Hexagon Composites ASA

OSE:HEX

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Karen Romer, executive]

Good morning, and welcome to Hexagon Composites Q2 2024 Financial Presentation -- Financial results. My name is Karen Romer, I'm the SVP Communications for Hexagon Composites. And joining me here in the auditorium in Oslo is Knut Flakk, our Chair of the Board; and David Bandele, our CFO, who will be covering this morning the Q2 highlights and market outlook, financials and then outlook again with Knut at the end.

For those of you that are online audience, there is a question field in your screen. So during the presentation, feel free to input your questions and in the room here at the end of the presentation, we will have a Q&A. And I'll ask you to wait for the mic to be delivered to you before asking your questions, so that we can include our webcast audience in hearing that.

So without further ado, I'd like to invite Knut Flakk to the stage.

[Knut Flakk, executive]

Thank you, Karen, and good morning, everyone, and welcome to our presentation. I'm very happy that you are here and also for the online audience, a heartfelt welcome.

As you all know or most of you know, at least, we are in the business of driving the energy transformation. We have a vision that we should create clean air everywhere. That goes for both local pollution, and it goes for CO2 reductions. And in the -- or in the first half of 2024, our solutions have enabled the reduction of CO2 in the range of 540,000 tonnes, which would equal to about 120,000 petrol cars removed from the road for 1 year.

In the quarter, we've also been approved by the science-based targets. They have approved our near term and net 0 greenhouse gas emission reduction targets. And we're quite proud of that because it's a limited number of companies worldwide that has so far been approved.

So Q1 was a solid quarter with significant margin growth, and we are definitely on track for our 2024 targets. That's with the adjustment of Hexagon Ragasco, which was sold during the quarter. We came in at NOK 1.15 billion in sales and had an EBITDA margin of NOK 137 million, which turns into a margin of 12%, which is quite an improvement compared to the previous quarters.

We had several highlights during the quarter. The commercial activity was very high, and we have noted substantial orders both for our fuel systems and for our mobile pipeline business. We saw the launch of the Hexagon Purus truck in the U.S., and we had the successful sale of Hexagon Ragasco in the quarter. So let's take a quick look at each of them.

On the commercial side, the most notable one was the order from UPS of close to USD 60 million. This is the front runner on the X15 natural gas engine. So it includes quite a number of the natural gas engines for the large X15 engines, and it is in a fairly soft U.S. freight market. So to see UPS place an order of that magnitude at this point in time is quite encouraging. And it shows that they put a lot of focus on renewable natural gas and have a clear aim to turn their fleet into a more green or greener solutions. In addition to the specific order, we also extended the framework agreement with UPS. So that's now extended for 3 years, well into 2027.

On the Mobile Pipeline side, we received an order of close to USD 13 million from a global gas company, and this is not for natural gas, renewable natural gas. It's a different gas. And it shows that there is a need for mobile pipeline solutions also in other segments, not just in the natural gas, renewable natural gas segment, which I will revert to later on. And they have continued their strong growth with the first half of the year being well above the first half of 2023.

The other major event during the quarter was in Hexagon Purus, which we are owner of in -- or 38.5% -- sorry, 38.4% owner of. So it means a lot to us as well. They launched the TERN truck in the U.S., and it created quite a lot of attention from the audience during the ACT Expo. This is a truck that is targeting regional and city use because that's where battery electric solutions have a clear advantage.

If you talk long haul trucking, if you talk very heavy loads, it's probably different solutions that will take the main part of the market. It's a groundbreaking, heavy-duty battery electric truck, and it will be quite exciting to see how that rolls out. They have had a very good response on the truck, and I think they also have received their first order, and they are starting now to deliver in Q3 2024.

What's also important here is the cooperation with the Hino trucks because these trucks will be sold exclusively through the Hino truck network. Hino is a Toyota Group company, as you might know. And to have this distribution arm and this after sales and service arm is quite important for us to be successful in this new segment.

Then last but not least, we sold Hexagon Ragasco in the quarter. We sold it to Worthington Industries, and we think that will be a good new owner for Ragasco, who can take the company further because of their strong position in the LPG market. So that was important to us. But even more important was the fact that we received a price that we were satisfied with and also that we can now focus even more on the fuel systems for buses and trucks and for mobile pipeline solutions because there is a lot of growth potential in those areas, and we want to ensure that we can really take the lion's share of the market going forward.

We're also proud that we have been able to develop Ragasco from being a fairly small company when we acquired it back in 2001 to become the leading -- globally leading composite LPG cylinder manufacturer with more than 22 million cylinders sold worldwide to over 100 countries. So it's been a journey, and it wasn't with easy heart that I decided, or we decided to sell because I've been following the company for 24 years, almost, but it was the right thing to do. And I certainly believe that Worthington will be a good owner for the company, and I also believe that this will be good for Hexagon with a strengthened balance sheet and with a more focused approach going forward.

So with that, I'll leave it to David to talk about the financials.

[David Bandele, executive]

Thank you very much, Knut. Yes, indeed, that was a successful quarter and also evidenced in the financials. So we had higher heavy-duty truck volume, something we've been waiting for. They came a little bit even further than our expectations in the quarter. That led to accelerated margin increase. And as Knut mentioned, a significantly strengthened balance sheet then, as we exited Q2.

But first, it's important to see how these transactions affect the financial statements from Q2 onwards. And first of all, the sale of Ragasco to Worthington. As Knut mentioned, it resulted in enterprise value of significantly NOK 1,050 million. It also included an earnout component with a sliding scale from minus NOK 50 million to NOK plus 100 million. And to put a data point in there. It's based on EBITDA. So if Ragasco could do the EBITDA performance they do in 2023, that would result in a plus NOK 50 million result.

No surprise that there was a gain on the transaction. We recorded that at NOK 677 million, and that is net of transaction costs. But perhaps the most important thing going forward is that Ragasco has been reclassified and presented as discontinued operations under IFRS. So that means that everything from revenue down to profit after tax has been stripped out of the continuing operations and presented below profit after tax in discontinued operations in one line. So that means that what's left is completely free of Ragasco numbers in the P&L from revenue down to profit after tax and that is both for 2023 represented and 2024 and going forward. So that's very important.

For the acquisition of 49% of Worthington Enterprises' Sustainable Energy Solutions business, SES, that we did for NOK 114 million. It's a 49% a non-controlling interest. So it's presented as investment in associates and will be accounted for using the equity method. So going forward, we will take the -- our share, 49% of the either profit or loss in that investment going forward.

Okay. So for the group, we did NOK 1.15 billion in revenues, but more importantly, of that revenue base, we generated NOK 137 million in EBITDA, up NOK 27 million from last year. And that 12% EBITDA margin then represents 3 percentage points increase year-over-year, so substantial. And really, this kind of accelerated margin recovery already in Q2 does set up a stronger second half of the year. We closed Q2 with net debt at NOK 753 million and leverage reduced to 1.6x then primarily as a result of the sale of Ragasco.

So where is this margin appreciation coming from? So first of all, we've had a very strong base of mobile pipeline volumes, particularly in the first half of this year and profit performance. So that's the base. What has been low and has been recovering for some time now, our truck volumes. And in the quarter, we were able -- or Hexagon Agility were able to deliver NOK 140 million EBITDA of their NOK 1.1 billion of revenue for EBITDA margin of 13% and that is the highest margin since Q3 2021.

So truly all the issues that followed the pandemic, the war in Ukraine, the cost inflation, the disruptions that all impacted our margins and the subsequent price revisions, all that is now firmly under control, and we look forward to hitting our longer-term EBITDA margins. So quarter-over-quarter, you see the real difference. There were 6 percentage points of EBITDA margin improvement. And that's really from a 2.6x pickup in heavy-duty truck sales versus the low Q1.

When we look at the shares on the left, although we see 28% in Q2 '23, 5 percentage points, so that was medium duty, where we have much lower content. So you can see there was even a year-over-year increase in heavy-duty truck sales for that period. So recovering truck volumes drive further EBITDA margins.

And what continues to drive Hexagon Agility going forward. Remember, we do transit buses. We do refuse trucks. We just got an order for almost $19 million [ published ]. But we also do trucks. And in the trucking business, we have 9-liter engines. We have predominantly 12-liter engines, doing a lot of business there. And what's new is this game-changing 15-liter engine. And what that does, and Knut will follow that up, but it does triple our market, and it opens the market up basically for high-power, high torque operations and particularly high payload, long range. So that's the difference.

UPS, as you heard, is a big customer, $58 million order from them that combines both the 12-liter and the 15-liter engine. So that is actually the largest commercial order for 15-liter to date. And of course, we've had some further orders as well.

So Kenworth and Peterbilt, they are the forerunners, who have adopted the 15-liter engine, and we had serial -- started serial production in Q3, and that's where the first orders are being generated through. And in time then in 2025, sometime from the mid-2025 onwards, then Daimler or DTNA will also have homologated or approved the 15-liter engine for use in their trucks. Altogether, that would be 2/3 of the North American OEM markets and a very good future base then for future sales going forward. At the moment, we see a lot of quoting activity being a market leader. We're heavily involved in that. And we will see that quoting activity then turn to orders and sales in due course. So that was Agility.

Let's turn our attention to Digital Wave, that's our cylinder inspection and testing arm. This is an arm that is fully complementary to both Hexagon Agility and Hexagon Purus businesses. Digital Wave increased their revenues 13% to NOK 45 million in the quarter, with a modest profit of about NOK 1 million each period stable. There was a pickup in the UE machine volumes from a low Q1, but that stable profit is really more due to continued growth OpEx year-over-year for Digital Wave.

So where are we on the guidance? We reconfirm our guidance, really no changes. We just adjust for the sale of Hexagon Ragasco, so 100% of the results of Ragasco are out. And that leaves us with a 2024 expectation of around about NOK 4.8 billion in top line. That would be against the comparative NOK 4.5 billion for 2023. And EBITDA of greater than NOK 500 million, and that's at least then a 37% increase from the comparative 2023, which is NOK 366 million. So impressive EBITDA expansion already in 2024, and we expect that to continue in 2025. So on track for our targets.

So as we close Q2, we see the uptick in truck volumes. We see the accelerated margin and margins coming back in. And of course, with the UPS order and the order for the refuse trucks for $19 million, really sets us up for a stronger second half of the year. And of course, all this within a much strengthened balance sheet going forward.

On that note, I will ask Knut to come back for the outlook.

[Knut Flakk, executive]

Thank you, David. So what's really been at the core of Hexagon's success. We've had since our -- since we founded the company back in 2000, we've had an annual -- cumulative annual growth rate of 18%. The majority of it being organic growth, some acquisitions, but there has also been some divestments. When I founded the company in 2000, the idea was to make composites more competitive -- cost competitive because everyone talked about the product advantages, the lightweight, the high strength, the corrosion resistance and so forth, they were preoccupied with that. Very few people talked about the cost of it. And in most cases, the cost was substantially more than the existing alternatives like steel and aluminum and so forth.

So to us, it was a question about focusing on cost competitiveness and make these products able to take market share from the established solutions. The same thing goes for it today. And this is what's going to drive the growth going forward in a market that is demanding our products. We have to stay cost competitive. We have to ensure that the product is able to compete with the existing solutions, as well as with our competitors. So it's for 2 reasons. One is to enable the green shift to actually happen. The world needs to go that way, but then they also need cost competitive solutions competing with the established solutions, and we do it because we want to stay ahead of the competition.

So this is what Hexagon looks like today after the sale of Ragasco. Obviously, Hexagon Agility is the largest part of it, 100% owned. Digital Wave is a smaller company, but important in terms of quality and ensuring that our products deliver and that they stay safe. Then we have the substantial ownership in Hexagon Purus of 38%. And we also have 2 other units, Cryoshelter, which is a development company at the moment, developing LNG solutions for the trucking business. And we also, after the sale of Ragasco, we have received a 49% ownership, as David mentioned, in SES.

And we see very interesting opportunities in SES, but those will be explored, as we go forward over the coming quarters. So we will then decide what to do, and we'll discuss it with Worthington, and I think we can find very exciting solutions in that business because there is a lot of overlap with the business that we have in Hexagon Agility and also in Hexagon Purus.

This has been mentioned already, so I'm not going to spend a lot of time on it, but it's quite important to understand that the market is opening up completely. In the past, it was only 1/3 of the market that was addressable to us. Now it's the entire market. And we see a lot of activity in this heavy-duty end of the market. We see a number of fleets now testing the new engine. We see Walmart. We see smaller fleet owners. So there is a lot of variety. It's not just 1 or 2 companies and not just UPS, for instance, which has already ordered the engine. We will see -- we see a lot of quoting activity. We will see a lot of orders coming on, as we move forward.

And the reason for this is that the large fleet owners and the medium and the smaller ones, they have ambitions to go green. So Waste Management, for instance, they already have 11,300 alternative fuel trucks in their fleet. Amazon has got 4,400 natural gas trucks at this point in time. And UPS, even more 6,500, and they have clear targets to go net 0 in the long term and to -- and that's going to have to be a gradual journey. You can't do it overnight. You have to do it gradually. And we're quite happy about that because we wouldn't be able to supply all demanded solutions right away.

This one is also important. It's to understand that renewable natural gas is a carbon negative solution in most cases. And especially when you go for agriculture as source, manure and other residuals from agriculture, that's actually contributing by reducing emissions, not just going 0 emission, but reducing them. And last year, 79% of the fuel used in these trucks were renewable natural gas.

And what about the availability of renewable natural gas. At this point in time, about 5% only of the possible supply is being utilized. So there is a lot of growth potential in renewable natural gas going forward. Yes. I mentioned this. But what's also important to notice is that most farms are located in rural areas. They are off grid, if you want. There is no pipeline next to the farm. So that creates a market for our mobile pipeline solutions. And this will be one of the main segments for mobile pipeline going forward because of the increased use of renewable natural gas, taking it from the farm and bringing it to the pipeline or to the end user directly.

There are other segments, of course, as well. We have the transportation of the gas from the pipeline to stranded users can be industrial companies. It can be oil and gas, exploration and so forth. And then you have the bottlenecks in the pipeline network. Because in the peak summer months and the peak winter months, you have a higher need for natural gas.

And then the pipeline network isn't necessarily -- it doesn't have the same capacity or sufficient capacity, I should say, in all parts of the country. So you get arbitrage possibilities to bring natural gas from one point to another one beyond the bottleneck in the system. And then we see an increasing activity in mobile refueling again, tied into our heavy-duty trucking and so forth because there is an increasing need for refueling around the country and in rural areas.

So when we introduced the mobile pipeline solution back in 2012, it was really a game changer. And why? Well, because compared to the existing solutions at the time, which was steel tube trailers, [ we ] increased the capacity more than 2.5x, and we provided a solution, which is 75% lower weight compared to steel tube trailers. So we've taken a lot of market share from that, and we've also created a product that can expand the market in its own right.

And this has been the journey over the last few years. 2020, we had NOK 296 million in sales, last year NOK 1.3 billion. And as you saw from the previous slides, we're also continuing to grow into 2024, and we expect that to go on as well in '25 and onwards. So to date, we have delivered more than 2,000 mobile pipeline modules, and we have a market share of roughly 60% in North America, but it's not just about North America. There is a market potential outside also.

And you have seen orders coming in from South America, you have seen from the Middle East, we're seeing it in Europe, but there is clearly a lot more potential in other regions of the world. You have Asia, you have increased penetration in Latin America and so forth and it's for different reasons. They have the regulatory -- the regulatory say, regulations in Europe, for instance, are different from the U.S. and so forth. So there will be different drivers of this in different parts of the world, but there is, for sure, potential in penetrating those markets in addition to the strong foothold that we have in North America.

And to meet this, we have increased our capacity. It's coming on stream, as we speak. We have upgraded the facility in Lincoln, Nebraska, and we've also established more assembly capacity in Kassel in Germany. So altogether, we are talking roughly about 40% increase in our capacity for mobile pipeline units.

So the key takeaways. We have established a market leader, which is serving large and demanding blue chip customers globally. We are in, I'd say, pole position to take advantage of the expected growth in these markets. And we're on track on our targets, and then adjusted for the sale of Ragasco, as we mentioned earlier.

So with that, I think I'll move on to Q&A.

[Karen Romer, executive]

Thank you, Knut and David. I'll remind the viewers on webcast. You can submit your questions via the question field in the screen that you have. And also, if there's any questions here in the audience, please raise your hand, and Emily will bring you a microphone. We have a question in the back, Emily, if you could. Fabian Jorgensen from Carnegie. You talked about high tender activity on the HDV side and for the 15-liter with the short lead times you have. Could we expect to see orders in the second half of the year? And could those be executed also in the second half of this year?

[David Bandele, executive]

Yes, and yes.

[Fabian Jorgensen, analyst]

Very good. And with the -- [ with seeing ] the volumes effect having a great effect on margins, do you see the scope for reaching 15% EBITDA margins for Agility in the second half of this year?

[David Bandele, executive]

I think if you look at history, Agility has had quarters with 19% EBITDA margin. So it all depends on volumes and how they're spread. We tend to look at it in years, obviously, because it is a pattern there. But to answer your question, yes, technically, that can happen. I think what we've tried to look at is say, second half of the year will be a higher margin than the first half of the year, clearly. And as the trend continues, the growth continues, then '25, '26, we'll see even higher margins.

[Fabian Jorgensen, analyst]

And finally, have a strong cash balance now. Can you talk about the alternatives for the use of those proceeds?

[David Bandele, executive]

Do you want to...

[Knut Flakk, executive]

We are quite happy that we have a strong balance sheet now because we see a lot of opportunities going forward. So we are prepared, and we want to be in a position, where we can take advantage of those opportunities, both in terms of increasing our capacity when it's needed because right now, we have already invested a lot and have sufficient capacity for the short, medium term. But we want to be able to also expand further as -- and follow the market as it grows. And there are interesting opportunities for acquisitions as well. So we see every reason to -- or I think we can employ the money in a good way going forward. We do that way.

[Fabian Jorgensen, analyst]

Would that be complementary technologies when you talk about the acquisitions here? Or is it more competition...

[Knut Flakk, executive]

I'm sorry, I didn't hear the question.

[Fabian Jorgensen, analyst]

When we speak about the potential acquisitions, is that complementary technologies? Or is it more competing companies with similar production?

[Knut Flakk, executive]

I think we will stay pretty focused going forward. But as you have seen, we've also, for instance, invested in Cryoshelter, which is a different technology compared to the high-pressure systems. It's a liquefied natural gas in that case. So yes, we will be focused, but we will also look at widening our portfolio so we can cover all parts of the market.

[Karen Romer, executive]

Yes. We have a question here in the front. I'm sorry. Yes.

[Thomas Dowling Naess, analyst]

Yes. Thomas, Sparebank 1 Markets. I'll just follow up on what Fabian asked about the 15-liter orders. You said, yes, yes, David. Have you included many of those in your guidance number? Or would those be [ had ] it on top?

[David Bandele, executive]

Yes.

[Knut Flakk, executive]

You can say so.

[David Bandele, executive]

I'd say we have expected that. We've talked about second half of the year, we expect an uplift, both in the 12-liter and the 15-liter, and I think the UPS order kind of shows what's happening in the market. So both will grow.

[Thomas Dowling Naess, analyst]

And can you say a bit more around the integration of Worthington SES. How is that going? I also think you mentioned something about competition regulations here in Europe because you were taking such a large part of the bus market? Or am I wrong now?

[David Bandele, executive]

First of all, it's a non-controlling interest. So there's no -- just to be clear on that. But maybe you want to talk about the opportunities?

[Knut Flakk, executive]

Yes. SES it's a mix of different products and solutions at this point in time. They have valve business. They have a T4 business, which is pretty much along the same type of product that Purus is working with. They have also an CNG business with the T3 systems. So we will evaluate these different product lines going forward and see what would be a good fit into Hexagon, both Composites and perhaps also Purus. But we see interesting opportunities there, but need a bit more time before we can present the final solution.

[Hans-Erik Jacobsen, analyst]

Hans-Erik Jacobsen, Nordea. Metals are obviously going very well in North America, and you mentioned Europe, as one of the places, where you probably see, business is going to pick up. But it's been rather slow compared to what we had expected a couple of years back. Can you explain a little bit why it is so slow and when do you expect business to pick up in this important geographic area?

[Knut Flakk, executive]

The European market is quite different from the North American at this point in time. And one of the challenges in Europe has been that the authorities or the EU has been focusing on tailpipe emission and not looking at from well to wheel. And in that case, battery electric solutions, for instance, they are 0 emission, but in reality, they're not 0 emission, if you take into account the way the electricity is produced.

For renewable natural gas, it would be a great benefit if we can get the regulators to actually talk about well to wheel. And we are spending a lot of time on that in Brussels and elsewhere to make them understand that renewable natural gas is actually a better solution than, for instance, a battery electric solution simply because it doesn't emit -- it emits much less CO2 or even negative CO2 footprint compared to, for instance, battery electric, which looking at the entire energy chain is certainly having a carbon footprint. So I hope and I think we will be able to get some traction there moving forward. But of course, it depends on that work.

[David Bandele, executive]

Yes. And we're working with a lot of groups to try and get that message across. It started with the [ 35 BCM ] RNG production, the 10x improvement in supply in Europe. But that's -- we understand there are some delays in terms of getting coordination across all the European states. But yes, it's still very much on our agenda.

[Karen Romer, executive]

I have a couple of questions from the webcast audience. We'll take those while we think in the room here. David, perhaps you could confirm, could you please confirm how much CapEx you have left on the CapEx program?

[David Bandele, executive]

So we had -- we talked about [ $9 million ] in the automotive and $3 million in mobile pipeline. So mobile pipeline is more or less all spent. And I would say, we're halfway there on the $9 million.

[Karen Romer, executive]

Excellent. Okay. Another question from the webcast audience. David, there did not seem to be a specific 2025 financial target in this presentation. Are these reiterated adjacent -- adjusting for Ragasco.

[David Bandele, executive]

Yes, we focus on 2024. Ragasco is a segment that's been reported individually. So I think all the analysts have adjusted Ragasco out of their numbers, '24, '25, and we agree with the expectations going into 2025.

[Karen Romer, executive]

Okay. Continuing then with the -- oh, no, we have a question here in the audience.

[Anders Rosenlund, analyst]

Anders, SEB. Can you be a bit more clear on that? Because previously, you said you have an ambition of [ NOK 6 ] billion in revenues in 2025 with the 15% EBITDA margin. What does that translate to now?

[David Bandele, executive]

If you look historically, Ragasco has had anything between 1% and 1.5% EBITDA margin accretion for the group. So obviously, you take out Ragasco, it's a higher-margin business, that will be naturally lower margins. But certainly, we can see we're overperforming on the continuing businesses of Agility. So again, as we see consensus, we feel that's the right position, and we are on track.

[Anders Rosenlund, analyst]

But my question is really what is that 15% target that you've talked about in the past? Is that 15%? Or is it 14%?

[David Bandele, executive]

The target will remain at 15%, and we will achieve that with the scale, volume and agility in due course. Absolutely.

[Anders Rosenlund, analyst]

In 2025, that's the target.

[David Bandele, executive]

In 2025, I think it will be difficult, just mathematically, but of course, not unachievable. But certainly, by '26, it should be very achievable.

[Anders Rosenlund, analyst]

Okay. So we should disregard the 15% target for 2025?

[David Bandele, executive]

No, it's a long -- it remains a long-term financial target. So we won't stop until we're at 15% EBITDA margin, and that will come through with the agility volumes to...

[Knut Flakk, executive]

I don't think you should stop there.

[David Bandele, executive]

Well, we will ensure our product is less pricey and more competitive versus diesel going forward after 15%.

[Anders Rosenlund, analyst]

Okay. I have another question as well, if I may. I think there was a commented behind me [indiscernible] that you were extremely cash rich after the sale, but you've used that cash to pay down debt, don't you?

[David Bandele, executive]

Correct.

[Anders Rosenlund, analyst]

So you have flexibility on your balance sheet, but you've actually paid down debt in order to avoid sitting on a lot of cash on the balance sheet.

[David Bandele, executive]

Correct and revolving debt facilities, yes.

[Anders Rosenlund, analyst]

And that revolving facility, that -- will that change in size given the lower operation or smaller operations?

[David Bandele, executive]

We will have a look at all the opportunities and just keep the flexibility for now.

[Knut Flakk, executive]

But now you have a [ NOK 1.4 billion ].

[David Bandele, executive]

[ NOK 1.4 billion ] in available capacity, yes.

[Anders Rosenlund, analyst]

Does that mean there's no change to the size of the revolving credit facility after the sale?

[David Bandele, executive]

Correct, as we stand.

[Karen Romer, executive]

Great. We have another question in the audience.

[Unknown Analyst]

Maybe just on that note, what do you see as a kind of sensible capital structure for Hexagon moving forward, seeing maybe a bit more depending on the structural growth, of course, for the CNG, RNG adoption rate. I mean, you're a bit more cyclical now than you were with Ragasco kind of delivering quite...

[David Bandele, executive]

Yes. I mean, historically, we've been acquisitive. So take Agility. So obviously, when we bought Agility, we had to lever up to around about 4x or so. So that will be normal in a growing company, a growing company like ours. But we've always had steady state. We do intend to try and keep to IFRS reported 3x leverage, steady state.

[Unknown Analyst]

Is 3x kind of a roof? Or is it a target?

[David Bandele, executive]

It's a target. It's good to keep under that leverage, yes. It can go up and down depending on situations.

[Karen Romer, executive]

So we also have another question from the web audience. Knut, you mentioned the importance of cost competitiveness. Can you shed some light on what you're doing to achieve this?

[Knut Flakk, executive]

Yes, I can do without revealing all of our strategy. But to achieve competitiveness, I think, first of all, it's very important that you set ambitious targets. And then if you look at our history, if you look at Ragasco, for instance, the reason why that company became very successful and why it increased in value was because we focused on automation. We built a state-of-the-art facility. We increased capacity. It's fully automated. And that gave us a competitive edge versus other players in the same industry. And we will do the same on the high-pressure side.

And in fact, we couldn't have sold Ragasco, in my opinion, if you go a few years back because at that point in time, we have transferred the, say, Ragasco technology over to our high-pressure area. So now that we have done that, when we have built facilities in Germany, in the U.S. and in China, using that kind of technology, then it was possible to actually exit the Ragasco business. So automation and efficient manufacturing is definitely important in order to achieve cost competitiveness.

And then I'll also say on the innovation side and working with project -- well, value engineering, you call it, that you actually look at, does this product feature actually create a value that is exceeding the cost of it. Looking at the actual need of the customer because you have to provide a product that is really adding value at the lowest possible cost. So value engineering, I think, is quite important.

And then you also have to understand that you are, in most cases, only one part of the value chain, okay? So you have to work closely with the other people in the value chain, your suppliers, your distributors, everyone to create an efficient chain all the way through. So I think those 4 are quite important. And then, of course, there are many, many other elements. But yes, so we'll continue to have a strong focus on that going forward.

[Karen Romer, executive]

Excellent. I have another -- I'll take one more from the webcast, then we'll go back to -- regarding the order win in mobile pipeline, in industrial gas, how is the competitive landscape compared to RNG? So industrial gas versus RNG.

[Knut Flakk, executive]

Could you repeat the question?

[Karen Romer, executive]

Regarding the order win in mobile pipeline that we recently announced in industrial gas, how is the competitive landscape compared to RNG?

[Knut Flakk, executive]

I think the competitive landscape is pretty much the same because it's not a different solution product-wise that's being applied in this -- on the industrial gas. It's very similar to the one that transports RNG or natural gas. So I think from that point of view, it's the same competitive landscape. But it opens -- it shows that there are other segments in the market in just natural gas.

[Karen Romer, executive]

Excellent. Yes. I'm sorry, we have one question.

[Anders Rosenlund, analyst]

It's Anders again. On Hexagon Purus, it's -- given their comments in Q2 about probably needing more capital, Hexagon Composites view on this, is that to continue to support -- be a supportive majority shareowner or not majority, but largest shareowner -- or how do you think about that is increasing your stake likely? Or will you -- because it's -- at least you've said on several occasions that you find it extremely attractive valuation wise. So would you consider increasing your stake to above 50% again? Or how should we think about that?

[Knut Flakk, executive]

I think it's very encouraging to see Hexagon Purus developing the way it is. They delivered a very strong second quarter, and they were, for the first time, EBITDA positive in the Mobile Pipeline segment. So I'm very encouraged about that. Then they also reiterate that they will be reaching the EBITDA positive numbers in 2025. So the situation is quite different from what it was back in '20 -- was it '21 that we divested.

[David Bandele, executive]

Yes. End of '20.

[Knut Flakk, executive]

[ '20 ]. Okay. Because at that point in time, it was a long journey before they expect it to be EBITDA positive. So they're getting closer. And we don't have a specific answer to your question because we will do whatever we think is to the best interest of the shareholders of Hexagon Composites when it comes to the ownership stake.

[Karen Romer, executive]

I have 2 more questions from the webcast audience. Perhaps, David, can you give us more detail on the quoting activity you're experiencing for the X15 with your fuel systems?

[David Bandele, executive]

Yes. It's obviously confidential processes. But we obviously see them. There's at least 40 names I recognize and a lot of them are new to us as well. So that augurs well because, again, these are long-haul operations and the market is opening up with the 15-liter. It's extremely hot, which is good, and it means that we need to gear up our capacity.

[Knut Flakk, executive]

And they're not just new to us as potential customers. But in many cases, they're actually new to natural gas. They've only had diesel trucks in their fleet in the past. So for instance, if you take -- because Walmart is out there with the news that they are testing the engine. They've never had natural gas engines in the past, and they've only relied on 15-liter diesel trucks or diesel engines. Now they're moving into the natural gas market as well. So it's encouraging to see. And it's -- as I said, it's not just the big guys. It's also the medium and the smaller guys. And to have that with 40-plus companies at this point in time is quite interesting.

[Karen Romer, executive]

I have one more question from the webcast, and then maybe we'll wrap it up from there. Is there any updates on the search for a new CEO, Knut?

[Knut Flakk, executive]

Yes. It's well underway. And I'm happy to see that we have some very interesting candidates in the pipeline. It's not determined yet who it will be. And of course, we will announce that as soon as it's clear. But we are certainly looking for someone, who can take the company from where it is today with NOK 5 billion, NOK 6 billion in sales to triple, quadruple that going forward.

I expect the new CEO to do what the -- his predecessors have done to take the company from being this size to this size to this size. It's Jon Erik has taken the company from NOK 1 billion to NOK 5 billion. NOK 6 billion today. And so, it's 5, 6 times the size when he started. And I expect the new CEO to be of a caliber that can actually do the same kind of thing going forward because the market opportunity is there, and the organization is there. It's a strong organization, and we just need to find the right person to lead the team. But the process is well underway, so.

[Karen Romer, executive]

Excellent. All right. Well, that concludes the questions I have on the webcast, and I think in the room. So thank you very much. Thank you both for the presentation. And thank you all for joining us this morning.

[David Bandele, executive]

Thank you.

[Knut Flakk, executive]

Thank you.