Hexagon Composites ASA

Okay. Very good morning to all of you.

Welcome to Hexagon's Q2 Presentation 2019. And we've just completed our strategic update, so I would like to spend the first section of this presentation in giving or sharing with you some of the highlights.

And then David will take you through the Q2 numbers and the outlook for the rest of the year. So the backdrop of our strategic position, we'll just allow the latest to arrive.

Good morning, so may not be the brightest for the globe, but for Hexagon, it represents major opportunities. In our assessment, the shift to clean energy alternatives has now passed the point of no return.

So there is a growing concern, I would say, in most layers of the populations around the world and an acknowledgment that the climate changes are real and also true concerns about local emissions. And in the last couple of years, we've also seen financiers to an increasing extent preferring environmental social governance papers.

So capital today is readily available for good investment opportunities in direction of improved environment. And regarding our sector, there is significant push now for greener transportation.

Short to medium-term, in our terminology advances to the next five to 10 years, we are strong expectation that natural gas will be a major source and the environmental impact will be improved further by renewable natural gas or biogas, while at the same time with the technology shift towards electric drive. So electric drive in itself has efficiency advantages more than combustion engines.

So we think that longer term electric drive will be the solution for the drivetrains, but the jury is still out on whether it will be battery electric, whether it will be fuel cell electric, or whether it will be hybrid, and potentially a hybrid between gas and electric drive. So very significant challenges in infrastructure development, less so with hybrid solutions, because then you could potentially generate the electricity on board the vehicles.

Also, we see that the center of gravity, especially for the hydrogen development is now shifting towards Asia, East Asia, China, Korea, Japan. You see, that's light duty coal projects in Europe and North America are getting delayed.

I'll come back to that. And we also see shifts to heavier vehicles.

So, while focus a couple years ago primarily was on the light duty side. We see now that there is considerable attention to the medium duty and heavy-duty vehicles.

So, the sum of this is, an expectation of significant growth probably that is strong understatement. And if you take a look at the forecast for the global vehicle sales, it is predicted to grow by approximately 1% per year.

In 2018, there were volume of 97 million vehicles sold on a global basis. That is growing by 1% per year will reach 110 million by 2030 and 134 million, by 2040.

KPMG they released a report annually and they estimates that by 2040, 77% of the new vehicles sold, will be clean fuels and hybrids, 77%. And if we then do some math, in 2018 Hexagon's estimated combined addressable markets globally was approximately NKK4 billion, corresponding to 0.4 per mille of the new sales vehicles globally.

It is driven that by 2030 and 10% of the new sales will be, will represent an addressable market for our products and systems that is conservatively translates into an addressable market of NKK600 billion. That may be deemed extreme, if you look at the relative growth, but if you look at it as steps to solve the problem, it is probably extremely disappointing.

Because 10% is not even the incremental growth of the sales of vehicles from now, until 2030. So, if one truly believes that this emissions challenge needs to be solved, and needs to be solved fast, then10% is far too low by 2030.

And I will not take the risk of making a prediction. But I do assume that Hexagon will need very, very strong growth in the years to come.

To take a strategic recap and go back to 2014, then I think many looked at Hexagon as shading aspect. We have a strong presence in North America and shale gas and to the markets at very competitive terms.

Then we have the oil price collapse in late 2014. And we repositioned Hexagon shortly thereafter to become an alternative cleaner systems supplier.

And we merged part of our business with Agility in 2016. Taking the step from product supplier to system supplier, we later acquired our main competitor xperian, consolidating the industry and we reorganized and established Hexagon Purus as the main vehicle for hydrogen sales globally.

We last autumn acquired Digital Wave, as the step towards digitizing our offering. And then late last year, we also announced the purchase of the remaining shares in Agility, acquiring 100%.

So, with these steps, we feel we now have established a very strong platform for pursuing the GE and e-mobility opportunities going forward. And if I say that in 2014, on the scale from 1 to 10, our confidence level was between four and five.

Today it is at 10. So we are now fully convinced that the strategic steps that we've taken were the right ones, in order to position Hexagon for the future.

With these steps, we now have engineering hubs in North America and in Europe, and we worked over the last year in particular in order to combine these and to establish joint processes and be able to position for further opportunities. We, as of today can broadly divide our business into G mobility on the one hand CNG and RNG and Hydrogen electric and battery electric on their e-mobility.

So as we have mentioned a couple of times in Agility, we have run the program to develop systems capability for battery electric, medium duty and heavy duty. So it's important to underline that we are not actually producer, we will probably never be a battery producer but we are integrating battery technologies with electric drive trains and are able to outfit trucks and medium duty vehicles to battery electric drive trains.

And also we have the capabilities to combine and deliver hybrids. And that is a bit premature.

We don't see a lot of hybrids between battery electric, hydrogen electric and natural gas, biogas at this stage. But it is our expectation that's some that will come into the picture in the coming years.

So there will not be one and only solution, there will be a combination of several. The Hydrogen momentum continues to build up stronger.

And so we announced few weeks ago that one of the programs that we have been working on and has been delayed indefinitely, so it may seem a paradox that we're then stating that the momentum is building up strongly, but it is an important message there. The reason why these light-duty programs get delayed are twofold.

One, the technology development is very challenging. And the OEMs are working through those challenges and they experienced some delays.

But more importantly, by moving hydrogen up their strategic agenda, they are taking a step back, looking at the vehicle platforms looking at their long term strategies, making adjustments to get it right. And the latest to announce that they are targeting the fuel cell space is BMW.

They have been late in entering the party. But they also then, a couple weeks ago, confirmed that they want to be in the markets from the mid 20s, with a serial production.

Germany. In Germany, the German government has followed Japan, Korea and China and express that they are targeting leadership, global leadership in development of hydrogen technology.

And also Cummins, one of the major players in the combustion technology space, recently announced that they wanted to acquire Hydrogenics and also then taking an important step from the combustion technology platform into the electric space. China having been a forerunner in battery electric developments now is shifting to hydro, sorry, to fuel cell electric.

The government there is targeting 1 million hydrogen fuel cell vehicles by 2030. And as the father of electric cars in China, has expressed we will sort of the factors that have been hindering the development of fuel cell vehicles.

So very interesting developments coming there. Somewhat under the radar in Norway is the development on renewable natural gas.

But this is maybe the hottest topic for the time being in North America. UPS, a major customer of ours, has already been a forerunner in promoting alternative fuels, and they recently announced their targets of 40% alternative fuels by 2025.

They also made a record RNG deal, so renewable natural gas, biogas if you like of 170 million diesel gallon equivalents. And the illustration to the right on this picture shows the impact on CO2 emissions by that deal.

So, as we've discussed before RNG can have a net CO2 reduction impact, as is it ties up methane and converts it to fuel and replace fossil fuels. And Volkswagen's program to promote CNG and biogas as main part of their strategy continues, they now have 19 passenger car models on the market but also a number of bus applications and also have a truck distribution.

And as you will see from the numbers, the development of that particular business is very satisfactory. So going forward, we will leverage our established leadership position and pursue even stronger growth.

And we will step up our R&D activities further. We will put major emphasis on developing a world class organization.

We have a strong organization, but we have to deal with some of the most sophisticated, large corporations in the world being used to the light-duty OEM standards, and we need to develop our organizations to fully meet those requirements. We are strong in North America, we are strong in Europe, we have weak presence in Asia, so to establish and develop an Asian footprint is high on our agenda.

From some of the commentary, we see that some investors and maybe also some analysts look at Hexagon as a value stock. That is slightly surprising to us.

I want to be clear that as much as we like to make money and feel that we have shown we have a track record of showing that we are able to do that. We also need now to balance the short-term profitability with continuing our establishments of long-term positions and organizational development.

And in a way, our dream is now coming true, and we are going to step up our efforts significantly further in order to take the right strategic position and take our fair share of a growth opportunity, which we think is pretty formidable. So, on that note, I will leave the floor to David and then we'll take some questions later.

Thank you Jon Erik. Exciting future.

I'm going to just take you through the second quarter financials will also touch, the near term outlook that is second half of 2019. So starting with Q2.

Our newly acquired division, Agility Fuel Solutions, acquired at the beginning of 2019 continues to have a strong performance 44% growth year-over-year in this quarter, particularly strong on Refuse truck. Extremely strong developments in the CNG light duty vehicle volumes.

We have Volkswagen as Jon Erik mentioned, pushing the CNG agenda in Europe. And we were contracted by Volkswagen then to triple annual production volumes in 2019, over 2018.

And we already see some of that new demand coming through. And by the, towards the end of Q3, we will be commissioning the extra capacity.

On mobile pipeline, relatively soft volumes. The one positive was that we're being quite dependent on North America, but we've seen some good deliveries into the UK.

So good to see a pickup outside of North America. On LPG, very solid sales volumes there.

Profitability is still lower than last year. Again, as we've seen in Q1, impacted adversely by mix factors.

As Jon Erik covered the hydrogen market continues to be extremely dynamic. So aside from the delay in the one of the hydrogen light duty projects that we have, there's been a lot of activity, particularly on the heavy duty.

And we'll cover the H2 bus consortium, that Hexagon joined also in the quarter. Firstly, from left to right, let's go through the financials for the quarter.

We recorded revenues of NOK882 million, versus just under NOK367 million same period last quarter. Of course, in 2019, we are now consolidating Agility Fuel Solutions.

Agility delivered NOK450 million of that top line growth and the rest then coming from the CNG light duty vehicles. On the EBITDA side, we recorded a NOK62 million in EBITDA versus 73.6, the same period last year.

In the middle, you'll see a block in the lighter color there. We're just adjusting for the NOK40 million accrual reversal that was to do with the obligations on our purchase of Xperion that were no longer required.

And so when we adjust like for like, the comparative figure then is 33.7. And we see some very good growth up to this quarter this year.

Agility contributed NOK38 million net of that but net of NOK7 million of transaction impact. And the hydrogen dilution again, hydrogen is very much a future play.

But we do have to invest significantly today in that. The dilution in 2019 was minus NOK30 million, same dilution last quarter at minus 20.

So a little pick up in dilution there as well. We go over to the right, we made a net loss of minus NOK27.3 million versus the profit last year.

And here we do have to include the depreciation and the amortization from all the goodwill post from the Agility transaction. In addition, we have obviously higher interest costs, we've issued a bond to finance that transaction year-over-year and have some leasing costs increase.

Those are cash. However, we've had unfavorable currency movements year-over-year of minus NOK30 million as contributed to the effect year-over-year.

Those of course are non-cash. And of course, the positive tax impact of 10 million given the lower results.

Of course important to look at the business outside of Hydrogen, how that is doing, so this picture to the right, shows our results from the left, and then in the middle, the Hydrogen results can see they are quite dilutive to the group results. So to the right hand side, we would have recorded the rest of the business outside of Hydrogen should I say, would have recorded around about 857 million in revenue, and about NOK92 million EBITDA for 11% margin.

So the dilution is four percentage points for the hydrogen business in the quarter, otherwise recording a solid double digit EBITDA margin rest of the business. Here we look at the new revenue splits in our segments.

So on the left hand side is 2018. Here we include pro forma numbers for Agility, and also for Digital Wave small acquisition we made at the end of 2018.

You can see the extreme growth there in Agility from 313 million in '18 to 450 million this quarter will talk a little bit more about Agility on the next slide. Having a look at the next area, Hexagon Purus, so that that combines our Hydrogen business and our light duty vehicle business.

In 2018, that recorded 67 million, 52 million of that was CNG light duty vehicles. And this quarter this year, 150 million, of which 125 million was CNG light duty vehicles.

So the run rate coming out of Q2 for CNG is a half a billion business unit. So very impressive growth and want to look for going forward.

For mobile pipeline, fairly flattish as we see, 131 verses 129 revenue this year. And for LPG, slight reduction on 191 last year that was very close to record sales last year and 175 is a pretty solid performance for LPG in this quarter.

Agility is our largest division we just take a few more minutes to concentrate on Agility here is the five quarter picture on the right hand side starting with quarter two '18. If we cast our minds back, we have the market was waiting for the low nitrogen oxide, lower emissions, new Cummins 12-liter engine, and that was actually launched towards the back end of 2018.

After launch, you can see quite a pickup than particularly in heavy duty truck volumes in quarter three and quarter four '18, and we've continued that momentum through 2019, both for quarter one and now quarter two recording revenues of 450 million in the quarter. A lot of that growth year-over-year in Q2 was due to refuse truck I would say that refuse truck orders are more skewed towards the first half of the year and will be lower at the second half of the year.

European transit in particular very much accelerating so we've continue to see that trend. You will see there is a margin reduction in the quarter to 8%, 1.5 percentage points is from those purchase price adjustments I mentioned in previous slides, and that was an effect of minus 7 million in the quarter, so that's about 1.5 percentage points there.

Otherwise, some adverse mix and also agility is ramping-up the ED program as well. So hence the slightly dampened margin for the quarter.

Very importantly, it continues to be self funded, meaning it doesn't need any group contribution. So it's working on its own cash and it's strongly cash generating.

As we issued the bonds basically on the back of that investment, that's very important to note. On the balance sheet, no real changes, we have remained at 45% equity ratio, which is good, net interest bearing debt going slightly above the level of the bond we issued in the quarter.

That is mainly driven by some adverse working capital. So we had a working capital draw minus $65 million in the quarter, otherwise pretty stable conditions.

So just jumping to near-term outlook. As I said we can unless otherwise stated, that's the second half of 2019.

Starting with Agility, we expect more of the same in 2019 second half. Certainly, the cleaner air directives that were introduced and adopted in Europe is having a significant impact to the focus in heavy-duty bus in cities around Europe.

That is definitely stimulating demand. And it's going to be more of a question of us having capacity to continue to supply demand, so very exciting segment there.

I mentioned that Refuse Truck will be more skewed towards the first half, and a little bit lower in the second half of the year. But overall for the full year of 2019 Refuse Truck very high levels and growth year-over-year.

Low and zero-emission heavy-duty trucks, we will speak a lot about RNG, we have already and will continue to do so. So RNG, renewable natural gas or bio gas.

Those initiatives together with CNG really helping our stakeholders achieve sustainability commitments. And the previous picture you saw one of our largest customers UPS.

They've been extremely aggressive on sustainability targets and I believe extended those out to 2025 and increased the level of alternative fuel vehicles that will be in their fleets. So very good news also for Agility going forward.

As I mentioned battery electric vehicle programs will remain on track, we have a very strong anchor customer there. So that's a paid development.

But of course, in addition to that, we do have some extra costs in order to keep competitive in that growing area. Hexagon Purus, at least the Hydrogen part of Purus.

Talk a little bit about the H2Bus partnership. Certainly, a lot of interest in heavy-duty on the hydrogen side.

The H2Bus partnership here we're in partnership with companies like Ballard, with Nel, Wrightbus, amongst others. And here the goal is to deploy 600 buses by 2023 at good and competitive total cost of ownership.

Hexagon, ourselves, we will provide the fuel solutions on these buses and also the distribution trailers. And that's quite important.

So with Agility fuel solutions and systems competence, we are quite a competitive package now especially when we go into the heavy-duty sector for hydrogen. And then combining our distribution and mobile pipeline expertise, it's quite a formidable package, we feel.

Geographically, as Jon Erik mentioned, certainly China and Korea are expanding and we see a lot of interest currently, and expected to grow in the future. As Jon Erik mentioned, that will continue to mean organization ramp up.

And when we look at the other side of Purus, on the light duty vehicle side. As I mentioned, very strong demand here in Europe.

Our order intake is at an all time high. And the, as I mentioned, the capacity investments contracted with Volkswagen to triple our volumes that should be commissioned by already and quarter three.

So I hope to supply even more from that point on. Volkswagen are targeting not only Germany, Germany, they have a target of 1 million CNG vehicles light duty on the road by 2025.

But also adjacent markets in Europe, so Italy, Spain, Belgium, Sweden, Czech Republic, for example. So these are all interesting areas of growth, also, hopefully, for Hexagon.

When we look at Mobile Pipeline. Mobile Pipeline, there're still strong underlying drivers.

But we know Mobile Pipeline very well, it's going to be challenging near-term. The challenge is really in a lumpy project based nature.

So that means that demand is fairly variable, sometimes unpredictable. We have low order visibility generally.

And that will be how we see the rest of 2019. I will say that North American oil and gas and industrial uses over the last two or three years, this has been really the main area driving volumes.

It continues to be high activity that is good. But what is really interesting, as well as back to RNG, we're getting initiatives that will also help us diversify revenue streams and applications.

If we look further down, we were awarded RNG contract for $4 million recently from a leading US utility, and again, enabling reduction of agricultural carbon emissions. So we hope to see many more of those projects, it's a little bit too early to see the size of that total market segment.

But certainly interesting one, both for Hexagon also for the climate. Also pleased to see on back on the industrial and North American side, we had a new order from Certarus for $7 million going into Canada and mining sector, for example.

On Ragasco LPG, we tend to refer to this Ragasco this step-by-step development. So we will continue that step-by-step approach.

Second half of the year, as you know, is seasonally softer, that's because the first half of the years, very heavily targeted to the European barbecue season. So Q2 and Q4 does tend to be lower.

Saying that, we see continued opportunities in Bangladesh and sales there. So that's been our largest market this year and market that is opened up over the last couple of years.

We're still gaining some traction, we have seven pilot programs in the US, so those remain ongoing. And we're happy to announce new markets in the quarter, our first sales into Bulgaria.

So step-by-step for LPG. So to summarize, the group outlook for the second half, we will have weak profitability in quarter three, but it's looking pretty strong for Q4.

In Q3, unfortunately, when all our major divisions have their softest quarter of the year at the same time. It does have an impact on the profitability.

But of course, the reverse is also applicable. So it could be fairly variable low Q3, higher Q4.

Agility, CNG, LBB and LPG will remain strong contributors. LPG, as I mentioned, will be seasonally lower, but the fairly solid rest of the second half of the year, CNG, LBB continues to grow and Agility is well poised.

I think for Agility we'll have some softness as well in Q3. But this is probably the strongest quarter expected then in Q4.

Underlying drivers remain strong. That's the key for Hexagon.

We are a long term play. And as the push for green and mobility only increases, this is exciting times for Hexagon.

On that note, I'll ask a Jon Erik to join me for any questions and answers. Any questions rather from the audience or web audience?

Halvor Nygard from SEB, you gave some details on the lost hydrogen contract. Could you say something the risk for additional contact?

I would imagine segment being pulled.

Being pulled, we don't see any significant risk. But delays, we see that the development that needs to take place in this whole technology evolution entails risks.

So we see risk for delays also in other, maybe more on the light duty side, but we see much more upsides potential than downside potential. And our overall estimates for the future yes, is higher today significantly higher today than it was, for example, six months ago.

Very good. In months or years for the delay?

It's very hard for us to comment on that. These are huge programs and massive resources spent by the OEMs.

And they will have their strategy reviews. And it's now moving, as I mentioned higher from their overall strategic agendas.

So I think they are first and foremost focused on getting it right. So while there maybe two, three years ago, some of them at least are more dipping their toe in the water.

Now they really see that this needs to be part of their portfolio. Their plans are 10-15 years horizon.

And then I think it's in the nature of that development, that there may be hiccups in development, which will then in consequence also affect us.

And on the guidance for second half any for comments for weak Q3 and a strong Q4. Is it possible to quantify how weak Q3 will be and how confident are you in a pickup in Q4?

You mentioned your scale four to five and 10. How confident are you that Q4 will be a strong quarter?

Yeah, I don't want to quantify be so precise. Because it will be the weakest quarter of the year.

That, as you know, turns up in LPG seasonally weak and then if the other divisions suffer relatively softer quarter, then there's less profit to cover the dilution of hydrogen. So I think, our mobile pipeline is something that is low visibility.

It's hard to predict, always have that risk, of course. But yeah, Q4 and the bigger divisions, I'm looking at backlog and real orders, so fairly confident then on the strong Q4.

And you mentioned that they're stepping up effort. Now, based on what you see and especially within Hydrogen, does that imply that you're also the Hydrogen EBITDA dilution and CapEx will that be changed from what you earlier have communicated?

We will come back to that and give more guidance as we quantify our plans. But the short answer is yes, maybe not near term but going into 2020, we will want to step-up the efforts, and you should assume higher dilution than what you've seen so far this year.

And it's not only the hydrogen program it's also the battery electric vehicle program, which is dilutive, it's also the geographical expansion projects we are spending quite significant relative to our size resources now on mapping, analyzing, and doing due diligence, etcetera. So that is also a cost factor.

And we want to continue and increase all these efforts. And maybe most importantly, we want to prepare for really significant growth, then we need to look at our organization.

And we need to look at every process, on the manufacturing side, on the R&D side, on our systems side we need to ramp-up all of those first and to create a truly world class organization in order to meet the expectations that we know will be there for us in two to three years from now. And that investment needs to be taken.

And that's what we're talking about. So the answer is yes.

We will probably give more guidance, that's fairly significant step up in the efforts to prepare for the future.

Mikkel Nyholt with Carnegie. First off question on the Agility since Q2 2018 that was the margin fluctuation from 5% towards just north of 12%, and I mean, in terms of revenues, it looks to be as you're delivering according to at least analysts estimates, but on the margin side you're coming in slightly weak, so I was wondering whether you could elaborate a bit is it a normal seasonality it's what kind of going rate margin should we expect long-term and interim seasonality is it of course very interesting and given our lack of history for this division it's difficult to estimate and then we have quarters like this and then possibly next quarter coming in Q4 coming in much better.

I was just wondering if you can elaborate there?

So firstly, we set a kind of a minimum requirement of the double digit EBITDA margin. So that's what we look to target and Agility is definitely looks to target that.

So long term target will still be in the 15% with a minimum target of 10%. Obviously, if you break down the divisions within the Agility portfolio, and there's a couple of things Jon Erik mentioned the ED programs so that is diluted by margin percentage just by definition.

But the second areas, if you remember, in 2018 Agility bought, sorry 2017. Something called the, what we call, the powertrains division.

It's the medium-duty propane. That's more or less on the startup phase.

So that is still looking to breakeven in 2019, and then start accelerating and giving good growth. So whilst the medium-duty is in that growth phase, you do see some drag on the margins.

As that improves into 2020 naturally you will get the more improved margin. On seasonality, I'm afraid I can't, it's not predictable in that way.

How we explain internally is that there will always be one quarter that's weaker, but it's not predictable which quarter. But we like the relative stability of Agility.

So hopefully the EV, the profile on medium-duty will help explain some of the margin drag, fluctuations will be also caused by mix factors within the business unit.

Lastly, on the g-mobility and e-mobility market, which you calculated to NOK 4 billion in 2018. Are you able to say what kind of market share you held in that market in 2018?

And how eventually see the competitive landscape developed towards the possible NOK 600 billion market in 2030?

I can at least comment on it. So, we, our estimate is that we are comfortably above 50% of that market, today.

In the near term, we don't see a lot of significant players being attracted. But certainly, as more and more companies get their eyes open to the opportunities, and as the OEMs figure out what their future supply chain needs to look like, we should assume that there will be several entrants and several worthy competitors entering the space.

So that's what we are preparing for, we have an advantage. We need to build that organization to withstand the competitive pressure that we should assume, and we think that we will be competing on know-how on flexibility.

And I think in this transformation of the whole sector, the fact that we are relatively small, we have a light structure is an advantage, and we intend to leverage that starting point.

Thank you.

Are there any more questions from the people in the room?

So by and large, it's a very constructive cooperation and so targeting the maritime opportunities. So we've had some successes, but that is the longer term play.

So we're thinking in terms of two, three years from now. It was an article in one of the Norwegian papers as late as yesterday discussing the fast ferry sector, which is now ready for zero-transmission.

So that's the type of opportunities that we are addressing and they will materialize. But we shouldn't expect a lot of revenue from that partnership in the next two to three years.

So if any impact, we believe that will be positive. Because the very high activity in the truck market has made capacity availability constraints.

The truck OEMs have naturally prioritized the serial production of diesel trucks. And there has been a times been constraints and also in the rest of the value chain, there have been constraints.

So for us, it's much more important that main transport is like UPS. Now make a firm commitment to alternative fuels.

That is what we believe is going to drive our markets.

Any further questions in this room? Seems not.

Then thank you very much for sharing this morning with us. And have a good rest of the day.