Hexagon Composites ASA

OSE:HEX

Earnings Call Transcript 2022-Q1

[Karen Romer, executive]

Welcome to Hexagon Composites' Q1 2022 presentation. My name is Karen Romer, I'm the SVP of Communications at Hexagon. And I welcome everybody here, both in our studio audience or in our auditorium audience and also those watching the webcast.

Today joining me here in Oslo is Jon Erik Engeset, who is our CEO; and David Bandele, our CFO. They will be presenting today an agenda that includes the highlights of Q1 2022, a market update, the financials, outlook and then a summary and Q&A.

I invite all of you who are our webcast audience to please use that little icon enter questions, you can do that throughout the presentation, just type in your question, and we will come around to it at the end of the presentation. And those of you in the audience will have an opportunity also to ask your questions here in the studio.

So without any further ado, we will turn the mic over to Jon Erik.

[Jon Engeset, executive]

Thank you, Karen. Good morning. Thank you for joining us today. A lot has happened in the world so far this year. And frankly, it affects Hexagon quite significantly in many ways, short and long term. And I will take the opportunity to discuss that with you today in today's presentation.

But before we go there, the highlights of Q1 we had a 47% group revenue growth year-over-year, significant, mainly driven by the renewable natural gas, RNG and hydrogen businesses, which also entails a very strong backlog for the remainder of the year.

In the quarter or more precisely just after the quarter, we entered into a deal to acquire 40% in Cryoshelter GmbH, an Austrian LNG tech company. And Hexagon Purus, on their side, they are delivering on their ambitious growth plans, including now good traction in the Chinese JV.

Hexagon is about driving energy transformation. And the final 2021 account is that we enabled by our solutions the avoidance of 1.15 million tonnes of CO2 equivalents. To accomplish that, we, ourselves, consumed north -- just north of 300,000 equivalent metric tonnes, which makes our net impact quite positive. That said, we, as all industry companies, also have to work more on our own footprint. And in the quarter, I signed the science-based target initiative, where we commit to net zero by 2050, and we will aim at achieving that well before that deadline. So that is very, very high on our agenda now as you can imagine.

Looking at the financials, high level, Hexagon excluding Purus had revenues of NOK 913 million in the quarter against NOK 690 million in the corresponding quarter last year, delivering an EBITDA of NOK 84 million. Hexagon Purus on their side tripled their top line from NOK 52 million to NOK 159 million. That is without Wystrach in 2021. And while Wystrach is already in profit generation phase, the rest of the business is still in a growth and development and build-out phase and still, therefore, generating negative EBITDA amounting to NOK 93 million in the quarter. So since we own 73.3% of Hexagon Purus, when consolidating then the group revenues amounting to NOK 1.016 billion, up from NOK 692 million last year and an EBITDA of minus NOK 9 million against a positive EBITDA of NOK 25 million in 2021.

So while the top line growth is highly satisfactory, the profitability is not growing in the quarter year-over-year. While there may be some mix effects to that, the main reason is the difficult supply chain situation around us. And of course, further increased by the Ukraine war and the lockdown in Shanghai in particular.

We have taken mitigating actions. We have a higher inventory of critical components in our factories. We have communicated price increases to our customers, and we have further intensified the already ongoing productivity programs. So you will see step-by-step in the coming quarters that margin compression will be reversed. And frankly, we also see that our type of products is in shortly. And as I will discuss further, we see the demand side just strengthening and strengthening. So we think there is a good prospect of achieving the 15% target mark and maybe exceeding that in not too distant future. So time has come for us to take this business from growth to truly profitable growth phase in the coming years.

And the raw material price increases and energy price increases are not only negative for us, this picture shows the delta between the diesel gallon equivalent basis in the North American markets for trucks showing that, first of all, CNG has been remarkably stable over the years at the PAM price, while diesel it's much more volatile. And when the oil and gas prices go up, then we see that the delta increases in favor of CNG. And right now, we are back to how it was in the 2013, 2014 time frame, when to upgrade from a conventional diesel truck to a CNG truck has a payback of down 1 to 2 years. So the value proposition also from an ROI perspective is becoming very, very favorable. But the main driver remains the environmental motives of the fleet owners to decarbonize their fleets.

The governments around the world are certainly not happy that the energy prices go up. And there are renewed commitments to secure energy independence by most governments in the free world. In the U.S., they want to step up production of conventional resources, but also committing to developing the renewable and clean alternatives.

In the EU, where the challenges are becoming quite precarious and critical, they have launched the REPowerEU, which is stepping up the already very, very ambitious energy transformation plans in the union. And that REPowerEU entails a rapidly increased import of liquid natural gas, LNG, replacing imported pipeline gas from Russia, utilization of the significant untapped RNG or biomethane resources in Europe, green hydro production and blue hydrogen imports and to accomplish this a significant build-out of infrastructure needs to be prioritized, which is also important for us.

Taking a closer look at this, in the REPowerEU plan, and I remind you that the fit for 55 plan was launched less than a year ago, already addressing these opportunities. But with the new plan on biomethane, the plan is to reach 35 billion cubic meters by 2030. That is up from around 3 billion in 2021. So an 11-fold, almost 12-fold increase.

A quadrupling of the hydrogen targets. So currently, hydrogen is close to 0 actually in the European energy balance, the fit for 55 ambition was 5 million tonnes. And now with the REPowerEU plan, they want to take that to 20 million tonnes by 2030.

And last but not least, more short term to replace Russian oil. The EU wants to increase the import of LNG by 50% by the end of the year, increasing that from 80 billion cubic meters to 130 billion cubic meters. And to accomplish this, our distribution modules and mobile pipeline modules will need to be a part of the solution. Frequently, these resources are off grid and it will take time and very significant investments to connect them to pipelines or other infrastructure. And that is why the mobile pipeline units, distribution containers is the only available logistical solution. And that part of our business should see significant growth for that reason.

On the vehicle side, while Hexagon has a very strong position in the bus market in Europe, we do not reach the heavy-duty truck market. And like in the U.S., where we are the market leader, and where that business is developing very strongly for us. And the reason for that is how trucks are being built in Europe compared to North America. While the North American trucks are larger with plenty of space available to package systems with tanks, the European trucks are much more compact, and there is less space available for adding tank capacity. And therefore, in Europe, the solution is LNG tanks to secure adoption of natural gas.

And we see that business developing very strongly. So the graph to the left here shows the development from 2018 to 2021, 3x increase, still a modest share of the overall trucking fleet. Around 3% of new trucks were natural gas, but growing strongly. And this is supported by a corresponding development of the LNG filling network. And this development is expected to continue in the years to come. And already now, actually, with 10,000 trucks in 2021, the number of new trucks in Europe, natural gas trucks is 3x bigger than in the U.S. So that market is significant and an opportunity that we would like to also reach.

And this, coupled with the opportunity of decarbonized heavy-duty trucks by renewable natural gas gives reason to have strong belief in this segment. Trucking is one of the so-called hard-to-abate sectors in the economy and at the same time contributing significantly to CO2 emissions. And the obvious solution and the only solution for the next 10 years is renewable natural gas or biomethane as most often termed in Europe. And we see an increase of that energy source 4 to 5x, reaching around 15% of the fuel consumption by 2030.

So for these good reasons, we made the decision to acquire 40% of technology company in Graz in Austria, Cryoshelter GmbH, which has developed unique technology for cryogenic storage of natural gas, but the technology can also then be further developed for also liquid hydrogen. And we have options to gradually go up to 100%. Over the next 10 years, we frankly expect to take controlling stake significantly earlier than that. And our role in the near term will be to support Cryoshelter in industrializing and commercializing their business.

And as I told you in the previous quarter, we have recently opened our commercial center of excellence in Munich for the European market, and that location is, of course, ideally also suited to support Cryoshelter.

Cryoshelter was founded by Dr. Matthias Rebernik in 2008. So they have spent 13 years, 14 years to develop the technology. We have known them and had the dialogue with them for the last 5 years or so. Matthias will stay on as Managing Director and of course, also a significant shareholder for a long time to come.

And the tank, as designed, will deliver up to 30% better fuel storage capacity than the competing products in the market. And without going into a lot of details on that technology, we don't want to share all the secrets, but it has to do with terminal management, it has to do with how the space both on the truck and in the tank itself is utilized. And very important, this technology allows 2 to 4x improved whole time depending on the size of the tank. And the whole time, so it means how long the truck can remain idle without having to vent the gas? Because if you don't run a natural gas engine, pressure will build up in the cryogenic tank. And after a while, you will have to vent unless you start moving the truck. That is a problem if you need to take a truck in for repair or you need to leave it over the weekend or holiday season. And to vent, it's not only a loss of valuable energy, but you're also then releasing which is a very, very potent climate gas. So that needs to be avoided.

And with the crystal technology, you can safely then leave the car for several days without having that venting issue. It's going to be a very important competitive advantage. So with this strategic move, we complement our already significant range of solutions for clean energy, transportation and storage and now also have liquid technology in our portfolio.

In Hexagon Agility for LNG and in Hexagon Purus for the liquid hydrogen, that the technology will take a few more years to develop fully on the hydrogen side.

Talking about Hexagon Purus, they are delivering on their ambitious plan to reach a revenue of NOK 900 million in 2022. In the quarter, we saw pro forma growth year-over-year of 52%, pro forma because Wystrach in Germany was acquired in Q4 last year. So we did not own that in Q1 last year, but they had 62% growth of their business. Also, our legacy Hexagon Purus business had 63% growth, but then there were also internal eliminations between the 2 companies.

And as already commented on, Wystrach is already in black figures. So Wystrach, just to remind you, that is the systems builder for hydrogen and also for mobile pipeline products in -- for the European market. And that business on the hydrogen side has reached scale, which then delivers positive numbers. Also Wystrach was impacted by the supply chain issues. So the margin is lower than it would normally be. And going forward, there will be constraints in the supply of such modules in the European market and worldwide. And that is why we expect to see that margin in particular reaching very satisfactory levels in not too distant future.

The rest of the business is still in an earlier phase, but approaching the deliveries at which point that business will follow the same path as the Wystrach business and turn in profitable numbers. For now, we are in the growth phase, and we will continue to build out the organization and make all the necessary investments to secure Purus' success.

And then finally, a slide on our Chinese JV. It has not been easy. Very difficult to travel back and forth. But the partners have still secured progress in the project. We entered into an investment agreement with the City of Shijiazhuang, which is a bit west of Beijing and we'll break ground now in Q2 and start the construction of the new factory.

And we made the first commercial agreement, an MOU with a company called Bravo Transport Services to develop a hydrogen storage concept for their double deckers for the Hong Kong market.

So a lot going on, and I'll invite David to say a few more things about it and also comment on the outlook for the remainder of the year.

[David Bandele, executive]

Thanks, Jon Erik. And it's a beautiful thing seeing the breadth of that alternative fuels portfolio and where Hexon is definitely a unique one-stop shop.

So before I go into the financials, many people will be pleased to note there are no changes year-over-year within our business segments reported in 2021. The only change is branding. So we need to be consistent in the box, you see Hexagon Agility that used to be term g-mobility and in order to be consistent with our brands for our other segments: Digital Wave, Ragasco and Purus. And under Hexagon Composites remains the medium- and heavy-duty vehicles, the automotive businesses, the mobile pipeline business and also light-duty vehicles from Castle.

All right. So highlights. Q1 2022, NOK 731 million in revenues. That's a very solid quarter from Hexagon Agility. In fact, 39% growth overall. And within that, we actually had a tripling of revenues year-over-year for mobile pipeline. Ragasco started with a very strong quarter, NOK 162 million in revenues, including increased deliveries to Europe and North America.

For Digital Wave, they posted NOK 15 million in revenues for 36% growth, and that's across all their technologies. And last but not least, Hexagon Purus, as Jon Erik just covered, 52% pro forma growth. and also, they can boast a very strong order backlog.

The market is valuing our 73% ownership and Purus currently at NOK 5.1 billion. So for Hexagon then, excluding Purus, we did NOK 913 million in revenues over NOK 690 million same period last year. So that 32% growth as we covered across all segments. EBITDA, NOK 84 million versus the NOK 87 million last quarter -- or the quarter last year. so you can see the margin -- adverse margin development. That is expected, and it's really a result of the higher sales prices, which we have negotiated now. They are lagging behind the higher input costs, and I'll go into that in a little bit more detail.

Also remember, we have a components related standstill that impacting the light-duty vehicles, so that continues. Both are effects from the pandemic, again, exacerbated by the war in Ukraine. But the key message for us is that overall market demand remains very strong with again, high backlog for 2022, and you can see that in our revenue performance.

So going into Agility, you see the same pattern agility during the NOK 731 million in revenues versus NOK 527 million same period last year, and really driven, again, robust North American truck market. The refuse market beginning to pick up again, which is good and similarly for medium duty year-over-year. And again, mobile pipeline tripling its revenues. Certainly, the recovery is now seen as sustained.

If you look at the shares of revenues on the right there, you'll see very healthy domination from the heavy and medium-duty truck sector. But transit bus at 22% is very significant. And refuse truck, again, going from single digits last year, now up to the double digits, say, 11%. That's a healthy bounce back for refuse.

Of course, Mobile Pipeline taking a large share this year in quarter 1 this year 22% and 8% in the light-duty vehicles. That is really primarily sales of cylinders to Hexagon Purus. You saw the Hexagon Purus numbers, particularly in distribution modules, increasing significantly, and we've been supplying cylinders to Purus.

And then on the margin, we see NOK 52 million versus NOK 58 million, again 4 percentage points drop in margin, and it's really the same issue. As we communicated last quarter in Hexagon Agility, if I break down the automotive business for us, the automotive business has very many long-term agreements typically about 3 years in length. These are quite notoriously difficult to increase prices. We have got that now in place. And they will begin to kick in from some point in Q2 and certainly to a largest scale in Q3 and Q4.

On the mobile pipeline side of things, it's the same issue coming to 2022 with very heavy backlog similar to automotive. Their backlog covers the first half of the year. So by the time we can deliver on newly increased prices, on new orders that will be the second half of the year for mobile pipeline.

So Hexagon Agility starts off with adverse margin development first quarter, should get progressively better in quarter 2 and then certainly large steps up in Q3 and Q4. So we expect the run rate coming out of Q4 to have restored margins as well.

On Ragasco, similar picture, solid start of the year at 10% revenue growth for the quarter to NOK 162 million. And on the EBITDA, you see we posted NOK 33 million versus the NOK 34 million last year. And again, same picture less margin, less adverse margin development, and that's because Hexagon Ragasco were able to already pass a first wave of price rises already in Q1, started January. Unfortunately, we underestimated the cost increases and costs have further increased from Q4 levels through Q1. And we have actually implemented a second wave then of sales prices that will take effect -- already taken effect in Q2. So we will see a restoration of Ragasco's margins at a quicker pace than Hexagon Agility.

And again, same issue there, higher material input costs, particularly glass fiber and resin. And unlike North America, we source most of the components in North America. Hexagon Ragasco source glass fiber from China. So it's also increased transport costs that we've seen in Q1.

The other thing we've seen in Europe as people in Europe are no stranger to is significantly higher energy costs. So the energy cost of operation in Ragasco has also been significantly higher, particularly in Q4, but even increased in Q1.

For Digital Wave, here, we posted revenues of NOK 15 million versus the NOK 11 million same quarter last year. So a very good year-over-year growth. And if I break down 2 of the main drivers in the revenue line, it's the Modal Acoustic Emission technology. That is a service offering. So we own the inspection equipment, and we are able to take that to the application and actually do requalifications, testings in a noninvasive way, so we don't have to break down the, for example, mobile pipelines and we will also do it ultimately in a much faster way, meaning less downtime of the asset for the customer.

Also ultrasonic examination. This is more a typical product sales. So we build machines, testing equipment, and then we package these and sell these 2 customers around the world Europe, North America, South America.

And on the EBITDA side there, we see similar EBITDA year-over-year, minus 4 versus minus 3, and that's because even though we've had the higher sales, we are continuing to increase the organization in order to develop the next product pipelines.

If we then take -- move our attention to the group. So I covered on the left-hand side, the Hexagon excluding Purus results, so close to NOK 1 billion in revenues and NOK 84 million in EBITDA. So that is the mature and profit-generating business.

And then in the middle, Hexagon Purus, it's still a fully consolidated subsidiary of ours, and those go into the group numbers. And you can see very terrific revenues, NOK 159 million, but also increased EBITDA of minus NOK 93 million as the organization continues to grow and chase those opportunities. Of course, when we consolidate these into the group numbers to the far right, we can see NOK 1 billion in revenues, but that negative margin that Jon Erik mentioned.

But summarizing Q1, certainly on the P&L side, there is strong demand and backlog across the board, and that's displayed the supply chain disruption. The supply chain challenges and inflation continue, and they are temporarily reducing margins, but the margin improvement than is expected, particularly in Hexagon Agility throughout the year as higher sales prices take effect, and Ragasco already from Q2.

On the balance sheet, we're almost at NOK 7 billion. The main factor or increase since the end of the year. is the private placement in Hexagon Purus, so new equity injected into Purus. And you can see on the left-hand side, then Purus closed the quarter with NOK 0.9 billion in cash and NOK 0.1 billion for Hexagon.

And on the right-hand side, interest-bearing debt has gone up. We've used that to fund primarily the equity injection and we are left with a very strong balance sheet equity ratio of 50%.

Just a reminder, in December, we signed a new even more flexible financing package, and we are already getting the benefit of that. So we have temporarily increased leverage due to the equity injection, but we will see us progressively reduce that in due course.

But I guess what people want to know is what the outlook is for 2022. Again, just a reminder, this is full year guidance. At the start of the year, we will go into all the main drivers of our business segments, starting with Hexagon Agility and the medium and heavy-duty vehicles market. We see no change to the momentum that we're seeing in renewable natural gas and CNG solutions. And again, buoyed by a bounce back in refuse truck to add to the truck, heavy-duty long-haul truck and transit bus momentum that we've seen for a couple of years now.

And on top of that, we also have a medium-duty increases from our large customer, UPS. Same disclaimer at the bottom of the page. And on the Mobile Pipeline side of things, as I mentioned, we've now had 3 successive quarters on high levels of revenue. So we are in a position that we can say we're fully recovered from COVID-19, at least in terms of demand.

And the strong order book, we've had distribution units for -- principally for RNG, production utilities, also other gases, such as helium. And what's particularly pleasing is the mobile refueling units. This is a new application for us in 2021. And some of our big customers, then we help them to optimize their -- I keep their fleets running, hub-and-spoke contracts using these smaller mobile refueling units to actively do that.

And again, a little disclaimer there, there have been delays to chassis, again, related to components, steel, etc. And the component shortage continues to affect the light-duty vehicles, so no changes there. We're hoping for then some improvement expected by the second half of 2022. Until then, we're busy, as you say, manufacturing cylinders for Purus.

And Hexagon Ragasco always remains very resilient in its demand picture despite what's happening in the world. Through 2022, we expect several introductory orders. We had some impressive ones in 2021, you remember Philippines. And this time, we've already had orders for CagoGas, which is the third largest German LPG marketer. Germany is a very large and important market for us. And to date, we haven't had a strong foothold, but this looks promising here.

In the meantime, Ragasco continues to manage the supply chain and raw material challenges as well as having managed the direct consequences to Russian sales and distribution from the war.

The Smart cylinders pilot program is ongoing. Each successive generation gets better. So that's good. Unfortunately, that's also -- there are delays to key electronic components. So yes, the program is ongoing, but continuing preparation for launch. So looking very promising for the smart cylinders in Ragasco.

And when we look to Digital Wave, we still see increased demand for the testing side, particularly through the modal acoustic emissions and also solid volume then for customized UE equipment. And then what's exciting and progressing in the background, and we hope to have some more breakthroughs by the end of 2022, but we are effectively then miniaturizing the technology and fitting these in pilot systems. And these are applications not only mobile pipeline but also heavy-duty automotive trucks, so mobility platforms. And these will then give us the data, which will give us the new digital twin concept, allowing us to enable real-time health monitoring and how those tanks are used and, of course, fleet management, et cetera. So progress continues there also on smart technologies in Digital Wave, more to come later in the year.

So I say all of that to say this is that we maintain our initial guidance for 2022 full year. So on the revenue side, that will mean greater than 15% growth, and you see the range from NOK 3.7 billion to NOK 3.9 billion, but also double-digit EBITDA margin, and that's despite these macro-related headwinds. And we have a range of EBITDA of NOK 400 million to NOK 450 million. And the principal reason for that is no one really knows the cost picture yet. So that continue -- that can continue to increase or could reduce. So a range of NOK 400 million to NOK 450 million is pertinent there.

And on that note, I'll ask Jon Erik to sum up.

[Jon Engeset, executive]

Thank you, David. So in summary then, a strong sustainability driven demand across the company and a very good order backlog for the remainder of the year. We are, as you understand, very focused on mitigating the supply chain disruptions and the cost increases. We are completing our portfolio of clean fuel storage solutions by investing in Cryoshelter initially 40%. And longer term, we see then the targets of NOK 6 billion revenue in 2025 as highly realistic and correspondingly, NOK 4 billion to NOK 5 billion in Hexagon Purus.

And with that, we will take some questions from the audience, and David, please come back up.

[Karen Romer, executive]

Okay. Now I'll just remind the audience that if you are in our webcast, please click on the orange icon to send your questions. If you have any challenges, you can also send your question to [e-mail]. Do we have any questions in the room to start. I do have 1 or 2 from the webcast on there?

[Unknown Analyst]

Thomas from Sparbanken markets. Do you see any immediate demand in light of RepowerEU as the biomethane targets were pretty front-end loaded in the growth?

[Jon Engeset, executive]

Sorry, you were a bit difficult...

[Unknown Analyst]

Yes, sorry. Have you seen any immediate demand effect, especially in the Mobile Pipeline segment in light of the repower EU report as the targets on biomethane were pretty front-end loaded in the report?

[Jon Engeset, executive]

To be frank, our order book is full for the year. We are not taking more orders in distribution segments. We will consider capacity expansion in that area. So the demand is very strong. I cannot tell if it has been further increased yet, but we are, as you understand, very confident that, that will happen. At the same time, it's difficult for companies, that have not been in this industry for a long while, to develop that capacity. So I think it's largely on us to make sure that, that capacity gets available to the market.

[Unknown Analyst]

And I guess that's suitable for my next question, is there any update on the CapEx moving forward, considering the increased demand you see?

[David Bandele, executive]

No updates to what we've covered before currently, yes.

[Unknown Analyst]

Okay. And just one last, if I'm allowed. On Cryoshelter, can you give us a bit more insight on kind of how far are they from having kind of ramping up commercial sales?

[Jon Engeset, executive]

Yes. So the in our assessment, and we have spent a lot of time analyzing this. So we think the technology is ready. There have been pilot trucks on the roads. So it has been tested in real operating environment. Then in the automotive world, you should assume an 18 to 24 months validation and homologation phase. So we are aiming at starting taking orders towards the end of next year and then starting delivering meaningful numbers in 2024. This is on the LNG side.

The liquid hydrogen is a longer story. So there, the technology is not yet ready. So even if in principle, it's the same. Liquid hydrogen is at even lower temperature minus 250 Celsius degrees. And it's not so much the tank technology, but it's all the fittings and the valves and the measurement technology, et cetera, which will take us some more time to develop. And also, we don't see that the industry around us. So refueling stations, other distribution technology is ready. So this is an opportunity which we consider will be towards the end of the decade into the 2030s more than in the next 10 years.

[Karen Romer, executive]

Do we have others in the audience here? I can take a question from the digital audience. Jon Erik, I'll propose the discussion we just had. Will LNG technology cannibalize CNG solutions over time?

[Jon Engeset, executive]

No, not really. So this is, as you saw from that slide with the truck configurations, it depends on how trucks are being built. So in North America, the most economical solution is CNG. While in Europe, it will be LNG. And then LNG technology will allow us also to enter additional markets. So India may be an interesting one, Eastern Europe also and also actually the Chinese markets. But for now, we are focusing on Europe and on North America for this market opportunity. And then it is nicely divided geographically with respect to technology choice.

[Karen Romer, executive]

Okay. We have a question here.

[Unknown Analyst]

Let's say, just for the sake of argument that somebody decides that they want to buy Hexagon Purus, how integrated and how connected or interconnected are composites and Purus? And how would it be possible for that to separate those 2 businesses, say, within a reasonable time frame? Or is that a multiyear track if that happens, say, promptly?

[Jon Engeset, executive]

No, not really. So that separation has actually more or less been completed. Hexagon Purus is an autonomous company. There is cooperation, as you heard from David's presentation, there are intercompany sales, which may continue. We have shared sites still in Germany, but we are building a new site in Germany for Hexagon Purus. So we will move into that new site next year. And we have a similar situation in Colona in Canada, where we are also constructing a new facility now. But already today, I think operationally, the businesses are, say, 95% separated.

[Karen Romer, executive]

Okay. I'll take another question from the webcast audience. Can you comment on the Nikola order? Their truck production is now ramping up, so how will their performance be reflected in Hexagon Purus performance data for the next 4 to 8 quarters?

[Jon Engeset, executive]

Yes, that is really a question for the Hexagon Purus management. So they had their presentation on Tuesday. So I can only confirm that Nikola is a very important customer for us. Of course, there has been a bit of turmoil around Nikola we see that they have gotten their act together a very professional serious management now. We believe in their plans, and we are prepared to support them with building out our capacity in the U.S. in order to support their volumes going forward.

[Karen Romer, executive]

Okay. Another question from the web audience directed you, David. What are the direct implications of the war in Ukraine for Hexagon?

[David Bandele, executive]

Yes, we -- Hexagon Ragasco has a sales and distribution entity there with 6 staff. And materially, it's small. It's -- sales are under 1% of group revenue. However, of course, even though our products are not directly sanctioned, we have stopped exports to distribution in Russia. So that's the consequence. Russia was a small market but has been a growing market. But of course, that is a consequence. And it will remain that situation until the situation changes.

[Karen Romer, executive]

And continuing with you, David, do you see further cost escalation throughout the year?

[David Bandele, executive]

Unfortunately, I do. I see -- we've seen it between Q4 and Q1. These are at high levels. So some of the factors Jon Erik covered like the China situation. So we can imagine transport costs will continue to be affected. We can imagine that with high energy costs, products like carbon fiber will continue to be affected. But again, we're preparing for that. And so of course, increasing and passing through those prices to our customers is crucial. And we've done most of those steps. We just need to see run through the financials, as I said, mainly in the back end of the year. But of course, we've got to be on our toes. And I think we prepare for the worst and hope for the best.

[Karen Romer, executive]

Excellent. Back to the LNG, will additional -- Jon Erik, will additional imported LNG lead to higher growth in LNG trucks?

[Jon Engeset, executive]

That is our view, yes, that shift from pipeline LNG to imported seaway, primarily probably from the U.S. will additionally stimulate the transition to LNG in the European truck markets.

[Karen Romer, executive]

And as a follow-up, will LNG technology cannibalize CNG solutions over time?

[Jon Engeset, executive]

I think I already answered that question. So the short answer is no.

[Karen Romer, executive]

Yes. Great. Do we have any questions here? No. And David, what needs to happen for Hexagon to achieve the top end of the EBITDA guidance, NOK 450 million?

[David Bandele, executive]

Same answer really that our sales prices are affected, which they are, and they will run through the financials. And then what we don't know is the cost prices. So if the input cost prices continue to rise, you can imagine going lower on that scale. And if they stabilize, I can imagine going further up on that scale.

[Karen Romer, executive]

Okay. Yes, we have a question here.

[Unknown Analyst]

And with regard to that, can you discuss your contracts with respect to cost compensation or cost escalation? Do you have inflation-adjusted contracts? Or is it -- are you bidding fixed price mostly?

[David Bandele, executive]

I'll to take that? Obviously, we can't go into the details of our contracts with our customers. There are contracts. So we have a lot of long-term agreements. There are certain clauses for escalations within a range, of course. But of course, we trade off typically recurring demand and orders for flexibility in changing those contract prices. There are surcharges that we can -- that we have pushed through immediately, but it's hard negotiation. The good thing is that today's environment, everybody can see what's happening. So yes, there could be more flexibility. But of course, we think having high demand, high backlog is more than a compensation in this environment.

[Karen Romer, executive]

We have no further questions from the web audience. Anything else from this room? No. And I think we've covered it today. Thank you very much for joining us, and we hope you have a good rest of the day.

[Jon Engeset, executive]

Thank you.

[David Bandele, executive]

Thank you.