Hexagon Composites ASA

Good morning, everyone. Welcome to Hexagon Composites Q4 2024 Presentation.

My name is Knut Flakk. I'm the Chairman and the Founder of Hexagon Composites, and I'm very pleased to be here today and see all of you.

And I'd like to just take a quick step back to 20 -- or not 2020, but 2000 when we founded the Company, and we went public. At that point in time, we had roughly NOK100 million in sales, so just north of NOK100 million.

And during the first 10 years, we managed to get to NOK1 billion. So, we made10x, and that was under the leadership of Erik Espeseth.

Then in 2013, Jon Erik Engeset took charge, and he brought the Company from NOK1 billion to NOK5 billion roughly. And I'd like to thank Jon Erik for his achievements and for his strong contribution over these years.

He's done a fantastic job, and he finished his duty as a CEO by the end of 2024. So what you see here today is much to his honor.

And then we will obviously introduce you to the next CEO. But before I do so, I'd like to mention just two main reasons why have we succeeded in going from NOK100 million to NOK5 billion in 25 years, 50x the size we were 25 years ago.

I think the main thing is that we have stayed true to our core philosophy, which is to make the best possible products, the highest quality products at the lowest possible cost. That has given us advantages over and above the competition that has made it possible for us to stay ahead and to make the green shift a reality.

The other thing is that we have -- we have gathered a group of fantastic people, very talented, strong people from the floor, shop floor and all the way up to the top management. So in that context, I'm very, very pleased to welcome Philipp Schramm as the new CEO of Hexagon Composites.

Philipp has extensive background from the automotive industry, both in Europe and in North America. And I'm certain that Philipp will manage to take the Company to the next level because we are not going to stop where we are today.

We are definitely going to grow and go forward. So the future will tell at what rate, but I'm convinced that Philipp is the right person to take charge and to lead the Company into the future.

So with that, Philipp, welcome to Hexagon Composites. I have great expectations, as you can understand.

You may not have a sexy voice as I do today. But on the other hand, I think you have the talent and the experience to make the Company successful.

Thank you.

Thank you, Knut, for your kind words, and also thank you to the entire Board for your trust in me. And good morning, everyone.

Good morning. I'm very happy to see you all here in-person, and also welcome to everyone who's joining us live dialing into our Q4 2024 results presentation.

I'm -- as you can imagine, I'm really honored to be here to step in shoes and as you said, bring Hexagon to the next level. These are exciting times.

Being with Hexagon now slightly over one month, I visited our major sites. I also talked to a lot of our colleagues, got insights from our business unit leaders about the market development, the opportunities, the challenges we face, but also talk to a lot of our customers, what they think about us.

And what I can tell you is that Hexagon has extremely talented individuals. We have great technology, and we have a committed client base.

This sets up for success. And what I also do see is that we have a very strong heritage, heritage in multiple dimensions, heritage in regards to our technology as good what you said is what brought us here is strong competencies within composites, but also our heritage, which states back, which I learned now to the start of NASA's Moon mission.

This is something where we are sometimes a little bit shy to share, but it's something which actually energizes a lot of our colleagues. And really tapping into what we have seen and where we are is really where I want to bring this company forward.

And this is talking to the -- to our customers is something which is important to me. It gives us insights about where we stand and where we can go to.

And what I hear is that we are the go-to persons, the go-to experts for lightweight, high-pressure cylinders and power systems in any kind of environment. And we do have a proven track record to deliver our mission successfully, and deliver our mission successfully is what is our mission?

Our mission is to drive the energy transition forward, a sustainable energy transition. And with that, what have we achieved in 2024?

With our supplied units, we've enabled the avoidance of 1.84 million metric tons of CO2 equivalents, which we prevented. In other words, it's more than or around 430,000 regular combustion cars off the street with our solutions.

And we have done this profitably. That sets us apart from some others out there.

With an excellent team, with great technology, with an outstanding client base, we have delivered in Q4 an outstanding result. We have all-time high revenues of NOK1.5 billion.

We have delivered an EBITDA of NOK257 million, and all of this results in an EBITDA margin of impressive 17%. For this great achievement, I want to congratulate the entire Hexagon Composites family.

It was an effort where everyone has chipped in. It was all hands-on deck, and we work together as one team to achieve that.

And all business units within Hexagon delivered to that result. Mobile Pipeline, for example, had an outstanding year, record high volumes, record high volumes or modules delivered and produced in that year, strong demand from oil and gas, but also from helium and RNG.

Our Fuel Systems business leveraged on its market position in North America. We supplied the most new power systems for the new X15 and engine from Cummins.

This sets up for growth, for success because we prove we are the market leader also with the new engine. And what I can tell you, this engine is real.

I had the pleasure two weeks ago to be in one of the trucks talking to the dealers and see what it means. It has the power; it has the torque.

It has diesel-like performance with less emissions and at a better price point. And this is what we see, and this is what we hear, and this is setting us up for success.

Besides the new engine, we also see high demand with Refuse and with other trucking companies. For example, our partnership with UPS and one of the most innovative refuse companies in the world are partnering with us, and they are relying on our service.

This will set us up for new heights to really look forward what we can achieve. But besides also the sales, we have done our job in improving our processes and becoming operational better, improve the performance and also improving our capacity.

We have a new production line for Mobile Pipeline in Lincoln, Nebraska, which gives us 50% more capacity and output. We have a new assembly line in Rialto, California for install of RNG and CNG fuel systems.

And we established at our Salisbury, North Carolina facility, a new cylinder winding line. This sets us up for growth.

Allow me before I hand over to David to give you some words about what I see and what I heard from you. In contrast to some other companies out there in the space of renewable energy and energy transition, we have done our part, and we have delivered at a profitable rate.

Some of you have voiced the concern about the current changes in regulation and administrations. But to be honest, I don't see it.

And I will come back to that later and get into the details of it. But why I don't see it before I hand over to David is actually RNG and CNG are there to stay.

They are abundant and available. The technology which we are using is known and proven.

The price point and the benefit to fleet owners is given. And last but not least, we are delivering a sustainable product, which benefits the environment.

So it's a true triple bottom line effect, which we are delivering. I will come back to this later.

And now I would like to hand over to David that he can guide you through our Q4 2024 results. David, please.

Thank you, Philipp. Okay.

So -- we really should dwell on Q4 2024. It was definitely a record high, both in revenue and EBITDA.

And we did a 17% EBITDA margin. And I'll tell you, the last time we beat that number was Q4 2014.

I also had the pleasure to report them. So we are coming back to really the eve of severe growth.

We have a business model that works. You can see that with a 17% margin.

And this is only with 1% natural gas adoption and very well set up in terms of our CapEx to deliver. So apart from the strong balance sheet and liquidity we go into Q4, we're going to focus on this top line effect that we see.

And if we focus on the top of the page, we have information for full year below. We did 21% growth in Q4 year-over-year.

And with that, posting NOK1.5 billion, we also increased EBITDA by 150% year-over-year. So we've had a strong focus on operating margins and with the volume, they yield the results.

And you can see that margin increased then from 8% last year to 17%. We made our final participation in Hexagon Purus in Q4 for NOK383 million.

And despite that, you can see that our leverage is still very comfortable as we come out at 1.5x for the quarter. We also have available liquidity of NOK1.2 billion from our financial partners should we require that.

Okay, 2024 was a year of structural change. We did sell our beloved LPG business, Hexagon Ragasco.

We achieved an enterprise value of $1 billion, just over $1 billion actually. And it included an earn-out component with a sliding scale from minus 50 to plus 100.

The earn-out component, well, that was based on Hexagon Ragasco's EBITDA performance for 2024. Glad to say that Ragasco is flourishing also under new ownership, and it's resulted at least preliminary results would imply then a minimum of NOK75 million of that sliding scale coming back into the Company.

Together with 50 million held on escrow, that will be NOK125 million of cash coming back into the Company should be in Q1 for a final enterprise value of NOK1.125 billion. So an extremely accretive transaction until the end.

And you can see the smiles on the faces there. But let's go back to our continuing businesses.

Hexagon Agility posted just under NOK1.5 billion in sales and NOK255 million in EBITDA. You can see that sales increased across the board, okay?

72% up in Refuse, 32% up in Mobile Pipeline, and Heavy-Duty Truck, also 19%. And with those kind of robust volumes, we had higher utilization from the higher throughput and definitely good results.

So 17% margin for Agility for Q4, and they closed the year on 14% margin themselves. Also in the Q4 party is Hexagon Digital Wave.

So though their sales were slightly down year-over-year, NOK54 million in the quarter, you can see EBITDA was up NOK4 million to NOK14 million for an EBITDA margin of 25%. And that capped off a very good year also for Digital Wave.

And speaking of good years, it's customary to have our financial and sustainability scorecards. We are strong across all parameters, and that's driven by our 1,000-plus employees.

Very proud to say that we've done 20% annual growth since 2020. Closing in on just under NOK5 billion for the year.

We posted an EBITDA margin of 13%. That's up from 8% same period for 2023.

Leverage, 1.5x, as I've mentioned, and that available liquidity gives us options of NOK1.2 billion and a comfort going into the next period. Our balance sheet strength is evidenced by the 50% equity ratio.

And of course, again, we should say our solutions helped avoid 1.8 million metric tons of CO2 equivalent. And that definitely contributes in clean air everywhere as per our vision.

Okay. So we are in good shape, and let's go into 2025.

Here, we are extremely excited on the key milestone that we will see, particularly in the truck business in second half of 2025. And that's when Daimler, the largest OEM for 38% or so market share in North America, comes online with the Freightliner trucks powered by the X15 engines.

And you've witnessed the testing and validation is going very, very well. So when that comes online, that will significantly increase the truck availability powered by this X15N engine.

And why is X15N engine a game changer? Just to remind, this triples our addressable market by actually opening up the whole of the long-haul market, which is 2/3 of the full market.

And in addition to Kenworth and Peterbilt, the PACCAR brands, who actually started serial production in 2024, together, this will be 2/3 of the heavy-duty market. So a key milestone with Freightliner coming online.

We've obviously shown this before. UPS, very experienced fleet, have the best ROI in the business.

They made the largest order to date on X15 of 250 trucks. But of course, with the new adopters coming on, they are also enticed by the significant return on investment.

But they will basically do pilot orders, so 1s, 2s, 5s trucks at a time. And then they will also gain the answers that UPS have gained looking at their fueling strategy to improve their ROI, looking at the performance on their routes, getting that driver acceptance that we see is very, very positive for the X15 and also considering the maintenance of these vehicles.

And then they will increase their order sizes progressively over time in 6 to 12 months type of cycles. So again, in 2025, our business model is proven.

Aggregate EBITDA margin for the back end was 16% and again, only with 1% natural gas adoption. We listened to Cummins, the major player in the value chain who produced the engines, and that was last week, and they reconfirmed that they are preparing for at least 8% natural gas adoption.

So it's not a case of if, but when. And when is that?

It is the second half of 2025. So 2025 will remain a transition year, but we will see that steady pace of natural gas adoption as new adopters come online.

We shouldn't forget that we are in a historically low freight market the last two years. So our success is despite this.

But again, looking at all the players, the freight markets, Cummins, of course, and the OEMs, the consensus is that market recovery in general will happen in the second half of 2025. And then combined with the other event, as I mentioned, the Freightliner coming on, increased truck availability for X15, we will have a significant return to growth for that second half.

So 2025, a transition year. We expect revenues or the first half to be soft.

They were soft also in 2024, but Mobile Pipeline will be soft at the same time as Truck. And then we expect both Mobile Pipeline and Truck to be significantly increased in 2025.

As a CFO, back-end loaded sales is not the best view, but we feel the guidance then reflects that. It's cautious on the timing of those sales on the back end, okay?

The exit rate at the end of the year is something different, but the calendar year of 2025, we need to have some caution. So we guide for NOK4.9 billion to NOK5.3 billion in sales and EBITDA will follow that pattern to NOK640 million to NOK740 million.

So what do we expect in Mobile Pipeline for '25? We see the second half really heating up with oil and gas.

And we are also excited on the new market opening up, which is backup power, micro-grids, et cetera, and demonstrate that Mobile Pipeline can be the solution there as well. Our backbone of revenues, Transit and Refuse Truck, Refuse remaining strong.

We see that going into 2025. And also on the Transit bus, we see both Europe, which is a big market for us as well as the U.S.

will remain steady. So it's all about Truck as well.

Three things, the U.S. freight market, the truck platform availability and the order sizes for the X15, they all improve in the second half over the traditional softer first half.

So I'm pretty excited. We can deliver really good margins with volumes, of course.

That will continue through the decade. And we have well set up capacity.

In fact, the only capacity in time to tackle that 8%. It is sunk.

We're ready to go with the volumes. We are looking at a 10% adoption rate, so over and above the 8%.

And in order to say a little few more words about it, Philipp, maybe you could take that pleasure.

Thank you, David. So let me come back to give you like some insights why we are so confident at Hexagon that we are actually a key part of the U.S.

energy mix transition and why natural gas is part of the mix for fuel for transportation in the United States. You heard the changes on zero emission, regulations in the United States.

CNG and RNG are not affected by it. We also don't see any impacts at the moment on anything, which is affecting NOx emissions.

So we can benefit from it. CNG and RNG are abundant resources in the United States.

They are domestic, they are available. It's part of energy independent energy security in the United States.

And CNG and RNG are delivering an economic benefit for fleet owners. So therefore, we see no risk that this might impact us in going forward with our strong position in the United States.

As David said, we expect a 10x growth by 2030 for heavy-duty trucking based on natural gas propulsion trucks engines. Why?

Strong market drivers. The fleets are continuing to decarbonize.

They see an economic benefit and it's ready at scale. Ready at scale, why?

The technology is available. The infrastructure for natural gas and CNG and RNG is available.

And this is driving the expectation with the new engine on board that a growth factor of 10 by 2030 is more than just realistic. What does this mean for us?

And where does this bring Hexagon to? We are confident that we are in the pole position to capture profitable growth in the energy transition.

We are the undisputed market leader, and we have proven that. We have a proven technology and unmatched capacity, so we are ready to deliver.

And CNG and RNG will continue global challenges. This is what we see abroad in the United States, but there's also a change in sentiment here in Europe.

And this is what we want to drive on, and we have proven it that we can do it based on our Q4 results, we can do it profitably and we can do it efficiently, and we can do it -- yes, economically and with the team on board, we are ready to do it so. And with that said, David and I are more than happy to take your questions.

And -- yes, David, please. You're guiding us through.

Perfect.

Thank you, Philipp. We will kick off this Q&A session with questions from the audience.

For our online viewers, please submit questions using the form on your screen.

Just focusing on the guidance for 2025. First, it would be good to kind of get more color on the breakdown in terms of segmental growth.

And then also it would be good to kind of understand with regards to the level, is it fair to assume there's some lowballing there? Or has it been that there's just maybe zero visibility in terms of contracts coming through?

And then if that's the case, it would be interesting to kind of hear from you if that visibility has decreased over the last month or two basically.

So addressing that first question about lowballing, we think it's a risk balance. So basically, if the freight market, if all the OEMs, if all the logistics companies come into themselves pointing to a recovery in the second half and a soft first half, we also need to take that into account.

In terms of backlogs, I would say Mobile Pipeline is more of a normalized backlog. Last year, we saw large backlogs, but some of that was capacity constraints.

We've obviously sold those, so we're ready to roll. It's unfortunate that both Mobile Pipeline and Truck traditionally softer in the first half is happening at the same time.

But then again, we have a lot of history of Mobile Pipeline, it is kind of project-based and it's lumpy. So I'd say visibility is the same and visibility is strong into second half, again, for that recovery, both in Mobile Pipeline, especially oil and gas related and on Truck because of truck availability and improving freight market.

if that helps.

Fabian Jorgensen from Carnegie. On the fuel systems again, I had a chat with Cummins on Monday, and they said 3,000 units for 2025, flat market share that we gave roughly NOK1 billion in sales to you.

Do you not see that those 3,000 units as a potential outcome for 2025?

It's -- yes, it's definitely a potential outcome. Things take time.

We also see that the Truck platform availability significantly increases once Freightliner comes online. If that availability was the same at the start of the year, that would be definitely possible.

But the exit rate of the back end of 2025 is going to be significant. We need to prepare for that.

But of course, the visibility we see now is quite a difference between the first half and the second half.

That's not [indiscernible] visibility on H2. So the question maybe then is how many 15-liter engines have you or sales have you assumed in the guidance?

We don't go into that level of detail. But of course, we assume a significant amount.

We are the 75%, 80% market share leader in that space.

But the low-end guidance suggests flat growth year-over-year. So what is then slowing down?

Mobile Pipeline. Last year, Mobile Pipeline was strong all the way through the year, so you shouldn't discount the impact on Mobile Pipeline, particularly in the first half.

And again, with so much back-end loaded sales, we need to be cautious in terms of what we guide.

Does that mean that you don't expect growth for Mobile Pipeline in '25?

We expect growth, but again, it's back-end loaded. So if there are any delays, then we need to account for that.

Okay. But for me, if there's growth in Mobile Pipeline and 15-liter sales and the, let's say, 12-liter market doesn't drop off, then sales should be pretty much higher than at least the low-end guidance that you have?

We definitely -- that is a scenario, but I think it's prudent for us to give the range of guidance that we've given.

Okay. Is this a case of similar guidance that you gave for Q4?

You said NOK560 million ended up at...

Q4, I just want to remember the 17% EBITDA margin and the fact that we can do NOK1.5 billion in sales in a quarter with reasonable volumes.

I'll stop there. But finally, you said final contribution for Hexagon Purus.

Does that mean that you will not contribute with capital if a potential share issue was to happen in a year or 2?

Do you want to...

Yes. I think we have the expectation as a 38% shareholder as every shareholder out there that what we heard earlier this week that the management team of Purus is delivering to what they have promised.

Earlier profitability and the cash, which we, as a shareholder, have provided will last that they are becoming cash flow breakeven. And that means that we have no intention to chip any more money.

I think they are set up with what we have given them last year with the right amount of liquidity to do the job to do. They are set up and so let them promise what they have -- yes, told us earlier this week.

I think that's a pretty bullish scenario that it wouldn't be required to get more cash there unless they divest something. So let's say, if demand deteriorates further than they expect now and cash doesn't last, would you be willing to put in more cash into Purus?

Let me reinforce. We're a strategic owner, a major owner.

So we have insights into the plans and preparation. And we are confident that we'll be able to hit that cash flow breakeven under any scenario, all the scenarios that we can see as they stated.

Therefore, they don't need extra funding, and we have no intention to fund more. I try to be clear on that.

I wonder who send that question. This is where I step back and say that's obviously a Board decision, administration is in place to facilitate that.

Yes. If you're to deliver a solid second half, then the order should come in the first half.

Is that correct?

Yes. So let's take the Freightliner situation.

That's obviously a major milestone for Truck. So what we hear is somewhere in the mid-Q3, let's just say, August for a good reason, then you can look back three months.

So you're looking at May then for significant Freightliner type of orders. So I think some point in Q2, we'll be able to give you that assurance.

Elliott from Danske Bank. Just with regards to the 30 fleet order you got at the end of last year, could you give some color into kind of what they're saying or what the major blockages are, if it's the price point of the Cummins engine or worries about subsidies going in terms of total cost of ownership.

There's obviously a reason why you've given the guidance you've given. So it will be interesting to kind of hear maybe you're less confident that they're going to come with larger orders in the near term.

So just any color on that.

Definitely a less confident. Cummins aren't less confident.

So again, [indiscernible] yes. Again, well, I would say Cummins has even a stronger relationship with the fleets, et cetera.

So Cummins are preparing for 8%. I would say there's probably two reasons.

One, there is some weight for Freightliner being the largest supplier, you can say. And the second thing is the -- generally, the freight market has been low.

So just capital allocation have been a bit more stingy. That's a very British word.

What are the moving parts? The moving parts are just a soft first half and an incredible second half.

And the moving parts, I think we went through them with Truck. So on the truck side of things, improving freight market, Freightliner coming online, and steady adoption anyway as new adopters do so.

And then Mobile Pipeline, which is a lumpy business, and we expect certainly, what we see is quite a race on the oil and gas side of things. And then again, that happens in the second half.

So those are sort of the levers we play with. And I think to balance that, we provide that more of a cautious look into full year 2025.

Thanks for joining us.

Thank you.

Thank you.