Hexagon Composites ASA (OTCPK:HXGCF) Q3 2023 Earnings Convention Name November 9, 2023 2:30 AM ET

Firm Contributors

Karen Romer – Senior Vice President of Communications

Jon Erik Engeset – Chief Government Officer

David Bandele – Chief Monetary Officer

Convention Name Contributors

Vetle Wilhelmsen – Sparebank 1 Markets

Karen Romer

Good morning, and welcome to Hexagon Composites Quarterly Presentation for the Third Quarter 2023. My identify is Karen Romer. I’m the SVP of Communications. I’ll average right now, and right here we’ve been within the studio or within the studio, within the auditorium at our Oslo workplaces are our CEO, Jon Erik Engeset; and our CFO, David Bandele.

We’ll begin off shortly. I’ll simply point out now that the – these of you which have questions in the course of the broadcast, you’ll be able to – we’ll take them within the room after the displays. However there’s additionally a discipline in your display if you happen to’re on the web viewers that if you happen to want to put up your query whilst the published is ongoing. We may have Jon Erik presenting the enterprise highlights and replace, after which it will likely be adopted by David Bandele, who will then current the financials and the outlook. After which we’ll go to the Q&A.

So thanks for becoming a member of us. I’ll now flip it over to Jon Erik.

Jon Erik Engeset

Thanks, Karen, and an excellent morning to all of you. So I’m glad to report a powerful Q3 2023, particularly so within the Cell Pipeline phase, which had one other report quarter. We now have lately printed that we’re conducting a strategic assessment of Hexagon Ragasco, and final however not least, for the reason that final quarter, we’ve introduced vital orders, NOK1.1 billion in Agility and €20 million contract in Hexagon Ragasco.

Possibly an important slide in our deck, to this point this yr, Q1 to Q3, we’ve enabled north of 1 million tons of CO2 avoidance for our prospects and that equals 250,000 petroleum automobiles off the roads for one yr with one quarter to go for the complete yr.

our financials, we had the highest line of 1 to 50, up from NOK1.80 billion in the identical quarter final yr. Our EBITDA reached NOK124 million. That’s together with or after a charge-off NOK12 million for the strategic assessment in Ragasco. So the underlying EBITDA is at NOK136 million, in contrast with NOK68 million in the identical quarter final yr.

Our EBITDA margin is 10%. If we then embody the one-off to – associated to the strategic assessment, that’s one other %. So we’re at 11% underlying up from 6% similar quarter final yr, nonetheless 4% to go to succeed in our goal of 15% in 2025. However we’re more and more assured that we’ll attain that.

Talked about Cell Pipeline, so this graph on the left hand that’s the 12 months rolling gross sales reaching NOK116 million in Q3, and we count on continued progress now going into This autumn, additionally very passable is that not solely is the cake rising, however the distribution amongst prospects and segments can be I might say extra wholesome than ever. And now 50% of the gross sales in Cell Pipeline is for renewable pure fuel distribution prospects. In order that’s very, very passable.

Additionally, whereas the Cell Pipeline exercise in recent times has been centered across the U.S. market. Now we’ve taken vital orders newest in Peru after the tip of the quarter NOK100 million, so a really, very fascinating and inspiring growth on this phase.

The truck market [ph] phase can be very thrilling now, albeit the gross sales for now’s type of flattish. Vital cause for that’s that in all probability a few of our prospects are ready for the brand new 15 liter engine from Cummins to be launched subsequent yr. So all the pieces we hear from them and from others is that the sphere trials are going very effectively. 25 discipline models beneath testing, a number of with our techniques on Board, and the OEMs are anticipated to start out taking orders from starting subsequent yr after which assuming certification of the engine mid subsequent yr. The deliveries will begin within the second half of 2024 and that may conceptually enhance our addressable markets on this phase by an element of three. So with this new engine, we are able to in precept provide to nearly each truck buyer within the U.S.

And in preparation for this progress, and in addition in response to the expansion that we’ve already loved over the past couple of years, we’ve – we’re within the midst of an enlargement program. It is a busy slide. I’ll simply take you thru the principle highlights there. So within the interval 2020 to 2022, we expanded our cylinder capability in Lincoln within the U.S., and we additionally put in a transit bus line in Kassel, Germany, which freed up then additionally extra capability for the U.S. markets. We now have achieved a further enlargement in Lincoln this yr and we’ve additionally established Cell Pipeline meeting capability in our Germany – Kassel, Germany facility.

After which going into 2024, we’ll improve the Cell Pipeline cylinder capability. We’ll substitute one of many winders in Lincoln, which can enhance our capability there by roughly 35%. And we’re within the midst of finalizing the funding program in Salisbury, the place we’ll then open cylinder manufacturing additionally there.

We now have taken the choice to shut down our Raufoss meeting operation and consolidate the meeting of greatest techniques in Kassel, Germany. And eventually, we’re transferring from a website in Fontana, California to close by a brand new website in Rialto, additionally in California, for that a part of our set up enterprise.

Altogether, these initiatives have a price of roughly $55 million. It can enhance our capability for observe and bus cylinders by at the very least 200%. And as talked about, 35% enhance of the Cell Pipeline capability. That’s effectively above what we want for the 2025 targets. Remind you, for the group that’s NOK6 billion in revenues and 15% EBITDA, however we count on progress past 2025. So we’re ready for that.

That is our Salisbury facility, which is the most important a part of the enlargement program. The white half on the fitting hand aspect, that’s the prevailing facility the place we assemble the truck techniques. After which we’ve erected this extra footprint on the left hand aspect. So the constructing is beneath roof and we’ll then set up the strains subsequent yr. So we’ll set up two winding strains for now, however we’ve left then vital footprint for moreover 4 strains if we want that, if we see that the expansion goes past what we’ve in our plans for the following three, 4 years.

And perhaps it’s a query of when slightly than if. And this extra capability enlargement will come at a really modest incremental CapEx, as a result of the footprint is there, the infrastructure round is there, the group is there. So we predict we at the moment are effectively – very effectively arrange for pretty streamlined and environment friendly and never least aggressive manufacturing construction.

Ragasco lately introduced an important settlement with our long-term buyer Ragasco in Saudi Arabia. Lot is occurring in that area and it has a price of NOK20 million beginning deliveries in Q1 subsequent yr. And looking out again now at 2022 and 2023, we’ve opened numerous new buyer accounts after which paving the best way for elevated recurring gross sales in new areas. So Center East, but in addition Africa, South of Sahara, in addition to Latin America very excessive progress – inhabitants progress areas.

They’re cooking domestically with coal, with natural wooden and different domestically polluting, very well being facades alternate options. So we see a strongly, strongly rising LPG demand in these areas, which we wish to take our share.

Shifting to Hexagon Digital Wave. We at the moment are on a powerful progress trajectory that may proceed into 2024 and doubtless effectively past. So that is excessive tech choices, Modal Acoustic Emissions, primarily used for cylinder retesting and requalification of Kind 4 cylinders. In order that’s a service enterprise. Then we’ve ultrasonic examination UE, which is primarily used for testing of Kind 1 metallic cylinders.

After which we’ve an rising portfolio of sensible techniques for automation, optimization, telemetry and monitoring options, primarily for our Cell Pipeline vary.

Final however not least, our mates in Hexagon Purus proceed to ship very sturdy income progress. They’ve a powerful order guide. The final 12 months income is up 56% year-over-year, notably sturdy momentum for the hydrogen infrastructure options, so ready for the inexperienced hydrogen to come back on market within the subsequent a number of years. The economic gamers, they’re getting ready for the decarbonization of their worth chain. The hydrogen, for now, will not be inexperienced, it’s grey, I’m afraid. But it surely’s actually pushed by their want to undertake hydrogen after which inexperienced hydrogen as quickly as attainable. So that could be a strongly rising enterprise. And it seems that our acquisition of Wystrach a few years in the past was a really lucky transfer.

We now have inaugurated or slightly Purus has inaugurated, their new hydrogen cylinder manufacturing hub in Kassel in Germany. That’s primarily for the mobility market. So the primary deliveries to Nikola have been made, and we see that market now coming strongly as projected.

Good board backlog, however equally vital, which isn’t within the backlog, as a result of it’s body agreements. However as you’ll keep in mind, Hexagon Purus entered into, pardon me, long-term settlement with Hino, price greater than NOK20 billion, and in addition introduced lately the dimeric operation. So very excessive chance and good line of sight to reaching the 2025, targets of NOK4 billion to NOK5 billion in income and EBITDA break even. In order that’s just some quarters forward. So we’re very, more than happy with the event there.

And on that notice, I’ll hand over to you, David.

David Bandele

Thanks, Jon Erik. Good. Okay, so we begin with an exquisite heavy responsibility pure fuel powered truck that’s a Kenworth and powered by Agility Gasoline Techniques. And on the again of it, our TITAN 450. So the most recent Cell Pipeline product delivering renewable pure fuel to wherever it’s wanted. So let’s have a look at the financials.

Jon Erik has lined this, however once more, income at NOK1.25 billion. In order that’s a 16% progress year-over-year, once more, powered by Hexagon Agility. And after we look over to EBITDA at NOK124 million for 10% EBITDA margin, once more, it’s these bettering margins in Agility that at the moment are pretty sustainable at that degree.

Jon Erik talked about the NOK12 million of strategic assessment prices in Hexagon Ragasco. So these prices will not be within the Ragasco enterprise space, however they’re within the central prices, because it’s a assessment initiated by company, after all. And if we add these again, we’d get to the 11% EBITDA margin or 136 for the quarter. So good and powerful outcomes for Q3.

Let’s have a look at the enterprise areas. Agility did revenues of NOK1.1 billion, and that’s up 19% over final yr, pushed once more by these report Cell Pipeline volumes Jon Erik talked about, but in addition very sturdy gross sales to Hexagon Purus. And this, once more, is within the distribution, this time of hydrogen fuel versus the pure and renewable fuel on composite aspect. Nonetheless resilient Refuse Vehicles and Transit Bus volumes, which is nice. After which that blue little bit of the pie you see of 30%. So we nonetheless have decrease year-over-year heavy responsibility truck volumes.

The excellent news is Q2 was increased than Q1 and Q3 has been increased than Q2. So bettering volumes there quarter-over-quarter for the lengthy haul heavy responsibility truck. And after we flip over to EBITDA, they’re nearly tripling EBITDA to NOK125 million and posting 11% margin for Agility. Once more, the upper pricing now realized via the P&L and we’ve steady, however excessive carbon fiber prices and excessive within the context of the final decade. However these are pretty steady now going ahead. And after we have a look at our margin image once more, we confirmed this final yr. So if we return to Q3 2021, we’ve had all these pressures via 2022.

Final quarter, we lastly noticed the pricing actually kicking in to 10% EBITDA margin and once more 11% this quarter. Quick-term, margins, after all, they’ll enhance additional with quantity, so that continues to be to be seen after all. However definitely within the medium-term, as we chase 2025, these margins will certainly enhance with the sustainable productiveness positive aspects. We talked quite a bit about our world class manufacturing applications focused to the U.S. factories. After which on high of that you simply heard concerning the 15 liter launch that may positively deliver loads of scale. And people two results actually make us assured that we’ll hit these 2025 margins, targets of 15%.

Hexagon Ragasco seasonally decrease second half, I might say, delicate Q3, as you see, NOK109 million in income so down 8%. So we had weaker volumes in Europe for the quarter, considerably counterbalancing that we had sturdy progress within the Center East and African volumes, however not sufficient to essentially seize what we did final yr. And we see that on the EBITDA degree, we have been at NOK3 million, nonetheless making a revenue, down NOK5 million from the identical interval final yr. And naturally, the margins, they’re primarily impacted by the decrease volumes.

On Digital Wave, 17% progress year-over-year to NOK35 million in revenues. our providers, the MAE enterprise tripling progress year-over-year. So that’s – the momentum is simply rising on that aspect of the enterprise. And on the UE enterprise, we had decrease machine gross sales year-over-year, primarily timing associated. We proceed to put money into the operational progress there, so they may proceed to weigh on margins going ahead.

And looking out on the stability sheets, we closed Q3 with a internet curiosity bearing debt of slightly below NOK1 billion. And the debt-to-EBITDA leverage then very comfy 2.2x. And as well as then, in whole, Hexagon Composites has NOK711 million of obtainable liquidity.

So waiting for the outlook. So that is the remainder of 2023 outlook. So you’ll be able to say This autumn, clearly. We now have very strong backlog. So once more, we repeat the message that we have to concentrate on producing what we’re producing in a very good method. And if we do this and promote it, after all, we count on then a strong group high line for This autumn. On the EBITDA aspect, we’d count on margins considerably much like the year-to-date margin closing Q3.

And if I am going into among the particular person objects, Cell Pipeline, they’ve backlog that kind of covers 2024. Transit and Refuse stay sturdy as I discussed. If we glance into heavy responsibility truck, This autumn order guide is wholesome. That’s nice. And backlog does lengthen into 2024. Nonetheless, a few of chances are you’ll know concerning the OEM or the strike exercise hitting among the OEMs within the U.S. We now have one explicit buyer which may be impacted. So there could also be a delay, a small portion of revenues to 2024.

And after I say delay, we are able to form of – after I say a small, often we contemplate not materials to be beneath 5% of high line revenues. After we have a look at the LPG, we’ve seasonally decrease H2 2023, as we talked about. Nonetheless, in This autumn, we count on some pickup versus Q3 2023. Nonetheless, there will probably be weaker volumes than the slightly monster quarter, similar interval final yr and similar interval in This autumn 2022. And that’s primarily as a result of postponements of orders. We now have a significant distributor who has simply postponed some orders into 2024. Identical as traditional for Digital Wave. And once more, like I say, strong income for This autumn and strong EBITDA going out.

Jon Erik talked about CapEx you noticed within the slide of that enlargement program of NOK55 million, simply to say that the majority of that’s sunk. And by way of going into 2024, we count on round about $10 million to $12 million on the automotive aspect. So cylinders in Lincoln – cylinders in Salisbury, sorry, and perhaps $4 million to $5 million for the enlargement in Cell Pipeline, so once more, most of that $55 million is sunk.

So the important thing takeaways. We proceed to have as via 2023, very sturdy high line progress. We now have demonstrated seen margin enchancment all through 2023. And Hexagon Purus is now fairness accounted from Q3 2023. So all these outcomes are beneath the road. And we reiterate our 2025 targets for the group. So income ought to exceed NOK6 billion and our EBITDA margin must be someplace within the space of 15%.

And on that notice, ask you again.

Query-and-Reply Session

A – Karen Romer

Nice. Okay, now’s your alternative to ask questions of Jon Erik and David. Do I’ve any within the room to start out with? Sure, proper right here within the center.

Vetle Wilhelmsen

Hello, Vetle, Sparebank 1 Markets. What are your ideas on collaborating in any future fairness races in Hexagon Purus, given the present liquidity scenario?

Jon Erik Engeset

Enable me to mirror slightly bit out loud on that one. So if you happen to return three years, December 2020, we listed Hexagon Purus after which we listed it at a value of NOK10 to NOK7 per share. That was in time of euphoria. And we have been very conscious on the time that we might have positioned at a better value than we did. However we did our personal evaluation and we balanced on the one hand, the distinctive expertise positions that we’ve and had with the truth that it was a younger firm early on, loads needed to occur danger within the marketing strategy.

So we wished to guarantee that buyers would get a very good return on that funding. After which we noticed the share value going sky excessive within the following months earlier than the sentiment modified. What has modified since? The corporate has, I might say, delivered remarkably on their marketing strategy. Established six personal websites within the U.S., in Europe, and one quickly to be accomplished in China.

Taking that market place and in contrast to many different firms within the so known as hydrogen area is positioned in segments that’s already rising. The distribution phase that I discussed is already worthwhile on the EBITDA degree. After which we’ve that battery electrical enterprise, which goes to increase. So there’s this nearly weird disconnect between the true world and what’s now the investor sentiment. A few of us got here from Brussels yesterday. We met with parliamentarians and the applications and the cash that’s going into the Inexperienced Deal and the REPower EU is simply monumental and the identical with the Inflation Discount Act within the U.S. In order that’s – that a part of the equation.

After which the opposite a part of the equation is the rising rate of interest, which we perceive has an impression on valuation. However for us, the present share value is simply grossly undervalued. And we’ve stated that we don’t thoughts or we stated after we went to deconsolidation place that we wouldn’t thoughts sooner or later getting diluted. However after all, at this value degree, we do thoughts. So with out giving a extra exact reply to your query, we’ll encourage the board and the administration of Hexagon Purus to hunt alternate options that take the prevailing shareholders’ pursuits into consideration.

And we wish to play a really constructive position in that. And we predict that there are actually good choices for the corporate. Proper now, the general public construction doesn’t work. Hopefully, that may appropriate itself, however that’s one thing to be monitored and we have to simply discover options in order that this anomaly is corrected a technique or one other.

Karen Romer

Do we’ve different questions within the room? I do have some from the web viewers. David, what’s your CapEx price range for 2024?

David Bandele

We don’t usually give that clear steerage and 2024 steerage additionally on the P&L will probably be in This autumn. However I believe the important thing level is that we’ll have our regular upkeep CapEx ranges. However as well as, the enlargement will then be one other $10 million to $12 million increased than regular for the automotive enterprise and about an additional $5 million, that is U.S. {dollars} for the Cell Pipeline enterprise in 2024.

Karen Romer

And we had one other query, which I believe ties into that. How a lot of the US$55 million in capability investments is remaining and what’s the anticipated phasing via 2024?

David Bandele

That’s the tip of it.

Karen Romer

Additionally for you, David, with bettering margins and NIBD/EBITDA now being 2.2x. Do you have got something so as to add on feedback about dividends made on the Q2 name?

David Bandele

No, I believe Jon Erik was very clear on Q2.

Karen Romer

Nice. And Jon Erik, are you able to give an replace on Hexagon Ragasco strategic assessment? How is it progressing and what’s the timeline?

Jon Erik Engeset

So we don’t have to start out with the final query. We don’t have a set timeline. We at the moment are within the evaluation section, and we’ve had a really productive couple of months along with our advisors and loads of fascinating progress alternatives. So it’s nothing that we actually look ahead to if we modify the possession of that.

That stated, we have to ask ourselves if we’re the perfect proprietor, or if perhaps a brand new proprietor might notice that potential in a greater method than we. In order that’s a part of it. After which clearly the valuation after we get to that. However nonetheless extra considering to be achieved and we’ll come again to that sooner or later.

Karen Romer

After which a follow-on query to that, Jon Erik, is the group margin sustainable past the present yr, particularly if the Hexagon Ragasco exit is realized?

Jon Erik Engeset

Sure.

Karen Romer

Okay. How is the room doing? Any questions right here? Sure. We now have one right here.

Unidentified Analyst

Thanks. You’ve spent the NOK12 million on the strategic assessment to this point. Might you assist us perceive what these NOK12 million entails?

Jon Erik Engeset

Sure. Clearly as a precursor to moving into the ultimate choice the place we stated, let’s launch this strategic assessment. We’ve checked out all potentialities, appeared on the market, et cetera, so consultancy charges. After which clearly, if you get into the sort of course of there are different skilled charges concerned. So we’ve needed to expense these within the quarter.

Unidentified Analyst

Okay. However is it entrance loaded advisory charges or…?

Jon Erik Engeset

It’s not entrance loaded advisory charges. No. These are advisor prices to essentially outline the enterprise plans and what’s attainable.

Unidentified Analyst

Okay. And I had one other query as effectively. Simply have to seek out it. Sure. The discontinuation of the meeting actions at Raufoss, is {that a} step of – is that a part of the gross sales strategy of Ragasco? Sorry. The strategic assessment of Ragasco.

Jon Erik Engeset

No. Possibly I can take that. No, under no circumstances. That’s fully disconnected. That’s a special authorized entity. We made the choice in 2020, I suppose to put in this. I discussed the 315 liter line in Kassel, which is used for bus techniques. Earlier than then or earlier than that was commissioned final yr, we have been transport cylinders from Lincoln, Nebraska to Raufoss assembled there.

Then we had prospects in Sweden, Scania, and in addition some on the continent. However then to make the most of the U.S. footprint for the U.S. markets get extra optimized footprint in Europe, we determined to put in the 315 liter capability in Kassel, Germany. And in the meantime Scania moved their meeting or their bus meeting to Poland.

So then for environmental causes, financial causes, logistical causes, it makes all of the sense to consolidate that a part of the enterprise in Kassel, in Germany. So with now the brand new Purus facility being inaugurated, we’ve freed up sways within the Agility facility and it’s going to be a really, very environment friendly setup. So very glad about that.

Unidentified Analyst

Sounds good. If I’ll have, I’ve a final query as effectively. You had this remark about full yr margins being on par with year-to-date margins. And there’s no Wi-Fi in right here so – and I overlook what the precise margin was in Q1, however I appear to keep in mind that Q1 margin was fairly dangerous, or not – it was not notably spectacular, and Q2 was roughly 10%. And Q3, you have got this NOK12 million cost, in order that type of pulls down the margin as effectively. Does that recommend that margins will decline in comparison with underlying margins in Q2 and Q3 and This autumn? As a result of all the pieces else you say appears to be suggesting stronger margins in This autumn.

Jon Erik Engeset

I might say I believe it’s round about 9.3%, 9.4% year-to-date margin. So its someplace round there, I believe is an efficient sufficient steerage.

Karen Romer

Okay. I’ve one other query from the web viewers. David, what’s the dimension of income probably, or Jon Erik probably being shifted to 2024 as a result of placing exercise within the U.S.? And the way might the strike impression us longer-term?

Jon Erik Engeset

Certain. At this time what we see is beneath 5% of group revenues. So probably not materials, however price a remark.

Karen Romer

Anything right here. I’ve yet one more on the web. When will you be guiding for full yr 2024?

Jon Erik Engeset

We’ll usually information then within the This autumn presentation in February 2024.

Karen Romer

Wonderful. And I believe that wraps it up for the web. Anything right here within the room? Okay. Nice. However then thanks very a lot for becoming a member of us right now, and I hope you all have nice day ahead. See you subsequent time.

Jon Erik Engeset

Thanks.

David Bandele

Thanks.