T1 Energy Inc. Q4 FY2021 Earnings Call

Operator: FREYR Battery's full year 2021 Earnings Call. I'll now hand the call to Jeff Spittel, Vice President and Investor Relations. Please begin.

Good morning. And welcome everyone to FREYR Battery's Fourth-Quarter and full-year 2021 Earnings Conference Call. With me today on the call are Tom Jensen, our Chief Executive Officer, John Oliver Hogan, our Chief Operating Officer, and Steffen Føreid, our Chief Financial Officer. During today's call, management may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our filings with the Securities and Exchange Commission, which are available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our annual report on Form 10-K for fiscal year 2021 and other reports that we may file with the SEC. With that, I will turn the call over to Tom.

Good morning, good afternoon, and good evening, everyone. And thank you, Jeff, for this kind introduction. And welcome everyone to this third quarterly reporting for FREYR and the fourth quarter report for 2021 and full-year results for 2021. Today, we will run through an update on the business, our strategic roadmap and priorities, how we are progressing in establishing localized supply chains. Our operations are now turning into gear. We will talk about the market opportunity, which we feel is and see is ever expanding. We're making strong progress on our commercial progress across a number of customer verticals. We're also making good progress on financing the expansion of our clean battery solutions plans and will focus on the near-term priorities and have a question-and-answer session. Next slide, please. So we are now well advanced in building various operational foundations. The Customer Qualification Plant, our first giga-scale facility, is on track for starting up production later this year. The Gigafactory development, which will rest upon the development we have in the CQP, the Customer Qualification Plant, we are now pleased to announce that we're combining Gigafactory 1 and 2 into one larger facility with eight production lines and an upsized nameplate capacity of 18 gigawatt hours. On a like-for-like basis, comparing to the similar chemistry in battery solutions we used in the business plan presented in February, this represents a 40% increase in nameplate capacity relative to earlier. This increase in capacity will allow us to increase the capital and operational efficiency over the past. We will be implementing a phased investment decision on the production lines to allow us to move as quickly as possible forward. We anticipate to start and ramp up production during the first half of 2024. When we are ready to make the final investment decision, which we aim to do later this half of the year, we will be providing updated CapEx estimates and timed development timelines to our investors. We're well underway, however, in making progress on our Gigafactory site in Mo i Rana. We've already started groundbreaking and the Board of Directors just recently approved additional capital investment in ground works and early works commitments to ensure that we can move as quickly forward as possible on this 18 GWh Gigafactory. Next please. So we started up the company, as mentioned to most of you, many times in 2018. And since then, we've made strong progress across the board. We have entered into a definitive technology and licensing agreement with 24M, a big part of the company's development to date that allowed us to go public on the New York Stock Exchange mid-2021, and during 2022, we'll be making significant additional progress points moving forward. Last year, we entered into a joint venture with Koch Strategic Platforms, also the largest investor in our PIPE transaction. And we also invested in 24M Technologies, both as the first licensee in Europe and also as a combined licensee with Koch Strategic Platforms for our joint venture in the U.S. We're now targeting more than 200 gigawatt hours of combined conditional offtake agreements to be entered into during 2022. We will start up our first giga-scale facility and actual industrial scale production line in the Customer Qualification Plant, which will come operational later this year. In the next couple of years, we will focus on stocking up Gigafactory 1 and 2. We will start up a modularized and gradual acceleration of the production lines in that combined Gigafactory, which, as previously mentioned, will be an 18 gigawatt-hour facility. We will also invest in a localized and decarbonized supply chain. Coming back to that, the progress that we're making across the board here on the supply chain in general. In addition, we're targeting downstream participation to essentially increase our ability to reach more customers, and also to optimize the value that we generate for our investors. Moving beyond the next couple of years, we will also be investing in additional battery cell manufacturing facilities, both in Norway, Finland, and in the U.S. We will also take select positions, both up-, mid-, and downstream, through joint ventures and other initiatives to ensure that we get as broad participation in the value chain as possible, reaching 43 gigawatt hours, as previously stated by 2025 in installed capacity. By 2028, we still aspire to have more than 83 gigawatt hours of capacity established, making us a large global low-cost and low-emission player in the industry. We previously said that we have an ambition of 100 to 150 gigawatt hours in the 2030 time frame, and we remain very optimistic that we're on track to achieve that ambition. We're now focusing on execution, and I'm really excited today to introduce to you our Head of Operations and President and Managing Director of our activities in Norway online, Jan Arve Haugan. He will be taking you through the status on our operations. I will bring him into these meetings on a quarterly basis to provide you with increasing and in-depth updates on the various strong execution-oriented progress that we're making across the board. But to give you a couple of highlights on how we're progressing against our giga-scale commercialization, let me focus on a couple of things. First, we are progressing multiple different tracks on the financing arena. We're combining export credit agencies (ECAs) and multilaterals, grants, strategic partners and investors to ensure that we can lower the cost of capital. We are supporting these funding tracks in order for us to process, to unlock the Gigafactory developments, complementing the equity that we raised to date. We have several potential solutions emerging for the combined Gigafactory 1 and 2 in Mo i Rana. And there is broad interest in the capital markets to participate in enabling Norway's first large-scale Gigafactory development. On the commercial front, we continue to make very strong progress. We announced recently our first two major offtake agreements with global industrial players that cover more than 50 gigawatt-hours of cumulative capacity. We are continuing additional discussions beyond this with multiple potential customers in the storage space, commercial mobility, as well as the electric vehicle sector. We have line of sight to an additional 150 gigawatt-hours or more of cell demand with the next potential customers in the pipeline, bringing us to more than 200 gigawatt-hours of combined offtake in the early stages of our commercialization. We will now be focusing on converting the initial offtake awards to firm sales contracts with value-accretive terms. And we will continue to highlight and high-grade the progress on the commercial front on a continuous basis. On the supply chain, we are working to secure additional raw material providers, as well as evaluating and catalyzing the localized supply chain partnerships that are core to FREYR's strategy. Decarbonizing the core inputs into battery cell manufacturing through a localization of the same in areas with low-cost renewable energy is a core component in both driving down the cost of the battery cell production itself, but also to reduce the CO2 footprint along the life cycle. We are in process to firm up potential suppliers with committed volumes and specific pricing terms and conditions. As previously mentioned, we have signed frame agreements for 9 out of 13 key raw material inputs for the Customer Qualification Plant and the combined Gigafactories 1 & 2. The remaining four are well advanced and will be signed in short order. We are pursuing a joint venture to develop the first giga-scale LFP cathode plant in the Nordic region. And we're very excited about that progress, which obviously constitutes a very large part of the cost structure of battery cells. Let me now hand it over to Jan Arve Haugan and let me introduce him briefly. Jan Arve Haugan is an industry veteran in the Norwegian oil and gas and aluminum business, who we're very excited to have on board, and who's been fundamental in driving the operational performance and preparedness of the company to date. So Jan Arve, please take over on the next couple of slides to give the exciting insight into how we are progressing on the operational front.

Thanks a lot, Tom. And good morning to everyone. Today, I am going to give you an update on our raw material supply, and then I'll also follow up with a brief on where we are on the Customer Qualification Plant, as well as our front-end engineering and non-current definition of the Gigafactory development. First, the raw material supply. As everyone is aware, the sourcing of raw materials to the battery industry is a core competence and certainly equally important to building the plant and building the operational team. I want you to take note of the fact that our technology license partner, 24M of Cambridge, Boston, U.S., has preapproved the key raw material suppliers as part of the license agreement. In FREYR, we have already converted some of these, and as Tom said, 9 out of 13 into frame agreements that we can continue to work on. And as we also said, the progress on the four remaining are well underway, ready to be converted. As a direct follow-up of the commercial contracts for sales, we will now build the bill of material for the production program and establish a form of supply contracts to meet our production buildup. We have today confirmed and secured volumes to be used during the factory acceptance test and the first production from our full-scale production lines in the Customer Qualification Plant. As part of our strategy to facilitate and develop localized and decarbonized upstream supply systems, we have also agreed to work with companies like Glencore and others for different business structures that can be sourcing materials out of the Nordic region. They maintained a clear ambition to build the long-term value chain for battery production that will reduce their carbon footprint by 80% compared to current conventional technology. As illustrated by the calculation here today, we indicate that this production system will have a commercial upside under the assumption that carbon tariffs continue to predicted levels of, say, $100 per ton of CO2 equivalent. Then let us go over to the operating status of plants in Norway. The Customer Qualification Plant is well underway in construction on the site in Mo i Rana following the baseline schedule that we agreed at the final investment that was done some few days after the listing in the U.S. in July last year. We have no direct consequences from the pandemic situation, and we are very careful in the construction management, and not to expose ourselves to any crew situations where COVID-19 can give us problems. The manufacturing of production line equipment is according to the schedule. A few design changes based on experience from 24M and other production partners are now currently being implemented. As of now, we are planning an extensive factory acceptance testing after various manufacturing locations. We are very committed to do a solid checkout of the production equipment before we accept release for a site delivery. Further on, the site integration and commissioning, as well as manufacturing readiness, is now being planned by the operational team. In line with our strategy and customer acquisition, we are also executing the front-end engineering, design, and procurement process for the combined Gigafactories 1 & 2, to be located in Mo i Rana. As Tom said, the groundwork has now been started for the foundations and the foundations for the 70,000 square meters of building will be done later this spring, as part of the pre-committed preparations. We are in good progress on designing the plant that can facilitate eight production lines, and that will give a nameplate capacity that is 40% higher than previously indicated. Noting that, as Tom said, there are different chemistries in the cell design. Finally, as part of the operational preparedness, we include the documentation and the structure for a holistic financing structure in our production system here in Norway. As you see on the picture, our CEO was hosting local and national politicians at the construction site some three weeks ago. Thanks. And then over to Tom, to address more about the business update and outlook.

Thank you very much, Jan Arve. Let's move to the next slide, please. Let's now turn to the market side of things. And as I've been alluding to many, many times before, we see a continuously growing and increasing market segment. In fact, we have now made an updated study, together with Rystad Energy, to look at what battery cell demand is required to meet various macroeconomic ambitions, keeping in line with climate ambitions that have been set by world leaders. If you assume a 1.6-degree target and you measure that up against a realistic assessment of all announced production capacity additions into the market to date, we see that there is a very strong market short on the horizon. This does not mean that we necessarily are expecting a 9 terawatt-hour market annually by 2030, it is more a reflection of where the market needs to be if we are going to be in line with Paris Agreement targets and the like. But if that is indeed the case, as you see broken down on this slide, and we look at all announced capacity and put a realistic roll-out assumption on all of these capacities, we actually are in a very strong market short environment. In fact, today it is already experiencing this, as also alluded to previously through our investor and many of our customer dialogues. A lot of the existing battery cell manufacturing capacity and supply is coming from China and Asia in general. An increasing number of customers are now being put on hold or even seeing cancellations in terms of battery deliveries. So the case for localized decarbonized battery cell manufacturing capacity, both in Europe and the United States, the two core focus areas of FREYR, is definitely a very strong value proposition in the medium to long term. We do see strong opportunity not only in the electric vehicle space, but also in energy storage and other applications including commercial vehicles. The 24M Technology is particularly suited for so-called low C-rate applications or thicker electrode applications, and both for passenger vehicles, commercial vehicles, and a large part of the energy storage market segment, we see an opportunity to deploy large volumes of 24M's technology, again produced based on a localized and decarbonized value chain, providing world-leading and cost-competitive supply to an ever-increasing market. Two of these initial commercial wins that we are working on have already been announced, and we were very pleased to announce the relationship with Honeywell, which is one of the leading U.S.-based companies in the energy transition. We are going to provide an initial 19 GWh of cumulative capacity to Honeywell during the 2024-2028 timeframe. Honeywell can also double these volumes under the contract we have with them, and we are now well advanced in detailing out the detailed terms and conditions of a firm sales agreement, which we'll announce back to the market in short order. The other main win that we have made so far is with an industrial player in the energy storage system space and a very large provider of different input factors into a broad variety of industries. Here, we are intending to establish a joint venture downstream from battery cell manufacturing production and the volume that has been indicated to be put into this joint venture is more than 50% of our predicted production in Mo i Rana. That, coupled with our Honeywell agreement, means that for the initial five years of production of that facility, we already have visibility to more than 70% of the projected production from that combined Gigafactory 1 & 2 development. So that is in essence already a strong signal that we're starting to get sold out on capacity from our first commercial facility. If we then move to the next slide, I can take you through some of the additional progress points that we're making on the commercial front. We're applying a funnel-based structure to our commercialization and our customer acquisition process. This is a rigorous, multi-step approach to ensure that we can optimize for value in all the batteries that we produce in an increasing production footprint around the world. We have more than 100 combined discussions ongoing of different maturities. And the two initial agreements that I mentioned are now well advanced towards firm sales agreements with specific pricing and volume commitments attached to them, enabling bankable propositions for our first Gigafactory 1 & 2 development. In addition to this, we now have five conditional offtake agreements in advanced stages of negotiation. These represent in culmination significantly above 150 GWh in potential demand in the same time-frame. Converting these conditional offtake agreements into signed sales agreements with firm terms and conditions will unlock potential additional investment decisions in additional Gigafactories, both in Norway, United States, and Finland. We are then maturing a number of different other customer segments and specific customer accounts across all market verticals. We have more than terawatt-hour unmet demand in many of our ongoing customer discussions. This will be an important contribution to keep expanding a modularized and highly effective production footprint built around the 24M Technology and a localized and decarbonized supply chain with select participation downstream, to capture additional value across the market verticals. So we're leveraging these very strong market conditions and our initial commercial success to optimize the value. We are very committed to providing deep shareholder returns in all of our efforts, and we're very pleased to see that there is very strong traction and interest in the battery solutions that FREYR is bringing to the market. Next, please. Let me now hand it over to our Chief Financial Officer, Mr. Steffen Føreid, to take you through the basics of our financial progress. Steffen.

Thank you, Tom. And good day, everyone. It's a pleasure to be here today. At the end of the fourth quarter, FREYR had $566 million in cash and cash equivalents on its balance sheet. The movement in cash position during the quarter is mainly explained by investment in 24M, payment of license fees, and capital expenditures relating to the Customer Qualification Plant. In addition, other cash outflows from operating activities were $13 million in the quarter, mainly explained by operating expenses and working capital movements. Short-term, our financial priority is to minimize the use of cash while we build the organization and secure offtake. Medium-term, our financial priority is to secure funding for development of Gigafactory 1 & 2. The plan is to raise financing among project finance banks and export credit agencies, in combination with funding from strategic partners and other sources. We have made good progress in securing support from key ECAs and multilaterals, and I'm working at bringing in more ECAs as we firm up our procurement strategy. We're also making good progress at developing solutions for potential build-to-lease possibly in combination with a bond issue or other instruments. As we prepare for final investment decision for the first Gigafactory, we would likely combine financing solutions to facilitate a phased development. And in parallel, we are pursuing opportunities to secure funding through grants. Longer-term, we will seek to diversify funding sources and optimize our capital structure as we execute on our strategy. This includes securing financing for additional Gigafactory build-outs in Norway, the U.S. and Finland. And on that note, I'll turn the call over to you, Tom, for your closing remarks.

Thank you, Steffen. So let's move to the next slide and summarize the key strategic priorities of the company. FREYR was built around three core strategic tenets: speed, scale and sustainability. They are mutually reinforcing, and our progress depends upon filtering everything we do through these lenses. We are executing on our plan to establish 100 to 150 GWh of clean battery production in Europe and the U.S. by 2030. We are now, as mentioned by Steffen, securing the capital required to finance the combined Gigafactories 1 & 2. This will complement our already strong cash position, which was unlocked through our IPO on the U.S. stock market last year. We're identifying additional capital solutions to facilitate planned giga-scale build out across Norway, U.S. and Finland, in addition to select participation up- and downstream from battery cell manufacturing capacity to decarbonize the supply of raw materials and localize the same, as well as unlocking additional customer segments and additional value capture. The localization and decarbonization of the supply chains are well advancing. And we're very happy to see that we are making strong progress in a highly tight environment to secure frame agreements, allowing us to start production of the Customer Qualification Plant and initial deliveries of the Gigafactories 1 & 2. We will keep expanding our initiatives to establish the Nordic battery belt comprising the key raw material inputs going into battery cell manufacturing: cathode, anode, electrolyte, lithium, and different sources. We are now negotiating volumes and prices on raw material frame agreements and complementing that with additional efforts to ensure that we have a cost competitive supply of the critical inputs needed for battery cell manufacturing across all the regions we are intending to establish such capacity. What we are doing now in Norway and the Nordic region is an excellent blueprint for replication, which we will leverage in our U.S. strategy, which we, by the way, are well advanced in progressing on moving into multiple site evaluations for a site selection process targeted to happen later this year, with an ambition to make our first Final Investment Decision for a U.S. facility towards the end of 2022. We are progressing strongly on our journey to giga-scale commercialization. We are converting the initial offtake agreements into firm sales agreements. We will be executing multi-line and phased investment decisions on the combined Gigafactories 1 & 2, which, as mentioned, is now growing in capacity to one larger facility of 18 GWh, primarily of LFP production. We will continue to sign additional agreements on the offtake side to support further growth. And we will then aggressively proceed to additional investment decisions on new giga-scale facilities beyond our Gigafactories 1 & 2 across Norway, U.S., and Finland. FREYR is very proud to be a core part of the energy transition space. Battery is our key enabler for a rapid acceleration of moving to a sustainable future and building large capacity rapidly with a deep sustainability footprint is probably one of the most important catalysts for the energy transition that we have in front of us. We thank all the investors in FREYR for your faith in what we're doing. We look forward to continued collaboration with all of our investors and invite additional companies and stakeholders to participate in this exciting journey moving forward. Have a great day, everyone. And now, we turn over to questions and answers. Thank you very much.

Operator: Thank you. Our first question comes from the line of Evan Silverberg at Morgan Stanley. Please go ahead. Your line is open.

Hey, good morning, guys. Evan Silverberg on behalf of Adam Jonas. Understanding that there's not a formal guidance for CapEx and OPEX for 2022 yet. But how can we think about the range of outcomes there? Obviously, you guys are putting a lot of stuff in the ground, probably need to hire. Are we thinking it's magnitude tier? Just any color there.

Thank you, Evan, and good morning. And thank you for that question. As mentioned during the presentation, we are now firming up the basis for the Final Investment Decision for the combined Gigafactories 1 and 2. And when we have such basis, we will come back to the market with a detailed breakdown of the CapEx estimates, as well as the schedule of the plan. What I can say is that we're still confident that the 24M technology offers material cost savings relative to conventional batteries and manufacturing capacity. I've said many times before, anyone with a screen and who is participating in the market space will of course be well-advised that there is inflationary pressure on, may I say, all cost components and aspects that go into this development. So you should expect a general increase, of course, in the CapEx estimate for proprietary facilities, but they will still be roughly 50% cheaper than what conventional capacity will be subjected to in this time frame. What is an important point to note is we have a very experienced project execution team that have entered into collaborative approaches with various suppliers across the supply chain of the materials and, more importantly, the manufacturing equipment that we need. So we're doing everything we can to mitigate any potential cost increases. But as I said, part of the benefit of having the 24M technology with a dramatic reduction in number of production steps relative to conventional capacity, and therefore, a dramatically reduced footprint of the battery manufacturing capacity, does allow for lower than conventional CapEx estimates. As stated, we'll come back with specific estimates on the capital program.

That's helpful. Thank you. Just one follow-up. Yes, I understand coming back after FID but can we assume that the cash consumption rates prior to FID will be similar to what we saw in the fourth quarter? And then, what is the timeline for FID to make sure that you're still on track for first half of '24?

So yes, you can assume that cash burn will be roughly in line with fourth quarter. Of course, we are taking early commitments in early works to ensure that we are on track for starting up the first half of 2024. So that is well underway. We do believe that we will have the sufficient bankable propositions in place during this half of 2022 to allow us to make initial investment decisions which we will communicate to the market later this spring and early summer. So we are on track to start up capacity in Gigafactory 1 and 2 in the first half of 2024, and we will make investment decisions correspondingly to ensure that we can reach that time-frame.

Operator: Thank you. Our next question comes from the line of Maheep Mandloi of Credit Suisse. Please go ahead. Your line is open.

Hey, good morning. Can you guys hear me?

Yes, we can.

Thanks, guys. Just first on the FID, I mean, in slide you talked about the phased FID. Could you just talk more about that? I mean, you said it's staged and you're in a good position. But what can we expect? And as part of that, do you have to wait for conversion of those customer contracts into firm contracts or do you conduct a different track altogether? Thanks.

Yes. Practically speaking, Maheep, we will be installing these production lines in a sequenced order. So we're not able to, nor is it industrially sensible to implement all of them at the same time. As mentioned, there will be eight production lines, similar in size to the production line we are now on track to stock up in the Customer Qualification Plant. All the learnings that we're having from the CQP will be implemented in this phased approach. So every other month, we will be installing a new production line, and then ramping that up to full capacity. A big part of the reasoning behind investing in the Customer Qualification Plant, an actual industrial-scale facility, is to minimize the ramp-up time and to get rapidly up to high yield and high uptime in the facility. When it comes to the phased FID approach, we obviously want to ensure that we have an optimized capital structure. The offtake agreements are core components in unlocking bankable project finance structures, which we are pursuing with international and local banks, supported by Norwegian export credit agency guarantees and other aspects. When we make this first FID, we will complement that by announcing the final financing structure around it. As we gradually then build up capacity, more and more financing will be attracted into the facility or into the company. We're well advanced in doing that so that we can be on track to stocking up this facility in the first half of 2024.

Got it. And just on the ramp, assuming that you'll ramp up in the first half of '24, and some of the supply contracts start in '24, could you just talk about the cadence of the supply contracts from '24 to '28 or 2030? How should we think about that as the supply ramps up?

Raw material supply will, as we have alluded to previously, gradually go from an existing supplier base, all the approved or pre-approved suppliers of the 24M technology and the frame agreements that we have announced. The 9 out of 13 that are already signed and the remaining four, which will be filed in short order, allow us to have initial volumes coming into the Customer Qualification Plant, as well as Gigafactory 1 & 2. Then we are complementing that approach with a localized joint venture-type approach where the partnership we announced some weeks ago is one example of how we aim to capitalize a localized and decarbonized supply of materials. In addition to this, we obviously are in process with a number of other suppliers from lithium hydroxide to lithium carbonate, to various anode providers, natural and synthetic, as well as cathode providers, not only LFP, but also NMC to be ahead of the curve in terms of what our customers would want. We do see strong movement towards the LFP segment, which also limits the burden of some of the nickel and manganese supply into the cathode side of things, whereas iron and phosphate is a simpler and easier raw material process to cover. All-in-all, this is done in sync with the roll-out of capacity. We are well-advanced in ensuring that the initial volumes that we will be producing in our first facilities are already secured. We'll continue to complement that with an increasing localization and decarbonization footprint, so that we can also capture the cost advantages of low-cost renewable energy and the decarbonization advantages of the same over time. This we will do with world-leading, well-established companies to see the benefit of establishing production of key input factors into battery cell manufacturing in the Nordic region. We have a broad variety of processes and structures ongoing in that regard, so quite confident that the raw material supply side is well captured as it looks now. But there is a lot of new battery cell manufacturing capacity that needs to come on stream. So as we've said many times, we need to be very active in this space to ensure that we have sufficient traction on those critical input factors into battery cell manufacturing, but so far so good.

Thanks for that. I understand the supply side. And then just the last one from me: commodity inflation. We're definitely seeing lithium component and other raw materials increasing. How does that feature into your discussions with suppliers given the large demand for batteries coming up? Thanks.

Clearly, this is filtering through not only through raw material pricing assumptions, but also to the offered battery itself in the marketplace today. Many battery prices in 2021 and in 2022, and possibly beyond, are likely to increase due to the increase in raw material prices. For FREYR, we will implement pass-through mechanisms in our agreements with our customers, so a relevant fraction of our exposure to raw material prices will be shared and passed through to our customers. Customers are already seeing price hikes, 20% to 25% in current battery cell supply from Asian providers, and this is in large part driven by inflationary pressure on raw materials. From a profitability point of view, given the pass-through mechanisms that we're implementing in our sales agreements, and the fact that we are taking equity positions in joint ventures with a localized decarbonization strategy, we are increasingly confident that the margin picture in the company remains robust. But we are in a situation where temporary, quite significant, inflationary pressures are being experienced across the board in the raw material space. We have good solutions to it, both from a commercial perspective as well as from a security-of-supply point of view.

Operator: Thank you. Our next question comes from the line of Fredrik Stene of Clarkson Platou Securities. Please go ahead. Your line is open.

Hey, Tom and team and congratulations on the quarter here. I have two questions for you today. The first relates to FID in general, not only what's happening in Norway, but also what's happening in the U.S. and Finland. You come to a point where approximately the first Gigafactory in Norway has been covered by offtake agreements. I was wondering in your ongoing discussions for more offtake agreements, do you have a threshold that you need to see being put in place before you'll go ahead with FIDs elsewhere? Obviously there's a bankable angle to do this, but is there a ballpark we need to see before we can be quite certain these other factories go ahead?

When it comes to our thinking around this, what we have communicated earlier is that we need to see at least 50% of the capacity to be installed committed for at least three years before we will contemplate adding capacity and making investment decisions against it. This is a threshold that we have been discussing with project finance advisors and banks, and seems to be resonating as a relevant threshold, particularly in the current market environment. What we've also stated previously is that in a very strong market short environment, ideally you don't want to necessarily tie up too much of your capacity in long-term structures. The flip side of that, of course, is that we are still a very young company. We're implementing gigawatt-hour scale, relatively nascent technology. Therefore, we would tend to want to cover more of the capacity in the early stages of that roll-out than we might in later stages. But generally speaking, you should expect that we are on track to make the full investment decision for Gigafactory 1 & 2 in Norway later this year. You should expect us to make investment decisions in the U.S. later this year and we are also working hard to potentially make investment decisions for capacity in Finland towards the end of this year. Our ambition is still to produce 43 GWh of battery cells in 2025 and 83 GWh in 2028, going to the 100–150 GWh range in the 2030 time frame. We will probably have more of the initial capacity covered by long-term offtake contracts in the early stages of that journey than we potentially would do in the later stages. The modular and highly scalable proposition of the 24M technology allows us to dedicate a large part of our production to specific customers. This means we can tailor production lines to the specific needs of specific clients. This resonates with customers who today are often subjected to standardized off-the-shelf products from commoditized providers. We provide a more tailor-made solution while leveraging the same raw material supply chain and a deeply decarbonized, more cost-optimized solution. We will be making investment decisions in Norway, Finland, and the U.S. later this year. We'll probably also make investment decisions on select upstream participation opportunities like the one we recently announced. We will then gradually and consistently be adding more capacity across these three regions in the quarters to come.

That's super helpful. A follow-up: you mentioned that the margin you're generating is being protected by contractual approaches to raw materials which can be passed on to end customers. Over the last 12 months in your initial offtake discussions, have you experienced any changing willingness among those participants to absorb extra costs, given limited alternatives to secure battery supply?

Without going into too much detail, reality prevails. Reality shows that there is limited supply of batteries. The decarbonization of transportation means an increasing number of electric vehicle producers are taking most of the available capacity in the market. Energy storage providers, commercial vehicle providers, and others are being forced to secure supply elsewhere. Existing battery suppliers are notifying customers that prices are increasing significantly due to raw material inflation. When we discuss commercial relationships, there is no surprise or negative reaction to the need to have a balanced approach in passing through some of those costs. Typically, we pass through most of the costs that have market references so that it's easy to monitor how the prices are moving. Our profitability becomes a function of our participation upstream on the supply side and our conversion cost focus. The efficiency and capital advantage of the 24M Technology allows us to drive down conversion costs relative to conventional production significantly. The combination of a localized, low-carbon material strategy with a superior conversion technology gives us a strong opportunity to pass through part of the cost increases we're seeing, but also offer lower costs and prices to our customers relative to conventional technology. We see opportunities to capture additional market share and we're excited about the market reactions.

Operator: Thank you. Our next question comes from the line of Saad Patel at J.P. Morgan. Please go ahead. Your line is open.

Hi, this is Todd on for Jose Assumed with J.P. Morgan. I have a few questions. The first one is on Slide number 11, you've given the breakdown between the different kinds of agreements. Can you just talk a little bit about the contracts or the discussions you are having with automakers currently? And can you remind us how you think about profitability and the business opportunities on auto versus ESS, considering your initial two contracts have been on the ESS side? I can ask my second question later. Thank you.

We will, of course, on a running basis when we have converted these processes into firm agreements, announce them to the market. We are in discussions with a number of automakers and commercial vehicle producers. A core part of what is driving their interest is the need to have localized battery cell capacity. Automakers depend too much on foreign supply today, and there is deep willingness across European and U.S. automakers to create structures whereby localized production capacity is unlocked. We are in talks with larger players and new entrants. At the heart of those discussions is what the technology delivers in terms of technical characteristics of the product itself. Volkswagen invested into 24M and took up the license toward the end of last year, which has increased interest in partnering with FREYR for cell manufacturing for vehicle applications. Across these segments there are different needs, from ultra-high energy density fast-charge solutions to overnight-charge and lower-cost segments, which determine cathode chemistry choices. With a flexible, chemistry-agnostic production platform that can produce both NMC and LFP, we have the opportunity to provide tailor-made solutions for customers. Profitability in those client relationships is a function of pass-through mechanisms on raw materials and our conversion efficiency. We generally see 24M Technology offering both bill-of-material cost savings and conversion cost savings relative to conventional capacity. We will balance that against the need for large volume commitments. Demand is higher than supply in the foreseeable future, so we will optimize for value and ensure margins in the products we sell are in line with or better than prior expectations. There are automakers and commercial vehicle producers in the funnel. We will announce agreements when signed, based on a balanced approach to optimize value for the capacity that we build.

My second question is more on the lines of FID coming into the picture now. Do you have any milestone payments to 24M tied to FID or any other milestones?

Our licensing and services agreement with 24M has no limitations in terms of where we are now targeting to establish production capacity. This is an evergreen production license that allows us to establish capacity anywhere in the world, with temporary restrictions in Japan and Southeast Asia given licenses held by other parties in those territories; those restrictions lapse at the end of this year. There is no need for us to go back to 24M to ask for permission or to pay anything specific when establishing new production capacity in the areas we are moving toward FID. As we start producing and selling to customers, there will be a running royalty-based fee that goes to 24M, and that royalty fee declines over time as volume increases.

One final question: for the plants that you're trying to set up, what sort of financing structure are you looking at? Is it around 25% equity and 75% debt?

We will come back to the market with details of the final financing structure for each site when we announce FID. As you can imagine, we are pursuing project finance-based structures for the facilities, combined with equity already raised and potentially build-to-lease and bond structures to provide low-cost capital for the initial facilities. We see increasing interest across all financing classes and will provide a detailed breakdown of the financing structure when we announce the FID later this year.

Operator: Thank you. Our next question comes from the line of Greg Lewis at BTIG. Please go ahead. Your line is open.

Thank you. Good afternoon and good morning, everybody. Realizing we're running a little long here, I'll just ask one. As you think about building your portfolio of supply contracts for raw materials, do you have any sense or targets about how you're thinking about securing spot versus fixed pricing as you build out your portfolio of key raw material supplies?

Yes, we are thinking about these things. Raw materials are a critical strategic component of being a battery producer. That is why we have consistently said that a localized and decarbonized supply chain of all critical inputs, with participation in that capacity over time, is important. In initial supply we will have a mix of long-term arrangements and some flexibility around spot pricing, but we will try to limit spot exposure as much as possible given current market conditions. Over time, you should see FREYR present in the upstream part of the value chain, to ensure not only the lowest potential cost of the biggest cost component of producing batteries, but also the most decarbonized supply. Energy is a major cost driver in processing metals into battery materials, which is why the Nordic region is attractive given competitive, low-carbon energy. On top of that, logistics benefits from processing close to manufacturing sites. There are also substantial raw material resources in the Nordic region and in parts of the U.S. where we are evaluating sites. Over time taking those raw materials and processing them close to our facilities will be part of the footprint. It's not one-size-fits-all; we'll use a mix of approaches to ensure material availability and to mitigate price volatility risks through commercial structures.

Operator: Thank you. We currently have one further question in the queue. The next question is from the line of Kenneth Steveson of Sperry Securities. Please go ahead. Your line is open.

Hi, team. Congratulations with the '21 results. On the 24M Technology, could you give us some internal experience from other partners in the process of ramping up production there?

Thank you, Kenneth. The 24M Technology was selected because we were looking for three things in our technology strategy: commercially introduced technology, one that will prospectively change performance and cost, and one that could show further improvements down the line as you take it to gigawatt-hour scale. FREYR is the first to take it to gigawatt-hour production and the first licensee in Europe. We have an increasing and strong relationship with other licensees of the 24M Technology. We've visited some of them, seen their facilities and are implementing some of the learnings they have had. Kyocera was among the first to take initial commercial volumes into the market and started pilot production in 2019 and has gradually been increasing capacity in Japan. It's still reasonably early, but all the learnings that we can leverage, whether from 24M itself or from other licensees, will be investigated and applied in our roll-out. At the same time, we are identifying and implementing efforts to ensure uptime and production while leveraging the Customer Qualification Plant to ensure that we can ramp up capacity and yield as quickly as possible in a pre-commercial facility. Therefore we will leverage those learnings during the modular rollout of our production lines in Gigafactory 1 & 2 and beyond.

Thank you. Just a follow-up on the CO2 footprint: we see in other base materials such as aluminum, steel, and iron that green metal will gradually attract a premium. Any thoughts on how this could play out for battery materials and cell production?

We have given a lot of thought to this, and we want to be a leader by offering the greenest battery on a life-cycle basis. Our initial ambition is an 80% reduction in CO2 footprint along the value chain. The commercial value of that depends on carbon pricing and potential carbon tariffs. At current ETS prices in Europe, you can see meaningful value from a lower CO2 footprint, which could translate into a significant monetary advantage. Given the IPCC findings and increasing regulatory momentum, carbon pricing may firm up over time and create more financial incentives for decarbonized materials. We will guide the market as we progress. Over time, decarbonized battery cell manufacturing and decarbonized upstream processing will help the broader supply chain decarbonize. With our earlier estimates of around 80 kg of CO2 per kWh produced, that becomes meaningful when scaled to tens of gigawatt-hours. We believe the value and incentive to decarbonize will be significant.

Operator: Thank you. As there are no further questions in the queue, I'll hand it back for the closing comments.

Thank you, and thank you everybody for your interest. We’re looking forward to catching up with you on the road or virtually this quarter. We will talk to you soon and please don't hesitate to follow up if you have other questions today or later this week. Thanks, and take care.