Hexagon Composites ASA

Hi and welcome to Hexagon Composites Third Quarter Results for 2020. My name is Karen Romer.

I'm the SVP of Communications at Hexagon and will be moderating today. Today's presentation will include the company update and market review, followed by a summary of group highlights and financials.

Outlook will be then covered, and then we will open up for Q&A. We ask those of you in the audience to submit your questions either through the tapping platform in the chat function, or just submit it to [email protected].

And we will read the questions at the end of the presentation to get answers from the CEO and CFO. And today I'm reporting live from our Oslo Streaming Senter in Oslo together with our CFO, David Bandele.

And joining us from Alesund is our CEO, Jon Erik Engeset. And without any further ado, I will hand over to Jon Erik.

Jon Erik?

If you go to the first slide please, so we are well into the fourth of a rapid year, but we feel quite good about where we stand at this point in time. So we have had impact of the COVID-19.

But fortunately, all the cases that we have had have either recovered or are recovering, so no direct serious effects on our employees fortunately. The business impact has been limited no major supplier disruptions.

And in the quarter, all our production facilities have remained open and have only been marginally affected and the underlying market demand is very strong. Next slide please.

And that is not least by the very favorable macro picture. So the governments around the world continue to firm up their emission reduction targets.

The EU has raised their targets to 55% CO2 emission reductions by 2030. China has now committed to carbon neutrality by 2016.

In California bans on new gasoline cars and trucks from 2035 to give some examples, Next slide please. And the customer is falling for Institute.

So they have equally or in many cases even more ambitious targets. Anheuser-Busch have planned to convert its entire long-haul fleet to renewable energy in five years.

UPS has announced that they will acquire more than 6000 natural gas vehicles in the next two years. And Waste Management will cut their emissions by 45% by 2038.

And on the OEM side, there's also lot of interesting things going on. There was an announcement this morning our partner Hino has launched their future zero emissions vehicles.

They are part of the broadened Toyota Group that also has very ambitious targets. Next slide please.

In the following slides, I will talk a little bit about some organizational changes that we will do in the coming months. Maybe the most exciting one is that we build - we will build on digital wave and establish a new business area where we will focus on digitalization solutions.

So we have this unique modal acoustic emissions technology, which you can say is a CT scanner for cylinders. And we've used that for a number of years now on mobile pipelines.

And we have been working over the last few years on miniaturizing that technology and our ambition is to make it so cost effective and applicable that we can have it in all the tanks that we deliver and that opens up a whole range of new digital opportunities for us, including artificial intelligence algorithms and new business models based on that. Next slide please.

And for the customers, this technology is giving a lot of new values. Increased safety, maybe the most important they will get real time data and warnings in case any changes in the structures.

Increased lifetime of the tanks as a result and reduced total cost of ownership. Next please.

Another organizational change we are in the process of doing is that we will now combine our mobile pipeline business area with Agility Fuel Solutions. And that will - with effect from the January 1, we renamed to Hexagon Agility.

And this will enable us to utilize the volatility of mobile pipeline or the mobile pipeline business in an efficient way, free of capacity and optimize the utilization of the workforce and capacities. And even out the ups and downs that we have experienced in the mobile pipeline business.

And at the same time, we will then coordinate the marketing resources in our continued endeavors to globalize the business of Agility. Next Page please.

And then Hexagon Purus is on track to being spun off and established or listed as a separate business on the Merkur Stock Exchange. That will allow that business its full potential.

And we have prepared this over a long period of time. We feel very ready.

It's a very strong case in our opinion. And we look forward to launching that on the Merkur Exchange and allowing our investors to have the direct exposure to that opportunity.

Next please. So with these changes with the effect from the January 1, 2021, we will report Hexagon Agility together with Hexagon CNG light duty vehicle.

So the CNG business, which has been part of Hexagon Purus, but which has been separated in connection with the preparation of the spinoff of Hexagon Purus. So Hexagon CNG LDV and Hexagon Agility will jointly be reported as G-Mobility.

Then we will start reporting on Hexagon Digital Wave as a separate business area and Hexagon Ragasco as you know and then Hexagon Purus as a separately listed company. And with that I hand over to you David.

Thank you, Jon Erik. Well, looks like Hexagon Purus is setting its course we look forward to the next big thing which is digitalization as Jon Erik mentioned through our very own Hexagon Digital Wave.

Let me first start off before we go into the numbers just the financial impact of COVID-19 quick update. In quarter three already received recovery well in progress.

We will cover Agility shortly, but they did have a record very strong quarter. That's very pleasing.

On the other side mobile pipeline continues to be impacted, given that the end customer's contracts are mainly project base. General disclaimer as we always do, it's difficult to assess or predict precision the future broad effects of COVID-19.

And the actual ongoing impact will depend on many factors beyond the company's control and knowledge. What we can say now is that we do expect of course, overall negative impact to full year results in 2020.

Good thing is, though, we see these as delays in sales across the board, rather than any cancellations of orders. Also, we don't expect any material impacts in the balance sheet.

As of quarter three, we had undrawn committed facilities of NOK653 million. In addition, we had 957 million in cash after the successful private placement in August this year, which returned 907 million in gross proceeds.

So that leaves our net interest bearing debt at a very low half a billion. And that's just 6% of market capitalization.

Depending on the day, you measure that. We continue to have very flexible arrangements with our principal financier.

We've had a long relationship with them. And these arrangements continue to provide good headroom, and they've been necessary through a challenging 2020, but also into 2021.

So we're in very good shape, there. Sneak look at the Hino XL7.

This is a heavy-duty battery electric vehicle powered by Hexagon Purus. And that should take us into the Q3 highlights.

So once again, top billing really goes to Agility. They had record revenues and exceptional EBITDA.

And this was really driven by the further deliveries on our major logistics customers. So the truck - heavy duty truck business, and also European transit bus businesses.

And G-Mobility in general was in good shape, strong momentum, when you include the Anheuser-Busch order, we got in the quarter for $8 million to be delivered in subsequent quarters. Mobile pipeline, as you mentioned, continues to be impacted by COVID-19.

We've used the quarter well. Production geared towards the $7 million order that we received earlier in the year for deliveries now in the fourth quarter.

For CNG, light duty vehicle volumes relatively low. Good news is that production restarted after Volkswagen successfully relocated their CNG assembly plant and Koleos have restarted in the quarter.

For Purus, the e-mobility market remains really heated. We were nominated for a serial production contract towards fuel cell electric vehicle SUV, with an estimated sales value of EUR25 million, very pleased with that one.

And of course, the big news is that we announced in the quarter the intended spin off and public listing, which as Jon Erik mentioned is on track. For LPG, Hexagon Ragasco, very robust performance in the quarter, remember, quarter three and quarter four for a Ragasco are seasonally low quarters, however, good profitability there.

One item is we're very pleased to see our first deliveries to Bangladesh since the pandemic. Europe remains strong.

And this is where COVID-19 has had a positive impact, particularly in the leisure sector with more barbecuing, we've seen this summer. And Hexagon Ragasco remains very diversified in terms of its customers, products and geographies.

And we did celebrate as well market entry into Argentina in the quarter. Let's go over to the numbers, quarter three 2020 for the group we did revenues of 770 million.

Again, record Agility revenues driving that. And that's counterbalancing the weak mobile pipeline volumes.

So we actually had the same top line as last year, so flat growth year-over-year. However, from quarter two, we've seen substantial recovery in our top line.

Despite that flat growth, if we go over to EBITDA in the center, we grew EBITDA by 32%. So that's significant to NOK65 million and again, this recovery from COVID-19, but also the great cost control in the quarter has helped to boost the profitability.

And if you bear in mind that, within that NOK65 million we're still absorbing the e-mobility ramp up effects of minus 28 million in the quarter, and the same quarter last year was minus 20 million. If we go over to the right, or we look at profit after tax, we made a loss after effects of minus 46 million this quarter, versus a profit of 56 million in the same quarter last year.

Big differences really, there was exceptional, favorable foreign exchange movements in the same quarter last year. Not quite the same very modest effects this year.

So year-over-year, you have that big difference of 94 million year-over-year effect. And the other effect we've had is some adverse movements in tax charges related to movements in deferred tax assets.

Taking a look at revenue by segment for the third quarter, first of all, just to point out the graph on the left is 2019. This is a pro forma view, meaning that it's not exactly how we reported in quarter three '19.

But it's actually apples-to-apples to how the business has organized and reported in 2020. So looking at 2020, to the right, you see Agility with 540 million, significant increase over last year's 389.

And again, like I said, the heavy-duty truck orders are really coming through the second half of the year, and being delivered successfully. Also, throughout the year, European transit bus has been really, really exceptional.

They have also been impacted in the second quarter by COVID-19, but we see the OEMs ramping up now and we expect that momentum to continue. If we go over to Purus, recorded 97 million in top line versus 143 the same year before, the real difference is again the CNG light duty volumes, which continued to be reported in Purus through 2020.

The CNG light duty vehicles will then be reported in G-Mobility in 2021. But for now you can see CNG light duty vehicles at a great quarter last year.

And of course, it's just coming back from the Volkswagen relocation impacts this quarter this year. Going over to mobile pipeline, they recorded 57 million in revenue, again, a weak quarter similar to quarter two.

And if you look at quarter three 2019, we see 132 million was the top line last year. And really again, you can see the difference given the reduction in online - I'm sorry, on onshore oil and gas revenues, but also the COVID-19 impacts year-over-year.

For Ragasco, pretty much the same level of top 116 million. I will say that the EBITDA was significantly higher year-over-year, some of that with favorable currency effects.

Looking at our balance sheet on the left, you can see the asset side that's really boosted mainly by the cash received from the private placement. Hence the high cash balance.

The other effects is in our receivables, the light grey area quite an expansion in receivables. Again, this is mainly due to Agility recovering from quarter two to quarter three and we should see those receivables turn into cash in the subsequent quarters going forward.

And then on the right-hand side, the equity position you can see has increased significantly to 3 billion and that leaves an equity ratio of about 50%. So much stronger balance sheet, of course after the private placement.

So in summary, very strong results, very strong profitability, given that we are still recovering from the COVID-19 impacts that were most severe in the second quarter of this year and also that we are not fully up to speed with Volkswagen, Koleos in the CNG light duty vehicle volumes. So great quarter and again top billing goes to Agility Fuel Solutions, now Hexagon Agility.

So let's look at the outlook. Short term outlook Q4 for agility, it's hard to keep breaking records, but we would of course, hope to maybe match Q4, so we're looking for a similar quarter as we had for Q3, pretty much driven by the same things European transit bus and heavy-duty truck.

If you go over to Purus, very pleased to say we've been working on a train contract since Alstom, and we have a few others in the pipeline. But we just signed a contract with Stadler Rail from Switzerland.

And we will be producing hydrogen cylinder storage systems for what should be then the first hydrogen powered commuter train in the US. So these are obviously longer-term projects, the building and testing will continue in Europe, mainland Switzerland through to 2023, before being transferred to California for operation.

In quarter three, we are working with at least five OEMs on battery electric and fuel cell electric contracts. Very pleased to say that we were awarded the contract to provide a full electric drive system to Hino's Project Z.

So he knows that Toyota Group Company and deliveries are expected in the first half of 2021. Deliveries continue to other major OEMs as we've seen in Q3, and that's what we expect in Q4.

And when we look at the fuel cell electric vehicles or hydrogen powered buses, we will continue deliveries to CAETANO bus and also continue to shift product to Solaris, so excitement in the fuel cell and battery electric vehicle heavy duty space. And when we look at our full project pipeline, we've now included the full e-mobility spectrum.

So previously, we reported mainly just on the hydrogen projects. But now we include of course, all the battery electric and other types of projects within Purus, the new Purus.

These include, automotive projects, as you see from light duty through to medium and heavy-duty vehicles, distribution of these gases, marine, rail as we've just seen, ground storage, mobile refueling and even aerospace as you've seen us report previously. So very high number of hydrogen and battery electric development contracts in quite a variety of segments.

CNG light duty vehicles, as I mentioned, Volkswagen have started up production that's good for us. So we have Koleos in Q3.

We're hoping that that ramps up even more in Q4. But we don't see that it will be the same level the run rates as we had in 2019.

And that's primarily due to some lingering effects of COVID-19. But also a subsequent delay of the SEAT Leon launch the new facelift the car that you see pictured there.

That will be produced in Spain, and then we expect then to have follow-on orders in first quarter of 2021. Hexagon mobile pipeline, so we have been focusing on opportunities in new segments for a while.

We've reported previously that the RNG segment is something that we've developed significantly. And that's helped us to diversify away from oil and gas exposure.

So COVID-19, and those oil related exposures continue to weigh on mobile pipeline. But for example, mobile refueling units, that's something we saw sales too in Q3, and that's a relatively new segment for us.

We expect more orders in quarter four. We expect a better quarter in quarter four, as I mentioned, due to our deliveries for units to virtual connects projects, some RNG and also energy intensive applications.

So far, they predict a cold winter, which is very good than for the virtual connect market, particularly in the northeast of US. When we look at Hexagon Ragasco, so demand for LPG domestic use recovering and there's been stable demand from Europe.

We expect that to continue in Q4. We've made deliveries to Argentina, the new market that opened up in Q3 for us, and also, we would expect deliveries then to our major customer in Bangladesh for Q4.

So in summary, I would say that barring any unfavorable COVID-19 developments, we're expecting that stronger market outlook of the second half of the year to continue in quarter four. As we've seen with Jon Erik, the COVID recovery is spurring significant green funding, incentive programs and also new regulations that are focused on cleaner fuel solutions around the world.

So that is very good for Hexagon. We have strong liquidity and business resilience.

And of course, we are very well prepared for the spinoff of Hexagon Purus. Thank you very much.

And now we'll go to the questions that we are receiving in on the tapping platform to start with, and John Eric will join us on screen here with David and myself. So from Amish Rosamond [ph], I think this is the third time you've made changes to the structure, is this it?

I imagine that's for you, Jon Erik.

And I think we over the years have probably made more changes to the structure than three times but of course, the integration of Agility, the focus on the hydrogen opportunity through Hexagon Purus has made it necessary to adjust the structure accordingly. So it's fair.

But that said, I think we will now for quite a while remain with the new structure.

Okay, Amish had a second question, please provide an update on the progress or the lack of such towards reaching an agreement with ENRIC, which was previously indicated as being completed within Q3?

Yeah, so the discussions are ongoing, very good dialogue with our Chinese friends. Of course, the COVID-19 situation has made it impossible for us to travel and do ordinary due diligence in China.

So that has caused some delays. But we remain optimistic that we will reach an agreement.

Okay, also continuing on the Purus front, McKinney Holtzman is saying [ph] in Purus what is the likelihood of signing a decent sized serial contract within the next six to 12 months?

Well, let me first remind you that we did sign quite recently, a very decent sized serial contract in Northeast Asia. And without going into a lot of detail, we have a lot of opportunities out there now.

So the market is very wide open and dynamic. So it depends, of course, on what one means by decent, but certainly, we think that there will be important breakthroughs.

That said the near years will be short series predominantly. And then we are preparing for long series from 2023 2024 onwards in the heavy-duty segments.

But a lot of very interesting and encouraging stuff is ongoing. And we expect to land quite a lot of business in the coming months and years.

Okay, from Paul Formanko. What is the timing for the hydrogen spin off?

So, we have indicated previously that we expect to complete that process by the end of this year. And that is maintained expectation and ambition.

On the same topic, how much additional funds do you plan to raise for the hydrogen business in 2021? And do you plan to issue more shares to support that separation of the business?

So we will not want to go into too much detail on that at this stage. We will keep the investors updated and informed as we take those decisions.

What I can say is that with the capital raise that we did in Hexagon Composites ASA in August, we have well-funded Hexagon Purus. So we are not in need of any near-term capital addition.

But of course, we will continue to make sure that that business is well funded for its opportunities going forward.

He continued with several more questions, which I think is basically covered, but I'll just repeat them to make sure that we've answered them all. What percentage of the business will be kept by Hexagon's existing shareholders and any remaining issues i.e.

debt holders and can existing shareholders participate in spin off share issuance?

So we will revert to all those questions, hopefully in the near future. But for now, we are not able to give more detail on the specifics of the restructuring or the spinoff and listing.

Okay, now from a Mikel Nagelsmann [ph] saying, still early in the quarter, but do expect Agility to report a somewhat similar level of EBITDA in Q4?

Yeah, I can I can take that, short answer is yes.

Okay, another question from Mikel, VW CNG volumes guided to recover to normal run rate during Q4, please elaborate and draw lines through respective quarters in 2019, when EBITDA was trending, 100 million to 120 million, but now being loss making?

Yeah, I would say, I think, I hope I was clear to say that we don't expect the same run rate as 2019 in Q4. But we do expect to see the ramp up continue.

So we had a return restart to production in Q3, we hope to see that ramp up then gradually build up Q4 and then into 2021. And part of that delay as we mentioned is due to the delay of the launch of the second layer facelift.

And once that is launched, I think you will see fairly decent run rate again through in 2021.

Okay, then this is for you Jon Erik. How large to expect the Digital Wave business opportunity to become?

I think that can become major without wanting to quantify it at this stage, but also our business need to digitalize. So we see some extremely attractive opportunities there.

And we will revert to that in the coming quarters, of course. But certainly, we see major opportunities.

We then have a question again from Amish Rosamond where you sent out a save the date for CMD on November 17. That date is approaching.

What should we expect? What will the agenda be?

I perhaps can answer that question. So the agenda will cover the entire Hexagon business.

So all the business areas, including Digital Wave We'll give investors a good deep dive into what we expect from that part of the business and the date November 17. There will be issued an announcement later just moving that slightly to adjust to some internal scheduling challenges with all the processes we have going on.

But we will cover all parts of the business. We encourage all of our investors to participate in the virtual presentation.

Anything you'd like to add gentlemen?

I think you covered that.

Okay. And I think that is we'll give them another second here to see if we've anything.

I think that covers the questions from the audience. So I think what we'll do there as well call it a wrap.

And thank everybody for joining us for our third quarter presentation.

Thank you.

Thank you.

Thank you.