Hexagon Composites ASA

OSE:HEX

Earnings Call Transcript 2018-Q1

[David Bandele, Chief Financial Officer]

Welcome everybody here in the studio and those joining the webcast. It's my pleasure to take you through Hexagon Composites' Quarter 1 2018 Earnings Broadcast. I will start with the, as usual, group highlights, the financials and segment overview. And we'll also have an update on the hydrogen-related investments. These are key strategic area for Hexagon at the moment. And also, Jon Erik, will join us for the outlook, and we'll both take any Q&A. In summary, a strong quarter, quarter 1, 2018; 20% year-over-year growth in revenues. Solid cash generation. Two factors here are really, strong Mobile Pipelines, in fact, the strongest quarterly revenues in 3 years. And in combination with the continuously strong LPG volumes, that's combined to give us the best group quarterly EBITDA since quarter 4 2014. In addition, very solid Hydrogen & Light-Duty Vehicles volumes. Relatively weak quarter for Agility Fuel Solutions. The good news is that revenues and profitability have picked up substantially since quarter 4 2017. We also joined the prestigious Hydrogen Council, and Jon Erik will cover that later. And in addition, we proposed and subsequently paid a modest dividend of NOK 0.3 per share. And we go into the financials and we recorded revenues to the left of NOK 416 million, that's a growth of NOK 70 million, or as I said, 20% growth. The year-over-year growth really driven by Mobile Pipelines and allowed us to record EBITDA of NOK 66.5 million or 16% EBITDA margin, and that's versus NOK 35.1 million same quarter last year and 10% margin. So those 6 margin percentage points very much driven by having high volumes both in our Mobile Pipeline business, and also the Hexagon Ragasco LPG business. The NOK 66.5 million is also stated after dilution effect of the hydrogen business unit. This is in its early growth phase, and we plan to invest a lot of resources in this, so the dilution is planned, and that factor you should put in for NOK 6 million in the quarter. When we look at net profit, we recorded NOK 23 million in net profit, that's a growth of NOK 16 million year-over-year versus the NOK 7 million in quarter 1 '17. And also, the 16 -- NOK 23 million, sorry, is recorded after NOK 6 million negative headwinds from currency effects. So the underlying effect even higher. Looking at our group income statement, I've touched the operating income, EBITDA and profit after tax, so I will concentrate on the lines in between. We can see just under EBITDA, our depreciation pretty much stable year-over-year. Our amortization and impairment has increased slightly, and this is due to the good development work we've done in 2017. So higher development attracts a higher amortization cost this year. And below EBIT, we have share of profit from associates. So this is a line of where we record the Agility investment. A slight improvement year-over-year by NOK 0.4 million, but again, negative figures of NOK 0.9 million, and we'll touch that later. The amortization connected to Agility's intangibles, fairly stable, NOK 3.2 million versus NOK 3.5 million, just foreign currency effects impacting those. And then our other financial items, we recorded NOK 11.9 million in charges in quarter 1 '18 versus NOK 5.7 million same quarter last year. And again, that increase of NOK 6.3 million, that's really primarily foreign currency movements, negative. So we recorded our operating margin or EBIT percentage of 11.4% for the quarter. That compares very favorable with the 4.8% margin for quarter 1 '17. And when we look to the full right, full year 2017, we had an average operating margin of 6.9%. So comparing very favorably, a very good start to 2018. Looking at our share of revenues between the Light-Duty Vehicles and Hydrogen, Mobile Pipeline and other and Hexagon Ragasco business segments. Two things we can draw from '18 versus '17. One is that all business segments have shown growth year-over-year, it's very good, and also the balance of the segments has improved in 2018. It was very -- much more heavily dependent on Ragasco LPG in 2017. Let's have a look at those segments. On the left-hand side, we'll begin with Hexagon Hydrogen & Light-Duty Vehicles. You can see 26% revenue growth, top line growth from NOK 67 million to NOK 84 million in the quarter, very much by CNG Light-Duty Vehicles driving that growth. There was actually lower hydrogen product revenues, instead, we have 3 Fuel Cell Electric Vehicle development contracts and we're recognizing the revenues based on progress to contract milestones. And when it comes to EBITDA, we see an improvement in EBITDA year-over-year. But again, remember the hydrogen business unit is dilutive and the year-over-year impact then is actually NOK 7 million on EBITDA year-over-year that we should also calculate in. When we look to the right, we take our Hexagon Mobile Pipeline and other business segment. Here, we have 51% growth from NOK 109 million in revenue to NOK 164 million in revenue. And really when we go north of NOK 100 million per quarter, you really see the release of scale efficiencies. So here, we're getting the decent volumes through our plants, and that's helping to generate double-digit EBITDA margin, you see NOK 20.2 million in EBITDA or 12% margin for the quarter this year. Going over to Hexagon Ragasco LPG on the left-hand side. Interesting enough, quarter 1 '17 was a record at the time. It still remains our third highest quarterly revenue. Quarter 1 '18, NOK 185 million is actually our second highest now, so LPG continues to be very strong and also still demonstrating growth year-over-year of 7%. Revenues primarily from the European core markets, that happens to be quarter 1, quarter 2, as they prepare for the summer season. But also, we did have the benefit of remainder of the contract to Iraq, so deliveries in quarter 1, most of those deliveries were in 2017. So again, higher volumes have allowed higher EBITDA, so we increased by 2 percentage points to 25% for quarter 1 2018. To the right-hand side, when we look at the Hexagon Group total, again, a very good growth. The margin upswing to 16%, again, a factor of LPG and Mobile Pipeline being strong in the same quarter. And when we look at 2017 as a whole, I think, Hexagon Composites is much better to record the year-over-year full year progress as we do tend to fluctuate in the quarters. You can see in 2017, our margins fluctuated between 10% and 15%. So within the year, there will be fluctuations, but very pleased with the underlying healthiness and strength of profitability in the business.Let's look at Agility Fuel Solutions, our equity accounted investment. These are the actual business operating results of Agility we're looking at. Far right-hand side, Agility recorded USD 36 million in revenues and that generated USD 2.5 million in adjusted EBITDA or 7% margin. The adjusted EBITDA is closest to cash. That was a distinct pick up from the weak quarter 4. You see there were NOK 32 million in revenues and NOK 0.7 million, so that's very encouraging. And that's been driven mainly by very strong transit bus revenue performance. Still year-over-year lighter than same quarter 1 '17 last year, and that's mainly due to Heavy-Duty truck, and the ordering patterns have been slightly disruptive due to a delayed launch in new-zero emission 12 liter engine, and good to say that engine will be on the market from quarter 2. Other pleasing thing is very solid refuse truck sales. First half of 2017 was fairly weak, and we saw momentum picking up fairly strongly in back end of 2017. That momentum has only increased and continues then in 2018. Agility have a very strong position within refuse truck. The fledgling business, Powertrain Systems, mainly medium-duty propane at this stage is on track to the business plan. It's under one year old and revenues will pick up as we go through the year. Agility continues to be fully funded and very good liquidity. And if we go over to the next page, this is how the equity accounting works for the Agility investments. Remember, it's not consolidated, so it's no longer in our numbers. And we go from an adjusted EBITDA of NOK 2.5 million after we take off share-based compensation, again, non-cash charges, depreciation and amortization of the intangibles within Agility, that takes Agility down to a minus NOK 1.4 million profit before tax. When we take it over to the right-hand side into the group accounts, we have to change and correct for IFRS amongst other things. And there, we record in NOK millions now, and negative NOK 0.9 million. And when we attach the intangible amortization for those intangibles recognized on our balance sheet, and that's negative NOK 3.2 million for a total loss of minus NOK 4.1 million. The balance sheet remains very strong. A couple of comments. Net interest-bearing debt was NOK 215 million the last quarter, has come down to NOK 175 million. Equity ratio at 60%. So remains very strong with lots of capacity. And then if we go on to the group cash movements, we see a very strong cash generation. NOK 80 million from all other underlying operations. I split out operating working capital changes, that's been negative NOK 17 million, of course, as we are expanding the business in quarter 1 '17. So all to all net NOK 63 million, more than covers our CapEx and development costs, which were NOK 22 million for the quarter and that will be split to around about NOK 17 million on normal CapEx and NOK 5 million on development expenses. Net movements in financing and FX movements have been fairly modest and we closed at NOK 204 million for that quarter. So it is very important to give an update on the hydrogen-related investments. So let's just reiterate our position on hydrogen. The energy transition to low carbon fuels is happening now. Very strong push certainly from the public bodies, whether they're national countries, whether they're states or whether they're cities, but also coalition, such as the Hydrogen Council, and Jon Erik will touch on that, also helping to focus, you can say, the private investment as well in this area. So we are seeing this. We have contracts already, substantial contracts. And we see really game changing opportunities for Hexagon already. That said, of course, we are then focusing on investments in this area. So the next 3 years, we will focus on attractive returns in the future within the hydrogen business. And just to illustrate the growth paths as we see and what hydrogen will do for Hexagon Composites. If we look back to 2016, this was basically 3% of our revenues, type of that business units. In 2017, it's 10%. 2025 and beyond, we're looking at probably higher than 50% of a much bigger pie. So all business units growing, but the growth rates will be dwarfed by the opportunities that we're seeing in hydrogen. So very significant, and I should mention actually hydrogen and biogas. So what we did is, last quarter we had some CapEx guiding. So I'm just bringing up the slide from quarter 4 2017. We like to be a little bit more precise on this CapEx guiding, and allow us to actually iterate another view. So back to quarter 4 2017. To the right-hand side, you'll see the CapEx guiding, that basically total NOK 664 million. About 45% of this is actually connected to contracts that we have in hand. The other 55% is if opportunities develop further within this period then also that CapEx will be attached to those opportunities, but they are not based on contracts in hand and I will just further specify over the page. So it allows the updated view. Firstly, in the, you can say, the peach colored area in the middle, this is the 2018 to 2020 CapEx spend. And this is the area of CapEx spend that is connected to the 2 -- actually, we have 3 Fuel Cell Electric Vehicle contracts, but specifically 2 that will garner most of the CapEx here. On the right-hand side then is the rest of the NOK 664 million, which is NOK 368 million. We are confident now that given our footprint of manufacturing, we have 2 sites in the U.S. and we have 1 site in Germany, and we feel in the 2018 to 2020 time frame, we'll have enough capacity already in hand to deal with any opportunities that arise, including the Fuel Cell Electric Vehicle contracts that we have today. That means that any future developments that arise through 2018 to '20, they'll probably materialize CapEx post-2020. So we'll take those as they come. So let's focus on the NOK 296 million then. It comes in, I'll say, generally 2 stages. To the left, NOK 122 million. These are basic customer requirements for 2 Fuel Cell Electric Vehicle contracts that we have today. The majority of that is backstopped by the customer as well. So it's -- majority of that is not at any risk. At some point, we think that will be around about mid-2019, we'll face a decision date with the customer on volume prognosis. And then we would expect an additional requirement, i.e. increased volume, you can say after that decision date. So with that additional volume requirement at that stage, we'll then be able to commit the rest of the CapEx, the NOK 174 million that you see there. And that's basically ensuring that we have higher volumes, higher capacities, more comprehensive plants that's capable of doing that. So hopefully that clarifies on the CapEx, around about NOK 300 million tied to Fuel Cell Electric Vehicle contracts. That CapEx will only be deployed as the customer wishes it or gives us that commitment. And the rest of the CapEx, NOK 368 million, that is really dependent on future opportunities as they arise. And before I finish, I'll hand over to Jon Erik, I'll just say that also, just to say that the NOK 300 million of CapEx, this will be fully funded with the cash inflows from the rest of the business areas. So I hope that clarifies the CapEx guidance. And Jon Erik, if you can join us for the outlook. Thank you very much.

[Jon Erik Engeset, CEO & Group President]

Thank you, David. Good morning, everyone. So we have really moved into a phase of very favorable market conditions. And so of course, the oil price increase is serving parts of our business very well. A healthy spread between diesel and natural gas prices in North America, in particular. As David has touched on rapidly growing momentum for our alternative energy exposed business, and it's clear that natural gas and biogas are key to achieving emission goals. The left-hand charts there indicates the growing spread. Interestingly, in North America, natural gas prices are trending down, while oil prices are trending up. But first and foremost, we emphasize the increased oil prices. The right-hand chart shows the spread at the pump between natural gas and diesel on the diesel equivalent. It's important to note that many of the operators, they have more attractive gas prices and consequently larger spreads. So for them the attractiveness of natural gas is even better. So we are back to a situation where certain fleets driving long, long ranges have a very healthy payback. We hear this or mentioned examples of less than 2 years for the long-range vehicles. This chart you've seen last year and the year before. What is interesting about -- this is BP's update is that every time it is updated, the curves get a little bit steeper for renewables and natural gas and the trend is moving closer in time. So I think, there is a strong consensus that natural gas and renewables will take relative share, while in particular, oil and coal will lose relative share of the total energy mix globally. And that's good news for Hexagon. We recently joined the Hydrogen Council, lots of highly esteemed companies set that organization up at the beginning of 2017. We get a lot of useful insights from that partnership. And their predictions for hydrogen's importance for the fuel supply in the world going forward is indeed very encouraging. So they predict 18% by 2050 of the world's energy demands, avoiding 6 gigatons of CO2 and fueling 10 million to 15 million cars and 500 trucks by 2030. That is significantly more ambitious, if you like, than what we have in our forecasts and numbers that have gone into the chart that David had on his update. So we may be on the conservative side even though we see significant opportunities for our businesses. Another interesting news flow recently from SINTEF and NTNU in Norway, really putting Carbon Capture and Storage back, but now for the production of hydrogen predicting by again, 2050, NOK 220 billion worth of hydrogen, separating then natural gas, storing the carbon in the North Sea and then facilitating the hydrogen to the markets. And an estimate of 25,000 to 35,000 jobs related to this development. Also, in April, the International Maritime Organization, as expected, made their commitment to reducing CO2 emissions in the maritime sector globally by 50% by 2050. It will be very interesting to see in the coming years what solutions will be developed. We feel confident that hydrogen will be one part of it, and LNG and other and also we see opportunities for CNG for certain types of vessels. And in the quarter, we had our first delivery of Mobile Pipelines for the capture and compression and storage of boil-off gas from LNG tank on a vessel. If we move on then to the business areas and the respective outlooks. We have discussed in previous quarters, Volkswagen's very strong commitment to CNG for passenger cars, and that is only getting reinforced every quarter, some press releases recently shown here. And they also report very strong growth both in Germany and in Italy. Still Italy is the largest market in Europe, but they have reported triple digit growth in Germany for its CNG model sales. They're constantly launching new CNG engines, I'm afraid there is a typo here, this launch is actually for 2018, but we expect more models to be launched in the next few years. Also, SEAT in Spain, part of the Volkswagen Group also have declared strong ambitions, 1 million LEVs sold by 2030. In consortium, they are promoting the development of the gas station network in Spain. So we have very large optimism for this sector. And it's interesting, because previously Volkswagen has talked about CNG as a transition to clean fuel environment, while the SEAT President now stated that CNG is not just a bridge technology, but real long-term alternative. And to us, that makes perfect sense, because if you especially mix biogas with CNG -- with natural gas and make renewable natural gas, that will have a very significant CO2 impact. So we strongly believe that we will see continued development of this mix of different technologies of which CNG and renewable natural gas will be a very important component. On the hydrogen side, as David mentioned, we are now very much focused on delivering the engineering and the development for the large OEM contracts programs that we have. We expect that we will start serial production for one of the programs in the second half of 2018, while 2 others will come in '19 and '20. And we see that in that part of the hydrogen business, we have somewhat reduced income level in the quarter, but that will fluctuate and it will certainly pick up as we go forward. Also in the quarter, we had the somewhat slow market on the distribution side of the business. So Mobile Pipelines for hydrogen, if you like, we see one application for that on this picture. But that also is expected to resume strongly in the second half of the year. On the Mobile Pipelines side, we have had the first delivery to biogas plant in North America, where the trucks are transporting renewable natural gas from farms to the pipeline. We are now in the final stage of preparing the new TITAN, TITAN 53, which we expect to launch in Q3. That is targeting the 65,000 to 80,000 pounds segment, where our other TITAN products have not been fairly optimal. We are also addressing this segment, which, lack of a better word, we call pipeline integrity segment. So securing operation during downtime maintenance, et cetera, for the pipelines. And also, we have projects aiming at connecting stranded communities, so communities that have not -- do not have access to the pipeline system and provide them with gas. The North American shale sector is very active. And on the international scene, there are a number of projects out there, some of which are quite large, but still we have to report relatively slow project flow. There are some deliveries, but not as high as we would like. But we remain quite encouraged by the prospects. So strong overall outlook, but do expect that there will be fluctuations between quarters. LPG, steady, a very robust European market, which is important now in the first half of the year. We've had a lot of success in the Middle East. We see a growing repeat order intake from the coastal customers, where the corrosion properties or lack of corrosion of the composite alternative is very important value -- customer value. And we are also making our drive -- newer drive to open the U.S. market and we have a pilot in Florida and we're moving on to California in this quarter. So very positive momentum into Q2. We have promising prospects for the second half of 2018. So we hope to also deliver a second -- a strong second half 2018 in the low-pressure business. The expansion program is on track and will then be phased in the new lines in the beginning of next year. Agility, so the market is picking up, and in particular, we have a positive outlook for the refuse and transit bus business. The Cummins near-zero emissions engine was made available in Q2. So that was somewhat delayed and only came on the market early this year. Now the truck builders are homologating the product. We didn't expect this to influence the market until Q3, but we see that it's already starting to pick up now in Q2. So there's a stronger outlook for Agility in the Heavy-Duty truck segment than we expected a quarter ago. There was a trade show in Long Beach 2 weeks ago, and a lot of announcements were made. Agility exhibited its first hydrogen storage systems for trucks. Also, we or Agility exhibited or made a press release that an alliance has been entered into with a company called Romeo Power Technology for the supply of storage modules. And we see an opportunity for hybrids between CNG and battery electric. So that is something we will focus on going forward, and which may be an exciting growth opportunity for Agility. Also for certain applications, it may be full electric trucks, but because of the weight disadvantage, we think, that will be relatively smaller share of the market, while the hybrid segment has a lot of attraction to it. So in summary, on the LPG side, full capacity utilization in the first half. And we will focus now the efforts on matching the record year of 2017 in the second half. Mobile Pipelines, strong outlook, non-linear, but we think we are on an upward trend. The Hydrogen & Light-Duty Vehicles side is strong outlook for LDV. We will have the dilutive effect from the hydrogen business, and also there, we will see non-linear revenue development. And on the Agility side, healthy outlook across all segments, and especially driven then by the recovery of the spreads between natural gas and diesel. So with those closing remarks, I invite David back to the stage and welcome any questions, please.

[Unknown Analyst]

My question is, you -- unless you will not need any further -- to raise any further equity to cover the CapEx in the hydrogen business, but how does that look if you include any expansion in other areas like in low-pressure or any transaction involving Agility will still be funded fully? Or will you then have to look at this again second during the next, say, 1 to 2 years?

[Jon Erik Engeset, CEO & Group President]

First of all, as David showed, the cash flow is strong and the hydrogen program that we have will be fully funded by the cash flow as we see it and expect. So any capital raise would have to be for other opportunities. And I have to say that it is highly unlikely that we will raise capital anywhere near the current stock price. So I think that answers the question. So of course, there are always opportunities out there, but we need to see attractive opportunities also on the capital side.

[Unknown Executive]

Any questions from the audience?

[David Bandele, Chief Financial Officer]

Any questions on the webcast?

[Unknown Executive]

There are no questions from the web audience. Thank you.

[David Bandele, Chief Financial Officer]

Okay. Thank you very much.

[Jon Erik Engeset, CEO & Group President]

Yes. I think there was another one from Ole.

[Ole-Andreas Krohn]

On the Light-Duty Vehicles side in Europe is -- it looks like its expanding quite good. Can you say anything about the competition there and what part of the market you're using for yourself?

[Jon Erik Engeset, CEO & Group President]

So at this stage, Volkswagen is really the leader in the market and we have a strong position there. We're also supplying to certain other OEMs. So what is exciting here is if these other -- I think we need to move -- if these other OEMs will go after the same opportunity that Volkswagen is so strongly pursuing. So at this stage, it is really a quite low activity with the other OEMs. So -- but we would assume that they take inspiration from Volkswagen. So yes, we are truly looking forward to the development in this sector. So it looks very encouraging. Any further questions? If not, I wish everybody a good rest of the day, and talk to you soon. Thank you.