to hand it back to the speakers for some closing remarks.

Yes. Thank you very much for everyone participating in our call today. I hope that we were able to share with you available details on our full year. As usual, if you have any further questions, please do not hesitate to reach out to Investor Relations. And with that, the only thing left for me would be to wish you all a great festive season. I hope you have a lot of joy and you can recharge your batteries at least on our side, that is what we are all looking forward to after a very intensive and also challenging year and hope to see you again next year. Thank you very much.