Hexagon Composites ASA

Jon Erik Engeset - CEO David Bandele - CFO

Halvor Nygard - SEB Hans-Erik Jacobsen - Swedbank Fredrik Steinslien - Pareto Securities

Good morning. Welcome to the Q1 presentation for Hexagon Composites.

We will, this morning, follow the usual script. I will give you some initial highlights regarding the past quarter, then David will take you through the details and I will dwell on the future in the last section.

So the quarter, bad news and good news. Bad news, we had weak turnover in the quarter.

The good news is that we see the light at the end of the tunnel and we expect that we will gradually improve for the coming - in the coming quarter. Also good news is that we've had very good development on our cost side and that is visible on the bottom line.

So, the main challenge remains the Mobile Pipeline segment. In the LPG segment, we have enjoyed very satisfactory growth and continue to expect so.

Hydrogen has become a very hot topic and we remain very excited about the prospects there. In the quarter, we also executed the investment agreement and the strategic alliance agreement with Mitsui & Co and I'll come back to that in my later section.

We also agreed to acquire 67% of a Brazilian leading buy systems builder. We had approval of our SMARTSTORE for the US markets and last but not least, we delivered above target on our cost reduction program.

So we feel that we are in very good shape on the cost side at this stage. So, with those introductory remarks, please David.

Thanks, Jon Erik. Welcome everybody to Hexagon Composites' first quarter 2016 financial summary.

Also, special welcome to Mitsui & Co, the new shareholder joining us from Tokyo on the webcast. If I begin with the highlights, financial highlights for quarter one ‘16.

Operating income low at NOK292 million, however, earnings before interest, tax, depreciation and amortization, EBITDA was NOK19 million, modest and net profit around about neutral. So again if we looked at our 2015 average quarter turnovers, it was around about the NOK350 million to NOK400 million mark, so clearly you see a big impact to our profitability there and that as Jon Erik pointed out, coming from the weakness in the Mobile Pipeline sector primarily.

But again, just to point out from the cost base side of things to absorb such an impaired, you can say, volume on the top line, those costs - the initiatives that we executed at the end of quarter four really allowed to be at the modest EBITDA, but EBITDA no doubt. The good news on Mobile Pipeline is we do have a growing order book, so that we've seen increase in quarter one.

So that should bear fruit then later in the year. In CNG North America, a large part of our business, we saw a very strong transit bus growth for quarter one, but somewhat softer on the refuse and truck side of things.

Strong recurring sales base in LPG and very important and also operating profits in the Light-Duty vehicles sector, you would recall in 2015, we were pretty much bleeding on that division, very margin disruptive. It was low volumes, but also quite a lot of losses and with the restructuring at the end of last year, we’ve been able to really turn that around even based on quite low sales volumes.

So good news there. I think the balance sheet is going to be the highlight point.

We had positive operational cash generation, that's good news, but certainly the large impact was the receipt of the new equity proceeds from the private placement, which were received on account right at the end of the period. If we come over to the detailed income statement, over to the right, we have the full year 2015.

This was the final audited amounts when we presented in Q4 at the preliminary pre-audit. There has been no changes other than the tax expense right at the bottom.

That was NOK3.9 million, it's gone up to NOK4.3 million, so NOK400,000 better. And the profit or loss stated then at NOK4.6 million.

So immaterial difference, but just to point that out. In the middle columns then, this looks at our quarter one 2016 on the left hand side, in the middle column, the 2015 quarter one, the variance to the right of that.

So, we started with the operating income, sales revenue, NOK291.6 million versus NOK401.6 million at the same period last year. Off to operating expenses, we drop down then to an EBITDA of NOK18.6 million versus NOK52.9 million same period last year.

Slight increase in depreciation of a couple of million that took operating profit then down to NOK3.2 million in the period this year and NOK39.5 million in the same period last year. Marginal effect on the below the line, the share of profit from associates, so the larger effect has really been in the other financial items year-over-year.

This year, quarter one, we had NOK5.8 million net cost. Within that, it was about NOK3 million of currency effects that have been negative whereas the corresponding period quarter last year, NOK13.8 million, that included actually NOK18 million of positive FX.

So year-over-year, we have quite a strong currency movement that's unfavorable looking at it from this quarter's perspective. So we had a profit - or loss before tax in the period of NOK2.6 million versus a profit of NOK53.2 million in the same period last year, and after the tax expenses or credits, we then have a profit after tax of NOK0.4 million in the quarter versus NOK37.6 same quarter last year.

EBITDA then 6.4% margin versus double digit 13.2% last quarter. Operating profit margin of 1.1% and the net profit then forced to 0.2% for the quarter.

Going to a little bit more detail, as we look at the quarter one ‘16 versus quarter one ‘15 view, starting with turnover, going to EBITDA, over to EBIT and then net profit, right on the right hand side. Starting on the left hand side on operating income, the NOK110 million reduction represents 27% decline.

It's really the High-Pressure contributing to that NOK127 million decline or 42%. Still some positive FX impacts from the US dollar-NOK in there, but they would gradually reduce as we go through the year when we look at year-over-year FX.

Low-Pressure, NOK17 million on 17% growth, that's the continued trajectory that we've been building our recurring sales base. So good news.

Going off on to EBITDA. We see the negative EBITDA margins in High-Pressure overall of minus 4%, had an effect year-over-year of NOK41 million reduction, whereas Low-Pressure contributed by NOK6 million year-over-year and we see healthier margins of 21.4% for the Low-Pressure segment.

So all in all, our spread at EBITDA is NOK34 million, it's a difference between the NOK53 million and the NOK19 million. That spread widens to NOK36 million, that's the extra NOK2 million of depreciation.

In the Low-Pressure area, we had pretty much aggressively depreciated our assets in 2014, so quite a low asset base. In 2015, we had a program [ph] of CapEx of around about NOK50 million, that's been activated gradually through the year.

So we see that will generate then this increased depreciation costs year-over-year as a theme in 2016. When we go over to net profit, the spread goes from the NOK36 million to NOK37 million, so we lose one more million krone and again it's really in the financial items area.

FX year-over-year or currency changes, currency differences, minus NOK21 million. Interest is positive.

We refinanced last year and we continue to benefit from much more favorable interest costs and then there is other non-cash impacts within that line of minus 1. Tax effects are of course positive with the lower profit situation year-over-year.

That contributes plus NOK19 million. So all in all, we had a big effect from the Mobile Pipelines, but the cost initiatives definitely helped offset the - or partially offset the impact of those.

So we come to our share of operating income. On the left hand side, this looks at the quarter one 2015 picture, you can see around over NOK400 million in turnover there.

In quarter one 2016, on the right, the NOK295 million. This is of course before the group eliminations at the segment level.

Just to return to the left hand side, last year, that was a record quarter in CNG. We had just launched low carbon 27-inch heavy duty, which was very successful commercially.

We had a very good start on transit bus, both in America, but especially rest of the world. Over the year, I think, we grew 70% in 2015 versus '14 and it was even more accelerated in quarter one.

So just to give some context of what was a record quarter in CNG. Mobile Pipeline in retrospect had a - I remember at that time, we were complaining about that, but in retrospect, that's a good healthy quarter and it was LPG that was a little bit weak in quarter one ‘15.

So High-Pressure really was dominating the theme. Coming over to this year, we have CNG more or less contributing the same impact, but at the lower level, at the NOK149 million and but really the big change, you can see that quite clearly on Mobile Pipeline year-over-year, but very glad to say, as we said, we started to report Hydrogen business unit now from 2016 onwards.

So the NOK4 million reflects only the commercial sales that we have, of course, we have a far larger number when it comes to the many active programs that we're getting funded for. So funded development.

As the year goes on and as the years go on, we'll expect that to grow in a very significant manner. LPG had a much better quarter than last year, NOK122 million and as I say, it's continued its growth trajectory there.

If we look at the operating profit, quarter one 2015, last year, was pretty much a normal share. High-Pressure slightly higher than Low-Pressure and we look that in quarter one 2016, of course, with the High-Pressure losses of NOK17 million, it's really Low-Pressure that's allowing a positive operating profit there.

I’ve made most of the points already on the High-Pressure cylinders, so just look at the third bullet. One issue we like to point out, we had one expected order for Q1, rather large order that's been pushed out to Q3, so that's just one change on the Heavy-Duty side of things, but also just to focus on the last bullet as well, we spoke about Hydrogen commercial sales.

The precursor to the Hydrogen sales is definitely the ground storage, infrastructure is the key really to get the Hydrogen whole business unit moving in terms of sales for us. And that will definitely be generated through the Light-Duty vehicles side of things.

There are many different applications that we're working on at the same time, I can confidently say that this is the busiest unit that we have at the moment in terms of activities, leads, real programs that we're working on. So very exciting in there.

And just to take the headline figures, operating income in High-Pressure was NOK172.7 million, NOK299.4 million in the same period last year, so you see the variance of almost NOK127 million on the topline. When we go down to EBITDA, a loss of just under NOK7 million versus a profit last year of NOK34 million and then after depreciation, we have an operating profit of - operating loss in the period of NOK17.5 million versus operating profit of NOK23.9 million same period last year.

Going on to Low-Pressure cylinders, we spoke about the recurring revenue growth, that's a fact. Quarter one is traditionally a strong point for our European markets, so we're not surprised there.

But we're very happy that we may continue our progress and traction we actually recorded, continue to record some sales in quarter one to African and South American markets. So part of our plan to, as you can say, spread our sales over and above our mature markets.

Third bullet, we mentioned last time about the milestones achieved in the investments in the Ragasco plant. These are generating real capacity improvements.

So these are pretty key three reasons. One is the bullet below it.

We can at the same time then focus on offer most customized solutions, which we're doing and another key area is that we - although we're trying to push the recurring base, we do like, I wouldn’t afford this, when we do get them and we need to have the capacity to actually produce those, so that's another key point in order to be efficient with our capital is to have these, you can say, debottlenecking or increasing real capacity, real speed of the line and so that should allow us to actually target one-offs when they occur. On the summary financials, we have operating income of NOK121.8 million versus NOK104 million, so that growth of actually close to NOK18 million.

Off to operating expenses, we have EBITDA of NOK26 million versus NOK20.4 million in the previous quarter, of the quarter in the previous period and then operating profit, NOK21.3 million versus NOK17.6 million. So good growth, top line to bottom line in Low-Pressure.

As I said, the real highlights are in the balance sheet this quarter. This is kind of a dream slide for me, so I'm going dwell on it.

We started the year with NOK93 million in the bank. We'd like to have that type of free cash balance for good working capital balancing.

And you can see that we had positive contributions through operations, through operating working capital, other movements, that's always good, they can change, but good for the quarter, we had very modest CapEx in the quarter of NOK13 million in total and then the dominating fact is obviously the proceeds from the private placement. After all other effects, we closed the balance sheet or closed the cash position at NOK763 million.

They literally were received right at the end. So few days after in April, we used them to pay off our loans completely.

Looking at the balance sheet then, apart from the cash position that we've mentioned, that significantly de-levers our balance sheet and puts us in that position to be opportunistic on M&A or other activities that arise. So aside from the cash, the two standouts really are in the inventory side and the other current liabilities, accounts payable side.

One would ask, is that a concern that our sales going down, but our inventories are coming so just to allay those fears, this is very much deliberate. We had a bulk buy of carbon fiber at very favorable terms.

Carbon fiber is something that typically turns within a month. So on the raw materials side, there is no risk there obviously and those favorable terms obviously price induced, but also extended payment terms and those extended payment terms, you can see that there is - we put that in the balance sheet and inventories, but it's also an accounts payable item down below.

So net neutral. Pictorially, the point I was trying to make is that this is the picture strictly at 31st of March, but this - a big chunk of that cash will then offset all that long-term debt as we go into April, we executed that in April.

So in effect, the balance sheet, after 31 March, will shrink accordingly, and our equity share ratio will increase from the 58.3% that we see there. So very strong resetting of the balance sheet and Hexagon is in a very good position to take things forward.

I thought I'd close with just some of these - summary of these financial impacts that will happen in quarter two, already happened. So as I mentioned, we paid down the book value of the debt of NOK383 million straight after close.

It reduces the net assets, get a higher equity ratio after that and then the - in addition to the book value, we were carrying capitalized costs connected to that financing of NOK4.7 million. So that also then is released to the P&L, so there will be a cost to finance - finance costs of NOK4.7 million that comes through in quarter two.

Just to note that the deal fee estimates of NOK18.6 million already included in the figures that you saw, so the proceeds are stated net of those deal fee costs. And then a final item, we still have legacy interest rate hedges, which this one is out to the money at NOK4 million and obviously with no loans, it's consistent to take that out as well.

So that interestingly enough has no P&L impact to the consolidated results, but it does obviously have a cash impact as we cash it out. On that note, I would like to invite Jon Erik back.

So looking ahead, North America, that has been the main challenge for us over the last year and a half. We see now that the environmental benefits of CNG are currently the main drivers.

In the US especially NOx emissions is very high on the environmental agenda and we see that there is continued strong growth in the transit bus and refuse segment. We expect more flattish development regarding heavy duty trucks until we see these spreads between natural gas and oil prices widening out.

That widening has now started gradually following the increases in the oil prices, but to what extent that will support our business short remains a function of the oil price development. All in all we have a fairly optimistic outlook of the North American market for the remainder of the year.

The mobile pipeline, we expect low sales also in Q2, not quite as low as in Q1, but still far from where we want the activity to be. However, the order backlog, the prospect list and general market activity went to a health recovery in the second half of the year and that is an encouragement that we have been waiting for and I am very pleased to see.

Number of projects are being discussed and prepared in North America and we also have large TITAN orders in Latin America that we will execute this year. We have a number of projects that are for mobile stations in Asia as well as industrial applications and we have made the first or taking the first order in Europe for biogas projects and we expect more of those to come as the environmental in general is maturing.

So we believe that we are gradually working us through hardship in the mobile pipeline segment and that we will have the better market conditions going forward. On the CNG automotive side, we expect continued very strong market for transit bus in the next quarters.

The European bus market has started very slow after a record 2015. You had the slow start to 2016.

We expect it to pick, but we are uncertain to whether it will be a strong year or whether the market is taking a slight pause after the strong 2015. We believe that our acquisition in Brazil will significantly strengthen our competitive position in the rest of world.

The Brazil investment itself is targeting South America, not so much Brazil itself actually, it’s more of export rather to South American markets and to Africa, but there are also projects in other parts of the world. The refuse truck market was relatively slow for us in Q1, but we expect normal year, meaning a good market for the rest of the year is our expectation while the other heavy duty truck segment is expected to be relatively flat.

Last but not least after restructuring of the light duty segment, we did record flat numbers in Q1 and we are looking forward to a healthy development there with more volume coming in this could become a fairly sound business for us and we have new mobiles being launched in Q3 and then again next year, so that is something that is very satisfactory. Regarding the LPG cylinders, David has already said the main things about that.

So there is now a very sound development in our core European markets and we are addressing new European markets. We just recently hired a new sales manager for Central Europe, so Poland is the market which we will target this year and also outside Europe, lot is going on.

We have previously talked about Africa, which we did not have great expectations for going back a couple of years that we see now a number of opportunities there, so very encouraging. And the technology investments that we did in 2015, we believe that we will get better return on those investments than we had assumed in the investment decision and we expect that it has increased our available capacity by more than 10%.

So, all in all, this business area is delivering on its growth strategy. The hydrogen business area is in its infancy, but we have strong expectations there.

The Japanese have termed the Hydrogen society and they have set 2020 Tokyo Olympics as the milestone to display the Hydrogen society to the world. The Tokyo Metropolitan government has planned to have 200,000 fuel cells vehicles by 2030 and 150 hydrogen refueling stations and it seems to us that they seem very committed to these ambitions.

So already by 2020 the Japanese OEMs are targeting around 40,000 vehicles. So we follow the debate, but batter electric versus fuel cell electric vehicles with interest, but it also seems a bit academic, because we see that with Japan taking the lead, this is happening and we very much would want to be a part of that.

So that’s why we are now conducting a feasibility study together with our partner Mitsui and also with Toray Industries being the main carbon fiber manufacturer in the world, but also a Japanese company with the intention to establish a facility in Japan by 2018, so in time to reach the establishment of the Hydrogen society. So this slide shows the models that are developed or under development and as David also mentioned, in order to support these cars on the roads, there is a need for infrastructure which also poses a major opportunity for us.

So the last slide today, it shows the closing ceremony that we have with Mitsui and Company for the alliance agreement and I think David and I are competing about the smile. It was a very pleasant two days together and Mitsui beyond being a global organization with a lot of capacity we find that we have individuals there who are real partners and that we will able to come to concrete business opportunities with this organization and leverage their global footprint.

So on that note, we will have some questions. David, please.

Halvor Nygard from SEB. Doing the feasibility study now with Toray, Mitsui and Hexagon, can you take us through next steps in the potential partnership?

So the feasibility study is planned to be done this year and next so by the end of year we will reach a decision point and then hopefully that will confirm then the intention to establish a facility in Japan. So I don’t think we are ready to comment beyond that at this stage, because clearly we need to define the facts and based on those facts we will be able to inform more deeply.

And can you talk a little bit about the competitive landscape within the hydrogen for your side?

Yeah, that’s an interesting question, because it’s the usual suspects Experian and Quantum that decide Hexagon have been most active. As you will have noted Quantum filed for Chapter 11, so we are uncertain about their intensions within this segment as in other segments in fact.

Regarding Experian, the German competitor, we understand that they are committed to hydrogen and that they will also pursue opportunities in this area. Beyond that Toyota, they have their own tank developed and so far have produced the relatively limited number of tanks so far they have produced in their own organization whether they intend to continue that strategy is also an interesting clarification that we will see in the coming years.

How has the Chapter 11 of Quantum impacted you guys since it was filed?

I wouldn’t say that it has had the strong impact yet. A company which is Chapter 11 is allowed to continue operations, so they are preparing now for a sale of the company.

I believe the date set for receiving bids is the 23rd of June and what we expect is that the new ownership will wish to have return on their investments, so that over time we expect a different commercial behavior and what we have seen till date, but we cannot say that this has had significant impact so far. This is quite recent news.

Okay, last question. We have a lot of cash at hand right now, how will that be employed?

We are monitoring all opportunities and we will find good use for it.

Thank you.

Hans-Erik Jacobsen, Swedbank. In the low pressure area, could you give us a little guidance on the sales outlook for the second half compared to last year?

Also for TITAN can you give us a little guidance on the margin development that you expect going forward compared to the margins you had when the business was building?

So on the former question, so we expect stronger year for the LPG business, also in the second half. Unlike last year, we have more potential one-off projects.

There is some certainty of course whether those will kick in or not. With luck we can more or less fill the capacity.

Our assumption is that we will have sound double-digit growth year-over-year. On the TITAN business, it is a fact that in the US, there are very projects and that we need to seek all possible ways to get the business rolling, so I think it’s fair to assume that there will be some margin impact by the depressed states, but hopefully we will get back to situation fairly soon, where the capacity utilization will be good and that then we think that market should continue to deliver sound economics.

Thank you.

Fredrik Steinslien from Pareto Securities. Just a question on kind of if you could indicate something you are thinking about these proceeds.

Earlier you talked about M&A, how do you think about that now compared to organic initiatives and kind of what types of engagements are you pursuing in order to kind of follow through on the hydrogen initiatives that you have taken?

I cannot comment beyond confirming that we are looking at a number of options. Of course the hydrogen potential JV in Japan will itself require substantial funds, so that’s one concrete opportunity, but apart from that I am not in a position to be specific, but we do have a number of opportunities that we find interesting that we will take our time and we will not spend the money unwisely.

So therefore, we will invest when the time is right.

Is it correct to say that most of these projects are hydrogen related or the other?

We have across the business areas in fact. What I have said previously is that we are now concentrating on fully utilizing the factory at Raufoss on the LPG side, but we hope to reach that capacity limits within a couple of years, so it means also that we need some stage to make decision on expansion there.

It could be at Raufoss but it could also be elsewhere. If it was completely free trade world then our preference would have been to invest at Raufoss.

We think that is more efficient, but in order to get behind the customs barriers in certain parts of the world, it might be that we will have satellite factory somewhere else, but that is also a decision which should be pushed out. We will not take it this year; hopefully we can get to a decision point next year.

One last one, if I many. You commented in terms of mobile pipelines, do you see Q2 being soft, but stronger than Q1 and indicating that second half should be quite better.

Could you try to quantify, for example, in kind of relative to 2015, ‘14 where you see that going for the second half of the year?

As always we will be careful, but the market outlook right now is such that we are at least hoping for a better 2016 totally, then 2015 and since 2015 started better than this year started, then you have a conclusion there.

Thank you very much.

Anything from the web audience? All right, then thank you all for joining us this morning and wish you a lovely day in the Oslo early summer.

Thank you.

Thank you.