Hexagon Composites ASA

OSE:HEX

Earnings Call Transcript 2020-Q2

[Karen Romer, Senior Vice President of Communications]

Welcome to Hexagon Composites Second Quarter and Half Year Results for 2020. My name is Karen Romer, and I'll be moderating the session. And today, I will be introducing our CEO, Jon Erik Engeset; as well as our CFO, David Bandele; and also our President of Purus, Morten Holum. They will be holding the presentation, and we'll take you through the -- let me just get the agenda up here, the company update and market review and then the summary and group highlights and financials, the outlook, and then this will be followed by Q&A. [Operator Instructions] Otherwise, you can just submit your question by sending it to [e-mail]. So -- and these questions, I'll moderate at the end of the session.Before I turn this over to Jon Erik Engeset, I would like to share with you a film which we've made to mark a very important milestone in our history, the 20th anniversary of our listing on the Oslo Stock Exchange. So please roll the film.[Presentation]

[Jon Erik Engeset, President & CEO]

Good morning, everyone. Thank you for joining us this morning. So as you've seen from the film, we are very proud of our 20 years history on the Oslo Stock Exchange. We are no less excited about the next 20 years and beyond and, not least, very proud to represent the driving energy transformation vision that we are running Hexagon on. So even the COVID-19 situation, we think will actually stimulate our business, and I will revert to that. But before that, we have had 14 cases of infections within our sites. Fortunately, 11 have recovered, and the remaining 3 are currently recovering [ now ] with serious symptoms. But we have a firsthand experience with this disease.Currently, we have no major supplier disruptions. Our customers have come back in production. So as you will hear from David, we have had some delays in orders in Q2. We should expect to also experience some disturbance in the Q -- in the third quarter. But altogether, we feel that the markets are coming back to normal, and we are looking forward to a stronger second half.And as I touched on, there are many voices out there suggesting we should take this opportunity to drive energy transformation as a measure of recovering from the pandemic. So the Director of the International Energy Association has proposed a very considerable program. So he is suggesting to invest more than USD 1 trillion annually to create more than 9 million jobs each year and, last but not least, save 4.5 billion tons of carbon emissions.And there is almost a competition now between regions and countries about who will launch the most ambitious green energy plants and hydrogen societies. So there is a long list. I would like to talk about each one of these, but I will highlight maybe the European Union who, on the 8th of July, launched their hydrogen strategy, a very ambitious program, pledging to spend EUR 450 billion by 2030. And in the first few years, it will concentrate on the infrastructure build-out, which is directly relevant for Hexagon businesses, so refueling stations, transportation solutions, et cetera. And that will have to start immediately in order to reach those targets.Also, in California, the Californian Air Resources Board (sic) [ California Air Resources Board ] announced new ambitions back in June. And they have stated an ambition to phase out carbon heavy-duty vehicles by 2050. And starting already from 2024, there will be imposed regulations that will require operators to have a certain portion of the fleets as zero-emission vehicles, especially concentrated around large course and other heavily dense areas.We are addressing these opportunities, and now through our 2 strategic focus areas: g-mobility and e-mobility. So we have solutions across this spectrum. So far, Hexagon's business is mainly in the g-mobility space. That is, we say, in the early maturity phase, with emphasis on early because there is a lot of growth opportunities for us in the near years but also long term. So if anyone thinks that this is just a transition technology, they are wrong because, especially the blending of renewable natural gas, biogas, is maybe the cleanest alternative of all, and that is going to be part of also the long-term solution. And we see that the number of customers are focusing on this solution at this stage. So in the refuse industry, there is substantial investment in CNG, compressed natural gas, technologies. And recently, we've seen a number of the distribution transport companies that have focused on this, so UPS, of course, being a leader. They are stating that by next year, 50% of their fleet of CNG vehicles should have renewable natural gas. And also more recently, Amazon has announced their very ambitious plan to go zero emission by 2040.That said, for us, there is also a very exciting opportunity for e-mobility. We are addressing that opportunity through Hexagon Purus. Hexagon Purus was established as a separate business area last year. It is managed by Morten Holum. He joined us a couple of years ago, has been instrumental in developing the Hexagon Purus strategy and assumed the role as President of that business area from March of this year. So Morten, please, the stage is yours.

[Morten Holum, President of Hexagon Purus]

Thank you very much, and good morning, everybody. So I want to talk to you about some of the exciting things that we have ongoing in Hexagon Purus. Hexagon is, as you know, a world leader in Type 4 cylinder technology. These cylinders are lightweight and extremely robust so they can contain high pressure. This is important to -- for the storage, the amount of storage you can have on the vehicle and thus, the vehicle range. They're also very durable, made from high-strength carbon fiber and they're noncorrosive, using a polymer liner instead of metal.But our technological capabilities goes far beyond the cylinder. We make hydrogen systems, which you see on the upper left part of this picture, and also battery packs. And then we also make and design other vehicle subsystems and software and combine that with third-party components and do a complete vehicle integration. So in North America, we are a Tier 1 supplier in heavy duty trucking. We also do then complete vehicle integration. We know how to combine all of these systems onto a truck and packaging all of that heavy equipment on in a weight-optimal way.So hydrogen is still in the early technology development phase, but it's more than just theory. We have solutions on the road, and they actually work. So now I thought I would take you on a short tour of some of the solutions that we deliver.First, what you see on this picture is a Toyota fuel cell electric truck. We have worked with Toyota for a number of years on different systems. In the Transit segment, this is a picture of a Solaris bus. We also work with Caetano in Europe and companies like New Flyer in North America.On the passenger vehicle side, we work and have worked with several OEMs on their development programs. This particular one is a Mercedes GLC F-CELL, which is a plug-in hybrid, fuel cell electric SUV.Distribution modules will be a very important business as the hydrogen economy grows, transporting hydrogen from the source to where it's being used. This particular module is our X-STORE. It stores energy at 500 -- or stores hydrogen at 500 bar and can store more than a ton of hydrogen. So it's the most -- the largest and the most efficient hydrogen distribution module worldwide.In the Marine segment, here, you see a picture of the Golden Gate fast ferry. It's a combination of fuel cell and batteries, and it's the first commercial hydrogen vessel in the U.S. This will be launched in the San Francisco Bay later this year.We also work with rail applications. This is a commuter train, hydrogen powered. We delivered the tanks for this. It's running in Northern Germany, storing hydrogen at 950-bar pressure.And then we delivered the ground storage tanks to the first hydrogen refueling station in Western Canada. Our Type 4 tanks are actually ideal for ground storage applications since their cycling fatigue properties, they are made of -- with a plastic liner instead of metal.The world needs to solve the global climate crisis, and the hydrogen is gaining popularity in this sector. We need, by 2050 -- every sector of society needs to contribute to reducing global greenhouse gas emissions. And the transportation sector accounts for about 70% of these greenhouse gas emissions and -- or 20%, sorry, and it needs to come down by around 70% by 2050. This is really a massive task, but the good thing is that the solutions to be able to achieve this are actually available, and the hydrogen economy can scale up and can solve this problem.We announced some time ago that we are ready to enter Asia. And China is the largest automotive market in the world and is set become the largest market for hydrogen mobility in the world. The Chinese authorities are committed to hydrogen because they want to reduce the harmful global greenhouse gas emissions and also to clean up local air pollution. So we have partnered with CIMC ENRIC, which is a Chinese major clean energy supplier. And we are aiming to form the joint venture agreement or to finalize the joint venture agreement with CIMC ENRIC by the end of Q3 this year.Jon Erik mentioned the competition on these type of measures that governments put together. And the EU also aims to be a global leader in hydrogen. Hydrogen is gaining popularity among governments all over the world because of its potential to work across the energy system and to decarbonize some of these areas, which are very difficult to achieve using batteries. So the EU has put an ambitious plan in place. They are focusing on green hydrogen production and want to scale up by 2030 to make hydrogen available in Europe at scale.Then finally, I want to take you on a -- just a short reminder of some of the contracts that we have announced lately. This is a picture of the Toyota truck. It's actually the fourth version of this truck that we are working with Toyota on. It's the advanced stage version, which we are delivering the hydrogen fuel system for.Then we announced a sale of hydrogen transport modules in the U.S., which is the first hydrogen modules we sell there. Our customer is a hydrogen fuel provider and a refueling station operator, which will use these transport modules to transport hydrogen from the source to the stations. So this will be our launch customer in the North American market. Very excited about that.We also received in July a grant from the U.S. Department of Energy, where we will study more how to get the cost down of the carbon fiber cylinders without compromising on the safety. This is an initiative, the hydrogen at scale in the U.S., which explores ways in which hydrogen could be utilized also in the U.S. at a grand scale. Then last but not least, we are going into space for the second time. So in July, we got a contract with a major commercial aerospace company to deliver cylinders to a new spacecraft. This is -- we're very excited, of course, about this. I think this is the most demanding operating environment that you can imagine for these cylinders. And it's a testament to our capabilities that we are able to get these contracts.Finally, Hexagon Purus, I think, is well positioned to capture the opportunity of the growing hydrogen economy. It's a massive market opportunity that we are well positioned. We have leading product competence, both in the carbon fiber cylinders but also in fuel systems. We have trusted customer relationships. We have an established operational footprint with serial production facilities in Europe and in North America and soon in Asia. And we have an extensive track record with decades of experience in this business. We are mobilizing to capture the benefits of the scaling hydrogen economy.Thank you very much. Then, David, for the numbers?

[David Bandele, Chief Financial Officer]

Thanks a lot, Morten. Okay. So exciting stuff there that's happening or to happen. Let's just take a quick financial update on the impacts of COVID-19. You heard from Jon Erik some of the operational impacts.Last quarter, we used 3 slides. So we're able to compress this into 1 slide this quarter. Certainly, in the second quarter, we felt the financial impacts more deeply than the first quarter, particularly in agility, where transit bus volumes are down in North America especially, but also in Europe due to a lot of the shutdowns of the OEMs at the time. I will say, though, that in Europe, the momentum is still stronger year-over-year. So great stuff going in transit in Europe.Our mobile pipeline, also quite impacted by the macro factors related to COVID-19, whereas in LPG Hexagon Ragasco, so far, these have been robust. Ragasco has been robust in its activities, although we will say a large market, Bangladesh has been particularly impacted by COVID-19. And so to date, we haven't had any orders to Bangladesh, but we expect some by second half of the year.So it's always difficult to assess or predict, reposition the future broad effects of COVID-19. And the actual ongoing impact will depend on many factors beyond the company's control and knowledge. What we can say is that we expect a negative full year impact to 2020, mainly contained to quarter 2.With that, we do not expect -- or we definitely haven't implemented any material impairments within the balance sheet. I will stress that liquidity is good. Hexagon remains financially robust at the end of quarter 2. We had undrawn committed facilities of NOK 655 million. And in addition, we had NOK 128 million in cash. Our net interest-bearing debt is at NOK 1.3 billion, and that remains only 16% of market cap. So a very good cushion there.We also have very flexible arrangements with our principal financier. That's very important. So it allows us a headroom, allows us to operate at underlying higher leverage and provides plenty of headroom for us to continually invest in e-mobility, especially through the challenging 2020 times. We also have access to relevant government programs where required.So highlights for quarter 2 '19 (sic) [ '20 ]. Again, as I mentioned, Agility was quite impacted, much lower revenues and EBITDA. However, good to stress that there was very good cost control. So those impacts were somewhat dampened. And it was really good news that we -- Agility secured a new major customer in the logistics sector. And of course, the logistics sector has been one of the winners, particularly in North America.In terms of mobile pipeline, a very weak quarter, but again, buoyed by securing a $7 million contract in the quarter for deliveries later in the year. Purus, light -- CNG light-duty volumes remain low, and that's due to the ongoing planned relocation of Volkswagen, which was due to ramp up and start again in the third quarter.Quite the opposite has been Purus e-mobility market. You saw some of that with Morten. So we're very, very pleased to win the contract with the third-generation Toyota fuel cell electric truck. The term sheet with CIMC ENRIC will certainly boost us in the future as we look to enter the Chinese market, largest fuel cell market in the world. And of course, as Jon Erik covered very well, there's a very strong international focus on the hydrogen green tech space.For LPG Ragasco, very strong sales volumes, about 75% of sales to Europe, but we also saw sales -- additional sales to Middle East, Africa and customers in South America.In terms of the numbers, I start from the left-hand side. For revenue, we did NOK 683 million this year versus NOK 882 million the year before. So you can see that for the quarter, being quite a significant top line impact, again, mainly due to COVID-19. Within that, as I said, LPG remains strong.When we come to EBITDA in the center, we did NOK 19 million in EBITDA versus NOK 62 million the previous year's quarter. And of course, the effect of such a large top line effect, you would expect a much larger impact to profitability. That was considerably dampened due to good cost control as the business areas implemented programs to counter the impacts of COVID-19.On e-mobility, I'm pleased to say the ramp-up effect has been lower than last year. Last year was minus NOK 30 million. This quarter, we had minus NOK 17 million. And that's mainly to do -- we had good commercial contracts and income at commercial margins through distribution, for one.As we go over to profit after tax, we recorded a minus NOK 77 million loss versus the minus NOK 27 million same quarter last year. The additional year-over-year impacts are quite small and net small impact by depreciation, increasing by NOK 6 million year-over-year. A positive charge, mark-to-market charge on the swap was a credit in the quarter of plus NOK 19 million. Interest costs year-over-year, plus NOK 1 million FX. So currency movements, noncash, negative NOK 25 million and tax charges plus NOK 4 million year-over-year.Of course, we look at our business within these brackets of g-mobility, you can see in the base; and e-mobility, more for future growth. On the g-mobility business, these numbers provided are the first half year. So for Q1 and Q2 together, just short of NOK 1.4 billion in revenue and NOK 126 million in EBITDA for a 9% EBITDA margin. So those margins again, dampened by the impacts of COVID-19, normally trading at double-digit margins.And up top on e-mobility, the Purus business did NOK 174 million in revenue and minus NOK 68 million in EBITDA. So you can see quite a different margin there. And when you combine the 2, this does dampen the Hexagon Group level margin to 4%, as you see on the right.On the balance sheet, strong balance sheet. What we -- most of the movements have just been currency movements. So in Q1, we had quite unprecedented rates on the dollars and euro when you translate to NOK, and that really increased the value of the balance sheet. And that has unwound a little bit, so some of those rates coming down, and you see consequently a reduction in the balance sheet.But let's switch gears to outlook. So starting with Agility Fuel Solutions. The heavy-duty truck business is expected to pick up in the second half of 2020. Actually, just -- the ink isn't dry, but we've just been able to announce a very large order from Anheuser-Busch for $8 million. And again, testament to how g-mobility is really driving, particularly in the heavy-duty truck side in America. Large number of deliveries to the new major logistics supply I referred to. We've got orders in Q2. We expect additional orders in Q3, which will support then the uptick in the heavy duty truck.On the European bus business, after the COVID-19 disruption, we will see a pickup, and we are expecting a record year there. However, for transit bus in North America, we expect that to be relatively slow year-over-year going into Q3.On Purus e-mobility, we signed our first contract for hydrogen transport modules in the U.S., as Morten went through. This contract does include additional purchase options, if exercised, and that will bring the total to $7 million. And the picture on the right is an example of one of those modules that can go on a vehicle and be transported to wherever it needs to be.In terms of battery electric vehicle and the hydrogen heavy-duty trucks, we talked about Toyota, actually doubled the order size now to $2 million. That's great. On the pure battery electric, the Daimler anchor customer that we have, have now logged successfully 300,000 miles. And that is a well-liked product by all those who are driving them. So the fleets have had very good feedback -- or given very good feedback to those products.We also include then a prototype that we have there on the road now, an electric Hino XL7. So a lot of momentum there on heavy-duty battery electric as well as the fuel cell electric.CNG light-duty vehicles. We do see the ramp-up starting in Q3. We've already had some call-offs in July, and we expect some more by the end of Q3. So that's a very good sign to see CNG LDV back in motion.During the shutdown or the planned relocation of Volkswagen, we also were having sales to SEAT in Spain. So that has been able to somewhat retain some volumes even through the first half of the year, but it's much stronger second half of the year expected as they ramp up.On the hydrogen project pipeline, here's where there's a real hotbed of activity. You can see quite a plethora of multitude of projects here. We have very many light-duty vehicle programs, multiple OEMs. We were informed that one OEM on a very small project has discontinued their project at this time, but we'll be available at the point when they want to start that up again. But otherwise, a lot of activity there in light-duty vehicles, as I mentioned. We saw some of the medium- and heavy-duty projects that are ongoing. They are very near term, I would say, and exciting projects to be working on.In terms of distribution, we continue to have a very good project pipeline in order to satisfy the demand and momentum that we see in the distribution of hydrogen gas as the refueling infrastructures increase and certain projects increase. For example, we talked about maritime railway projects. These all do need some sort of refueling or distribution network. And in the other box, I guess we can claim aerospace, very exciting project to come.Mobile pipeline, again, very challenging first half of the year. We expect the impacts of COVID-19 to continue as well as the onshore oil and gas activity to be low. So Q3, we expect to be similarly a weak quarter. Very good new opportunities, though. I mean that's what we are really searching for. We have a great little project in Indonesia or contract for micro CNG. And also similarly, our mobile refueling business, we had our first SMARTSTORE order. New customer and additional orders expected there.The virtual interconnect, so we have a large backlog for quarter 4. We are hoping and expecting actually additional orders or options to that order to have that order intake in Q3 to further boost Q4's deliveries.And finally, in Latin America, you can see we've had that market come back to us -- activity in Q1 and Q2. So we expect this positive trend to continue in Q3.Hexagon Ragasco LPG. Maybe one benefit from the COVID-19, certainly on the leisure side, we have had good demand in Europe. People appear to be barbecuing more. However, as I mentioned, we should expect delays to those countries that are significantly impacted by the pandemic. And for us, the largest country is obviously, in terms of our sales last year and [ 2B ], is Bangladesh. However, we expect to have some orders already in either Q3 or Q4 towards Bangladesh as they come out of the pandemic.Also, always celebrate new markets. We have a new country in the Caribbean. Orders are received for those, and that's always exciting to add yet another country to Ragasco's roster.So in summary, we have to say that COVID-19 probably will have some disruption and therefore, impact earnings in Q3 2020. Barring any further unforeseen COVID-19 developments, though, we expect a stronger market outlook in the second half of the year. Strong liquidity and business resilience remains. And as we saw earlier, we are moving from containment to recovery, and we can visibly see that the g-mobility and e-mobility drivers have been strengthened. And Hexagon does remain well positioned to capture these opportunities.And with that, thank you, and we'll go to Q&A.

[Karen Romer, Senior Vice President of Communications]

Okay. So those of you that would like to ask questions, I've gotten a few in. [Operator Instructions] You can go to the link on our front page of the website and/or send to [e-mail] have received a few questions. The first, we'll start -- it's regarding Ragasco. And you just addressed it, but the question is coming from [ Tucca Rantula ]. In the report, you said that Hexagon Ragasco had problems with Bangladesh because of the pandemic. However, they now have taken bottles from Aburi Composites and started marketing their bottles. Are you losing this customer? And then she follows up with the question, will the Bangladesh composite cylinders deal continue with [ fixed income ]?

[David Bandele, Chief Financial Officer]

No, we're not losing the customer. And in fact, we have begun with orders for the second half of the year, so it should be business as usual. But main thing is we're very pleased that Bangladesh has been able to come over the worst and get back into the ordering business.

[Karen Romer, Senior Vice President of Communications]

Great. Another question from [ Brühl Alwin Edwardson Substun ]. Does Hexagon have any plans to look into reverse osmosis water filtration systems in the future? They require large composite tanks and therefore should be a huge growth opportunity. Erik?

[Jon Erik Engeset, President & CEO]

So we are aware of that opportunity. We don't have any concrete plans to address it, but it's one of those opportunities that we have on our monitoring list. So we -- wherever there is an opportunity to produce composite products at scale, that's where we would take an interest.

[Karen Romer, Senior Vice President of Communications]

Excellent. We have received just those 3 questions. I'm just checking to see if we have any on our -- no questions on our e-mail. So I guess we addressed most of the questions in the presentation, but feel free to reach out to us after that, if you wish.So with that, I think we can thank our audience and wish them a safe and good rest of the week.

[Jon Erik Engeset, President & CEO]

Thank you.

[David Bandele, Chief Financial Officer]

Thank you very much.